Assertions

Explanation

Audit procedures

Existence

To establish the existence of trade

Receivables as at the period- end

              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.

              To ensure that trace receivables ledger reconciles to general ledger. Ask for a period-end accounts receivable aging report and trace the grand total to the amount in the accounts receivable account in the general ledger.

              Calculate the receivable report total. Add up the invoices on the accounts receivable aging report to verify that the total traced to the general ledger is correct.

              Investigate reconciling items. If there are journal entries in the accounts receivable account in the general ledger, review the justification for larger amounts. This implies that these journal entries should be fully documented.

              See 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 i.e. previous bill is adjusted first. If realization is made on account, verify if the Company has obtained confirmations from debtors.

Completeness

Trade receivable balances that were supposed to be recorded have been recognized in the financial statements.

              The auditor needs to satisfy himself of correct and proper cut-offs. Without a correct cut-off, sales could be understated or overstated, hence, the need to perform the following cut off tests:

—                       For the invoices issued during the last few days (say 5 days) closer to the reporting date/ cut-off date and which  have  been  included in the debtors; the goods should have been dispatched and not lying with the Company and included in closing stock;

—                       All good dispatched prior to the period/ year-end have been invoiced and included in debtors;

— No goods dispatched after the year- end have been invoiced and included in debtors for the period under audit

              Test invoices listed in receivable report. Select few invoices from the accounts receivable ageing report and compare them to supporting documentation to see if they were billed with the correct amounts, to the correct customers, and on the correct dates.

              Match invoices to shipping/ dispatch log. Match invoice dates to the shipment dates for those items in the shipping/ dispatch log, to see if sales are being recorded in the correct accounting period. This can include an examination of invoices issued subsequent to the period being audited, to see if they should have been included in the period under audit.

Valuation

Trade receivable balances have been valued appropriately.

              Assess the allowance for doubtful accounts. Review the process followed by the Company to derive an allowance for doubtful accounts. This will include a consistency comparison with the method used in the last year, and a determination of whether the method is appropriate for the underlying business environment.

              Obtain the ageing report of accounts receivable (both Dr/Cr balance), split between not currently due, 30 days old, 30-60 days old, 60- 180 days old, 180- 365 days old and more than 365 days old (refer screenshot below). Also, obtain the list of debtors under litigation and compare with previous year.

              Scrutinize the analysis and identify those debts which appear doubtful; Discuss with management their reasons, if any of these debts are not included in the provision for bad debts; perform further testing where any disputes exist; Reach a final conclusion regarding the adequacy of the bad debts provision.

              Assess bad debt write-offs. Prepare schedule of movements on Bad Debts – Provision Accounts and Debts written off and compare the proportion of bad debt expense to sales for the current year in comparison to prior years, to see if the current expense appears reasonable.

              Check that write-offs or other reductions in the receivable balances have been approved by an appropriate and authorised member of senior management, for example the financial controller or finance director.

Presentation and Disclosure

Required disclosures for trade receivables have been appropriately made

              Check that the restatement of foreign currency trade receivables has been done properly.

              Companies must prepare and present their financial statements according to a financial reporting framework. Auditors, therefore, determine that the accounting policies and procedures related to accounts receivables are appropriate and are applied consistently according to GAAP. They also validate that the Company presents and discloses its accounts receivable balances in the balance sheet and its accompanying notes properly.

              Verify that the split between more than 6 months and less than 6 months has been done from the due date instead of sales invoice date.

              Check classification of amount due is properly disclosed as:

—                       Secured, considered good

—                       Unsecured, considered good

—                       Doubtful

              Verify that proper disclosure of amounts due from the following parties has been made:

—                       By directors

—                       By other officers of the company

—                       By any of them either severally

—                       By jointly with any other person

—                       By firms

—                       By private companies respectively in which any director is a partner or director or member.

              Note down the transactions with parties under section 189 of Companies Act, 2013 and ensure that the same is reported properly in CARO.

Assertions

Explanation

Audit procedures

Existence

To establish the existence of trade payables and other current liabilities as at the period- end

              Check whether there are controls in place to ensure that the same purchase/ expense invoice cannot be recorded more than once and payable balances are automatically recorded in the general ledger at the time of recording of expense.

              To ensure that trade payable ledger reconciles to general ledger, ask for a period-end accounts payable aging report and trace the grand total to the amount in the accounts payable account in the general ledger.

              Calculate the accounts payable report total. Add up the expense/ liability items on the accounts payable aging report to verify that the total traced to the general ledger is correct.

              Investigate reconciling items. If there are journal entries in the accounts payable account in the general ledger, review the justification for larger amounts. This implies that these journal entries should be fully documented.

Completeness

Trade payables and liability balances that were supposed to be recorded have been recognized in the financial statements.

              The auditor needs to satisfy himself of correct and proper cut-offs. Without a correct cut-off, purchases and expenses could be understated or overstated, hence, the need to perform the following cut off tests:

- For the invoices received/ recorded during  the last few days (say 5 days) closer to the reporting date/ cut off date and which have been included in the trade payables; the goods should have been received/ risk and rewards of ownership in goods should have been transferred in favour of the entity;

- All good received prior to the period/ year- end should have been booked in the form of purchases and included in trade creditors;

- No goods received/ risk and rewards of ownership in goods transferred in favour of the entity after the year- end should have been recorded as purchases and included in trade creditors for the period under audit.

              Test purchase/ expense vouchers listed in account payable report. Select few purchase/ expense vouchers from the accounts payable ageing report and compare them to supporting documentation to see if the purchases were recorded with the correct amounts and correct vendors and on the correct dates.

              Match purchase/ expense vouchers to gate entry (inward) register/ log. Match purchase invoice dates to the gate entry (inward) dates for those items in the log, to see if purchases are being recorded in the correct accounting period. This can include an examination of purchase/ expense invoices received subsequent to the period being audited, to see if they should have been included in the period under audit.

Valuation

Trade payables and other liability balances have been valued appropriately.

              Assess old outstanding liability balances- Review the process followed by the Company to identify if any old creditor balance/ liability needs to be written back. This will include a consistency comparison with the method used in the last year, and a determination of whether the method is appropriate for the underlying business environment.

Obtain the ageing of payable balances, split between current, less than 30 days old, 30-60 days old, 60-180 days old, 180 - 365 days old and more than 365 days old (refer screenshot below). Also, obtain the list of vendors with whom the Company has disputes and any claims from customers, under litigation and compare with previous year.

Presentation and Disclosure

Required disclosures for trade payables and

Other liabilities have been appropriately made

Ensure whether the following disclosures as required under Ind AS compliant Schedule III to Companies Act, 2013 have been made:

              Whether the Company has classified a payable as a trade payable if it is in respect of the amount due on account of goods sold or services rendered in the normal course of business.

              Whether the Company has disclosed the following details relating to micro enterprises and small enterprises in the notes:

              The principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier at the end of each accounting year.

              The amount of interest paid by the buyer in terms of section 16 of the Micro, Small and Medium Enterprises Development Act, 2006, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year.

              The amount of interest due and payable for    the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under the Micro, Small and Medium Enterprises Development Act, 2006.

Assertions

Explanation

Audit procedures

Existence

To establish the existence of loans and advances and other current assets as at the period- end

              For establishing existence of loans and advances, direct confirmation procedures, similar to those performed for ‘’Accounts receivable’’ balances are undertaken with the only difference that while undertaking circularisation of direct confirmations, in addition to the principal amount, interest received/ receivable, if any, as per the agreed terms between the parties, may also be included as part of the balance to be confirmed.

Completeness

Loans and advances and other current asset balances that were supposed to be recorded have been recognized in the financial statements.

•                Obtain a list of all advances and other current assets and compare them with balances in the ledger.

Inspect loan agreements and acknowledgements of parties in respect of outstanding loans. A loan or an advance, if material, can be granted only if authorised by the Memorandum and Articles of Association in the case of Company. In addition, the auditor should confirm that the loans advanced were within the competence of persons who had advanced the same, directors in the case of a Company, partners in the case of a firm and trustees in the case of a trust.

Valuation

Loans and advances and other current asset balances have been valued appropriately.

              Assess the allowance for doubtful accounts. Review the process followed by the Company to derive an allowance for doubtful accounts. This will include a consistency comparison with the method used in the last year, and a determination of whether the method is appropriate for the underlying business environment.

              Obtain the ageing report of loans and advances, split between not currently due, 30 days old, 30-60 days old, 60- 180 days old, 180- 365 days old and more than 365 days old. Also, obtain the list of loans and advances under litigation and compare with previous year.

              Scrutinize the analysis and identify those loans and advances that appear doubtful; Discuss with management their reasons, if any of these loans/ advances are not included in the provision for bad recoverable; Perform further testing where any disputes exist; Reach a final conclusion regarding the adequacy of the bad and doubtful loans/ advances provision.

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Presentation and Disclosure

Required disclosures for loans and advances and other current assets have been appropriately made

Ensure whether the following disclosures as required under Ind AS compliant Schedule III to Companies Act, 2013 have been made:

Whether loans have been classified as:

1.    Security deposits
2.         Loans to related parties (giving details thereof)
3.         Other loans (specify nature)

Whether all the above loans have been further sub-classified as:

1              Secured, considered good

2              Unsecured, considered good

3              Doubtful

Whether allowance for bad and doubtful loans has been disclosed separately under the relevant heads i.e. separately for each category of loans

For loans, whether separate disclosure has been made for amounts due by:

1.                     Director(s) of the company
2.                    Director(s) of the company jointly with other persons
3.                     Other officer(s) of the company
4.                     Other officer(s) of the company jointly with other persons
5.                     Firm(s) in which director is a partner
6.                       Private company(ies) in which director is a director or a member

Assertions

Explanation

Audit procedures

Existence

To establish the existence of provisions as at the period- end

Obtain a list of all provisions and compare them with balances in the ledger.

Completeness

Provisions that were supposed to be recorded have been recognized in the financial statements

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.

Valuation

Provision balances have been valued appropriately

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.

Wherever required, obtain experts report, calculation and underlying working for the provision amount, example for employee defined benefit provision, the auditor may request the management to share the actuarial valuation report and in case of any matter under legal dispute, the auditor should request for assessment made by a legal expert in relation to likelihood of a liability devolving on the entity i.e. whether probable or possible or remote as defined above. The auditor should then verify the underlying assumptions used by the expert with the data shared by the management.

Presentation and Disclosure

Required disclosures for provisions have been appropriately made

Ensure whether the following disclosures as required under Ind AS compliant Schedule III to Companies Act, 2013 have been made:

              Whether current and non- current portions have been split for

-               Provision for employee benefits

-               Others (specify nature)

              Whether for each class of provision, disclosure has been made for:

-               the carrying amount at the beginning and end of the period;

-               additional provisions made in the period, including increases to existing provisions;

-               amounts used (i.e. incurred and charged against the provision) during the period;

-               unused amounts reversed during the period; and

-               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

Assertions

Explanation

Audit Procedure

Existence

To establish the existence of tangible fixed assets (PPE) as at the period- end

Review client’s plan for performing physical verification of PPE i.e. whether performed by own staff or by a third party and the policy regarding periodicity i.e. whether physical verification shall be done on annual basis or once in two years/ three years.

Evidence of appropriate supervision of those performing physical verification of PPE should be examined.

Obtain PPE physical verification report backed by the working sheets from the client and perform the following procedures:

Assess if all items of PPE are properly tagged and carry identification marks/ numbers and physical verification work papers do capture the asset identification numbers for assets physically verified.

Reconciliation of items of PPE as physically verified with the fixed asset register maintained by the entity as at the date/ period of undertaking physical verification. Specifically verify if the PPE additions up to the date of physical verification have been updated in the fixed asset register.

Verify the discrepancies noted, based on physical verification undertaken and the manner in which such discrepancies have been dealt with in the entity’s books and financial statements, for example any identified shortages/ assets not in working condition and/ or active use should be accounted for as deletions in the books of account post approvals by the entity’s management and depreciation charge should have ceased to be charged beyond the date of deletion.

Completeness

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

Verify the movement in the PPE schedule (asset class wise like building, P&M etc.) compiled by the management i.e. Opening + Additions - Deletions= Closing and tally the closing balance to the entity’s books of account.

Check the arithmetical accuracy of the movement in PPE schedule, tally the opening balances to the previous year audited financial statements. For additions during the  period  under  audit,  obtain  a listing of all additions from the management and undertake the following procedures:

— For all material additions, verify if such expenditure meets the capital expenditure test vis- à-vis revenue expenditure. Students should note that the cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:

It is probable that future economic benefits associated with the item will flow to the entity; and

The cost of the item can be measured reliably. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it.

In particular, the cost of an item of property, plant and equipment as per Ind AS 16 should comprise

Its purchase price, including import duties and non- refundable purchase taxes, after deducting trade discounts and rebates;

Any costs directly attributable to  bringing  the  asset  to   the location and condition necessary for it to be capable of operating in the manner intended by management, examples being costs of employee benefits (as defined in Ind AS 19, Employee Benefits) arising directly from the construction or acquisition of the item  of  property,  plant and equipment,  costs  of site preparation, initial delivery and handling costs; installation and assembly costs; costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and professional fees.;

Students should note that following costs do not qualify as costs of an item of property, plant and equipment:

Costs of opening a new facility; (ii) costs of introducing a new product or service (including costs of advertising and promotional activities); (iii) costs of conducting business in a new location or with a new class of customer (including costs of staff training); and

(iv) Administration and other general overhead cost.

(c) The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a  particular  period  for purposes other than to produce inventories during that period.

Items such as spare parts, stand-by equipment and servicing equipment are recognised as property, plant and equipment, when they meet the definition of capital expenditure.              Otherwise, such items are classified as inventory.

Items of property, plant and equipment may be acquired for safety or environmental reasons. The acquisition of such property, plant and equipment, although not directly increasing the future economic benefits of any particular existing item of property, plant and equipment, may be necessary for an entity to obtain the future economic benefits from its other assets. Such items of property, plant and equipment qualify for recognition as assets because they enable an entity to derive future economic benefits  from related assets in excess of what could be derived had those items not been acquired. For example, a chemical manufacturer may install new chemical handling processes

To comply with environmental requirements for the production and storage of dangerous chemicals; related plant enhancements are recognised as an asset because without them the entity is unable to manufacture and sell chemicals.

On the contrary, an entity should not recognise in the carrying amount of an item of property, plant and equipment the costs of the day-to-day servicing of the item. Rather, these costs are   recognised in profit or loss as incurred. Costs of day-to-day servicing are primarily the costs of labor and consumables, and may include the cost of small parts. The purpose of these expenditures is often described as for the ‘repairs and maintenance’ of the item of property, plant and equipment.

Parts of some items of property, plant and equipment may require replacement at regular intervals. For example, a furnace may require relining after a specified number of hours of use, or aircraft interiors such as seats and galleys may require replacement several times during the life of the airframe. Items of property, plant and equipment may also be   acquired   to   make a less frequently recurring replacement, such as replacing the interior walls of a building, or to make a nonrecurring replacement. Under the recognition principle as defined in paragraph 7 of IndAS 16, an entity recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if the recognition criteria are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of Ind AS 16.

Verify the installation certificate or report or other similar documentation maintained by the entity to establish the date of addition, for all additions to PPE during the period under audit.

Verify if the PPE additions have been approved by appropriate entity’s personnel and is as per the capital expenditure budget approved by the board of directors at the start of the financial year.

Verify if proper internal processes and procedures like inviting competitive quotations/ floating tenders etc. were   followed   prior   to   finalizing   the    vendor for procuring item of PPE/ awarding of work contract for capital project.

In relation to deletions to PPE, understand from the management the reason and rationale for deletion (example could be new purchase of similar asset once the old asset was no longer fit to be used in production process) and the manner of disposal. Obtain the management approval and discard note authoring discard of the asset from its active use. Verify the process followed for sale of discarded PPE, example inviting competitive quotes, tenders and the basis of  calculation  of sales proceeds. Verify that the management has accurately recorded the deletion of PPE (original cost and accumulated depreciation up to the date of disposal) and the resultant gain/ loss on discard in the entity’s books of account.

Valuation

PPE have been valued appropriately   and    as per generally accepted accounting policies and practices

It is a common understanding that the value of fixed assets/ 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 given period. Unless this cost in the form of depreciation is charged to the accounts, the profit or loss would not be correctly ascertained and the values of PPE would be shown at higher amounts. The auditor should:

Verify that the entity has charged depreciation on all items of PPE unless any item of PPE is non- depreciating like freehold land;

Verify that the depreciation method used reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the straight-line method, the diminishing balance method and the units of production method. Straight-line depreciation results in a constant charge over the useful life if the asset’s residual value does not change. The diminishing balance method results in a decreasing charge over the useful life. The units of production method results in a charge based on the expected use or output. The entity should have selected the method that most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. That method should have been applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits.

The auditor should also verify if the management has undertaken an impairment assessment to determine whether an item of property, plant and equipment is impaired. For the purpose, the auditor needs to verify if the entity has applied Ind AS 36, Impairment of Assets for determining the manner of reviewing the carrying amount of its PPE, determining the recoverable amount of the PPE to determine impairment loss, if any

Rights and

Obligations

The entity has valid legal ownership rights over the PPE claimed to be held by the entity and recorded in the financial statements

In addition to the procedures undertaken for verifying completeness of additions to PPE during the period under audit, the auditor while performing testing of additions should also verify that all PPE purchase invoices are in the name of the entity that entitles legal title of ownership to the respective entity. For all additions to land, building in particular, the auditor should obtain copies of conveyance deed/ sale deed to establish whether the entity is mentioned to be the legal and valid owner.

The auditor should insist and verify the original title deeds for all immoveable properties held as at the balance sheet date. In case the entity has given such immoveable property as security for any borrowings and the original title deeds are not available with the entity, the auditor should request the entity’s management for obtaining a confirmation from the respective lenders that they are holding the original title deeds of immoveable property as security. In addition, the auditor should also verify the register of charges, available with the entity to assess the PPE that has been given as security to any third parties

Presentation and Disclosure

Required disclosures for PPE have been appropriately made

Ensure whether the following disclosures as required under Ind AS compliant Schedule III to Companies Act, 2013 have been made:

Whether all items of property, plant and equipment have been classified as:

Land

Buildings

Plant and equipment

Furniture and fixtures

Vehicles

Office equipment

Others (specify nature)

Assertions

Explanation

Audit procedures

Existence

To establish the existence of intangible fixed assets as at the period- end

              Since an Intangible Asset is an identifiable non-monetary asset, without physical substance, for establishing the existence of such assets, the auditor should verify whether such intangible asset is in active use in the production or supply of goods or services, for rental to others, or for administrative purposes.

Example- for verifying the existence of software, the auditor should verify whether such software is in active use by the entity and for the purpose, the auditor should verify the sale of related services/ goods during the period under audit, in which such software has been used.

Example- For verifying the existence of design / drawings, the auditor should verify the production   data   to    establish if such products for which the design/ drawings were purchased, are being produced and sold by the entity.

In case any intangible asset is not in active use, deletion should have been recorded in the books of account post approvals by the entity’s management and amortization charge should have ceased to be charged beyond the date of deletion.

Completeness

Additions to Intangible assets during the period under audit have been recorded appropriately in the financial statements

              Verify the movement in the Intangible assets schedule (asset class wise like software, designs/ drawings, goodwill etc.) compiled by the management i.e. Opening

+ Additions - Deletions= Closing and tally the closing balance to the entity’s books of account.

Check the arithmetical accuracy of the movement in intangible asset schedule, tally the opening balances to the previous year audited financial   statements.  For additions during the period under audit, obtain a listing of all additions from the management and undertake the following procedures:

             For all material additions, verify if such expenditure meets the criterion for recognition of an intangible asset. Students should note that an intangible asset shall be recognised if, and only if:

(a)                      the said asset is identifiable;

(b)                     the entity controls the asset

i.e. the entity has the power  to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits;

(c)                      it is probable that future economic benefits associated with the asset will flow to the entity;

(d)                     the cost of the item can be measured reliably.

Valuation

Intangible have been valued appropriately and as per generally accepted accounting policies and practices

The value of intangible assets may diminish due to efflux of time, use and/ or obsolescence. The diminution of the value represents an item of cost to the entity for earning revenue during   a given period. Unless this cost in the form of amortization is charged to the accounts, the profit or loss would not be correctly ascertained and the values of intangible asset would be shown at higher amounts. The auditor should:

-      Verify that the entity has charged amortization on all intangible assets;

-      Verify that the amortization method used reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

-      The auditor should also verify if the management has undertaken an impairment assessment to determine whether an intangible asset is impaired. For the purpose, the auditor needs to verify if the entity has applied Ind AS 36, Impairment of Assets for determining the manner of reviewing the carrying amount of its intangible asset, determining the recoverable amount of the asset to determine impairment loss, if any.

Rights & Obligations

The entity has valid legal ownership rights over the PPE claimed to be held by the entity and recorded in the financial statements

In addition to the procedures undertaken for verifying completeness of additions to intangible assets during the period under audit, the auditor while performing testing of additions should also verify that all expense invoices/ purchase contracts are in the name of the entity that entitles legal title of ownership to the respective entity