AUDITING ASSURANCE Tee oe aT Tesco) Nios CRM aS Lae eoCA INTER AUDIT COURSES AVAILABLE a By ome CA Kapil Goyal aEGuLanin. speptw ‘= FULL COURSE — Booster Cou FULL COURSE wwwys ademy.com Ena LE ‘Question Bank + MCQ Book Set |————-—= a = a pERRuey Books For Sale y Available @ www.vsmartacademy.com PS V’Smart Acapemy pe Se Beau E, Ct tt v’smart Academy Whats App wapi'Sit 7887 7887 04Chapter 12- ia weer yg Items in Financial SHORT NOTES re) Seeers 1 Assertions 2 ‘Audit of Share Capital 3 ‘Audit of Reserves and Surplus (Other Equity) 4 ‘Audit of Borrowings 5 ‘Audit of Trade Receivables 6 Audit of Cash and Cash Equivalents 7 Audit of Inventories 8 ‘Audit of Tangibles Fixed Assets (PPE) 9 ‘Audit of Intangible Fixed Assets 10 ‘Audit of Trade Payables and Other Current Liabilities II ‘Audit of Loans and Advances and Other Current Assets 12 ‘Audit of Provisions and Contingent Liabilities 13 Audit of Sale of Products and Services 14 Audit of Other Incomes (Interest, Dividend, Profit/Loss__on sale of 15 Audit of Purchases 16 Audit of Employee Benefit Expense 17 ‘Audit of Depreciation and Amortization 18 ‘Audit of Other Expenses (Power & Fuel, Rent, Repairs, Insurance, Traveling etc.) | W’Smart Academy RSA aB7 7887.04 ©1, ASSERTIONS Meaning of Assertion SA 315 "Identifying and Assessing the Risk of Material Misstatements 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.” When making assertions about the financial statements of certain entities, especially, for example, where the Government is a major stakeholder, in addition to assertions management may often assert that transactions and events have been carried out in accordance with legislation or proper authority. Such assertions may fall within the scope of the financial statement audit Assertions used in Financial Statements Income Statement (a) Oceurrence: Transactions recognized in the income statement have occurred and relate to the entity. (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. (d) Accuracy - amounts and other data relating to recorded transactions and events have been recorded appropriately (c) Accuracy - amounts and other data relating to recorded transactions and events have been recorded appropriately. (9, Classification - transactions and events have been recorded in the proper accounts. Balance Sheet (a) Existence: Assets, liabilities and equity balances exist as at the period end. (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. (c) 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 and Disclosure (a) Occurrence and Existence: Transactions and events disclosed in the financial statements have 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. Let us elaborate this with the help of two illustrations. We must clearly understand that each item contained in financial statements asserts something to the readers of the accounts to indicate the ownership, existence, quantity of various things, etc. Auditing is concerned with the testing of the authenticity of the information thus conveyed. | (Oo vsmanacademy —SRARENGELSY Yee7 7e8704 ©Example 1: When we find in the balance sheet, an item under current assets reading as "cash in hand - Rs8,000" the obvious assertions that would strike the mind are the following: () The firm concerned had Rs8,000 in hand in valid notes and coins on the balance sheet day; (ii) That the cash was free and available for expenditure to the firm; and (iii) That the books of account show a cash balance of identical amount at the end of the day on which the balance sheet is drawn up. Example 2: Particulars Rs Plant and Machinery (at cost) 2,00,000 Less: Depreciation till the end of previous year 70,000 Depreciation for the year 13,000 83,000 1,17,000 ‘The assertions are as follows: (the firm owns the plant and machinery; (i) the historical cost of plant and machinery is Rs2 lacs; (ii) the plant and machinery physically exists; (iv) the asset is being utilised in the business of the company productively; (¥) total charge of depreciation on this asset is Rs. 83,000 to date on which Rs.13,000 relates to the year in respect of which the accounts are drawn up; and (vi) the amount of depreciation has been calculated on recognised basis and the calculation is correct. From the above two illustrations we know the sort of assertions that are implied in the financial statements. Incidentally, the assertions are generally implied and not specifically spelt out, though some explicit assertions are also found in the financial statements. Explicit assertions are made when otherwise the reader will be left with an incomplete picture; it may even be misleading. ‘An example of the former category may be found in the following items appearing in the liability side of the balance sheet: Secured Loans Rs 4,00,000 The description does not give us a complete picture. We do not know: (i) the name of the lender, if it is relevant; (i) the nature of security provided; and (ii) the rate at which interest in payable. ‘A specific mention is required about these things for a proper appreciation of the item and the financial position. Negative assertions are also encountered in the financial statements and the same may be expressed or implied. For example, if it is stated that there is no contingent liability it would be an expressed negative assertion; on the other hand, if in the balance sheet there is no item as "building", it would be an implied negative assertion that the entity did not own any building on the balance sheet date. Every financial statement contains an overall representation in addition to the specific | (Oo wsmantacademy —SERARRIGELSY 7ee7 788704 © |assertions so far discussed. Each financial statement purports to present something as a whole in addition to its component details. For example, an income statement purports to present "the results of operations" a balance sheet purports to present "financial position". The auditor's opinion is typically directed to these overall representations. But to formulate and offer an opinion on the overall truth of these statements he has first to inquire into the truth of many specific assertions, expressed and implied, both positive, and negative, that makes up each of these statements. Out of his individual judgments of these specific assertions he arrives at a judgement on the financial statement as a whole. AUDIT OF SHARE CAPITAL Assertions to be examined Existence To establish the existence of share capital as the 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 and Disclosure To check whether required disclosures for equity have been appropriately made Audit procedure 1. Compare the year end balances of authorised, issued and paid up share capital, to the previous year audited financial statements. 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 Procedure in Special Cases Issue of Shares at Premium Where a company has issued shares at a premium, whether for cash or otherwise, 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: (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; (a) providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or (¢) 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 Shares at Discount + A company cannot issue shares at discount as provided by Sec. 53 of the Companies Act, 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. + Any share issued by a company at a discounted price shall be void. * Where a company contravenes the provisions of this section, the company shall be punishable with fine which shall Not be less than % 1 Lac but which may extend to @ 5 Lacs and Every officer who is in default shall be punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than ?1 Lac but which may extend to % 5 Lacs, or with both. + 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. Issue of Sweat Equity Shares "Sweat Equity Shares’ means equity shares issued by the company to employees or 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. 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; (c) not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business; and (a) 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. Reduction of Capital The duties of the auditor in this regard are following: . 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 Ill w.r.t. reduced capital have been complied with, 7. Confirming that the revaluation of assets has been properly disclosed in the Balance Sheet. 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. | W’Smart Academy RARE aB7 7887.04 ©Disclosure requirements of Schedule III For each class of share capital (different classes of preference shares to be treated separately]: (a) the number and amount of shares authorized; (b) the number of shares issued, subscribed and fully paid, and subscribed but not fully paid; (c) par value per share; (@) a reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period; (c) the rights, preferences and restrictions attaching to each class of shares including restrictions on the distribution of dividends and the repayment of capital; ( 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; (2) shares in the company held by each shareholder holding more than 5 per cent 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. ()) 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) ()| forfeited shares (amount originally paid up) AUDIT OF RESERVES AND SURPLUS (OTHER EQUITY) Meaning of Reserves and Provisions Meaning of Reserve «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. * 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. + Provisions are normally charged to the Statement of Profit and Loss before arriving at the amount of profit. Difference between Reserves and Provisions Pore(b) They are not intended to meet any liability, contingency or diminution in the value of assets, though may be made for some specific purposes, like redemption of debentures. (b) They are made to provide for depreciation, renewal or a known liability or a disputed claim (Gj Reserves cannot be created unless there is a profit except a few like revaluation reserves (Q) They must be created whether or not there is profit (@ Reserves are generally optional except few ones like creation of CRR, DRR, (d) Provisions are not optional and have to be made as per generally etc. accepted accounting principles. ‘Types of Reserves Revenue Reserves Revenue reserves represent profits that are 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 Reserves * 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 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. © 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 be examined Existence To establish the existence of reserves and 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 and Disclosure Required disclosures for reserves and surplus have been appropriately made. Audit Procedure 1. Compare the opening balance of reserves and surplus to the 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 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. | (Osmantacademy —SERAREIGELSY 7ee7 7887.04 © |(e) Other Equity: Understand the underlying reason for the transaction. Disclosure requirements of Schedule III CO Reserves and Surplus shall be classified as: (a) Capital Reserves; (b) Capital Redemption Reserve; (c) Securities Premium Reserve; (a) Debenture Redemption Reserve; (c) Revaluation Reserve; (, Share Options Outstanding Account; (g) Other Reserves - (specify the nature and purpose of each reserve and the amount in respect thereof); (h) Surplus ie. balance in Statement of Profit & Loss disclosing allocations and appropriations such as dividend, bonus shares and transfer to/from reserves etc. (Additions and deductions since last balance sheet to be shown under each of the specified heads) (i) A reserve specifically represented by earmarked investments shall be termed as a ‘fund’, ()) 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. 3. AUDIT OF BORROWINGS Assertions to be examined Existence Ensure that all borrowings on the balance sheet 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 and Disclosure Ensure that borrowings have been presented, classified and disclosed in the Balance Sheet in accordance with the requirements of applicable financial reporting framework. Audit Procedure 1. Ensure that the loans obtained are within the borrowing 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.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 Confirmation Procedure Auditor is required to take confirmations from major lenders w.r.t. major aspects related with 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 (c) For any exception identified, perform necessary inquiries with the management and identify instances of any possible misstatement. Disclosure Requirements of Schedule III Long Term Borrowings 1. Classification of Long Term Borrowings into— * Bonds/Debentures ‘Term Loans: From Banks From Other Parties Deferred Payment liabilities 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] Particulars of the redeemed bonds which can be reissued to be shown Terms of repayment of the following to be shown: + Term loans * Other Loans 7. Period and amount of continuing default in the repayment of loans and interest shown separately in each case. oe Short Term borrowings 1. Classification of borrowings as: * 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 inti Secured (nature of the security to be specified) | W’Smart Academy RRR aB7 7887.04 ©© 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. 5. AUDIT OF TRADE RECEIVABLES Assertions to be examined Existence To establish the existence of trade receivables as 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 and Disclosure To ensure that trade receivables have been presented, classified and disclosed in the Balance Sheet in accordance with the requirements of applicable financial reporting framework. Essential features of internal Controls w.r.t. to trade receivables In relation to credit sales, it becomes imperative to carry out compliance procedures so as to ensure that the system for receivables has the following features: Only bona fide sales lead to receivables. Sales are made only to approved customers. All such sales are duly recorded in the books. Once recorded, the debts can only be eliminated by receipt of cash or on the approval by a responsible official. Debts are collected promptly. 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. OVE aa Audit Procedure Verification of trade receivable may be carried out by employing 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 judgment of the auditor. Examination of Records 1. The auditor should carry out an examination of the relevantrecords 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 | (Oo wsmanacademy —SERARRIGELSY 7ee7 788704 © |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. Direct Confirmation Procedure 1. The auditor employs direct confirmation procedure with the consent of the entity 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. 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 Review Procedures Auditor may also perform below mentioned analytical review procedures as a means of obtaining audit evidence regarding the various assertions relating to trade receivables, loans and advances: (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; (a) comparison of current year's aging schedule with the corresponding figures for the previous year; (c) comparison of significant ratios relating to trade receivables, loans and advances with the similar ratios for other firms in the same industry, if available; (9. comparison of significant ratios relating to trade receivables, loans and advances with the industry norms, if available. Disclosure Requirements of Schedule III 1. Aggregate amount of outstanding trade receivables exceeding 6 months shown separately 2. Sub-classification of Trade Receivables: * Secured, considered good | (Oo vsmantacademy SRAREIGELSY 7ee7 788704 © |* 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. AUDIT OF CASH AND CASH EQUIVALENTS Assertions to be examined Existence To establish the existence of cash and cash 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 and Disclosure Required disclosures for cash and cash equivalents have been appropriately made. Audit Procedure Cash Balances 1. 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 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. 3. All cash balances in the same location should be verified simultaneously. 4. If 10Us (1 owe you'l 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. 7. Where post-dated 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, directl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 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. 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. () 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 Requirements in Schedule III 1. Classification of Cash and Cash Equivalents into * Balances with Bank * Cheques, Drafts on hand * Cash on hand + Others (specifying nature) 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. 7. AUDIT OF INVENTORIES Assertions to be evaluated Existence To establish the existence of Inventories as at the year-end. Completeness | W’Smart Academy RRR aB7 7887.04 ©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 Obligations ‘The entity has valid legal ownership rights over 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 practices. Presentation and Disclosure Required disclosures for inventories have been appropriately made. Auditor's procedures for verification Verification of inventories may be carried out by employing the following procedures: (a) examination of record: (b) attendance at stock-taking; (c) obtaining confirmations from third parties; (d) examination of valuation and disclosure; and (e) analytical review procedures. The NTE of audit procedures to be performed is, however, a matter of professional judgment of the auditor. Examination of Records Auditor should examine the stock records with 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 Stock-Taking (a) The physical verification of stock is the 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 ensure that the instructions given for inventory taking is followed. (a) He test checks few items by himself for their existence and quantum. He selects to test high value items importantly. (c) The physical conditions of stock - like its age, deterioration, obsolescence etc., are looked into by auditor. (. The auditor reviews stores records and notes down major discrepancies for reconciling them in a subsequent date. (2) 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 from Third Parties © Where significant stocks of the entity are held by third parties, the auditor should examine 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 Valuation and Disclosure * The auditor should satisfy himself that the valuation of inventories is in accordance with the AS 2, "Valuation of Inventories” * 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 | (Oo wsmanacademy —SERARENGELSY 7ee7 788704 © |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 Review Procedures Auditor may also apply following analytical review procedures so as to obtain audit 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 corresponding figures for the previous year; 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 corresponding figures for the previous year, 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 Considerations in case of WIP To carefully assess the stage of completion of the WIP for assessing the appropriateness of its valuation, the auditor may perform the following: examine the production/costing records (e.g., cost sheets), + hold discussions with the personnel concerned, and © obtain expert opinion, where necessary. 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. (q) 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. () Ensure that the Work-in-Progress as at Balance Sheet date has been appropriately disclosed in Balance Sheet as per the requirements of Schedule II Verification of Goods on Consignment Such transaction should be vouched and verified as under— (a) Vouch the Proforma invoice sent with goods to ascertain the quantity and value of goods sent. (b) Freight evidences given by the transporter like Challan, Bill, Receipt for freight charged. (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. (Unsold goods should have been taken in the closing stock valued properly inclusive of expenses (Proportionate) incurred by consignee. | (Oo smantacademy —SRAREIGELSY 7ee7 7887.04 ©(@ Journal entries relating to such transaction be verified from the books of the Company. Disclosure requirements of Schedule III 1. Inventories shall be classified as: «Raw materials Work-in-progress Finished goods Stock in trade (in respect of goods acquired for trading) Stores and spares Loose tools * Others (specifying nature) 2. Goods-in-transit to be disclosed under relevant sub-head 3. Mode of Valuation to be stated 8. AUDIT OF TANGIBLE FIXED ASSETS (Property, Plant and Equipment PE) Revenue Expenditure vs. Capital Expenditure Revenue Expenditure + It isa routine expenditure incurred in the normal course of business. + Its main purpose is to maintain the earning capacity of the business + Itis usually a recurring item. + Itis 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 ete. Capital Expenditure * It is incurred in acquiring or improving 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: 1. Material and wages when expended on the construction of a building or erection of machinery. Legal expenses incurred in connection with the purchase of land or building. Freight when incurred in respect of purchase of plant and machinery. Major repairs of a fixed asset that increases its productivity. Wages paid on installation costs incurred in Plant & Machinery. Interest paid for the qualifying period as per AS-16 ie. before the asset is constructed. Saren Assertions to be examined Existence To establish the existence of tangible fixed assets (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 Rights and Obligations The entity has valid legal ownership rights over the PPE claimed to be held by the entity and recorded in the balance sheet. | W’Smart Academy MRARRUGENS TaB7 7887.04 ©Valuation PPE have been valued appropriately and as per generally accepted accounting policies and practises Presentation and Disclosure Required disclosures for PPE have been appropriately made. Verification procedure Evaluation of Internal Control ‘An auditor should review the system of internal controls relating to PPE, particularly the following © Control over expenditure incurred on PPE acquired or self- constructed Accountability and utilisation controls Information controls Safeguarding of assets Substantive Procedures * Verification of PPE consists of examination of 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. * 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 procedures w.r.t. specific situations Opening Balances The opening balances of the existing PPE should be verified from records such as the schedule of PPE, ledger or register balances. In the case of 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. Capital Work-in- Progress Capital work-in-progress should be verified with 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 PPE Acquisition of new PPE and improvements to the 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 PPE The ownership of assets, like land and buildings, 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. Physical Verification + It is the responsibility of the management to carry out physical verification of PPE at | W’Smart Academy RSA aB7 7887.04 ©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. Disclosure Requirements of Schedule HI 1. Classification of Tangible Assets into: « Land * Buildings * Plant and Equipment * Furniture and fixtures * Vehicles 2. Office Equipment’s Others (specifying nature) 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 4. beginning and end of the reporting period showing: Additions Disposals Acquisitions through business combinations Other Adjustments Depreciation * Impairment losses/reversals 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. AUDIT OF INTANGIBLE FIXED ASSETS Assertions to be examined Existence To establish the existence of intangible fixed assets as at the period- end. Completeness To ensure thatadditions to Intangible assets duringthe period under audit have been recorded appropriately in the financial statements. Valuation To ensure that intangible have been valued appropriately and as per generally accepted accounting policies and practices. Presentation and Disclosure To ensure that required disclosures for intangible assets have been appropriately made. Audit Procedures 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. 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 | (Oo wsmanacademy —SERARIGELSY 7ee7 788704 © |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 judgment has been taken to assess as to which element is predominant. 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 procedure for Specific Intangible Assets Goodwill (a) Ensure that goodwill has been recognized in the books in compliance of AS 26. As per AS - 26, "Intangible Assets’ internally generated goodwill is not to be recognised as an asset, 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. (4) 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. (c) Ensure goodwill has not recognised in the books by revaluation of assets or writing back the amount of goodwill earlier written off. ( Ensure that the goodwill not yet written off has been properly disclosed under the head "Non-Current Assets” as per Schedule III requirements (2) 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. (a) Check that the patent rights are alive and legally enforceable. (c) 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. (9 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 and Copyright 1. Obtain duly signed schedule of Trade Marks and Copyrights and confirm that all of them 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. | (Oo smantacademy —SRARENGELSY 7ee7 788704 © |4. Verify existence of copyright by reference to contract between the author & the entity and note down the terms of payment of royalty. 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. Ascertain that the legal life of the trademarks and copyrights have not expired. 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 requirements of Schedule III xo 1. Classification of Intangible Assets into: © Goodwill 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) 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. 10. AUDIT OF TRADE PAYABLES AND OTHER CURRENT LIABILITIES Classification of liabilities A liability shall be classified as current when it satisfies any of the 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 (a) 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 shalll be classified as non-current. Assertions to be examined Existence To ensure the existence of trade payables and other current liabilities as at the year end 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 and Disclosure To ensure that required disclosures for trade payables and other liabilities have been | W’Smart Academy RRR TaB7 7887.04 ©‘appropriately made. Audit Procedures Compliance Procedure The auditor should study and evaluate the 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. The payments made to trade payables should be in line with the approved policies. 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, 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 Procedures Verification of trade payables and other current 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 judgment of the auditor which is based, inter alia, on the auditor’s evaluation of the effectiveness of the related internal controls. Examination of Records 1. The auditor should check the adequacy of cut-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 Confirmation Procedures 1. The verification of balances by direct communication with trade payables is 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 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 | W’Smart Academy RRR aB7 7887.04 ©‘positive’ form of request, wherein the creditor is 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 Procedures In addition to the audit procedures discussed 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 corresponding figures for the previous year; (c) comparison of actual closing balances of trade payables, etc., with the corresponding budgeted figures, if available; (a) comparison of current year’s aging schedule of trade payables with the corresponding figures for the previous year; (c) comparison of significant ratios relating to trade payables with the similar ratios for other firms in the same industry, if available; () comparison of significant ratios relating to trade payables with the industry norms, if available. Disclosure Requirements as per Schedule III Schedule III requires that other current liabilities to be classified into: * Current maturities of Long-term debt 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 11. AUDIT OF LOANS AND ADVANCES AND OTHER CURRENT ASSETS Classification of Assets An asset shall be classified as current when it satisfies any of the 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 (@) 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. Assertions to be examined Existence To ensure the existence of loans and advances 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. Presentation and Disclosure To ensure that required disclosures for loans and advances and other current assets have been appropriately made. | (Oo wsmantacademy —SERAREIGELSY 7ee7 7887.04 © |Audit Procedures Compliance Procedures i. The system should specify total amount up to 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. All variations in the terms of loans and advances should be duly approved in writing by the competent authority. ili, 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 Procures 1. Auditor should examine whether the entity is 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. 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" Disclosure Requirements of Schedule III Loans and Advances 1. Classification of Loans and Advances: * Loans and Advances to Related parties (giving details thereof) * Others (specifying nature) 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 Current Assets All-inclusive heading which incorporates current assets that do not fit in other asset categories. Specifying nature of all items. 12, AUDIT OF PROVISIONS AND CONTINGENT LIABILITIES | (Osmantacademy —SERAREIGELSY 7ee7 7887.04 © |Features of Provisions and Contingent Liabilities Provision A provision is a liability which can be measured only by using a substantial degree of estimation, A provision should be recognised when: (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. Contingent Liability A contingent liability is: (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 ji, a reliable estimate of the amount of the obligation cannot be made. Assertions to be examined Existence To establish the existence of provisions as at the 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 and Disclosure Required disclosures for provisions have been appropriately made. Audit Procedure for verification 1. Obtain a list of all provisions and compare them with balances in the ledger. 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 Il to the Companies Act, 2013. Disclosure Requirements of Schedule III Provisions Long Term Classification of Provisions as: * Provision for employee benefits + Others (Specifying nature) Short Term Classification of short term provisions into: * Provision for employee benefits Others, specifying natureContingent Liabilities The following shall be disclosed to the extent not 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) Disclosure Requirements of Ind-AS 37 + For each class of provision, an entity shalll disclose: (a) the carrying amount at the beginning and end of the period; (b) additional provisions made in the period, including increases to existing provisions; (c) amounts used [ie. incurred and charged against the provision) during the period; (a) 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: (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. 13. AUDIT OF SALE OF PRODUCTS AND SERVICES Audit Procedures Occurrence Ensure that sales recorded represent goods shipped/services performed during the Period. 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 and Disclosure Ensure that required disclosures for sales have been appropriately made. Audit Procedures: Steps to be followed © W’Smart Academy RSA aB7 7887.04 ©© Identify the control points over sales. * 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 of Records 1. The auditor should examine whether the 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. 3. The auditor should examine selected entries inthe 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. 7. Where the consideration is receivable in instalments 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. Analytical Procedures In addition to the audit procedures discussed 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 for the current year with the corresponding figures for previous years. (@) Comparison of ratio of trade discount to sales for the current year with the corresponding figures for previous years. (| Comparison of ratio of excise duty/sales tax/export incentives to sales for the current | (Oo wsmanacademy —SERARRIGELSY 7ee7 788704 © |