Unit 4: Audit of specific items:

1. Audit of trade receivables

2. Audit of trade payables
3. Audit of Inventory
4. Audit of Tangible Assets
5. Audit of Intangible Assets
payables & accruals,
6. Audit of Cash & cash equivalents
7. Directors’ Remuneration – details of audit checks for
these items and reporting thereof – use of management
representation
Recap……..
 1. Trade receivables or Accounts
receivables/ Debtors
Trade receivables are essential parts of any organizations balance sheet (shown as
current asset)
Following points need to be considered in respect of trade receivables
• Only bona fide(in good faith) sales lead to trade receivables
• All such sales are made to approved customers (signed a promissory note payable)
• All such sales are recorded
• Once recorded, the debtors can be settled only by receipt of cash or on the authority
of a responsible official.
• Debtors are collected on time
• Balances are regularly reviewed. A proper system of follow up should exist and if
necessary adequate provision for bad debt should be made.
 To establish the existence of trade receivables as
at the period end

Audit Procedure

• Check whether there are controls in place to ensure that invoices cannot be recorded more than once and
receivable balances are automatically recorded in the general ledger from the original invoice.

• Ask for a period-end receivable aging report and trace the balance as per the report to the general ledger.

• Check whether realization is recorded invoice- wise or not. If not check that money received from debtors is
adjusted chronologically invoice-wise and on FIFO basis. If realization is made on account, verify whether the
company has obtained confirmations from debtors in respect of the same.
Direct confirmation Procedure (with customers)
• Contact customers directly and confirm the amount of unpaid
accounts receivables as of the end of the reporting period under the
audit.
• Obtain the consent of the entity under the audit for direct
confirmation procedure.
• The method of selection of the trade receivables to be circularized
should not be revealed to the Company until the trial balance of the
trade receivables’ ledger is handed over to the auditor.
• Where no reply is received , the auditor should perform alternate
procedures regarding the balances.
2.
 3. To establish the existence of cash and cash
equivalent balances as at the period- end.

Audit procedure
• Special care is necessary in regard to verification of cash balances.
• Unless they are checked by surprise there can be no certainty that the
cash produced for inspection was in fact held by the custodian.
• For this reason the cash should be checked not only on the last day of the
year but also checked again sometimes after the close of the year without
giving notice of the auditors visit either to the entity or to his staff.
• There are more than one cash balances example when there is a cashier, a
petty cashier, a branch cashier and in addition there are impressed
balances with employees all of them should be checked simultaneously as
far as practicable so that the shortage in one balance is not made good by
transfer of amount from the others.
• It is desirable for the cashier to be present while cash is being counted and he
should be made to sign the statement prepared containing the details of the cash
balance counter. If he is absent at the time the cash is being verified he may hold
the auditor responsible for the shortage if any in cash.
4. Inventories
• Inventories are a form of current asset held for sale in the ordinary
course of business or in the process of production for sale or
consumption in the production of goods or services for sale or in the
form of materials or supplies to be consumed in the production
process or rendering of services.
• As per AS 2 valuation of inventories- inventory is valued at lower of
cost and net realizable value
 To establish the existence of inventories as
at the period end
Audit procedure
• Review entities plan for performing inventory count
• Ensure that consigned goods have been segregated
• Auditor should participate in the inventory count with the management
• Test counts of inventory by auditor should include -
• Observing employees or adhering to the agreed plan
• Assuring that all items are properly tagged
• Observing that proper amounts are shown on tags
• Determining the tags and the summary sheets are controlled and reconciled
• Reconciliation of test counts with tags and summary sheets and discrepancies noted if any are summarized
and agreed with client personnel
• Staying alert at all times and specially being cautious about empty boxes etc and obsolete items
• Performing cut off testing by documenting last five to 10 receiving reports and shipping documents as of the
period end
• Ensuring exclusion of 3rd party stock and damaged or obsolete stock.
 5.
To establish the existence of PPE-
• Review entities planned for performing physical verification of PPE that is whether performed by on staff or by a 3rd party
and the policy regarding periodicity. That is whether physical verification shall be done on annual basis or once in two
years or 3 years.
• Evidence of appropriate supervision of those performing physical verification of PPE should be examined
• Additions to PPE during the period under audit have been recorded in the financial statements and do not include any
PPE that belong to 3rd parties but does include PPE owned and controlled by the entity although lying with the 3 rd party
• Verify the PPE schedule
• In relation to deletions to PPE understand from the management the reason and rationale for deletion and the manner of
disposal obtain the management approval and discard node authoring disposal of the asset from its active use
• Verify the process for load for sale of discarded PPE
• Verify that the management has accurately recorded the deletion of PPE and the resultant gain or loss on disposal of PPE
item in the entities books of account
 PPE have been valued appropriately and as per generally accepted accounting policies and practices
value of the assets or PPE depreciates due to efflux of time use and obsolescence.
• The diminution of the value represents an item of cost to the entity for earning revenue during a
run. Unless this cost in the form of deposition is charged to the accounts the profit and loss would
not be correctly ascertained and the value of PPE would be shown at higher amounts
• The auditor should verify the entity has charged depreciation on all items of PPE unless any item of
PPE is non appreciable like freehold land.
• Assess that the depreciation method used reflects the pattern in which assets future economic
benefits are expected to be consumed by the entity
• The auditor should also verify whether the management has done an impairment assessment to
determine whether an item of property plant and equipment is impaired as per the requirements
of AS 28 impairment of assets.
6.

• 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.
• Enterprises frequently spend resources on the acquisition, development, maintenance or
enhancement of intangible assets such as scientific or technical knowledge, design and
implementation of new process for systems, licenses, intellectual property, market
knowledge and trademarks (including brand names and publishing titles).
 7. Directors’ Remuneration

Auditing directors' remuneration involves

thorough checks to ensure accuracy,
compliance, and transparency in the
compensation provided to company
directors.
 Audit checks for specific items related to
directors' remuneration and the reporting process:
1. Base Salary and Fees:

Audit Check:
• Obtain remuneration agreements, contracts, or resolutions for each director.
• Verify the accuracy of the base salary or fees by comparing with documented agreements.
• Confirm the proper authorization and approval of the salary or fees.
Reporting:
• Report any discrepancies between disclosed remuneration and documented agreements.
• Ensure that the base salary or fees are accurately disclosed in the financial statements and
annual report.
2. Bonuses and Incentives:
Audit Check:
1.Review bonus and incentive plans to ensure alignment with company
performance targets and objectives.
2.Verify calculations of bonuses and incentives based on documented criteria.
Reporting:
3.Report any inconsistencies between bonus calculations and plan criteria.
4.Confirm that bonuses and incentives are accurately disclosed and justified in the
financial statements.
3.Stock Options and Equity Grants:
Audit Check:
5.Verify the issuance of stock options and equity grants to directors against
documented resolutions or agreements.
6.Review the valuation methods used for stock options and equity grants.
Reporting:
7.Report any instances of unauthorized or inaccurately documented stock options
or equity grants.
8.Confirm proper valuation and disclosure of stock options and equity grants in
the financial statements.
4. Pensions and Retirement Benefits:
Audit Check:
1.Review pension agreements and retirement benefit plans for directors.
2.Verify the accuracy of pension calculations and the adherence to plan
terms.
Reporting:
3.Report any discrepancies between pension calculations and plan terms.
4.Confirm accurate disclosure of pension and retirement benefits in the
financial statements.

5. Perquisites and Benefits:

Audit Check:
• Identify and evaluate any non-cash benefits provided to directors (e.g., housing, cars, travel
allowances).
• Verify the proper authorization and documentation for these benefits.
Reporting:
• Report any instances of undisclosed or inadequately documented perquisites and benefits.
• Confirm accurate disclosure of perquisites and benefits in the financial statements and annual
report.
6. Related Party Transactions:

Audit Check:
• Identify transactions between the company and directors or related
parties.
• Evaluate the nature of these transactions and ensure they are
disclosed and at arms-length.
Reporting:
• Report any transactions that are not properly disclosed or are not at
arms-length.
• Confirm accurate disclosure of related party transactions in the
financial statements.
7. Disclosure and Presentation:

Audit Check:
1.Review the company's annual report and financial
statements for accuracy and completeness of
remuneration disclosures.
2.Ensure compliance with relevant accounting
standards and regulatory requirements.
Reporting:
3.Report any deficiencies in the disclosure of
directors' remuneration.
4.Confirm accurate and compliant disclosure in the
financial statements and annual report.
Examples Module 4