Auditing and Assurance

Chapter 9 “Audit of Financial Statements” ©www.altclasses.
in
Compiled by: Pankaj Garg

Page 1
Chapter 9 “Audit of Financial Statements” ©www.altclasses.in
Chapter 9
Audit of Items of Financial Statements
9.1 – Assertions
Meaning of SA 315 “Identifying and Assessing the Risk of Material Misstatements

Assertion through Understanding the Entity and its Environment” defines the
term assertion as “Representations by management, explicit or
otherwise, that are embodied in the financial statements, as used by
the auditor to consider the different types of potential misstatements
that may occur.”
Assertions Income (a) Occurrence: Transactions recognized in the

used in Statement income statement have occurred and relate to the
Financial entity.
Statements
(b) Completeness: All transactions that were
supposed to be recorded have been recognized in
the income statement and further, transactions
have been recognized in the correct accounting
periods.
(c) Measurement: Transactions have been recorded
accurately at their appropriate amounts and
further, transactions have been classified and
presented fairly in the income statement.
Balance (a) Existence: Assets, liabilities and equity balances

Sheet exist as at the period end.

Page 2
(b) Completeness: All assets, equity and liabilities

balances that were supposed to be recorded have
been recognized in the balance sheet.
(c) Valuation: Assets, liabilities and equity balances
have been appropriately valued.
(d) Rights & Obligations: Entity has the right to
ownership or use of the recognized assets, and
the liabilities recognized in the balance sheet
represent the obligations of the entity.
Presentation (a) Occurrence and Existence: Transactions and

and events disclosed in the financial statements have
Disclosure occurred and relate to the entity and further, the
closing balance does exist as at the period- end
(b) Completeness: All transactions, balances, events
and other matters that should have been
disclosed in the financial statements are actually
disclosed.
(c) Measurement and Valuation: Transactions,
events, balances and other financial matters have
been measured and disclosed correctly at their
appropriate values and in a manner, that
promotes the understandability of information
contained in the financial statements.

Page 3
Important Questions
Q. No. 1: What are the obvious assertions in the following items appearing in
the Financial Statements?
(i) Statement of Profit and Loss
Travelling Expenditure Rs. 50,000
(ii) Balance Sheet
Trade receivable Rs. 2,00,000
Answer: Travelling Expenditure:
• Expenditure has been incurred for the purpose of travelling.
• Travelling has been undertaken during the year under audit.
• Total expenditure incurred was Rs. 50,000 during the year.
• It is classified as revenue expenditure and charged to Statement of
Profit and Loss.
Trade Receivable
• These include all sales transaction occurred during the year.
• These have been recorded properly and occurred during the year.
• These constitute assets of the entity.
• These have been shown at proper value, i.e. after showing the
deduction on account of provision for bad and doubtful debts.

Page 4
Q. No. 2: Give your assertions for the following items appearing in Balance
Sheet of a Limited Company:
Rs. Rs.
(i) Cash in hand 10,000
(ii) Investments 1,00,000
(iii) Secured Loans 10,00,000
(iv) Machinery:
Opening cost 13,00,000
Less: depreciation
Current depreciation 1,30,000 11,70,000
Answer: (i) Cash in Hand:
Cash in hand is an item of current assets and it implies the following:
• that the company has Rs. 10,000 in hand in the form of currency
notes and coins on the Balance Sheet date.
• that the cash is free and available for expenditure to the company.
• that the books of accounts show a cash balance of Rs. 10,000 as on

balance sheet date.
(ii) Investments:
Investments is an item appearing in Balance Sheet either as non-

current or as current investments and it implies as follows:
• that the company has made invested its surplus funds in the

Page 5
investments, i.e. its existence and ownership.
• that the investments are non-current or current investments, i.e.

its classification. (2) Rate of interest receivable.
• that the value of investments as on Balance Sheet date was Rs.

1,00,000, i.e. its valuation.
(iii) Secured Loan
Secured loan is an item appearing in the Balance sheet either as long

term borrowing or as short term borrowings and it implies as
follows:
• That the company has borrowed, i.e. its existence
• That the borrowing is secured one, i.e. its nature,
• That the borrowing as on Balance sheet date was Rs. 10,00,000, i.e.
its valuation.
(iv) Machinery
Machinery is an item appearing in the balance sheet as fixed asset

under the heading Non-current assets and it implies as follows:
• That the Company has certain Plant and Machinery as on balance

sheet date, i.e. its existence and ownership.
• Opening WDV is Rs. 13,00,000 and year end WDV was Rs.
11,70,000 after charging current year depreciation, i.e. its
valuation and allocation of current year depreciation.
Q. No. 2A: 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). In
preparing financial statements, Company’s management makes

Page 6
implicit or explicit claims (i.e. assertions) regarding assets,

liabilities, equity, income, expenses and disclosures in accordance
with the applicable accounting standards. Explain with example
stating the relevant assertions involved in this regard. Also explain
financial statement audit. [RTP-May 20]
Q. No. 2B: What does the Valuation assertion mean in respect of Assets,
liabilities and equity balances? Explain with the help of example in
respect of Inventory. [RTP-May 20]
Section A “Audit of Balance Sheet Items”
9.2 – Audit of Share Capital
Assertions to Existence To establish the existence of share capital as the

be examined period end.
Completeness To ensure that equity balances that were

supposed to be recorded have been recognized in
the Balance Sheet.
Valuation To ensure that equity balances have been valued

appropriately.
Presentation To check whether required disclosures for equity

and have been appropriately made
Disclosure
Audit 1. Compare the year end balances of authorised, issued and paid
procedure up share capital, to the previous year audited financial
statements.

Page 7
2. If there is no change during the year, obtain a written

representation from the management that there were no
changes to capital structure during the year.
3. If there is any change, obtain the certified copies of relevant
resolutions passed at the meetings of board of directors,
members authorising the changes in authorised and paid up
share capital.
4. Obtain a copy of Form SH 7 for increase in authorised share
capital, Form PAS 3 for increase in paid up capital and verify
the number of securities issued along with the issue price.
5. Verify whether the paid-up capital as at the year-end is within
the limits of authorised capital.
6. In case of increase in authorised share capital, verify whether
the Company has accurately calculated the fee and stamp duty
payable to MCA and obtain a copy of the receipt in support of
the payment made.
Audit Issue of Where a company has issued shares at a

Procedure in Shares at premium, whether for cash or otherwise,
Special Cases Premium
company shall transfer the amount received by it
to securities premium account and state the
means in which the amount in the account can be
applied.
As per Sec. 52 of Companies Act, 2013 the
securities premium account may be applied by
the company for the following purposes:

Page 8
(a) issue of unissued shares of the company to

the members of the company as fully paid
bonus shares;
(b) writing off the preliminary expenses of the

company;
(c) writing off the expenses of, or the commission

paid or discount allowed on, any issue of
shares or debentures of the company;
(d) 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.
Auditor needs to verify whether the premium

received on shares, if any, has been transferred to
a “securities premium account” and whether the
application of any amount out of the said
“securities premium account” is only for the
purposes mentioned above.
Issue of • A company cannot issue shares at discount as

Shares at provided by Sec. 53 of the Companies Act,
Discount 2013. As per Sec. 53, a company shall not issue
shares at a discount, except in the case of an
issue of sweat equity shares given u/s 54 of the
Companies Act, 2013.

Page 9
• Any share issued by a company at a discount

shall be void.
• However, a company may issue shares at a

discount to its creditors when its debt is
converted into shares in pursuance of any
statutory resolution plan or debt
restructuring scheme in accordance with any
guidelines or directions or regulations
specified by the RBI under the RBI Act, 1934 or
the Banking (Regulation) Act, 1949.
• Where any company fails to comply with the

provisions of this section, such company and
every officer who is in default shall be liable to
a penalty which may extend to an amount
equal to the amount raised through the issue of
shares at a discount or ₹ 5 lakh, whichever is
less, and the company shall also be liable to
refund all monies received 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.
• Auditor needs to verify that the company has

not issued any of its shares at a discount. For
this purpose, he may read the minutes of
meeting of its directors and shareholders
authorizing issue of share capital and the issue
price.

Page 10
Issue of “Sweat Equity Shares” means equity shares

Sweat Equity issued by the company to employees or directors
Shares at a discount or 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.
Verification aspects
The auditor may see that the Sweat Equity Shares

issued by the company are of a class of shares
already issued and following conditions are
fulfilled:
(a) the issue is authorised by a special

resolution passed by the company;
(b) the resolution specifies the number of

shares, the current market price,
consideration, if any, and the class or classes
of directors or employees to whom such
equity shares are to be issued; and
(c) where the equity shares of the company are

listed on a recognised stock exchange, the
sweat equity shares are issued in
accordance with the regulations made by
the SEBI in this behalf and if they are not so
listed, the sweat equity shares are issued in
accordance with such rules as may be
prescribed.

Page 11
Reduction of The duties of the auditor in this regard are

Capital following:
1. Verifying that the special resolution has been

passed for reduction of capital in the meeting
of the shareholder.
2. Check that the Articles of Association

authorizes the reduction of capital.
3. Examine the order of the Tribunal confirming

the reduction and ensure that a copy of the
order and the minutes have been registered
and filed with the ROC.
4. Inspecting the ROC Certificate as regards

reduction of capital.
5. Vouching the journal entries recorded to

reduce the capital and to write down the
assets by reference to the resolution of
shareholders and other documentary
evidence.
6. Ensure that the requirements of Schedule III

w.r.t. reduced capital have been complied
with.
7. Confirming that the revaluation of assets has

been properly disclosed in the Balance Sheet.

Page 12
8. Verifying the adjustment made in the

members’ accounts in the Register of
Members and confirming that either the paid-
up amount shown on the old share
certificates have been altered or new
certificates have been issued in lieu of the old,
and the old ones have been cancelled.
9. Confirming 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.
10. Verifying that the MOA of the company has

been suitably altered.
Disclosure For each class of share capital (different classes of preference

requirements shares to be treated separately):
of Schedule
(a) the number and amount of shares authorized;
III
(b) the number of shares issued, subscribed and fully paid, and
subscribed but not fully paid;
(c) par value per share;
(d) a reconciliation of the number of shares outstanding at the
beginning and at the end of the reporting period;
(e) the rights, preferences and restrictions attaching to each class
of shares including restrictions on the distribution of
dividends and the repayment of capital;

Page 13
(f) shares in respect of each class in the company held by its
holding company or its ultimate holding company including
shares held by or by subsidiaries or associates of the holding
company or the ultimate holding company in aggregate;
(g) shares in the company held by each shareholder holding more
than 5 percent shares specifying the number of shares held;
(h) shares reserved for issue under options and
contracts/commitments for the sale of shares/disinvestment,
including the terms and amounts;
(i) for the period of five years immediately preceding the date as
at which the Balance Sheet is prepared:
(i) Aggregate number and class of shares allotted as fully paid
up pursuant to contract(s) without payment being
received in cash.
(ii) Aggregate number and class of shares allotted as fully paid
up by way of bonus shares.
(iii) Aggregate number and class of shares bought back.
(j) terms of any securities convertible into equity/preference
shares issued along with the earliest date of conversion in
descending order starting from the farthest such date.
(k) calls unpaid (showing aggregate value of calls unpaid by
directors and officers)
(l) forfeited shares (amount originally paid up)

Page 14
Important Questions
Q. No. 3: Discuss the following: Securities premium can be utilized only for
certain purposes laid down in the Companies Act, 2013.
[Nov. 17 (5 Marks)]
Or
ABC Ltd. has issued shares for cash at a premium of Rs 450, that is,
at amount in excess of the nominal value of the shares which is Rs
10 for cash. Section 52 of the Companies Act, 2013 provides that a
Company shall transfer the amount received by it as securities
premium to securities premium account. Advise the means in which
the amount in the account can be applied. [RTP-May 18]
Or
The securities premium account may only be applied by the

company towards the issue of unissued shares of the company to
the members of the company as fully paid bonus shares, Comment.
[May 19 (3 Marks)]
Q. No. 4: Discuss the following: Shares issued at a discount.
[Nov. 12 (5 Marks)]
Or
Any share issued by a company at a discounted price shall be void.

Explain stating also the audit procedure in this regard.
[MTP-March 19]

Page 15
Or
Validity and consequence of issue of shares at discount, check with

respect to the provisions of the Companies Act, 2013.
[Nov. 19 (4 Marks)]
Q. No 5: Write short note on: Verification of issue of Sweat Equity shares.
[Nov. 13 (4 Marks)]
Or
What audit points are to be borne in mind in case of issue of “Sweat

Equity shares” by a limited company?
[Nov. 16 (6 Marks), MTP-Oct.19]
Q. No. 6: How would you vouch/verify the following: Reduction of Share

Capital. [May 10 (5 Marks)]
Or
What are the duties of an auditor in case of reduction of capital.
[Nov. 11 (8 Marks)]
9.3 – Audit of Reserves and Surplus (Other Equity)
Meaning of Meaning of Reserve • Reserves are amounts appropriated

Reserves and out of profits which are not intended
Provisions to meet any liability, contingency,
commitment or diminution in the
value of assets known to exist at the
date of the Balance Sheet.

Page 16
• Reserves are made up of amounts

appropriated out of profits, held for
equalising the dividends of the
company from one period to another
or for financing the expansion of the
company or for generally
strengthening the company
financially.
Meaning of Provisions • Provisions are amounts charged
against revenue to provide for
depreciation, renewal or diminution
in the value of assets or a known
liability the amount of which cannot
be determined with substantial
accuracy or a claim which is
disputed.
• Amounts contributed or transferred
from profits to make good the
diminution in assets values due to
the fact that some of them have been
lost or destroyed, as a result of some
natural calamity or debts have
proved to be irrecoverable are also
described as provisions.

Page 17
• Provisions are normally charged to
the Statement of Profit and Loss
before arriving at the amount of
profit.
Difference between Reserves and Provisions
Reserves Provisions
(a) It is an appropriation of profit (a) It is a charge against Profit.
(b) They are not intended to (b) They are made to

meet any liability, contingency provide for depreciation,
or diminution in the value of renewal or a known
assets, though may be made liability or a disputed
for some specific purposes, claim
like redemption of debentures.
(c) Reserves cannot be created (c) They must be created

unless there is a profit except a whether or not there is
few like revaluation reserves profit
(d) Reserves are generally (d) Provisions are not

optional except few ones like optional and have to be
creation of CRR, DRR, etc. made as per generally
accepted accounting
principles.

Page 18
Types of Revenue Revenue reserves represent profits that are
Reserves Reserves available for distribution to shareholders held
for the time being or any one or more purpose,
e.g., to supplement divisible profits in lean years,
to finance an extension of business, to augment
the working capital of the business or to
generally strengthen the company’s financial
position.
Capital • Capital reserve represents surplus or profit
Reserves earned in respect of certain types of
transactions (like sale of fixed assets at a price
in excess of cost, realisation of profits on issue
of forfeited shares, etc.) which are not
regarded by the directors as free for
distribution as a dividend.
• Capital Reserves does not include any amount
regarded as free for distribution through the
Statement of Profit and Loss.
• Capital reserves includes share premium,
capital redemption reserve, development
rebate reserve and profit on reissue of
forfeited shares.

Page 19
• Capital reserve, can be utilised for writing
down fictitious assets or losses or for issuing
bonus shares if it is realised. But the amount of
share premium or capital redemption reserve
account can be utilised only for the purpose
specified in Sections 52 and 55 respectively of
the Companies Act, 2013.
Assertions to Existence To establish the existence of reserves and
be examined surplus as at the year end.
Completeness Reserves and Surplus balances that were
supposed to be recorded have been recognized
in the financial statements.
Valuation Reserves and Surplus balances have been valued
appropriately.
Presentation Required disclosures for reserves and surplus
and Disclosure have been appropriately made.
Audit 1. Compare the opening balance of reserves and surplus to the
Procedure previous year audited financial statements.
2. For addition/ utilisation in current year, in case of:
(a) Profit and Loss balance: Trace the movement as disclosed
in Statement of changes in Equity to Surplus/Deficit as per

Page 20
Statement of Profit & Loss for the year under audit. For
adjustment related to dividend payment and dividend
distribution tax, verify the resolution passed by the board of
directors regarding declaration of dividend.
(b) Share Premium: Confirm whether company has issued any
shares during the year in excess of the nominal value of the
shares. Ensure that any withdrawal from securities
premium account is in compliance of Sec. 52.
(c) Other Equity: Understand the underlying reason for the
transaction.
Disclosure (i) Reserves and Surplus shall be classified as:
requirements (a) Capital Reserves;
of Schedule (b) Capital Redemption Reserve;
III (c) Securities Premium;
(d) Debenture Redemption Reserve;
(e) Revaluation Reserve;
(f) Share Options Outstanding Account;
(g) Other Reserves – (specify the nature and purpose of each
reserve and the amount in respect thereof);
(h) Surplus i.e. balance in Statement of Profit & Loss disclosing
allocations and appropriations such as dividend, bonus
shares and transfer to/from reserves etc.

Page 21
(Additions and deductions since last balance sheet to be shown
under each of the specified heads)
(ii) A reserve specifically represented by earmarked investments
shall be termed as a ‘fund’.
(iii) Debit balance of statement of profit and loss shall be shown as
a negative figure under the head ‘Surplus’. Similarly, the
balance of ‘Reserves and Surplus’, after adjusting negative
balance of surplus, if any, shall be shown under the head
‘Reserves and Surplus’ even if the resulting figure is in the
negative.
Disclosure requirement for individual components of other
equity
For each component of other equity, whether the company has
disclosed the following (to the extent applicable):
(1) Balance at the beginning of the reporting period
(2) Changes in accounting policy or prior period error
(3) Restated balance at the beginning of the reporting period
(4) Total Comprehensive Income for the year
(5) Dividends
(6) Transfer to retained earnings
(7) Any other change (to be specified)
(8) Balance at the end of reporting period

Page 22
Important Questions
Q. No. 7: Distinguish Between: Reserves and Provisions.
[May 07, May 12 (5 Marks), MTP-March 19]
Q. No. 8: Reserves are amounts appropriated out of profits whereas on the

contrary, provisions are amounts charged against revenue. Discuss
explaining the difference between the two and also explain clearly
revenue reserve and capital reserve. [RTP-May 19]
Q. No. 9: Explain the disclosure requirements of IND AS compliant Schedule

III to Companies Act, 2013 for each component of “Other Equity.
[Nov. 19 (3 Marks)]
9.4 – Audit of Borrowings
Assertions to Existence Ensure that all borrowings on the balance sheet

be examined represent valid claims by banks or other third
parties.
Completeness Ensure that all borrowings have been accounted

for in the books of the company on a timely basis.
Valuation Ensure that liability is recorded at the correct

amount.
Presentation Ensure that borrowings have been presented,

and classified and disclosed in the Balance Sheet in
Disclosure accordance with the requirements of applicable
financial reporting framework.

Page 23
Audit 1. Ensure that the loans obtained are within the borrowing
Procedure powers of the entity.
2. Examine the relevant records to judge the validity and

accuracy of the loans.
3. Examine the important terms in the loan agreements and the

documents, if any, evidencing charge in respect of such loans
and advances.
4. Where the entity has accepted deposits, the auditor should

examine whether the directives issued by the RBI or other
appropriate authority are complied with.
5. Obtain a certificate from the bank showing the balance in the

accounts as at the end of the year.
6. Certificate may also be obtained from the bank showing

particulars of securities deposited with the bank as security
for the loans or of the charge created on an asset and confirm
that the same has been correctly disclosed and duly registered
with ROC and recorded in the Register of charges.
7. Reconcile the balances in the overdraft or loan account with

that shown in the bank statements.
8. Verify that the loan or draft has been raised by appropriate

authority. In the case of a company, only the BOD is
authorised to raise a loan or borrow from a bank.
9. Confirm, in the case of a company, that the conditions

prescribed in Sec. 180 of the Companies Act, 2013 as regards
the maximum amount of loan that the company can raise has
not been contravened.

Page 24
10. Ascertain the purpose for which loan has been raised and the
manner in which it has been utilised and ensure that this has
not prejudicially affected the entity.
Direct Auditor is required to take confirmations from
Confirmation major lenders w.r.t. major aspects related with
Procedure loans. Procedure that may be followed:

(a) Design the confirmation in a manner that
asks for all information likely to be relevant
for audit purposes, for example, interest
rates, due dates, the date to which interest
has been paid, collateral and security
interests etc.
(b) Send the requests under own control to the
lenders.
(c) In case of non-reply, send reminders.
(d) Compare replies to requests.
(e) For any exception identified, perform
necessary inquiries with the management
and identify instances of any possible
misstatement.
Disclosure Long Term 1. Classification of Long Term Borrowings into-

Requirements Borrowings • Bonds / Debentures
of Schedule III
• Term Loans:
• From Banks
• From Other Parties
• Deferred Payment liabilities

Page 25
• Deposits shown
• Loans and advances from related parties
• Long Term maturities of finance lease

obligations
• Other Loans and advances, specifying

nature, shown
2. Long term Borrowings to be sub-classified as:
• Secured (nature of the security to be

specified)
• Unsecured
3. Aggregate of loans guaranteed by the

following should be disclosed
• Directors
• Others
4. Rate of interest and terms of redemption /

conversion of bonds/debentures (to be stated
in descending order of maturity of
redemption/conversion)
5. Particulars of the redeemed bonds which can

be reissued to be shown
6. Terms of repayment of the following to be

shown:
• Term loans
• Other Loans

Page 26
7. Period and amount of continuing default in the

repayment of loans and interest shown
separately in each case.
Short Term 1. Classification of borrowings as:

borrowings • Loans repayable on demand
- From banks
- From other parties
• Loans and Advances from related parties
• Deposits
• Other Loans and Advances, specifying

nature
2. Further sub-classification of the borrowings

into:
• Secured (nature of the security to be

specified)
• Unsecured
3. Aggregate of loans guaranteed by the

following should be disclosed:
• Directors
• Others
4. Period and amount of continuing default in the

Repayment of Loans and Interest shown
separately in each case

Page 27
Important Questions
Q. No. 10: How will you vouch/verify: Borrowings from banks?
Or
On going through the financial statements of PQR Ltd, its auditors
Kamal Gagan and Associates observed that company has taken
Loans from banks and financial institutions. Further, the audit team
discusses the following about Liabilities:
“Liabilities are the financial obligations of an enterprise other than
owners’ funds. Liabilities include loans/ borrowings, trade
payables and other current liabilities, deferred payment credits
and provisions.
Verification of liabilities is as important as that of assets, for, if any
liability is omitted (or understated) or over stated, the Balance
Sheet would not show a true and fair view of the state of affairs of
the company.”
Advise stating clearly the audit procedures generally required to be
undertaken for verification of existence of Borrowings.
[MTP-March 18, Oct. 18]

Page 28
9.5 – Audit of Trade Receivables
Assertions to Existence To establish the existence of trade receivables as

be examined at the year end
Completeness To ensure that trade receivable balances that

were supposed to be recorded have been
recognized in the balance sheet.
Valuation To ensure that trade receivable balances have

been valued appropriately.
Presentation To ensure that trade receivables have been

and presented, classified and disclosed in the Balance
Disclosure Sheet in accordance with the requirements of
applicable financial reporting framework.
Essential In relation to credit sales, it becomes imperative to carry out

features of compliance procedures so as to ensure that the system for
internal receivables has the following features:
Controls w.r.t. 1. Only bona fide sales lead to receivables.
to trade 2. Sales are made only to approved customers.
receivables 3. All such sales are duly recorded in the books.
4. Once recorded, the debts can only be eliminated by receipt of
cash or on the approval by a responsible official.
5. Debts are collected promptly.
6. Balances are regularly reviewed and aged, a proper system of
follow up exists and if necessary adequate provision for bad debt exists
7. Clear segregation of duties relating to identification of debt,
receipt of income, reconciliations and write off of debts.

Page 29
Audit Verification of trade receivable may be carried out by employing
Procedure the following procedures:

(a) examination of records;
(b) direct confirmation procedure;
(c) analytical review procedures.
The nature, timing and extent of audit procedures to be
performed is, however, a matter of professional judgement of the
auditor.
Examination 1. The auditor should carry out an examination

of Records of the relevant records to satisfy himself
about the validity, accuracy and recoverability
of the trade receivable balances.
2. The auditor should check the agreement of

balances as shown in the schedules of trade
receivable with those in the ledger accounts.
3. In the case of significant trade receivable, the

auditor should also examine the
correspondence or other documentary
evidence to satisfy himself about their validity
and accuracy.
4. Proper authorisation should be inspected in

respect of bad debts written off or excessive
discounts or unusual allowances made.
5. The auditor should examine whether the

contingent liability, if any, in respect of bills
accepted by customers and discounted with
the banks is properly disclosed.

Page 30
Direct 1. The auditor employs direct confirmation
Confirmation procedure with the consent of the entity
Procedure under audit. If management does not allow

the auditor to seek confirmation from certain
trade receivables, the auditor should
consider whether there are valid grounds for
such a request.
2. While determining the information to be
obtained, the auditor should consider all
relevant factors such as the effectiveness of
internal control, the apparent possibility of
disputes, inaccuracies or irregularities in the
accounts and the materiality of the amounts
involved.
3. The trade receivables may be requested to
confirm the balances either (a) as at the date
of the balance sheet, or (b) as at any other
selected date which is reasonably close to the
date of the balance sheet.
4. Where the auditor decides to confirm the
trade receivables at a date other than the
balance sheet date, he should examine the
movements in debtor balances which occur
between the confirmation date and the
balance sheet date and obtain sufficient
evidence to satisfy himself that debtor
balances stated in the balance sheet are not
materially misstated.

Page 31
5. The form of requesting confirmation from the

trade receivables may be either (a) the
'positive' form of request or (b) the 'negative'
form of request.
6. Where positive form of request is used, the

auditor may, in appropriate cases, request
the entity to follow up with a reminder to
those trade receivables from whom he
receives no replies.
7. Any discrepancies revealed by the

confirmations received or by the additional
tests carried out by the auditor may have a
bearing on other accounts not included in the
original sample. The entity should be asked
to investigate and reconcile the
discrepancies.
8. In addition, the auditor should also consider

what further tests he can carry out in order
to satisfy himself as to the correctness of the
amount of trade receivables taken as a whole.
Analytical Auditor may also perform below mentioned

Review analytical review procedures as a means of
Procedures
obtaining audit evidence regarding the various
assertions relating to trade receivables, loans
and advances:

Page 32
(a) comparison of closing balances of trade

receivables, loans and advances with the
corresponding figures for the previous year;
(b) comparison of the relationship between

current year debtor balances and the current
year sales with the corresponding figures for
the previous year;
(c) comparison of actual closing balances of

trade receivables, loans and advances with
the corresponding budgeted figures, if
available;
(d) comparison of current year's aging schedule

with the corresponding figures for the
previous year;
(e) comparison of significant ratios relating to

the similar ratios for other firms in the same
industry, if available;
(f) comparison of significant ratios relating to

the industry norms, if available.
Disclosure 1. Aggregate amount of outstanding trade receivables exceeding

Requirements 6 months shown separately
of Schedule III 2. Sub-classification of Trade Receivables:
- Secured, considered good

Page 33
- Unsecured, considered good
- Doubtful
3. Allowance for bad and doubtful debts disclosed under relevant

heads:
4. Debts due from:
- Directors or other officers of the company
- Amounts due by firms in which any director is a partner
- Amounts due by private companies in which any director is

a director or member
- To be aggregated and separately stated.
Important Questions
Q. No. 11: “Until the invoice is paid, the invoice amount is recorded on the
organization’s balance sheet as accounts receivable. If balances are
not recoverable, then these amounts will need to be written off as
an expense in the income statement/ profit and loss account.”
It is important to carry out compliance procedures in the sales

audit as part of the debtors’ audit procedure.
Verify to ensure that the system for receivables has the necessary
features. [MTP-March 18, Oct. 18]
Q. No. 12: Give your comments and observations on the following: Balance
confirmations from trade receivables/trade payables can only be
obtained for balances standing in their accounts at the year-end.

Page 34
Answer: Balance Confirmations from trade receivables / trade payables:

• Guidance Note on Audit of Debtors, Loans and Advances” recommends
that the trade receivables may be requested to confirm the balance
either:
(i) As at the date of the balance sheet; or
(ii) As at any other selected date which is reasonably close to the date
of the balance sheet.
• The date should be settled by the auditor in consultation with the
entity.
• Where the auditor decides to confirm the trade receivables at a date
other than the balance sheet date, he should examine the movements in
trade receivable balances which occur between the confirmation date
and the balance sheet date and obtain sufficient evidence to satisfy
himself that trade receivable balances stated in the balance sheet are
not materially mis-stated.
• Therefore, it is not necessary that balances of trade receivables/ trade
payables should necessarily be verified only at the end of the year only.
Q. No. 13: Describe “Analytical Review Procedures” in Audit. Briefly discuss
analytical procedures for verification of debtors.
[May 14 (8 Marks)]
Q. No. 14: Explain disclosure requirements of debtors in financial statements.
[Nov. 11 (5 Marks)]
Or
Discuss the following: Disclosure requirements relating to trade
receivables under Schedule III to the Companies Act 2013.
[Nov. 14 (5 Marks)]

Page 35
9.6 – Audit of Cash and Cash Equivalents
Assertions to Existence To establish the existence of cash and cash

be examined equivalent balances as at the year-end.
Completeness Cash and cash equivalent balances that were

supposed to be recorded have been recorded in
the balance sheet.
Valuation Cash and cash equivalent balances have been

valued appropriately.
Presentation Required disclosures for cash and cash

and equivalents have been appropriately made.
Disclosure
Audit Cash 1. The auditor should carry out physical

Procedure Balances verification of cash at the date of the balance
sheet. However, if this is not feasible, physical
verification may be carried out, on a surprise
basis, at any time shortly before or after the
date of the balance sheet and reconcile the
balance shown in the financial statements with
the results of the physical verification
considering the transactions for intervening
period.
2. Besides physical verification at or around the

date of the balance sheet, the auditor should
also carry out surprise verification of cash
during the year.

Page 36
3. All cash balances in the same location should

be verified simultaneously.
4. If IOUs (‘I owe you’) are found during physical
verification, the auditor should obtain
explanations from a senior official of the entity
as to the reasons for such IOUs remaining
pending. It should also be ensured that such
IOUs are not shown as cash-in-hand.
5. The quantum of torn or mutilated currency
notes should be examined in the context of the
size and nature of business of the entity.
6. If, during the course of the audit, it comes to
the attention of the auditor that the entity is
consistently maintaining an unduly large
balance of cash in hand, he should carry out
surprise verification of cash more frequently. If
the cash in hand is not in agreement with the
balance as shown in the books, he should seek
explanations from a senior official of the entity.
In case any material difference is not
satisfactorily explained, the auditor should
state this fact appropriately in his audit report.
Auditor should satisfy himself regarding the
necessity for such large balances having regard
to the normal working requirements of the
entity. The entity may also be advised to
deposit the whole or the major part of the cash
balance in the bank at reasonable intervals.

Page 37
7. Where postdated cheques are in hand on the

balance sheet date, the auditor should verify
that they have not been accounted for as
collections during the period under audit.
Cash at Bank 1. The auditor should advise the entity to send a

letter to all its bankers to, directly confirm the
balances to the auditor.
2. The auditor should examine the bank

reconciliation statement prepared as on the
last day of the year to identify cheques issued
by the entity but not presented for payment,
and cheques deposited but not credited in the
bank account and their tracing in subsequent
period.
3. The auditor should pay special attention to

those items in the reconciliation statements
which are outstanding for an unduly long
period.
4. Where a large number of cheques has been

issued/deposited in the last few days of the
year, and a sizeable proportion of such
cheques has subsequently remained
unpaid/uncleared, this may indicate an
intention of understating creditors/debtors or
understating/overstating bank balances. In
such a case, it may be appropriate for the

Page 38
auditor to obtain confirmations from the

parties concerned, especially in respect of
cheques involving large amounts. The auditor
should also examine whether a reversal of the
relevant entries would be appropriate under
the circumstances.
5. In respect of fixed deposits, the relevant

receipts/certificates, duly supported by bank
advices, should be examined.
6. Remittances shown as being in transit should

be examined with reference to their credit in
the bank in the subsequent period.
7. Where material amounts are held in bank

accounts which are blocked, e.g., in foreign
banks with exchange control restrictions or
any banks which are under moratorium or
liquidation, the auditor should examine
whether the relevant facts have been suitably
disclosed in the financial statements.
8. Where the auditor finds that the number of

bank accounts maintained by the entity is
disproportionately large in relation to its size,
the auditor should exercise greater care in
satisfying himself about the genuineness of
banking transactions and balances.

Page 39
Direct Confirmation Procedure
(a) Auditor is required to confirm all year end

account balance maintained with the bank.
(b) In case of any discrepancies, client should be
asked to investigate and reconcile the
discrepancies, including seeking written
explanations/ clarifications from the banks/
financial institutions on any unresolved
queries.
(c) Auditor should emphasize for confirmation of
100% of bank account balances. In remote
situations were no reply is received, the
auditor should perform additional testing
regarding the balances. This testing could
include:
• Agreeing the balance to bank statement
received by the Company or internet/
online login to account in auditor’s personal
presence;
• Prepare a final summary of the results of
the circularization and draw the final
conclusion.
Disclosure 1. Classification of Cash and Cash Equivalents into:
Requirements - Balances with Bank
in Schedule - Cheques, Drafts on hand
III - Cash on hand

- Others (specifying nature)

Page 40
2. The following shall be shown separately:
- Earmarked balances with bank.
- Balances with bank held as margin money or security

against borrowing, guarantees and other commitments.
- Repatriation restrictions, if any, in respect of cash and bank

balances.
- Bank deposits with more than 12 months maturity.
Important Questions
Q. No. 15: What procedures an auditor should adopt to test the authenticity of
cash at bank. [Nov. 11 (5 Marks)]
Or
How will you verify the following: Bank Balances?
Q. No. 16: Mention disclosure requirements of Bank Balances in the financial

statements of a company.
Q. No. 17: “No entry is passed for cheques received by the auditee on the last
day of the year and not yet deposited with the bank”. Give your
comments and observations.
Answer: Cheques Received on the Last Day of Accounting Year:
• Many a times, cheques are received from the customers on the last day
of the accounting year and there are chances that these cheques could
not be deposited in the bank on the same day.

Page 41
• Though in general, it is expected that all cheques should be deposited

in the bank daily, but there may be a possibility that such cheques
which are received particularly during the late hours could not be
deposited in the bank.
• In such cases, it becomes important that such cheques should be

properly accounted for to avoid any frauds and that the financial
statements reflect a true and fair view. For this purpose, an effective
internal control system needs to be ensured.
• It should be ensured that a list of such cheques is prepared in duplicate

and a copy of the same has been sent to person controlling the trade
receivables’ ledger and a second copy is handed over to cashier along
with the cheques received. The person who is controlling the trade
receivables’ ledger should ensure that proper accounting entries have
been passed by crediting respective trade receivables’ accounts.
• The balance of cheques-in-hand should also be disclosed along with the

cash and bank balances in the financial statements.
Q. No. 18: State any six important points to be examined by you, as an auditor,
in verifying the correctness of bank balance of an Educational
Institution which deposits all its collection/receipt in separate
collection account of a bank.
Answer: Verification of Bank Balance of an Educational Institution:
For verifying the balances lying with bank in collection account, the
auditor should adopt following procedure:
1. Compare the counterfoils of pay-in-slips with the entries in the ledger

account.

Page 42
2. Compare the entries in the ledger account with the pass book or bank
statement.
3. Review the bank reconciliation statement for its correctness.
4. Scrutiny the subsequent period bank statement to ensure that items of

reconciliation are subsequently cleared.
5. Check the casting, carry forwards and balancing of ledger account.
6. Obtain the balance confirmation certificate from the Bank.
Q. No. 19: Comment on “The cash-book showed a huge cash balance on hand
consistently throughout the year”.
Answer: Maintenance of Huge Cash Balance:
“Guidance Note on Audit of Cash and Bank Balances” recommends that if,
during the course of the audit, it comes to the attention of the auditor that
the entity is consistently maintaining an unduly large balance of cash in
hand, he may perform the following procedures:
He should carry out surprise verification of cash more frequently.
1. If the cash in hand is not in agreement with the balance as shown in

the books, he should seek explanations from a senior official of the
entity.
2. In case any material difference is not satisfactorily explained, the

auditor should state this fact appropriately in his audit report.
3. He should satisfy himself regarding the necessity for such large

balances having regard to the normal working requirements of the
entity.
4. The entity may also be advised to deposit the whole or the major part
of the cash balance in the bank at reasonable intervals.

Page 43
Q. No. 20: M, Statutory Auditor of ABC Ltd wants to verify cash on hand as on
31st March, 2018. The Management informs Mr. M. that it is not
possible to cooperate, as cashier has been hospitalised. Advise Mr.
M. on how to deal with the situation.
Answer: Limitation on Scope of Auditor:
• As per “Guidance Note on Audit of Cash and Bank balances” the auditor
should carry out physical verification of cash at the date of the balance
sheet. However, if this is not feasible, physical verification may be
carried out, on a surprise basis, at any time shortly before or after the
date of the balance sheet. In the latter case, the auditor should examine
whether the cash balance shown in the financial statements reconciles
with the results of the physical verification after taking into account the
cash receipts and cash payments between the date of the physical
verification and the date of the balance sheet.
• In the present case, management refuses for physical verification as
cashier has been hospitalised. This refusal amounts to limitation on
scope of auditor, which warrant the auditor to express disclaimer of
opinion or qualified opinion in his audit report depending upon the
circumstances.
Conclusion: Non-co-operation of ABC Limited will amount to limitation
on scope of auditors and auditor may modify the report based on the
circumstances.

Page 44
9.7 – Audit of Inventories
Assertions to Existence To establish the existence of Inventories as at

be evaluated the year - end.
Completeness 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.
Rights and The entity has valid legal ownership rights over
Obligations the inventories claimed to be held by the entity
and recorded in the financial statements.
Valuation Inventories have been valued appropriately

and as per generally accepted
Accounting policies and practises.
Presentation Required disclosures for inventories have been

and appropriately made.
Disclosure
Auditor’s Verification of inventories may be carried out by employing the
procedures for following procedures:

verification (a) examination of records;
(b) attendance at stock-taking;
(c) obtaining confirmations from third parties;
(d) examination of valuation and disclosure; and
(e) analytical review procedures.

Page 45
The NTE of audit procedures to be performed is, however, a

matter of professional judgement of the auditor.
Examination Auditor should examine the stock records with

of Records reference to the relevant basic documents like
goods received notes, inspection reports,
material issue notes, bin cards, etc.
If the entity does not maintain detailed stock

records, the auditor would have to suitably
extend the extent of application of other audit
procedures.
Attendance at (a) The physical verification of stock is the

Stock-Taking responsibility of the management. The
auditor may find it appropriate to attend
the stock taking, if the inventory value is
material in his opinion.
(b) The extent of participation in inventory

taking depends upon the internal control
system prevailing, results of examination of
inventory records and analytical review
procedures.
(c) When auditor attend inventory taking, he

ensures that the instructions given for
inventory taking is followed.
(d) He test checks few items by himself for their

existence and quantum. He selects to test
high value items importantly.

Page 46
(e) The physical conditions of stock – like its

age, deterioration, obsolescence etc., are
looked into by auditor.
(f) The auditor reviews stores records and

notes down major discrepancies for
reconciling them in a subsequent date.
(g) The cut off arrangement is also looked into

ensure that the entity accounts for stock for
which liability had been booked and
excludes stick which had been sold.
Confirmations • Where significant stocks of the entity are held

from Third by third parties, the auditor should examine
Parties
that the third parties are not such with whom
it is not proper that the stocks of the entity
are held.
• The auditor should also directly obtain from
the third parties written confirmation of the
stocks held.
• Arrangements should be made with the entity
for sending requests for confirmation to such
third parties.
Examination of • The auditor should satisfy himself that the

Valuation and valuation of inventories is in accordance with
Disclosure the AS 2, “Valuation of Inventories”.

Page 47
• The auditor should examine the evidence

supporting the assessment of NRV. In this
regard, the auditor should particularly
examine whether appropriate allowance has
been made for defective, damaged and
obsolete and slow-moving inventories in
determining the NRV.
• The auditor should satisfy himself that the

inventories have been disclosed properly in
the financial statements. Where the relevant
statute lays dawn any disclosure
requirements in this behalf, the auditor
should examine whether the same have been
complied with.
Analytical Auditor may also apply following analytical

Review review procedures so as to obtain audit
Procedures evidence regarding the various assertions:
1. Reconciliation of quantities of opening

stocks, purchases, production, sales and
closing stocks;
2. Comparison of closing stock quantities and

amounts with those of the previous year;
3. Comparison of the relationship of current

year stock quantities and amounts with the
current year sales and purchases, with the

Page 48
4. Comparison of the composition of the

closing stock (e.g., raw materials as a
percentage of total stocks, WIP as a
percentage of total stocks) with the
5. Comparison of current year gross profit

ratio with the gross profit ratio for the
previous year;
6. comparison of actual stock, purchase and

sales figures with the corresponding
budgeted figures, if available;
7. comparison of yield with the corresponding

figure for the previous year;
8. comparison of significant ratios relating to

inventories with the similar ratios for other
firms in the same industry, if available;
9. comparison of significant ratios relating to

inventories with the industry norms, if
available.
Special To carefully assess the stage of completion of the WIP for

Considerations assessing the appropriateness of its valuation, the auditor may
in case of WIP perform the following:
• examine the production/costing records (e.g., cost sheets),
• hold discussions with the personnel concerned, and
• obtain expert opinion, where necessary.

Page 49
If physical verification of WIP is impracticable, the auditor

should lay greater emphasis on ascertaining whether the system,
from which the WIP is ascertained, is reliable.
Cost sheets of WIP should be verified as follows:
(a) Ascertain that the cost sheets are duly attested by the works
manager
(b) Test the correctness of the cost as disclosed by the cost

records by verification of quantities and cost of materials,
wages and other charges included in the cost sheets by
reference to the records maintained in respect thereof.
(c) Compare the unit cost or job cost as shown by the cost sheet
with the estimated cost.
(d) Ensure that the allocation of overhead expenses had been

made on a rational basis.
(e) Compare the cost sheet in detail with that of the previous
year. If they vary materially, investigate the cause thereof.
(f) Ensure that the Work-in-Progress as at Balance Sheet date

has been appropriately disclosed in Balance Sheet as per the
requirements of Schedule III.
Verification of Such transaction should be vouched and verified as under-

Goods on (a) Vouch the Proforma invoice sent with goods to ascertain the
Consignment quantity and value of goods sent.
(b) Freight evidences given by the transporter like Challan, Bill,

Receipt for freight charged.

Page 50
(c) Insurance charge to be verified from cover note and

premium paid receipt issued by Insurance Company.
(d) Account sale sent by consignee, referring to sale price of the

goods sold, expenses incurred by him and stock remained
unsold.
(e) Obtain confirmation from consignee for the goods held on

consignment on balance sheet date.
(f) Unsold goods should have been taken in the closing stock
valued properly inclusive of expenses (Proportionate)
incurred by consignee.
(g) Journal entries relating to such transaction be verified from

the books of the Company.
Disclosure 1. Inventories shall be classified as:

requirements
- Raw materials
of Schedule III
- Work in progress
- Finished goods
- Stock in trade (in respect of goods acquired for trading)
- Stores and spares
- Loose tools
2. Goods-in-transit to be disclosed under relevant sub-head.
3. Mode of Valuation to be stated

Page 51
Important Questions
Q. No. 21: Comment on the “Responsibility for properly determining the

quantity and value of inventories rests with the management of
the entity”.
Answer: Responsibility for determination of quantity and value of

inventories:
Guidance Note on Audit of inventories specifies the following:
• The responsibility for properly determining the quantity and value

of inventories rests with the management of the entity.
• The management satisfies this responsibility by carrying out

appropriate procedures which will normally include verification of
all items of inventory at least once in every financial year.
• This responsibility is not reduced even where the auditor attends

any physical count of inventories in order to obtain audit evidence.
• In any auditing situation, the auditor employs appropriate

procedures to obtain reasonable assurance to corroborate the
management's assertions regarding the following:
1. Existence: that all recorded inventories exist as at the year-end.
2. Ownership: that all inventories owned by the entity are recorded

and that all recorded inventories are owned by the entity.
3. Valuation: that the stated basis of valuation of inventories is

appropriate and properly applied, and that the condition of
inventories is recognised in their valuation.

Page 52
Q. No. 22: How will you vouch/Verify the following: Work in Progress.
[May 13 (4 Marks)]
Q. No. 23: Write short notes on: Physical attendance by auditor during
inventory taking. [May 09 (5 Marks)]
Or
Briefly mention the matters that are relevant in planning

attendance at physical inventory counting. [Nov. 18 (5 Marks)]
Q. No. 24: Write the audit procedures to be performed as an auditor for

valuation (assertion) of following: Finished goods and goods for
resale. [Nov. 18 (5 Marks)]
Q. No. 25: State the different types of Analytical Review carried out in
verification of inventories. [May 06 (6 Marks)]
Or
State the analytical review procedures normally carried out in

the audit of inventories. [May 17 (6 Marks)]
Q. No. 26: How will you vouch or verify: Goods sent on consignment.
9.8 – Audit of Tangible Fixed Assets (Property, Plant and Equipment – PPE)
Revenue Revenue • It is a routine expenditure incurred in the

Expenditure Expenditure normal course of business.
vs. Capital
• Its main purpose is to maintain the earning
Expenditure
capacity of the business
• It is usually a recurring item.

Page 53
• It is consumed within an accounting year and

the entire amount is charged to income
statement.
• Examples are: Cost of raw material, repairs

and renewals, advertisements, insurance etc.
Capital • It is incurred in acquiring or improving

Expenditure permanent assets which are not meant for
resale.
• It seeks to improve the earning capacity of the

business.
• It is normally a non- recurring outlay.
• It produces benefits over several years. Only a

small part of it is charged to Statement of
Profit and Loss as depreciation & the rest
appears in Balance Sheet.
• Capital expenditure may be in the form of

Land, Building, Plant and Machinery,
Intangible assets, etc.
• Expenses which are essentially of a revenue

nature, if incurred for creating an asset or
adding to its value for achieving higher
productivity, are also regarded as expenditure
of a capital nature. For Example:

Page 54
1. Material and wages when expended on the
construction of a building or erection of
machinery.
2. Legal expenses incurred in connection
with the purchase of land or building.
3. Freight when incurred in respect of
purchase of plant and machinery.
4. Major repairs of a fixed asset that
increases its productivity.
5. Wages paid on installation costs incurred
in Plant & Machinery.
6. Interest paid for the qualifying period as
per AS-16 i.e. before the asset is
constructed.
Assertions to Existence To establish the existence of tangible fixed assets

be examined (PPE) as at the year end
Completeness To ensure that additions to PPE during the
period under audit have been recorded in the
financial statements and do not include any PPE
that belong to third parties but does include PPE
owned and controlled by the entity although
lying with a third party

Page 55
Rights and The entity has valid legal ownership rights over
Obligations the PPE claimed to be held by the entity and
recorded in the balance sheet.
Valuation PPE have been valued appropriately and as per

generally accepted accounting policies and
practises
Presentation Required disclosures for PPE have been

and appropriately made.
Disclosure
Verification Evaluation of An auditor should review the system of internal

procedure Internal controls relating to PPE, particularly the
Control following:
• Control over expenditure incurred on PPE

acquired or self-constructed
• Accountability and utilisation controls
• Information controls
• Safeguarding of assets
Substantive • Verification of PPE consists of examination of

Procedures related records and physical verification. The
auditor should, normally, verify the records
with reference to the documentary evidence
and by evaluation of internal controls.
Physical verification of PPE is primarily the
responsibility of the management.

Page 56
• The auditor must also consider the

appropriateness of the accounting policies,
including policies for determining which costs
are capitalised, whether a cost or valuation
model is followed and depreciation (including
assessment of residual values) appropriately
calculated.
• As per AS 10, the auditor should ensure that
the entity has capitalised the assets as per the
component approach, whereby a component
or part of an asset which is significant in value
compared to the total value of the asset or the
useful life of which is different from that of the
asset, has to be capitalised separately.
Substantive Opening The opening balances of the existing PPE should

procedures Balances be verified from records such as the schedule of
w.r.t. specific
PPE, ledger or register balances. In the case of
situations
initial engagements, as per SA 510 (Revised),
“Initial Audit Engagements – Opening Balances”,
for the purpose of ascertaining the accuracy of
the opening balance of PPE, some audit evidence
may be obtained by examining the accounting
records and other information underlying the
opening balances.

Page 57
Capital Work Capital work in progress should be verified with

in Progress reference to the underlying contractor bills,
work orders, certification of work performed by
independent persons, comparison of the
progress and the costs incurred up-to-date with
the budgets, capital asset management policy
and plan, pending commitments, etc.
Additions to Acquisition of new PPE and improvements to the

PPE existing ones should be verified with reference to
supporting documents such as orders, invoices,
receiving reports and title deeds and applicable
customs or excise documents. Due care needs to
be taken when the purchase is from a related
party. The auditor may employ procedures such
as possible comparative prices prevalent in a
ready market, evaluation, justification and
approvals for the purchase.
Ownership of The ownership of assets, like land and buildings,

PPE may be verified by examining the title deeds. In
case the title deeds are held by other persons,
such as solicitors or bankers, confirmation
should be, at least where significant, obtained
directly by the auditors through a request signed
by the client.

Page 58
Physical • It is the responsibility of the management to

Verification carry out physical verification of PPE at
appropriate intervals in order to ensure that
they are in existence.
• Auditor should satisfy himself that such
verification was done by observing the
verification being conducted by the
management wherever possible and by
examining the written instructions issued to
the staff by the management and the relevant
working papers.
• Auditor should also satisfy himself that the
persons conducting the verification, whether
the employees of the entity or outside experts
have the necessary competence.
• Auditor should examine whether the method
of verification was reasonable in the
circumstances relating to each asset.
• The auditor should examine whether the
frequency of verification was reasonable in
the circumstances of each case.
• The auditor should test check the records of
PPE with the physical verification reports.

Page 59
Disclosure 1. Classification of Tangible Assets into:
Requirements • Land
of Schedule III • Buildings
• Plant and Equipment
• Furniture and fixtures
• Vehicles
• Office Equipments
• Others (specifying nature)
2. Asset under lease shall be shown separately under each class
of asset
3. Reconciliation of gross and net carrying amounts of each class
of assets at the beginning and end of the reporting period
showing:
• Additions
• Disposals
• Acquisitions through business combinations
• Other Adjustments
• Depreciation
• Impairment losses/reversals
4. Where a capital reduction scheme or a revaluation of assets has
taken place, every balance sheet subsequent to the reduction or
revaluation shall show the reduced/increased figures, the date
of the reduction/increase and the amount of
reduction/increase for the first 5 years subsequent to the
reduction/revaluation.

Page 60
Important Questions
Q. No. 27: Indicate Expenses which are essentially of a revenue nature, if
incurred for creating an asset, are also regarded as expenditure of
capital nature. [May 14 (4 Marks)]
Q. No. 28: The auditor A of ABC & Co.- firm of auditors is conducting the audit
of XYZ Ltd and while performing testing of additions wanted to
verify that all PPE (Property Plant and Equipment) purchase
invoices are in the name of the entity he is auditing. For all
additions to land, building in particular, the auditor desires to
have concrete evidence about ownership. The auditor is worried
about whether the entity has valid legal ownership rights over the
PPE claimed to be held by the entity and recorded in the financial
statements. Advise the auditor.
[RTP-May 18, MTP-Oct.19, RTP-Nov. 19]
9.9 – Audit of Intangible Fixed Assets
Assertions to Existence To establish the existence of intangible fixed

be examined assets as at the period- end.
Completeness To ensure that additions to Intangible assets

during the period under audit have been
recorded appropriately in the financial
statements.

Page 61
Valuation To ensure that intangible have been valued

appropriately and as per generally accepted
accounting policies and practices.
Presentation To ensure that required disclosures for intangible
and assets have been appropriately made.
Disclosure
Audit An intangible asset is an identifiable non-monetary asset, without
Procedures physical substance, held for use in the production or supply of

goods or services, for rental to others, or for administrative
purposes. Auditor should check the following points:
1. Auditor should ensure that intangible asset should be
recognised only if (a) it is probable that the future economic
benefits that are attributable to the asset will flow to the
enterprise; and (b) the cost of the asset can be measured
reliably.
2. Ensure that at initial stages, intangible asset should be
measured at cost. After initial recognition an intangible asset
should be carried at its cost less any accumulated amortisation
and any impairment losses.
3. Ensure that if an item covered does not meet the definition of
an intangible asset, expenditure to acquire it or generate it
internally is recognised as an expense when it is incurred.
4. In some cases, an asset may incorporate both intangible and
tangible elements that are, in practice, inseparable. Ensure that
in determining whether such an asset should be treated under
AS 10, “Property, Plant and Equipment”, or as an intangible
asset under AS 26, “Intangible Assets” appropriate judgement
has been taken to assess as to which element is predominant.

Page 62
5. Auditor should also ensure that proper disclosure is made in

the financial statements about the carrying amount,
amortisation methods, useful lives, etc. in compliance of AS 26
and Schedule III to the Companies Act, 2013.
Audit Goodwill (a) Ensure that goodwill has been recognized in
procedure the books in compliance of AS 26. As per AS –
for Specific 26, “Intangible Assets”, internally generated

Intangible goodwill is not to be recognised as an asset,
Assets as it is not an identifiable resource controlled
by the enterprise that can be measured
reliably at cost.
(b) Examine the vendors’ agreement to ascertain
the amount of goodwill.
(c) Ensure that whenever business is acquired at
a price, payable in cash or otherwise, which is
in excess of the value of net assets taken over,
such excess amount is the goodwill.
(d) Ensure that only the amount paid to the
vendors not represented by tangible or
intangible assets, the value of which can be
measured reliably has been debited to
goodwill account.
(e) Ensure goodwill has not recognised in the
books by revaluation of assets or writing
back the amount of goodwill earlier written
off.

Page 63
(f) Ensure that the goodwill not yet written off

has been properly disclosed under the head
“Non-Current Assets” as per Schedule III
requirements.
(g) Ensure amortisation of goodwill over a
reasonable period as a matter of financial
prudence.
Patent (a) Obtain a list of patents owned by the client as
on the balance sheet date and verify
ownership of a patent by inspection of the
certificate issued in respect of grant of the
patent.
(b) Examine the agreement if it has been so as to
find out the total cost.
(c) In case of outright purchase of patent rights,
the purchase consideration, legal fees and
registration charges should be included in
cost. When they are developed within the
organisation, all costs incurred on their
development including legal and registration
expenses for registration of the patent should
constitute the cost.
(d) Check that the patent rights are alive and
legally enforceable.

Page 64
(e) Check that renewal fees have been paid on

due dates and being charged to revenue. The
last renewal receipt should be examined to
ascertain that the patent has not lapsed.
(f) Ascertain that the rate at which the value of

each patent is being written off is adequate
since the amount paid in respect of each
patent should be amortised over its life or a
lesser period if its commercial life is shorter;
its value would be completely written off by
the time it would cease to have a commercial
value.
(g) Ascertain that only the actual cost incurred in

the process has been capitalised.
Trade Mark 1. Obtain duly signed schedule of Trade Marks

and and Copyrights and confirm that all of them
Copyright are shown in the Balance Sheet.
2. Examine the written agreement in case of

assignment of Copyrights or transfer of trade
marks.
3. Ensure that trademarks and copyrights have

been duly registered under respective laws.
4. Verify existence of copyright by reference to

contract between the author & the entity and
note down the terms of payment of royalty.

Page 65
5. See that the value has been determined

properly and the costs incurred for the
purpose of obtaining the trademarks and
copyrights have been capitalised.
6. Ascertain that the legal life of the trademarks

and copyrights have not expired.
7. Ensure that amount paid for both the

intangible assets is properly amortised having
regard to appropriate legal and commercial
considerations, as per the provisions of AS 26
on Intangible Assets.
Disclosure 1. Classification of Intangible Assets into:

requirements
• Goodwill
of Schedule
III • Brands/trademarks
• Computer software
• Mastheads and publishing titles
• Mining rights
• Copyrights and patents and other Intellectual property

rights, services and operating rights
• Recipes, formulae, models, designs and prototypes
• Licenses and franchises
• Others (specifying nature)

Page 66
2. Reconciliation of gross and net carrying amounts of each class

of assets at the beginning and end of the reporting period
showing:
• Additions
• Disposals
• Acquisitions through business combinations
• Other Adjustments
• Amortization
• Impairment losses/reversals
3. Where a capital reduction scheme or a revaluation of assets has

taken place, every balance sheet subsequent to the reduction or
revaluation shall show the reduced/increased figures, the date
of the reduction/increase and the amount of reduction /
increase for the first 5 years subsequent to the reduction /
revaluation.
Important Questions
Q. No. 29: Explain with examples the audit procedure to establish the
existence of intangible fixed assets as at the period-end.
[RTP-Nov. 18, MTP-April 19, RTP-Nov. 19]
Q. No. 30: How will you verify the following:
(a) Intangible Assets [Nov. 15 (4 Marks)]
(b) Goodwill [May 05 (4 Marks)]
(c) Patents [Nov. 04 (4 Marks)]
(d) Trade Marks and Copyrights [May 17 (4 Marks)]

Page 67
Q. No. 31: You are an auditor of PQR Ltd. which has spent Rs. 10 lakhs on
Research activities of the product during period under audit.
Board of Directors want to recognize it as an internally generated
intangible asset. Advise and discuss the conditions necessary to be
fulfilled to recognize the intangible assets in the financial
statements. [May 19 (4 Marks)]
9.10 – Audit of Trade Payables and Other Current Liabilities
Classification A liability shall be classified as current when it satisfies any of the

of liabilities following criteria:
(a) it is expected to be settled in the company's normal operating

cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is due to be settled within twelve months after the reporting

date; or
(d) the company does not have an unconditional right to defer

settlement of the liability for at least twelve months after the
reporting date. Terms of a liability that could at the option of
the counterparty, result in its settlement by the issue of equity
instruments do not affect its classification.
All other liabilities shall be classified as non- current.
Assertions to Existence To ensure the existence of trade payables and

be examined other current liabilities as at the year end

Page 68
Completeness To ensure that trade payables and liability

balances that were supposed to be recorded
have been recognized in the financial statements.
Valuation To ensure that trade payables and other liability

balances have been valued appropriately.
Presentation To ensure that required disclosures for trade

and payables and other liabilities
Disclosure have been appropriately made.
Audit Compliance The auditor should study and evaluate the

Procedures Procedure system of internal control relating to liabilities to
determine the NTE of his other audit procedures.
(i) The procedure should ensure proper
recording of transactions.
(ii) The payments made to trade payables
should be in line with the approved policies.
(iii) There should be specific procedures for
payments against duplicate invoices as well
as for payments against accounts which have
remained unclaimed for quite some time.
(iv) There should be a procedure for preparation
of schedules of trade payables at periodic
intervals.

Page 69
(v) Statements of account should be called for

trade payables at periodic intervals and the
discrepancies, if any, should be duly
investigated and reconciled.
(vi) All adjustments in the trade payable

accounts such as rebates, allowances,
commissions etc., should require approval of
competent authority.
(vii) There should be appropriate cut-off

procedures in relation to transactions
affecting the creditor accounts.
Substantive Verification of trade payables and other current
Procedures liabilities may be carried out by employing the
following procedures:
(a) examination of records;
(b) direct confirmation procedure;
(c) analytical review procedures,
The NTE of substantive procedures to be
performed is, however, a matter of professional
judgement of the auditor which is based, inter
alia, on the auditor’s evaluation of the
effectiveness of the related internal controls.

Page 70
Examination 1. The auditor should check the adequacy of cut-

of Records off procedures adopted by the entity in
relation to transactions affecting the trade
payable accounts.
2. The auditor should examine the

correspondence and other relevant
documentary evidence to satisfy himself about
the validity, accuracy and completeness of
trade payables/acceptances.
3. In case there are any unusual payments

around the year-end, the auditor should
examine them thoroughly.
4. The auditor should review subsequent

transactions to identify/confirm material
liabilities outstanding at the balance sheet
date.
Direct 1. The verification of balances by direct

Confirmation communication with trade payables is
Procedures theoretically the best method of ascertaining
whether the balances are genuine, accurately
stated and undisputed, particularly where the
internal control system is weak.
2. The auditor employs direct confirmation

procedure with the consent of the entity
under audit. There may be situations where
the management of the entity requests the

Page 71
auditor not to seek confirmation from certain

trade payables. In such cases, the auditor
should consider whether there are valid
grounds for such a request. Before accepting a
refusal as justified, the auditor should
examine any available evidence to support the
management's explanations, e.g.,
correspondence between the entity and the
trade payables.
3. While determining the information to be

obtained, the form of confirmation, as well as
the extent and timing of application of the
confirmation procedure, the auditor should
consider all relevant factors such as the
effectiveness of internal control, the apparent
possibility of disputes, inaccuracies or
irregularities in the accounts, the probability
that requests will receive consideration, and
the materiality of the amounts involved.
4. The trade payables may be requested to

confirm the balances either (a) as at the date
of the balance sheet, or (b) as at any other
selected date which is reasonably close to the
date of the balance sheet.
5. The form of requesting confirmation from the

trade payables may be either (a) the 'positive'
form of request, wherein the creditor is

Page 72
requested to respond whether or not he is in

agreement with the balance shown, or (b) the
‘negative’ form of request, wherein the
creditor is requested to respond only if he
disagrees with the balance shown.
Analytical In addition to the audit procedures discussed

Procedures above, the following analytical review
procedures may often be helpful as a means of
obtaining audit evidence regarding the various
assertions:
(a) comparison of closing balances of trade

payables with the corresponding figures for
the previous year;
(b) comparison of the relationship between

current year trade payable balances and the
current year purchases with the
(c) comparison of actual closing balances of

trade payables, etc., with the corresponding
budgeted figures, if available;
(d) comparison of current year’s aging schedule

of trade payables with the corresponding
figures for the previous year;
(e) comparison of significant ratios relating to

trade payables with the similar ratios for
other firms in the same industry, if available;

Page 73
(f) comparison of significant ratios relating to

trade payables with the industry norms, if
available.
Disclosure Schedule III requires that other current liabilities to be classified

Requirements into:
as per • Current maturities of Long term debt
Schedule III
• Current maturities of finance lease obligations
• Interest accrued but not due on borrowings
• Interest accrued and due on borrowings
• Income received in advance
• Application money received for allotment of securities and

due for refund and interest accrued thereon.
• Unpaid matured deposits and interests accrued thereon
• Unpaid matured debentures and interest accrued thereon
• Other payables, specifying nature
Important Questions
Q. No. 32: Verification of liabilities is as important as that of assets,

considering if any liability is omitted (or understated) or
overstated, the Balance Sheet would not show a true and fair view
of the state of affairs of the entity. Explain stating also criteria for
a liability to be classified as current liability.
[RTP-Nov. 18, MTP-April 19]

Page 74
Q. No. 33: Liabilities include trade payables and other current liabilities,
deferred payment credits and provisions. Verification of
liabilities is as important as that of assets, considering if any
liability is omitted (or understated) or overstated, the Balance
Sheet would not show a true and fair view of the state of affairs of
the entity.
Advise stating clearly the audit procedure to establish the

existence of trade payables and other current liabilities as at the
period-end. [MTP-Aug. 18]
Q. No. 34: How will you vouch/verify: Trade Creditors? [Nov. 07 (5 Marks)]
9.11 – Audit of Loans and Advances and Other Current Assets
Classification An asset shall be classified as current when it satisfies any of the

of Assets following criteria:
(a) it is expected to be realized in, or is intended for sale or
consumption in, the company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is expected to be realized within twelve months after the
reporting date; or
(d) it is cash or cash equivalent unless it is restricted from being
exchanged or used to settle a liability for at least twelve
months after the reporting date.
All other assets shall be classified as non-current.

Page 75
Assertions to Existence To ensure the existence of loans and advances

be examined and other current assets as at the period- end.
Completeness To ensure that loans and advances and other
current asset balances that were supposed to be
recorded have been recognized in the financial
statements.
Valuation To ensure that loans and advances and other
current asset balances have been valued
appropriately.
Audit procedure for Examination of Valuation
(i) Examine the provision made for doubtful

accounts. For this purpose, auditor need to
review the process followed by the entity to
derive an allowance for doubtful accounts.
Compare the process used in the last year
and determine the appropriateness of
method used.
(ii) Obtain the ageing report of loans and
advances, split between not currently due,30
days old, 30-60 days old, 60- 180 daysold,
180- 365 days old and more than 365days
old.
(iii) Obtain list of loans and advances under

Page 76
dispute and compare with previous year.

(iv) Identify loans and advances that appear
doubtful and check the respective provisions
made. In case provisions are not been made,
inquire the reasons from management
(v) Examine bad loans/ advances write-offs.
Prepare schedule of movements on Bad
loans/ advances – Provision Accounts and
loans/ advances written off.
(vi) Examine whether the write-offs or other
reductions in the recoverable balances have
been approved by appropriate authority.
(vii)Examine whether the restatement of foreign
currency loans and advances/ other current
assets has been done properly.
Presentation To ensure that required disclosures for loans and

and advances and other current assets have been
Disclosure appropriately made
Audit Compliance (i) The system should specify total amount up to
Procedures Procedures which loans may be made; the purposes for

which loans may be made; the terms on
which such loans may be made; the persons
who are authorized to make loans; procedure
for ensuring compliance with relevant legal
requirements.

Page 77
(ii) All variations in the terms of loans and
advances should be duly approved in writing
by the competent authority.
(iii) Where security is taken against the loans,
the form and adequacy of security should be
reviewed by a responsible official.
(iv) The loan and security documents should be
kept in safe custody of a responsible official.
(v) The system should provide for identification
of cases where principal and/or interest
have become overdue or where terms are
not being complied with.
(vi) Confirmation of balances should be obtained
at periodic intervals in the same manner as
in the case of trade receivables.
Substantive 1. Auditor should examine whether the entity is

Procures empowered to make loans having regard to
requirements of governing laws and internal
regulations.
2. The auditor should examine the loan

documents and other evidence so as to
examine the terms and conditions on which
loans and advances has been granted.

Page 78
3. The auditor should ascertain whether the

parties to whom loans and advances have
been made have complied with the terms and
conditions relating to payment of interest,
repayment of loans or adjustment of
advances, etc.
4. In the case of defaults, e.g., where the

repayment of loans or advances or the
payment of interest are overdue, the auditor
should consider whether such defaults are
indicative of unwillingness or inability of the
parties concerned to make the payment.
5. The auditor should pay particular attention to

loans and advances given to parties in whom
directors or persons who are substantial
owners of the entity are interested.
6. The auditor should also examine any other

aspects required to be examined or reported
upon by the relevant statute. For example,
Sec. 143(1) of Companies act 2013, requires
the auditor to inquire "whether loans and
advances made by the company on the basis
of security have been properly secured and
whether the terms on which they have been
made are not prejudicial to the interests of the
company or its members".

Page 79
Disclosure Loans and 1. Classification of Loans and Advances:
Requirements Advances - Loans and Advances to Related parties

of Schedule III (giving details thereof)
2. Sub-classification of Loans and Advances:
- Secured, considered good
- Unsecured, considered good
- Doubtful
3. Allowance for bad and doubtful debts
disclosed under relevant heads
4. Debts due from:
- Directors or other officers of the company
- Amounts due by firms in which any
director is a partner
- Amounts due by private companies in
which any director is a director or member
- to be aggregated and separately stated
Other All-inclusive heading which incorporates current
Current assets that do not fit in other asset categories.
Assets Specifying nature of all items.

Page 80
Important Questions
Q. No. 35: Describe the criteria for classification of assert as current asset.
Q. No. 36: Write the audit procedures to be performed as an auditor for
valuation (assertion) of: Loans and Advances and other current
assets. [Nov. 18 (5 Marks)]
9.12 – Audit of Provisions and Contingent Liabilities
Features of Provision A provision is a liability which can be measured

Provisions
only by using a substantial degree of estimation.
and
Contingent A provision should be recognised when:
Liabilities
(a) an enterprise has a present obligation as a
result of a past event;
(b) it is probable that an outflow of resources
embodying economic benefits will be
required to settle the obligation; and
(c) a reliable estimate can be made of the
amount of the obligation. If these conditions
are not met, no provision should be
recognised.

Page 81
Contingent A contingent liability is:

Liability (a) a possible obligation that arises from past
events and the existence of which will be
confirmed only by the occurrence or non-
occurrence of one or more uncertain future
events not wholly within the control of the
enterprise; or
(b) a present obligation that arises from past
events but is not recognised because:
(i) it is not probable that an outflow of
resources embodying economic benefits
will be required to settle the obligation;
or
(ii) a reliable estimate of the amount of the
obligation cannot be made.
Assertions to Existence To establish the existence of provisions as at the

be examined period- end
Completeness Provisions that were supposed to be recorded

have been recognized in the financial statements.
Valuation Provision balances have been valued

appropriately.
Presentation Required disclosures for provisions have been

and appropriately made
Disclosure

Page 82
Audit 1. Obtain a list of all provisions and compare them with balances
Procedure for in the ledger.
verification
2. Inspect the underlying arrangements like appointment
agreement with employees to understand the entity’s
commitment towards defined benefits, agreement with
customers to assess warranty commitments, any legal and
other claims on the entity i.e. litigations.
3. 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.
4. Review minutes of the meetings of the Board of Directors or

other similar bodies.
5. Review list of pending law suits and obtain a certificate and

opinion of the lawyer dealing with the cases.
6. Review of records relating to contingent liabilities maintained

by the company.
7. Review of terms and condition of grants and subsidy availed.
8. Obtain representation from the management that all known

contingent liabilities have been included in the accounts and
disclosed properly.
9. Ensure that proper disclosure is made of all the contingent

liabilities as per the requirements of AS-29 and Schedule III to
the Companies Act, 2013.

Page 83
Disclosure Provisions Long Classification of Provisions as:

Requirements Term • Provision for employee benefits
of Schedule III
• Others (Specifying nature)
Short Classification of short-term

Term provisions into:
• Provision for employee benefits
• Others, specifying nature
Contingent The following shall be disclosed to the extent not

Liabilities provided for:
1. Classification of Contingent liabilities:
- Claims against the company not

acknowledged as debts
- Guarantees.
- Other money for which the company is

contingently liable.
2. Classification of Commitments into:
- Estimated amount of contracts remaining

to be executed on capital account and not
provided for
- Uncalled liability on shares and other

investments partly paid
- Other commitments (specifying nature)

Page 84
Disclosure • For each class of provision, an entity shall disclose:

Requirements (a) the carrying amount at the beginning and end of the period;
of Ind-AS 37 (b) additional provisions made in the period, including
increases to existing provisions;
(c) amounts used (i.e. incurred and charged against the
provision) during the period;
(d) unused amounts reversed during the period; and
(e) the increase during the period in the discounted amount
arising from the passage of time and the effect of any
change in the discount rate. Comparative information is not
required.
• An entity shall disclose the following for each class of
provision:
(a) a brief description of the nature of the obligation and the
expected timing of any resulting outflows of economic
benefits;
(b) an indication of the uncertainties about the amount or
timing of those outflows. Where necessary to provide
adequate information, an entity shall disclose the major
assumptions made concerning future events; and
(c) the amount of any expected reimbursement, stating the
amount of any asset that has been recognised for that
expected reimbursement.
• Unless the possibility of any outflow in settlement is remote, an
entity shall disclose for each class of contingent liability at the
end of the reporting period a brief description of the nature of
the contingent liability and, where practicable:

Page 85
(a) an estimate of its financial effect;

(b) an indication of the uncertainties relating to the amount or
timing of any outflow; and
(c) the possibility of any reimbursement.
Important Questions
Q. No. 37: Write a short note on: Contingent Liability.
Q. No. 38: How will you vouch/verify: Contingent Liabilities.
[May 07, May 17 (4 Marks)]
Section B “Audit of Income Statement Items”
9.12 – Audit of Sale of Products and Services
Audit Occurrence Ensure that sales recorded represent goods

Procedures shipped/ services performed during thePeriod.
Completeness Ensure that all sales made during the period

were recorded and there in no understatement
or overstatement.
Measurement Ensure that all sales are accurately measured as

per applicable accounting standards and
correctly journalized, summarized, and posted.
Presentation Ensure that required disclosures for sales have

and been appropriately made.
Disclosure

Page 86
Audit Steps to be • Identify the control points over sales

procedure followed • Tests the identified controls to determine how
strong and reliable they are. If controls are
assessed as strong, the auditor can reduce the
amount of substantive testing.
• Selects a random sample of transactions and
examines the related customer purchase
orders, invoices and customer statements.
• Performing substantive audit procedures like
vouching and substantive analytical procedure
(SAP). SAP will consist of sales trend analysis,
comparison of sales figures with previous
accounting period etc.
• Verification of revenue may be carried out by
employing the following procedures:
(a) Examination of records;
(b) Analytical review procedures.
Examination 1. The auditor should examine whether the

of Records basis of recognition of revenue by the entity
is in accordance with the AS 9, Revenue
Recognition.
2. The auditor should examine whether the

entity has instituted adequate cut-off
procedures in relation to sales and sale
returns.

Page 87
3. The auditor should examine selected entries

in the sales journal with reference to the
related sale invoices, dispatch documents and
other supporting documents.
4. The auditor should examine selected entries

in the sales return journal with reference to
the receiving reports in respect of goods
returned, credit notes and other supporting
documents.
5. In respect of goods sent on approval, the

auditor should particularly examine that
revenue in respect of such goods is not
recognised until
(a) the goods have been formally accepted

by the buyer, or
(b) the buyer has done an act adopting the

transaction, or
(c) the time period for rejection has elapsed

or where no time has been fixed, a
reasonable time has elapsed.
6. In respect of sales to intermediate parties, the

auditor should examine that revenue from
such sales is not recognised until the
significant risks and rewards of ownership
have passed.

Page 88
7. Where the consideration is receivable in
installments and includes an element of
interest, the auditor should examine that the
revenue attributable to the sale excludes the
interest element.
8. In respect of export sales, the auditor should
carry out the following additional
procedures:
(a) The auditor should examine that revenue
from export sales in which consideration
is receivable in a foreign currency is
recorded at an appropriate amount in
accordance with AS 11, Accounting for
the Effects of Changes in Foreign
Exchange Rates.
(b) The auditor should obtain a written
representation from the management to
the effect that the entity has complied
with the legal and regulatory
requirements relating to exports.
9. In respect of revenue arising from services
rendered, the auditor should examine the
related agreements and other documents.

Page 89
Analytical In addition to the audit procedures discussed

Procedures above, the following analytical procedures may
often be helpful as a means of obtaining audit
evidence:
(a) Comparison, product-wise and location-wise,

of revenue for the current year with the
corresponding figures for previous years.
(b) Comparison of ratio of gross margin to sales

for the current year with the corresponding
figures for previous years.
(c) Comparison of ratio of sales returns to sales

(d) Comparison of ratio of trade discount to sales

(e) Comparison of ratio of excise duty/sales

tax/export incentives to sales for the current
year with the corresponding figures for
previous years.
(f) Comparison, product-wise and location-wise,

of quantity sold during the year with the
corresponding figures for previous years.
(g) Product-wise reconciliation of quantity sold

during the year with opening stock,
purchases/production and closing stock.

Page 90
Audit Consignment 1. Verify the terms of agreement between the

procedure in Sales consignor and the consignee to ascertain the
specific cases terms and conditions regarding commission
and other expenses.
2. Ensure that the goods consigned are not

treated as ordinary sales.
3. Ensure that the gross sale proceeds as

mentioned in the account Sales has been
credited to the Consignment Account and
debited to the consignee's account.
4. Ascertain that credit has been taken only for

the profit on the goods sold through the
consignee before the year end. No profit
should be taken for the profit on goods
remaining in the hands of the consignee.
5. Ensure that the stock lying with the consignee

at the end should be taken in the balance
sheet at cost on a consistent basis and
credited to the Consignment A/c to arrive at
the result of the consignment transactions.
6. Obtain confirmation of the balance in the

account of the consignee from the consignee.
7. In case, goods are consigned at invoice price,

auditor should ensure that the necessary
adjustments to remove the loading have been
made.

Page 91
8. Examine the adjustments made at the year

end in respect of the goods not yet sold,
commission and the expense incurred by
consignee.
Good Sent out (a) Check maintenance of separate memoranda

on Sale or records of goods sent out on sale or return.
Return basis Only after approval from customer, personal
account of customer is debited and the sales
account is credited.
(b) Ensure that the price of such goods is

unloaded from the sales account and the
debtor’s record before the approval from
customer.
(c) In respect of the goods for which approval

period has expired, ensure that either goods
have been received back or customer’s
account have been debited.
(d) In respect of the goods for which approval

period has not expired till the close of the
year and lying with the party, ensure that
cost of such goods has been included in the
closing stock.
Disclosure A Company shall disclose separately by way of notes on the face of

Requirements the Statement of Profit and Loss-
of Schedule III (a) In respect of a company other than a finance company:
Revenue from Operations

Page 92
Revenue from—
(a) Sale of products;
(b) Sale of services;
(c) Other operating revenues;
Less:
(d) Excise duty.
(i) In respect of a finance company:
Revenue from Operations
Revenue from—
(a) Interest; and
(b) Other financial services.
Important Questions
Q. No. 39: How will you vouch/verify the following:
(a) Consignment Sales
(b) Goods sent out on sale or return basis. [Nov. 09 (5 Marks)]
9.13 – Audit of Other Incomes (Interest, Dividend, Profit/Loss on sale of

Investments etc. )
Recognition of Interest on Interest income on fixed deposits is recognized

Income Fixed on a time proportion basis taking into account
Deposits the amount outstanding and the applicable
interest rate.

Page 93
Interest Interest income from debt instruments is

Income from recognized using the effective interest rate
debt method.
instruments
Dividend Dividends are recognised in the statement of

profit and loss only when:
(i) the entity’s right to receive payment of the

dividend is established;
(ii) it is probable that the economic benefits
associated with the dividend will flow to the
entity; and
(iii) the amount of the dividend can be
measured reliably.
Gain (Loss) Gain/(loss) on sale of investment is recorded as

on other income on transfer of title from the entity
investments and is determined as the difference between the
redemption price and carrying value of the
investments.
Assertions to Occurrence Recorded other income was earned during the

be examined period.
Completeness Other income earned during the period was

appropriately recorded and there in no
understatement or overstatement.

Page 94
Measurement Other income has been measured appropriately

as per the applicable accounting standards.
Presentation Required disclosures for other income have

and been appropriately made.
Disclosure
Audit Interest on • Obtain a list of all fixed deposits exist at the

Procedures Fixed beginning of the year and newly made during
Deposits the audit, along with the applicable interest
rate and the number of days for which the
deposit was made.
• Verify the arithmetical accuracy of the
interest calculation by multiplying the
deposit amount with the applicable rate and
number of days during the period under
audit.
• For deposits outstanding as at the year end,
obtain direct confirmation 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.
• Obtain a copy of Form 26AS (TDS) and
reconcile the interest reflected therein to the
calculation shared by client.

Page 95
Dividend Verify that the dividend is recognised in the

statement of profit and loss only when the
entity’s right to receive payment of the dividend
is established, provided it is probable that the
economic benefits associated with the dividend
will flow to the entity and the amount of the
dividend can be measured reliably.
Gain (Loss) • Verify that Gain/(loss) on sale of investment

on sale of in mutual funds is recognised as other income
investment in only on transfer of title from the entity and is
Mutual Funds determined as the difference between the
redemption price and carrying value of the
investments.
• For this 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.
Disclosure 1. Classification of Other Income into:

Requirements ➢ Interest Income (except for a finance company)
of Schedule III
➢ Dividend Income
➢ Net gain/loss on sale of Investments
➢ Other Non-Operating Income (net of expenses directly

attributable)
2. Dividend from foreign company
3. Adjustments to the carrying amount of investments

Page 96
4. Net gain from foreign currency transactions and translations

other than those considered as Finance Costs
5. Any item of revenue which exceed 1% of revenue from

operations or Rs. 1 lakh, whichever is higher.
Important Questions
Q. No. 40: As statutory auditor of the company, list out audit procedures
required to be undertaken for the following:
(i) Interest income from fixed deposits.
(ii) Dividend income.
(iii) Gain/ (Loss) on sale of investment in Mutual funds.
Also indicate disclosure requirements of above as per Companies

Act, 2013. [May 18 (4+2+2+2 Marks)]
9.14 – Audit of Purchases
Assertions to Occurrence Ensure all purchases recorded in books of

be examined account represent goods actually received/
services availed during the period
Completeness Ensure all purchases made during the period

were recorded and there in no understatement
or overstatement.
Measurement Ensure all purchases have been measured

appropriately

Page 97
Presentation Ensure that required disclosures for purchases
and Disclosure have been appropriately made
Audit Steps to be • Identify the control points over purchases

procedure followed • Tests the identified controls to determine
how strong and reliable they are. If controls
are assessed as strong, the auditor can
reduce the amount of substantive testing.
• Selects a random sample of transactions and
examines the related purchase orders,
Goods Received Note (GRN), purchase
invoices, inward gate entry register and
vendor reconciliation/ statements.
• Performing substantive audit procedures
like vouching and substantive analytical
procedure (SAP). SAP will consist of
purchase trend analysis, comparison of
purchase figures with previous accounting
period etc.
• Verification of revenue may be carried out
by employing the following procedures:
(a) Examination of records;
(b) Analytical review procedures.

Page 98
Examination of While examining records of purchases, the

Records auditor should consider the followings:
1. Ensure that the date of invoice falls within

the accounting period for which audit is to
be performed;
2. Ensure that the invoice is made out in the

name of the client;
3. Ensure that the credit to the supplier has

been given with the full amount of the
invoice;
4. Ascertain the nature of goods purchased

and ensure that the goods purchased are
those that are regularly dealt in by the
concern and that the price payable has
been correctly arrived at;
5. Trace the recording of purchases to an

appropriate nominal account or accounts;
6. Ensure that the invoice has been verified

by the accountant as well as by the store-
keeper to indicate that the delivery of
goods have been taken by him.; and
7. Ensure that payment has been made only

after authorisation by the manager or some
other official, competent to sanction
payment, has authorised its payment.

Page 99
Analytical Perform analytical procedures to obtain audit

Procedures evidence as to overall reasonableness of
purchase quantity and price which may
include:
(i) Consumption Analysis: Auditor should

examine consumption of raw material from
manufacturing account and compare the
same with previous years with closing
stock and ask for the reasons from
management for any significant variations
noticed.
(ii) Stock Composition Analysis: Auditor
should collect reports from management
for composition of stock i.e. raw materials
as a percentage of total stock and compare
the same with previous year and ask for
reasons from management for any
significant variations noticed.
(iii) Ratios: Auditor should compare the
creditors turnover ratios and stock
turnover ratios of the current year with
previous years.
(iv) Quantitative Reconciliation: Auditor
should review quantitative reconciliationof
closing stocks with opening stock,
purchases and consumption

Page 100
Special 1. Adjustment of Invoice Amount: In case, the total amount of

Precautions the invoice has been adjusted in separate accounts, the entire
in verification amount so adjusted should be added together to confirm that
of Purchase
there has not been error under adjustment.
Invoices
2. Duplicate copy of Invoice: Ensure that if the payment is
adjusted on the basis of duplicate invoice, the original invoice
also needs to be marked as paid at the same time.
3. Compliance of special conditions: If supplies are received on

certain special conditions, verified that these conditions are the
same as were agreed to at the time the order was placed, e.g.,
payment of freight and insurance charges of goods while in
transit, etc.
4. Timings of Payment: If the amount of an invoice was payable

after the lapse of some time, subsequent to the receipt of goods,
it should be ascertained that it has not been paid earlier and
the benefit of cash discount, if any, has been obtained.
5. Goods purchased for personal use: Where goods have been

purchased for the use of an officer but the invoice is made out
in the name of the entity, it should be seen that the cost has
been charged to the officer concerned and not to the Purchases
Account of entity.
6. Purchases from related parties: If purchases are made from

the associated concerns, ensure that such purchases are made
only under an appropriate sanction.

Page 101
7. Inspection before taking delivery: Ensure that the goods

were inspected on arrival and the delivery note and the goods
inward note should be examined.
8. Goods delivered directly to customer: The auditor should

make appropriate inquiries in order to establish that the
transaction was appropriately authorised by a responsible
official. A copy of the delivery note signed by the account
receivable on delivery of the goods should be examined, and it
should be ascertained whether the account receivable is a
regular purchaser of the company’s goods and not an employee
of the company wishing to take advantage of a weakness in the
system.
9. Examination of inventory records: Though it is not

practicable for an auditor to verify that every item of goods
purchased has been entered in inventory, he should trace into
the inventory record at least purchases of goods during the
opening and closing months and accept the correctness of the
rest only if he is satisfied that there exists a system of internal
control which prevent payment being made for any goods not
received in inventory.
Disclosure (a) Cost of In case of Manufacturing Companies:

Requirements Materials - Raw Materials under broad heads
of Schedule III Consumed
- Goods purchased under broad heads
(b) Purchases In case of Trading Companies:

of Stock-in- Purchases of goods traded in by Company
trade under broad heads

Page 102
(c) Changes in Work in progress to be shown under broad

Inventories heads
of Finished
Goods, WIP
& Stock-in-
trade
Important Questions
Q. No. 41: Discuss the special precautions in verification of purchase invoice.
Q. No. 42: While auditing purchases which types of analytical procedures will
be performed by the auditor to obtain audit evidence as to overall
reasonableness of purchase quantity and price. [May 19 (4 Marks)]
Or
Discuss the audit procedure to be considered by an auditor while

performing analytical procedure to obtain audit evidence as to
overall reasonableness of purchase quantity and price.
[Nov. 19 (3 Marks)]
9.15 – Audit of Employee Benefit Expense
Audit Occurrence Ensure employee benefit expenses recorded in

Procedures books of account were actually incurred during
the period

Page 103
Completeness Ensure that employee benefit expenses

pertaining to the period have been recorded
appropriately and there in no understatement or
overstatement.
Measurement Ensure that employee benefit expenses have

been measured appropriately.
Presentation Ensure that required disclosures for employee

and benefit expenses have been appropriately made.
Disclosure
Audit • Obtain an understanding of process of recording employee

Procedure attendance.
• Obtain a list of employees along with a monthly movement split
between new hires, leavers and continuing employees.
• In case of new employees, select few cases on random basis
and obtain the appointment letter and verify whether the
salary for first month and subsequent months was processed
as per the agreed terms.
• In case of employees who resigned, select few cases on random
basis and 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.

Page 104
• Obtain the monthly salary registers for the complete year.

Compile a monthly payroll reasonability by calculating the
average salary per employee per month and compare with the
previous year and preceding month.
• Verify whether provision has been made for all employee
benefits and obligations like bonus, gratuity, leave encashment.
• In case provident fund (PF), employee state insurance (ESI) are
applicable to the entity, determine a reasonable amount by
applying the rate to the basic wages and comparing to the
amount recorded in books and analyse reasons for variance, if any.
• Perform analytical procedures to obtain audit evidence as to
overall reasonableness of employee benefit expense.
Disclosure • Salaries and Wages

Requirements • Contribution to Provident and Other Funds
of Schedule III • Expenses on Employee Stock Option Scheme (ESOP) and
Employee Stock Purchase Plan (ESPP)
• Staff Welfare Expenses
Important Questions
Q. No. 43: State the disclosure requirements in respect of Statement of point

and loss as per Schedule III of Companies Act, 2013, in case of
Employee benefits expenses. [Nov. 16 (4 Marks)]
Q. No. 44: While reviewing Employee benefits expenses of a company, how

you as an auditor you will evaluate its hiring, appraisal and
retirement process? [May 19 (3 Marks)]

Page 105
9.16 – Audit of Depreciation and Amortisation
Meaning and AS 10 “Property, Plant and Equipment” defines depreciation as

purpose of the systematic allocation of the depreciable amount of an asset
Depreciation over its useful life.
Purposes of Depreciation
(a) To provide the funds for the replacement of assets: This is

accomplished by retaining the amount of depreciation
charged in the profit and loss account in the business.
(b) To determine true cost of manufactured goods: As the
value of fixed assets depletes gradually by consumption
during the process of production, it is necessary that such
consumption of value be charged in the accounts for
determination of the true cost of production.
(c) To determine the profit or loss for the year: Depreciation
being an expense represented by the loss in value of fixed
assets arising on use, it is charged to the profit and loss
account for determining the profit or loss during a year
(d) To show a true and fair value of entity's assets in the
balance sheet: since the original costs of fixed assets
gradually decreases due to use and other factors, it is
improper to continue to carry such assets at original costs.
Therefore, the amount of depreciation charged in the profit
and loss account representing the loss in value of the assets is
deducted from the original cost on a cumulative basis so as to
reflect in the balance sheet a true and fair value of the fixed
assets.

Page 106
Audit Occurrence Recorded depreciation and amortisation

Procedures expenses were actually incurred during the
period.
Completeness Depreciation and amortisation expenses

pertaining to the period have been recorded
appropriately and there in no understatement/
overstatement.
Measurement Depreciation and amortisation expenses have

been measured appropriately.
Presentation Required disclosures for depreciation and

and amortisation have been appropriately made
Disclosure
Auditor's The auditor should pay attention to the following points:

Duty
(i) Understand and evaluate the adequacy and effectiveness of
internal controls as regards accounting, maintenance and
safeguarding of fixed assets and that a proper distinction is
being made between capital expenditure and revenue
expenditure.
(ii) Check that the amount of depreciation is accurately

calculated considering the acquisitions or disposal, if any, of
the fixed assets during the year.
(iii) Ensure that the company has complied with the

requirements of AS 10 on Property, Plant and Equipment.

Page 107
(iv) Also ensure that the provisions of Section 123(1) of the

Companies Act have also been complied with by the
company.
(v) Perform analytical procedures to obtain audit evidence as to

overall reasonableness of depreciation and amortisation
expense.
Disclosure As per AS 10 “Property, Plant & Equipment, the financial

Requirements statements should disclose, for each class of property, plant and
equipment:
• the depreciation methods used;
• the useful lives or the depreciation rates used. In case the

useful lives or the depreciation rates used are different from
those specified in the statute governing the enterprise, it
should make a specific mention of that fact;
• the gross carrying amount and the accumulated depreciation

(aggregated with accumulated impairment losses) at the
beginning and end of the period.
Important Questions
Q. No. 45: Define Depreciation and discuss various purposes of providing

depreciation. [May 11 (8 Marks)]
Or
Write short note on: Purposes of providing depreciation.
[Nov. 12, Nov. 14, May 17 (4 Marks)]

Page 108
Q. No. 46: Mention any five attributes to be considered by an auditor while

verifying for depreciation and amortisation expenses.
[May 18 (5 Marks)]
9.17 – Audit of Other Expenses (Power & Fuel, Rent, Repairs, Insurance,
Travelling etc.)
Composition Other expenses may comprise of following expenses:

of other (a) Consumption of stores and spare parts;
Expenses (b) Power and fuel;
(c) Rent;
(d) Repairs to buildings;
(e) Repairs to machinery;
(f) Insurance;
(g) Rates and taxes, excluding, taxes on income;
(h) Miscellaneous expenses,
Assertions Occurrence Recorded other expenses were actually incurred

to be during the period.
examined
Completeness Other expenses pertaining to the period have been
recorded appropriately and there in no
understatement or overstatement.
Measurement Other expenses have been measured

appropriately.
Presentation Required disclosures for other expenses have

and Disclosure been appropriately made.

Page 109
Attributes • Whether the expenditure pertained to current period under

to be audit;
examined • Whether the expenditure qualified as a revenue and not capital
while expenditure;
vouching • Whether the expenditure had a valid supporting like travel
expenses 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 Rent expense • Obtain a month wise schedule of rent payment

Procedures along with the rent agreements.
• Examine whether rent expense has been
recorded for all 12 months and whether the
rent paid is as per the underlying agreement.
• Examine whether agreement contains any
escalation clause, if yes, verify whether rent has
been increased / adjusted during the period
only as per escalation clause.
• Verify whether the agreement is in the name of
the entity.
• Verify whether the expense pertains to
premises used for running business operations
of the entity.

Page 110
Power and • Obtain a month wise expense schedule of

fuel expense payment towards power and fuel along with
the power bills.
• Examine whether the expenses have been
recorded for all 12 months.
• 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.
• Analyse the monthly power units consumed by
linking it to units of finished goods produced
and investigate reasons for variance in monthly
trends.
Insurance • Obtain a summary of insurance policies taken

expense 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 • Obtain a month wise and consultant wise

professional summary.
expenses • In case of monthly retainer ship agreements,
verify whether the expenditure for all 12
months has been recorded correctly.
• For non- recurring expenses, select a sample on
random basis and vouch for the attributes
discussed above.

Page 111
• Special focus should be given 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 • Select a sample on random basis and vouch for

and the occurrence, completeness, measurement
maintenance, and appropriate disclosure.
printing and • Wherever possible, the auditor should try and

stationery, prepare a summary of expenditure on monthly
miscellaneous basis and then analytically compare the trends.
expenses
• In addition, auditor should perform analytical procedures to

obtain audit evidence as to overall reasonableness of other
expense which may include expenditure per unit produced.
• Auditor should analyse expense per unit produced and compare
the same with previous years and prevent industry trends and
ask for the reasons from Management If any significant
variations are found.
Important Questions
Q. No. 47: “While the auditor may choose to analyse the monthly trends for
expenses like rent, power and fuel but for other expenses, an
auditor generally prefers to verify other attributes.” Mention those
attributes. [Nov. 18 (5 Marks)]

Page 112
Q. No. 48: Explain the audit procedure to vouch/verify:
(i) Rent expenses

(ii) Power and Fuel expenses [RTP-May 19]
Objective Type Questions (True/False, Correct/Incorrect)
1 In vouching payments, the auditor does not merely check proof that
money has been paid away.
Answer: Statement is correct
The object of vouching is not merely to ascertain that money has
been paid away, but also to obtain reasonable assurance with regard
to various assertions like authorisation, completeness, cutoff,
classification, validity etc.
2 It is not essential to verify the sale proceeds of scrap which did not have a
significant value if the company had a good accounting and costing
systems.
Answer: Statement is incorrect.
Auditor cannot overlook other aspects like existence of internal
control, percentage of scrap produced, sale price of scrap etc.
3 Employee benefits expense represents the amount an entity pays to its

employees for their labour/ efforts only.

Page 113
Employee benefits expense represents the aggregate amount an

entity pays to its employees for their labour/ efforts, as well as
associated expenses such as perquisites/benefits, post- employment
benefits like gratuity, superannuation, leave encashment, provident
fund contribution etc.
4 Dividends are recognised in the statement of profit and loss only when
the entity’s right to receive payment of the dividend is established.
Recognition of dividend in the statement of profit and loss is subject

to satisfaction of following conditions:
(a) the entity’s right to receive payment of the dividend is

established;
(b) it is probable that the economic benefits associated with the
dividend will flow to the entity; and
(c) the amount of the dividend can be measured reliably.
5 “Sweat Equity Shares” means equity shares issued by the company to

employees or directors at a premium or 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.
As per section 2(88) of Companies Act, 2013 “Sweat Equity Shares”

means equity shares issued by the company to employees or

Page 114
directors at a discount or 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.
6 There is no difference between reserves and provision.
• Reserves are amounts appropriated out of profits which are not

intended to meet any liability, contingency, commitment or
diminution in the value of assets known to exist at the date of the
Balance Sheet.
• Provisions are amounts charged against revenue to provide for

depreciation, renewal or diminution in the value of assets or a
known liability the amount of which cannot be determined with
substantial accuracy or a claim which is disputed.
7 Capital reserves represent profits that are available for distribution to

shareholders held for the time being or any one or more purpose.
Capital reserve represents surplus or profit earned in respect of

certain types of transactions (like sale of fixed assets at a price in
excess of cost, realisation of profits on issue of forfeited shares, etc.)
which are not regarded by the directors as free for distribution as a
dividend.
Profits that are available for distribution to shareholders held for the
time being or any one or more purpose are generally classified as
Revenue Reserve.

Page 115
8 Capital reserve, generally, can be utilised for writing down fictitious

assets or losses or (subject to provisions in the Articles) for issuing bonus
shares if it is realised.
Answer: Statement is correct.
• Capital reserve represents surplus or profit earned in respect of

certain types of transactions (like sale of fixed assets at a price in
excess of cost, realisation of profits on issue of forfeited shares,
etc.) which are not regarded by the directors as free for
distribution as a dividend.
• Capital reserve, can be utilised for writing down fictitious assets or
losses or for issuing bonus shares if it is realised. But the amount of
share premium or capital redemption reserve account can be
utilised only for the purpose specified in Sections 52 and 55
respectively of the Companies Act, 2013.
9 If Company X’s balance sheet shows building with carrying amount of Rs.
100 lakh, the auditor shall assume that the management has only
asserted that the building recognized in the balance sheet exists as at the
period-end.
Showing building with carrying amount of Rs. 100 lakhs in the

balance sheet entitled the auditor to assume that the management
has represented that:
• The building recognized in the balance sheet exists as at the

period- end (existence assertion);

Page 116
• Company X owns and controls such building (Rights and

obligations assertion);
• The building has been valued at Rs. 100 Lakhs (Valuation
assertion);
• All buildings owned and controlled by Company X are included
within the carrying amount of Rs. 100 lakhs (Completeness
assertion).
10 Authorised capital is the sum stated in the memorandum as the capital of

the company with which it is to be registered being the maximum amount
which it is authorised to raise by issuing shares, and upon which it pays
the stamp duty.
Answer: Statement is Correct.
Section 2(8) of the Companies Act, 2013, defines “Authorised capital”

or “Nominal capital” as such capital as is authorised by the
memorandum of a company to be the maximum amount of share
capital of the company.
11 The securities premium account may only be applied by the Company

towards the issue of unissued shares of the company to the members of
the company as fully paid bonus shares.
As per Section 52 of Companies Act, 2013, securities premium

account can be utilised for below mentioned 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;

Page 117
(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.
12 A company can issue its sweat equity shares at discounted price.
Answer: Statement is correct.
• As per Sec. 53 of the Companies Act, 2013, a company shall not

issue shares at a discount. However, exception has been given in
the case of an issue of sweat equity shares.
13 A company shall disclose by way of notes additional information

regarding aggregate expenditure and income for an item which exceeds
₹1,00,000.
• As per Schedule III to the Companies Act, 2013, a company shall

disclose by way of notes additional information regarding
aggregate expenditure and income for an item which exceeds 1%
of the revenue from the operation or ₹1,00,000 whichever is
higher.
14 A Special Resolution is required by company to authorize issue of shares

at a discount. [Nov. 09 (2 Marks)]

Page 118
Answer: Statement is Incorrect.
As per Section 53 of Companies Act, 2013, a company cannot issues

shares at a discount.
15 The Statutory Auditor is required to verify inventory physically.
[Nov. 14 (2 Marks)]
• Physical verification of inventories is the responsibility of the
management of the entity.
• However, as per SA 501 “Audit Evidence - Specific Consideration
for Selected Items” where the inventories are material and the
auditor are placing reliance upon the physical count by the
management, the auditor should attend the stock-taking.
16 Depreciation is charged by the company on purchase of stand-by
depreciable assets which are ready to use. [Nov. 17 (2 Marks)]
Answer: Statement is Correct.
• As per AS 10 “Property, Plant and Equipment, depreciation of an
asset begins when it is available for use, i.e., when it is in the
location and condition necessary for it to be capable of operating in
the manner intended by management.
• Therefore, it is irrelevant, whether the asset is in active use or held
in standby mode.

Page 119
17 Vouching of payments is merely check proof that money has been paid.
[Nov. 17 (2 Marks)]
• Vouching is an act of examining vouchers with an objective to

establish the authenticity of the transactions recorded in the
primary books of account.
• Vouching may be classified as substantive audit procedure which

aims at verifying the genuineness and validity of a transaction
contained in the accounting records. Vouching is used to ensure
that various transactions for the period are fairly & truly recorded
in the books.
18 Negative balance of ‘Reserves & Surplus’ is shown on the Assets side of

Balance Sheet. [Nov. 17 (2 Marks)]
As per General Instructions for preparation of Balance Sheet as given

in Schedule III to Companies Act, 2013, Balance of ‘Reserves and
Surplus’ should be shown on the liabilities side of Balance sheet even
if it has negative balance.
19 According to Section 53 of the Companies Act, 2013, a company can issue

shares at a discount. [RTP-Nov.19]
• As per Sec. 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.

Page 120
20 An intangible asset is an identifiable monetary asset. [RTP-Nov.19]
Answer: Statements is incorrect.
• An intangible asset is an identifiable non-monetary asset, without

physical substance, held for use in the production or supply of
goods or services, for rental to others, or for administrative
purposes.
-------------------------------

Page 121
Summary of Examination Weightage

Attempt Marks of Marks of Topics Covered
Objective Subjective
Questions* Questions
May 2018 0 5 + 10 + 5 Revenue Expenses to be capitalised +
Verification of Other Incomes +
Verification of depreciation
Nov. 2018 0 5 + 10 + 5 Attributes of expenses to be examined
+
Audit procedures for Valuation of
Loans and Advance and Other Current
Assets AND Finished Goods and Goods
for resale +
Planning Attendance at Physical
Inventory Count
May 2019 0 4+4+3+3 Conditions to recognise intangible
assets + Analytical Procedures while
auditing purchases + Verification of
Employee Benefit Expense +
Utilisation of Securities Premium
balance
Nov. 2019# 0 4+3+3 Issue of Shares at a discount +
Disclosure requirements of Schedule
III for each component of other Equity
+ Analytical Procedures while auditing
purchases
May 2020
Nov. 2020
May 2021
Nov. 2021
May 2022
Nov. 2022
* Compulsory Question

Page 122
Notes
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________

Page 123
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________
__________________________________________________________________________________________________

Page 124

Auditing and Assurance

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Auditing and Assurance

Uploaded by

Copyright:

Available Formats

Chapter 9 “Audit of Financial Statements” ©www.altclasses.

Compiled by: Pankaj Garg

Audit of Items of Financial Statements

Meaning of SA 315 “Identifying and Assessing the Risk of Material Misstatements

Assertions Income (a) Occurrence: Transactions recognized in the

Balance (a) Existence: Assets, liabilities and equity balances

Compiled by: Pankaj Garg

(b) Completeness: All assets, equity and liabilities

Presentation (a) Occurrence and Existence: Transactions and

Compiled by: Pankaj Garg

the Financial Statements?

(i) Statement of Profit and Loss

Travelling Expenditure Rs. 50,000

(ii) Balance Sheet

Trade receivable Rs. 2,00,000

Answer: Travelling Expenditure:

• Expenditure has been incurred for the purpose of travelling.

• Travelling has been undertaken during the year under audit.

• Total expenditure incurred was Rs. 50,000 during the year.

• It is classified as revenue expenditure and charged to Statement of

Profit and Loss.

• These include all sales transaction occurred during the year.

• These constitute assets of the entity.

deduction on account of provision for bad and doubtful debts.

Compiled by: Pankaj Garg

(i) Cash in hand 10,000

(ii) Investments 1,00,000

(iii) Secured Loans 10,00,000

Opening cost 13,00,000

Current depreciation 1,30,000 11,70,000

Answer: (i) Cash in Hand:

Cash in hand is an item of current assets and it implies the following:

• that the books of accounts show a cash balance of Rs. 10,000 as on

Investments is an item appearing in Balance Sheet either as non-

Compiled by: Pankaj Garg

investments, i.e. its existence and ownership.

• that the investments are non-current or current investments, i.e.

• that the value of investments as on Balance Sheet date was Rs.

(iii) Secured Loan

Secured loan is an item appearing in the Balance sheet either as long

• That the company has borrowed, i.e. its existence

• That the borrowing is secured one, i.e. its nature,

Machinery is an item appearing in the balance sheet as fixed asset

• That the Company has certain Plant and Machinery as on balance

Q. No. 2A: Companies prepare their financial statements in accordance with

Compiled by: Pankaj Garg

implicit or explicit claims (i.e. assertions) regarding assets,

Section A “Audit of Balance Sheet Items”

9.2 – Audit of Share Capital

Assertions to Existence To establish the existence of share capital as the

Completeness To ensure that equity balances that were

Valuation To ensure that equity balances have been valued

Presentation To check whether required disclosures for equity

Compiled by: Pankaj Garg

2. If there is no change during the year, obtain a written

Audit Issue of Where a company has issued shares at a

to securities premium account and state the

means in which the amount in the account can be

As per Sec. 52 of Companies Act, 2013 the

securities premium account may be applied by

the company for the following purposes:

Compiled by: Pankaj Garg

(a) issue of unissued shares of the company to