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What should an auditor understand regarding the sales of the client?

The auditor should understand the type of services/products provided, demand, major selling product/service, new products/services introduced, discontinued products/services, major customers, and sales terms (credit or cash).

What are brief audit procedures for sales?

Obtain understanding of internal control over the sales process, test sales cycle controls, examine sample transactions, perform sales trend analysis, and compare with prior periods.

What are detailed audit procedures regarding the occurrence of sales?

Check for duplicate invoices, confirm genuineness of sales, verify fictitious customers, review sales journal entries, and test for unearned or contingent revenues.

How can auditors ensure completeness of sales?

Perform cut-off tests, verify credit notes post-period, review sales reconciliations, and check GST reconciliations with financial records.

What steps are included in verifying the measurement of sales?

Trace transactions from inception to completion, ensure compliance with applicable accounting standards, and compare rates with related-party sales.

What disclosures should auditors verify for sales?

Check for disclosure of sales of products, services, grants, other revenues, excise duty, and related-party transactions.

What are the brief audit procedures regarding purchases?

Test purchase cycle controls, examine sample transactions, check GRN, vendor invoices, and perform substantive analytical procedures like purchase trend analysis.

What are detailed audit procedures for purchase occurrence?

Verify vendor authenticity, inspect quality and GRNs, ensure original purchase invoices, and review transactions for related-party purchases at arm's length.

How can auditors ensure the completeness of purchases?

Perform cut-off tests, ensure correct accounting of goods-in-transit, obtain management representations, and review journal entries.

What are the key analytical procedures for purchases?

Perform consumption analysis, stock composition analysis, and calculate turnover ratios to compare with previous periods.

What should an auditor verify in employee benefit expenses?

Test controls over payroll, verify attendance records, review employee movements, check salary accuracy, ensure provident fund and gratuity compliance, and perform analytical procedures.

What are disclosure requirements for employee benefit expenses?

Ensure disclosures of salaries, provident fund contributions, ESOP/ESPP expenses, and staff welfare expenses in financial statements.

How should an auditor verify other income such as interest income?

Confirm deposit details, recalculate interest, obtain bank confirmations, and reconcile with Form 26AS.

How should auditors verify dividend income?

Ensure the entity’s right to receive dividends, confirm the flow of economic benefits, and verify measurable reliability.

What are the disclosure requirements for other income?

Classify interest, dividend income, net gain/loss on investments, and other non-operating income appropriately in financial statements.

How should an auditor verify depreciation and amortization expenses?

Obtain understanding of the process, verify fixed asset register, check depreciation rates, ensure compliance with useful lives, verify residual values, and check that depreciation is charged from readiness for use.

What disclosures are required for depreciation and amortization?

Disclose accounting policy, useful lives, residual value, and depreciation method as per Schedule II to the Companies Act, 2013.

How should an auditor verify other expenses?

Verify if expenses pertain to the current period, are revenue in nature, have valid supporting documents, are classified correctly, and authorized as per delegation rules.

What specific points should an auditor check for rent expenses?

Verify agreements, ensure expenses are recorded for 12 months, consider escalation clauses, and confirm the expense pertains to business premises.

How should an auditor verify power and fuel expenses?

Verify bills for accuracy, perform trend analysis linking power consumption to production, and check unit-wise cost.

What should an auditor check for insurance expenses?

Verify policy validity, ensure correct classification between prepaid and expenses, and check period of coverage.

How should an auditor verify legal and professional expenses?

Verify monthly summaries, check agreements for recurring expenses, and ensure proper documentation for non-recurring expenses.

How should an auditor verify goods sent on consignment?

Reconcile consignment accounts, obtain consignee confirmations, verify commission and valuation, and check disclosure of consignment goods.

How should an auditor verify foreign travel expenses?

Check travel allowance bills, supporting documents, authorization, Reserve Bank permissions, and disclosure of foreign exchange spent.

What should an auditor verify for advertisement expenses?

Verify agency bills, ensure expenses relate to business, ascertain nature of expenditure, and ensure proper classification of prepaid expenses.

How should an auditor verify payment of taxes?

Verify assessment orders, notices, challans, e-payment records, and ensure correct PAN/TAN information on payments.

How should an auditor verify the sale of scrap?

Review internal controls, analyze production and scrap patterns, check sale rates, vouch invoices, and ensure proper classification of scrap and goods.

What should an auditor check for receipt of capital subsidy?

Verify application and purpose, check documents for conditions attached, ensure compliance with AS 12, and confirm proper accounting and disclosure.

What does Section 54 of the Companies Act, 2013 state about issuing shares at a discount?

Companies cannot issue shares at a discount, except for sweat equity shares under Section 54 of the Companies Act, 2013.

What happens if a company issues shares at a discounted price?

Any shares issued at a discounted price are void.

Under what conditions can a company issue shares at a discount to creditors?

A company may issue shares at a discount to creditors when its debt is converted into shares under a statutory resolution plan or debt restructuring scheme as per RBI guidelines.

What penalties apply if a company fails to comply with provisions regarding discounted share issuance?

The company and its defaulting officers face a penalty of up to the amount raised or ₹5 lakh, whichever is less, and the company must refund all monies received with 12% interest per annum.

What are sweat equity shares?

Sweat equity shares are equity shares issued by a company to employees or directors at a discount or for consideration other than cash, for providing know-how, intellectual property rights, or value additions.

What authorization is required to issue sweat equity shares?

The issue must be authorized by a special resolution passed by the company specifying the number of shares, market price, consideration, and eligible directors or employees.

How should sweat equity shares be issued for listed companies?

They must comply with regulations made by the Securities and Exchange Board of India.

How should sweat equity shares be issued for unlisted companies?

They must follow prescribed rules under Section 54 of the Companies Act, 2013.

How are sweat equity shareholders ranked compared to other equity shareholders?

They rank pari passu with other equity shareholders.

What are reserves?

Reserves are amounts appropriated from profits not intended to meet liabilities, contingencies, commitments, or diminution in asset value.

What is the difference between revenue reserves and capital reserves?

Revenue reserves are distributable profits, while capital reserves are not free for distribution and can only be used for specific purposes.

How should the opening balance of reserves and surplus be verified?

It should be traced and tallied to the previous year's audited financial statements.

What steps should be taken to verify the utilization of securities premium?

Confirm the resolution by the board and ensure the premium is used only for specified purposes like issuing bonus shares, writing off expenses, redeeming preference shares, or buybacks.

What should be disclosed under the "Reserves and Surplus" head in financial statements?

Details such as capital reserves, revaluation reserves, debenture redemption reserves, share options outstanding accounts, and surplus balance in the profit and loss statement.

What is the treatment of a debit balance in the statement of profit and loss in financial disclosures?

It is shown as a negative figure under "Surplus" and adjusted in the "Reserves and Surplus" section, even if it results in a negative total balance.

What must an auditor review to verify the approval of new lending agreements?

Review the board minutes for the approval of loans.

How should the auditor confirm the validity of recorded liabilities?

Obtain written representations that all recorded liabilities represent valid claims by lenders.

What schedule should the auditor obtain to verify completeness of borrowings?

A schedule of short-term and long-term borrowings showing beginning and ending balances, and borrowings taken and repaid during the year.

How can the auditor verify the accuracy of balances in the books for borrowings?

Send direct confirmation requests to lenders, compare the confirmations to the books, and resolve any discrepancies.

What must the auditor confirm regarding foreign currency loans?

Verify the closing exchange rates and recompute the restatements of foreign currency balances as per AS 11.

How should the auditor check compliance with loan covenants?

Review loan agreements for compliance with covenants and confirm waivers from lenders if any provisions have been breached.

What should the auditor examine in the loan agreements related to security?

Ensure compliance with creation and registration of charges as per applicable statutes.

How should the auditor classify borrowings when security value falls below loan amount?

Classify the loan as secured only to the extent of the market value of the security.

How should liabilities towards discounted bills be verified?

Ensure they are correctly reflected and disclosed in the financial statements.

What statutory restrictions on borrowings should the auditor verify compliance with?

Verify compliance with Sections 180, 185, and 186 of the Companies Act, 2013.

What disclosure is required for long-term borrowings under Schedule III of the Companies Act, 2013?

Classify as bonds, term loans, deferred liabilities, deposits, related party loans, etc., and specify security nature.

What must be disclosed for loans guaranteed by directors or others?

The aggregate amount of such loans under each head must be disclosed.

How should default periods and amounts be disclosed for loans?

Specify period and amount of continuing default in repayment of loans and interest as on the balance sheet date.

How should the auditor ensure proper use of borrowings?

Examine whether borrowings have been used for their intended purposes and disclose details if otherwise.

What must be disclosed about current maturities of long-term borrowings?

Disclose them separately under the short-term borrowings section.

What must be disclosed when a company has borrowings secured by current assets?

The company must disclose if quarterly returns/statements filed with banks are in agreement with the books and provide reconciliation if discrepancies exist.

What details must be disclosed if a company is declared a wilful defaulter?

The date of declaration and details of defaults, including amount and nature, must be disclosed.

What should be disclosed for charges or satisfaction not registered with the Registrar of Companies?

Details and reasons for delays beyond the statutory period.

What must be disclosed if funds are advanced or loaned to intermediaries for ultimate beneficiaries?

Dates, amounts, and details of funds advanced, ultimate beneficiaries, and compliance declarations with laws like FEMA and PMLA.

What disclosure is required when funds are received for lending or investing on behalf of funding parties?

Dates, amounts, and details of funds received and lent, plus compliance declarations with applicable laws.

What should the auditor ensure about internal controls over trade receivables?

Controls should ensure genuine sales, approved customers, accurate recording, and timely collection.

How should large outstanding trade receivables be verified?

The auditor should ask for reasons and justifications for significant overdue balances.

What is the significance of accounts receivable ageing reports?

They help trace balances to the general ledger and assess the valuation and provision for doubtful accounts.

What cut-off procedures are essential for verifying trade receivables?

Ensure goods dispatched before year-end are invoiced and included, and goods dispatched after are excluded.

What must be disclosed for trade receivables under Schedule III?

Ageing schedules, classification as secured/unsecured or doubtful, allowances for bad debts, and related party disclosures.

What should the auditor physically verify regarding cash?

Cash on hand as of the balance sheet date, ideally with a surprise check after the year-end.

What are key steps for verifying bank balances?

Obtain bank reconciliation statements, match balances to confirmations, and verify reconciling items.

What must be disclosed for cash and cash equivalents?

Classification into bank balances, cheques, cash on hand, and others; plus details on margin money, restrictions, and long-term deposits.

How should the existence of inventory be verified?

Participate in inventory counts, perform test counts, and ensure proper tagging, segregation, and supervision.

What analytical procedures help ensure the completeness of inventory?

Compare inventory turnover ratios, perform vertical analysis, and reconcile physical counts with perpetual records.

How should the valuation of damaged or obsolete inventory be checked?

Ensure valuation at net realizable value, request ageing splits, and verify lower-of-cost-or-net-realizable-value principles.

What disclosures are required for inventory under Schedule III?

Classification into raw materials, work-in-progress, finished goods, etc., disclosure of goods-in-transit, and the mode of valuation.

What are the recognition criteria for Property, Plant, and Equipment (PPE)?

PPE is recognized as an asset if: a) Future economic benefits are probable, and b) The cost can be measured reliably.

What elements are included in the cost of PPE?

Purchase price (net of trade discounts), directly attributable costs (e.g., site preparation, delivery, installation), and initial dismantling/restoration costs.

What costs are not included in the cost of PPE?

Inauguration costs, promotional costs, staff training, and general overheads.

How should the existence of PPE be verified?

Review physical verification plans, check tagging and identification of assets, and reconcile physical counts with the fixed asset register.

What steps are involved in verifying the completeness of PPE?

a) Verify opening balances, additions, and deletions in the PPE schedule. b) Ensure additions meet recognition criteria. c) Confirm approval of additions and proper procedures for purchases and disposals.

How should PPE disposals be verified?

Review approval documents, discard notes, and sale processes (e.g., tenders). Verify accurate recording of the disposal.

How should the auditor verify ownership of PPE?

Check invoices, sale deeds, and title deeds for ownership. Verify charges or liens on assets and confirm if property is pledged as security.

What disclosures are required for PPE under Schedule III of the Companies Act, 2013?

Classification into categories like land, buildings, vehicles, etc., reconciliation of gross/net carrying amounts, and depreciation/impairment details.

What additional disclosures are required for immovable properties not in the company's name?

Details of such properties, extent of the company’s share, and reasons for not holding title deeds.

What must be disclosed if PPE has been revalued?

State whether the valuation was performed by a registered valuer as per Companies (Registered Valuers and Valuation) Rules, 2017.

How should Capital Work-in-Progress (CWIP) be disclosed?

Provide an ageing schedule and completion schedule for projects that are overdue or exceed planned costs.

How should the existence of an intangible asset be verified?

Verify that the asset is in active use for production, rental, or administrative purposes. For example, ensure software is actively used by reviewing related sales/services.

What should be done if an intangible asset is no longer in active use?

Ensure its deletion is recorded post-management approval, and the amortization charge ceases beyond the deletion date.

How should the completeness of intangible assets be verified?

Review the movement schedule (opening + additions - deletions = closing balance) for arithmetical accuracy and verify recognition criteria for additions as per AS 26.

What costs should not be recognized as intangible assets?

Costs related to research or the research phase of an internal project should not be recognized as intangible assets.

How should the rights and obligations of intangible assets be verified?

Check that expense invoices or purchase contracts are in the entity's name, ensuring legal title of ownership.

What aspects of valuation should the auditor verify for intangible assets?

a) Ensure amortization is charged on all intangible assets. b) Confirm the amortization method reflects the pattern of economic benefit consumption. c) Verify impairment assessments for any potential losses.

What disclosures are required under Schedule III for intangible assets?

a) Classification into categories like goodwill, brands, software, patents, etc. b) Reconciliation of gross and net carrying amounts, including additions, disposals, and revaluations. c) Notes on any changes due to revaluation or write-offs for five years after the change.

What disclosures are required for intangible assets under development?

Provide an ageing schedule and a completion schedule for projects that are overdue or exceed their planned costs.

How should the auditor verify the existence of provisions?

Obtain a list of all provisions, inspect agreements (e.g., warranty commitments, legal claims), and verify underlying calculations.

What should the auditor do if provisions involve complex calculations?

Obtain reports or calculations from experts, such as actuaries, and assess their competence and independence as per SA 500.

What disclosures are required for provisions under Schedule III of the Companies Act, 2013?

Disclose provisions for employee benefits and others under long-term and short-term provisions, along with contingent liabilities and commitments.

What information must be disclosed for each class of provision under AS 29?

Beginning and ending balances, additions, amounts used, unused reversals, nature, timing, uncertainties, and any expected reimbursements.

What should an enterprise disclose about contingent liabilities?

A brief description, estimated financial effects, related uncertainties, and possibility of reimbursement.

How should the auditor verify the existence of trade payables?

Perform direct confirmation procedures, check for duplicate entries, trace balances to the general ledger, and test subsequent payments.