LET’S BECOME A STATUTORY AUDITOR: STAT AUDIT

CHECKLIST
AUTHOR :SUPRIYA DEWAN

https://taxguru.in/company-law/lets-statutory-auditor-stat-audit-checklist.html

INTRODUCTION:

So, we are again at the close of the financial year 2020-21 and across our responsibility as an auditor of
expressing our opinion on true and fair view of the financial statements. As a statutory auditor we are expected
to check the compliances with respect to Companies Act,2013.

In this article we are going to discuss the check points for an auditor while conducting statutory audit. Although
the audit procedures shall remain relevant to every entity, however they can be modified by the auditor as per the
nature and size of the entity. Let’s start with the Balance sheet items and the checkpoints.

1. PROPERTY PLANT & EQUIPMENT: The auditor should start with checking the standard operating
procedures of the company and the policies followed by the company. The auditor is expected to check the
delegation of powers to understand the level of authority w.r.t additions, deletions and write offs. The auditor
should obtain the block schedule of the financial year and reconcile to the general ledger account wise. The
auditor should check the pre-budget set for investment in fixed assets during the year and whether the additions
are in conformity with the budget during the year. The auditor should confirm whether titles to the assets are in
the name of the Company, if not report

On a sample basis, certain additions can be checked w.r.t the invoice, name of the supplier, taxes and
duties levied and their entries should be matched in the fixed asset register and reconciled with the fixed
asset general ledger.
The auditor should confirm the date of capitalization I.e., on date they have been put to use and in case of
ready to use, on the date of purchase of such assets.
The auditor should also obtain the list of deletion of fixed assets during the year and verify that the
disposal has been approved by the proper authority and any tax liability have been paid for. The disposed
asset should also be deleted from the fixed asset register and the general ledger.
In case of impaired assets, the auditor should verify how does the management assess the carrying value
and the provision for impairment as per the accounting standards requirement.
The auditor should ensure proper classification of expenditure with regard to fixed assets. For e.g.,
Revenue expenditure is not capitalized.
The auditor needs to check whether physical verification of fixed assets have been carried out by the
management and the auditor needs to perform a 2-way test verification of fixed asset register vs books to
physical verification and physical verification to books. Any discrepancy also needs to mentioned in audit
report.
The auditor should reperform the calculations of depreciation for certain assets on sample basis and ensure
that the depreciation as per the workings is reconciled to the fixed assets register as well as the General
Ledger balances.
 The auditor should also check whether the management has reviewed the useful life of assets during the
year and if there is a change in accounting estimate like change in rate of depreciation and its subsequent
impact.
The auditor should check deferred tax calculations in relation to depreciation of the assets.

2. INVENTORIES: The auditor needs to verify the existence and location of the inventory as reflected in the
books of accounts and the valuation of inventory is as per AS-2 and all the costs incurred in bringing inventory
to its present condition are included in the valuation. The auditor needs to verify the legal ownership of the
inventory. Any unusual inventory movement entries such as recording of excess / shortage write offs, damaged
stock disposals etc. should be made only by higher levels of authority

The auditor needs to check whether for the goods in transit, the receipts have been subsequently traced.
The auditor needs to verify the use and movement of the stock and ensure that they have been valued
correctly and in the period to which it relates.
The auditor should check the management’s analysis of obsolete, non-moving items and excess stock and
the provisions have been adequately made for slow moving, non-moving, obsolete and damaged
inventory.

3. INVESTMENTS:

The auditor should confirm the balance of securities by ensuring that investments are backed by original
certificates. The investments should be held in the name of the Company as per Sectin-187 of Companies
Act,2013
The auditor should confirm that the addition in investments is in compliance with Section-186 of
Companies Act,2013 keeping in view investment up to two layers of investments. Two layers of
investment would mean the flow of investment from a holding company to its 2nd step-down subsidiary.
The disclosure requirements of investments as mentioned in Sch III.
Investments are classified as current and non-current as appropriate.
Non-current investments shall be classified as trade investments and other investments and further
classified as: –

? The investments shall be classified as Investment property, Equity, Preference shares, Government or
Trust Securities, Debentures or bonds, Mutual funds or investment in partnership firms or other
investments

? Investments carried at other than at cost should be separately stated specifying the basis for valuation
thereof.

? The following shall also be disclosed: (a) Aggregate Amount of quoted investments and market value
thereof; (b) Aggregate Amount of unquoted investments; (c) Aggregate provision for diminution in value
of investments

? Current investments are disclosed under Current Assets with further classifications as below: The
investments shall be classified as Equity, Preference shares, Government or Trust Securities, Debentures
or bonds, Mutual funds or investment in partnership firms or other investments.

? The following shall also be disclosed: (a) The basis of valuation of individual investments (b) Aggregate
amount of quoted investments and market value thereof; (c) Aggregate amount of unquoted investments;
(d) Aggregate provision made for diminution in value of investments.
 ? Under each classification, details shall be given of names of the bodies corporate (indicating separately
whether such bodies are (i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled special
purpose entities) in whom investments have been made and the nature and extent of the investment so
made in each such body corporate.

? Partly paid investments shall also be indicated properly.

? The auditor is required to ensure the valuation of investments as per relevant Accounting standard and
charge off Diminution if nay in long term investments to revenue account.

? The auditor shall also keep in mind the enquiry mentioned under Section-143(1) c)- Where the company
not being an investment company or a banking company, whether so much of the assets of the company as
consist of shares, debentures and other securities have been sold at a price less than that at which they
were purchased by the company.

4. ACCOUNTS RECEIVABLE:

The auditor should ask for customer confirmation directly and ask them to confirm the amounts of unpaid
accounts receivable as of the end of the reporting period they are auditing. This is primarily for larger
account balances, but may include a few random customers having smaller outstanding invoices.
In case auditor does not receive confirmations, the auditor should inspect bank statements for subsequent
period as to confirm the realization of revenue subsequently.
Ensure that the system reports on aging are accurate. The auditor should test check with reference to few
cases to confirm the aging. Also, the auditor should check whether debit and credit notes are not accounted
back-to-back just to improve the ageing of debtors.
The Auditor should review the company’s policy for allowance for doubtful debts and applying it to the
receivables balances.

5. CASH AND BANK BALANCES:

The auditor should ensure a receipts and payments are backed by relevant vouchers, all receipts and
payments are authorized and are recorded in correct head.
In the audit of cash, comparing balances to the prior-period is very useful to examine the fluctuation of
cash between the two periods. This way, we can evaluate the reasons behind any major fluctuation of cash
balances in order to alert to the risks involving cash.
The auditor should obtain written authority from the client to have bank confirmation letter.
The auditor should Review the last period bank reconciliation to see whether they are cleared or carried to
the current period
The auditor should get a cutoff bank statement that shows the transactions after the end of the period to
trace and check on items such as deposits in transit and outstanding check to see if they have been cleared
after year-end
The auditor should verify that balances per accounting records shown on the reconciliation agree with the
general ledger account balance the year-end and that this has been properly reflected in the financial
statements.
The auditor is also required to check cash payments and receipts according to statutory limits set under
Section-40(a)(3), Section-269SS, Section-269 ST and Section269T of Income tax Act,1961.

6. LOANS AND ADVANCES:

The auditor should verify All loans and advances should be backed by a policy or agreements in writing
 They should obtain ageing of long-term loans and advances to verify that loans are classified in correct
categories, maturity has been correctly calculated, value of securities are available against each loan and
check the subsequent recovery of loans.
Ensure Compliance with Section 185 of the Act as well as the notification under Sec 462 for Private
Limited Companies.
The auditor should keep in mind the inquiries related to loans and advances with respect to section-143(1)
as to whether loans and advances are properly secured, have not been shown as deposits and whether the
terms are prejudicial to the interests of the company and its members.
Auditor should select a sample of transactions and re-perform calculation of interest income to verify rate
of interest from agreement and check the number of days for which interest income is charged.
Auditor should send confirmation to related parties and match replies with the amounts outstanding
against each party.
The auditor should ensure compliance with CARO 2013 AND Section 269SS and Section 269ST of
Income tax act.

We will get into being audit literate in the coming series on statutory audit. For now, we have finished with the
audit of asset side of balance sheet. Remember, an auditor needs to exercise professional judgement and
skepticism. Nothing can be exhaustive when it comes to an audit checklist.

For any queries, the author can be reached at supriya@guptapiyush.com or piyush@guptapiyush.com.