Assurance Revision Manual

L EA R N I N G M O D U L E

“ THINKING BRIDGE”

Website: www.thinkingbridge.in Email: connect@thinkingbridge.in

 Session 1-
Audit Overview
 Purpose of Audit How it is done

• Enhance the degree of confidence among • Obtain reasonable assurance – by seeking sufficient +
stakeholders appropriate audit evidence

• Make sure numbers are reliable • Expression of an opinion –true and fair view
 Flow of Audit

Understand the Business Activity

(Process Flow)

Understand Control Environment &

Identify ROMMs

Perform Control Testing to check Design

and Operating Effectiveness of Controls

Decide NTE of Substantive Testing

based on Results of Control Testing

Perform Substantive Testing

Conclusion & Reporting

 Sample Walkthrough

I HAVE THE POWER TO DO EVERYTHING MYSELF ROMMs (What could go Wrongs) Controls
Concentration of Power Segregation of Duties

Initiating a
transaction

Approving a
Reconciliation transaction,
Authorization DESIGN &
IMPLEMENTATION

Processing the Recording a

FAIL ⤬
payment transaction
 Sample Walkthrough

ROMMs (What could go Wrongs) Controls

Unapproved Transaction Authorizations & Approvals
Initiating a
transaction

Reconciliation
⤬
Approving a
transaction,
Authorization

DESIGN & IMPLEMENTATION ✓

Processing the Recording a
payment transaction

OPERATING EFFECTIVENESS ⤬ FAIL

 Test of Controls &
Test of Details (Substantive Procedures) -

Test of Control (TOC) procedures

inversely related to
Test of Details (TOD- Substantive Procedures)

Situation I II
Controls Effective Ineffective
Nature, Timing, Extent (NTE) Low High
of Substantive Procedures
 Materiality

TOLERABLE ERROR LIMIT Materiality Levels

OM PM CTT
6000000

5000000

4000000

3000000

2000000

1000000

0
Category 1 Category 2 Category 3 Category 4
 Materiality Cycle

Determine Overall
Materiality

Communicate with Determine

Those Charged with Performance
Governance (TCWG) Materiality (PM)

Evaluate impact of Determine Clearly

Mis-statements on Trivial Threshold
Materiality (CTT)

Accumulate Mis-
statements
Audit Training Module IL&FS-
Horrors of US Financial Crisis Revisited:
I n d i a ’s L e h m a n M o m e n t ?

Why the Crisis Then?

Liabilities Side: ALM Mismatch, Over

Dependence on Short-Term Funding

Assets Side: Concern On Asset Quality

(Advances to Real Estate, Infra, Stressed
Sectors)

Starring: IL&FS, Yes Bank, DHFL, Other

NBFCs
 Session 4-
Cash & Cash Equivalents (CCE)
 Components of CCE

Cash in
Hand

Marketable
Securities Bank Balance
(Commercial
Papers,
Treasury
Certificates etc.)
CCE in Current &
Savings
Account

Fixed
Deposits
 Directional Risk & Primary Assertions

Directional risk Primary Assertion

1. Existence?
UNDERSTATEMENT OR 2. Valuation?
OVERSTATEMENT???? 3. Rights & Obligations?
4. Completeness?
5. Presentation & Disclosure?

Yes, EXISTENCE is
OVERSTATEMENT
primary; but in fact
all five are relevant.
Auditor’s Objective: To Gain Comfort for the assertions through audit testing and gathering evidences.
 Satyam Computers:
The fraud that shook India Inc.
2009 – Satyam Shame Market Price of Share
Fall of 96%!
• Company: Indian IT services and back-office firm From Rs 179
to Rs 6/
share
• Size:
Employees- 53,000
Clients- 185 of Fortune 500 Companies
Operations- 66 Countries
“Reported” Annualized Revenue- $2 Bn

• What happened: Falsely boosted revenue by Rs 55 Bn

• How he did it: Falsified revenues, margins and cash

balances to the tune of Rs 50 Bn

• How he got caught: Admitted the fraud in a letter to

the company's board of directors

• Consequences: Huge hit to Auditor’s reputation. SEBI

proposed 2 yr ban
 ROMM, Control & Substantive Testing
Major ROMMs (What could go Major Controls
Wrongs) Head Substantive Audit Procedures
i. Physical Cash Verification
Concentration of Power Segregation of Duties Cash Balance ii. Balance Certificate from Management
Unapproved or unauthorised Transaction Approval on
transactions being incurred each transaction by Bank & FD Balance i. Direct Balance Confirmation from Bank
ii. Reconcile with Bank Statements
Appropriate Authority
i. Obtain BRS from auditee
BRS not prepared at regular BRS prepared & reconciled BRS ii. Verify Book Balance with TB
intervals and Reco not done with Bank Statements on iii. Check Reconciling Items
with bank statements monthly basis i. Verify Calculation based on FD Receipt (No. of
Control over Cash not Cash Count done in every days and Interest Rate)
FD Interest ii. Check Interest Certificate of Bank
appropriate 15 days
iii. Also check form 26AS for TDS deducted
FD Transactions not reconciled Monthly Reco. with FDRs,
and FD interest not calculated Interest calculation sheet For Foreign
i. Verify Rate of Exchange from RBI
correctly prepared by Treasury as Currency Accounts
per FDRs
i. Review IC minutes and reports
Marketable ii. Evaluate method of accounting & valuation
Conclusion- Controls are aptly Designed and are Securities iii. Evaluate presentation and disclosure
operating effectively, thus NTE of Substantive is NORMAL iv. Perform analytical procedures
 Substantive Procedure: Cash & Bank

S. No. Head Audit Procedures Assertion/ Risk Covered

Cash Balance i. Physical Cash Verification Existence- Cash Balance in books exists and is
1 ii. Balance Certificate from Management accurate
 Bank & FD Balance

DIRECT Balance Confirmation

Head Particulars

Testing Area Bank & FD Balance

Assertion Existence
 BRS Testing

Head Particulars
Check Reconciling
BRS testing
Items
BRS
 FD Testing
Fixed Deposits
Procedures
FD Calculation &
FDR
Bank Interest
Certificate
Check 26AS for TDS
 Marketable Securities Testing

Marketable Securities

Cost NRV
Head Particulars

Assertion Valuation

Procedure Verify Market Price

LOWER
 Session 5-
Business Expenses
 Overview of Business Expense

• Expenses are reflected in the P&L Account on the

debit side
• All and every expenses involved in running the
business

Major Expenses –
• Rent
• Repair Maintenance, Travelling, Conveyance, Printing
Stationary, Legal & Professional

Covered Later On –
Salaries, Wages: with Payroll
Direct material: with Revenue
Interest Costs (Not an Opex): with Borrowings
Depreciation: with Fixed Assets
Statutory Levies (Taxes): with Stat. Levy
 Directional Risk & Primary Assertions

DIRECTIONAL RISK PRIMARY ASSERTIONS

1. Occurrence- To ensure that Expense has actually been

incurred or not?
UNDERSTATEMENT OR
OVERSTATEMENT???? 2. Accuracy- To ensure that expenses recorded are accurate
as per the supporting docs

3. Completeness- To ensure all expenses incurred have been

recorded and there are no unrecorded liabilities

CAN BE BOTH 4. Classification- To ensure that expenses have been

recorded in correct expense heads

5. Cut Off- To ensure that expenses of period under audit

have been recorded aptly
 ROMM, Control & Substantive Testing
ROMMs (What could go Wrongs) Controls
Rent –
• Expense not in line • Approval as per policy
with terms agreed • Periodic review S. No. Head Substantive Audit Procedures
• Expense not booked for i. Party-wise schedule for
complete period under Analytical Testing
Legal & Professional
audit 1
Legal & Professional – • Procedure for measurement of Expenses ii. Sample Voucher & Invoice
Under/overstatement on services availed, e.g. verification checking for TOD
account of difference in with contracts
i. Sample Voucher & Invoice
degree of services agreed • Reconciliation of quantum of 2 Printing Stationery checking for TOD
vs availed services availed to invoices
i. Sample Voucher & Invoice
3 Travelling Expenses
General Expense – checking for TOD
• Expense made without • SOD
authorization • Control over quotations Repairs and i. Ledger Scrutiny
• Overpayments to • Procedures for adoption and 4 Maintenance ii. Sample Voucher & Invoice
suppliers and kick-backs implementation of industry best Expenses checking for TOD
• Incorrect capitalization practices in relevant areas
of revenue expenditure
or vice-versa
Rent Analytical

RENT

Head Particulars
Check Agreement,
Procedure
Develop Expectation
Accuracy,
Assertion
Completeness
 Expenses Sampling

Operating Expenses
SAMPLING TABLE

Rent

Legal & Repair

Professi Mainten
onal ance
Expense

Travellin
Printing
g,
Stationa
Conveya
ry
nce
 Test of Details- Expenses

Sample Voucher and Invoice Checking

External Confirmations

Head Particulars
Existence,
Assertion
Completeness
 Session 6-
Revenue & Debtors
 Components of Revenue

Sale of goods

Revenue

Interest,
Rendering of
Royalties and
services
Dividends
 Directional Risk & Primary Assertions

DIRECTIONAL RISK PRIMARY ASSERTIONS

1. Occurrence- To ensure that Revenue has actually been

earned or not?

2. Accuracy- To ensure that expenses recorded are accurate

as per the supporting docs (agreement, invoices)
OVERSTATEMENT
3. Completeness- To ensure all revenue stands recorded

4. Classification- To ensure that revenue have been recorded

in correct heads

5. Cut Off- To ensure that revenue of period under audit

have been recorded aptly

Auditor’s Objective: To Gain Comfort for the assertions through audit testing and gathering evidences.
 Revenue Recognition

Conditions for recognition of revenue in P&L statement

Many Accounting Standards – AS 9, IFRS 15, Ind AS 115; but
crux remains the following –

Earnings process
is complete-
Risk and Rewards Sales price is Collectability is
Goods have been Revenue
have been certain or reasonably
delivered, Recognition
transferred determinable assured
Services have
been rendered
Accounting and auditing challenges

Trade
Discounts

Provision
for Some Peculiar Indirect
Doubtful Aspects Taxes
Debts

Sales
Returns
 ROMM, Control & Substantive Testing

ROMMs (What could go Controls

Wrongs) S. No. Head Audit Procedures
i. Sample Voucher & Invoice
Revenue recognition policy not Periodic review of checking for TOD
in accordance with reporting Recognition Policy as per 1 Service Revenue
framework reporting guidelines ii. Analytical Testing – Variance
Revenue not recognized in line Recognition as per and Ratio analysis
with policy approved policy 2 Sale of Goods/ iii. Debtor Confirmation
Product
Booking of revenue of Test for revenue
iv. Aging dashboard and test for
incorrect period (in violation of recognition at starting and
Doubtful Debts
cut off procedures) end of reporting periods
3 Interest, Royalty,
Incorrect recording of payment Segregation of duties Dividend
collections from customers
• Non- realizability of debtors Provision built up as per
• Understatement of aging and risk classification
provision thereof of debtors
Revenue Substantive Testing
SALES REGISTER

SALES TOD- Invoice & Voucher Testing

 Debtor ’s Substantive Testing

DEBTOR’S CONFIRMATION & AGEING TESTING

Head Particulars
Debtors’
Procedure
Confirmation
Debtors’ Ageing-
Procedure Test for Doubtful
Debts
 Session 7-
Fixed Assets (PPE),
Inventory & Share Capital
 Components of PPE

Land and
Buildings

Vehicles,
ships, Machinery
aircraft

PPE

Furniture
Office
and
equipment
fixtures
Accounting and auditing challenges

Depreciation

De-
recognition
Revaluation
/
Retirement

Some Peculiar
Aspects

Recognition
of
Impairment
Subsequent
Costs

Physical
Verification
 Directional Risk & Primary Assertions

Directional risk Primary Assertion

1. Existence?
UNDERSTATEMENT OR 2. Valuation?
OVERSTATEMENT???? 3. Rights & Obligations?
4. Completeness?
5. Presentation & Disclosure?

Yes, EXISTENCE is
OVERSTATEMENT
primary; but all five
are relevant.
Auditor’s Objective: To Gain Comfort for the assertions through audit testing and gathering evidences.
 Sample Walkthroughs
WALKTHROUGH- PROCUREMENT WALKTHROUGH- DISPOSAL

Purchase
Requisition Due diligence of
(PR) raised by assets by each
particular dept. (Condition
dept. & Existence)
PR sent to
Asset
admin dept.
recorded in
for
books and Identify
procurement Asset is retired
FAR Obsolete,
of assets from FAR &
damaged assets
books and
and identify
profit/loss is
need for
recorded
disposal

Quotations
Asset is
invited by
delivered
Admin Dept.
with Invoice
from Vendors
Asset Disposal
Form initiated
Asset Sold and
L1 selected by the dept.
amount
specifying
and PO recovered
reason of
issued
disposal
 Substantive Testing (Fixed Assets)

S. No. Head Audit Procedures Assertion/ Risk Covered

Reconciliation of Gross Block, Acc. Dep. and Dep. Exp.- Accuracy and Completeness
Fixed Assets
1 i. Fixed Assets Register (FAR) with Trial Balance/ Ledger
Register
ii. FAR with FA Schedule of Financials
i. Sample Testing of Additions done during the year with supporting
Test of Details- docs
2
Additions ii. Ensure Date of capitalization is correct and nature of expense is Occurrence, Accuracy,
capital Valuation
Test of Details- i. Sample Testing of Assets sold/disposed off during the year
3
Additions ii. Check profit/ loss on sale of assets Accuracy

4 Depreciation i. Depreciation Recalculation for ensuring correctness of depreciation

charged during the year Accuracy
i. Check Physical Verification report of fixed assets for identification of
5 Physical Verification
damaged assets and assets which do not exist Existence
i. Verification of Title Deeds of Immovable Properties owned by the Existence and Rights and
6 Title Deeds
Company Obligations
 3 Way Reconciliation - FAR, TB & FA Schedule

1) TB- Fixed Assets

2 ) FA S c h e d u l e

Fixed Assets
1
Register

Reconciliation of Gross Block, Acc. Dep. and Dep. Exp.-

3) Fixed Asset Register i. Fixed Assets Register (FAR) with Trial Balance/ Ledger
ii. FAR with FA Schedule of Financials
 Additions & Deletions TOD

A d d i t i o n s & D e l e t i o n s i n FA R

Test of Details-
2
Additions

i. Sample Testing of Additions done during the year with

supporting docs
ii. Ensure Date of capitalization is correct and nature of
expense is capital

Test of Details-
3
Deletions

i. Sample Testing of Assets sold/disposed off during the year

ii. Check profit/ loss on sale of assets
 Depreciation Recomputation

Depreciation Calculation

4 Depreciation

Depreciation Recalculation for ensuring correctness of

depreciation charged during the year
Physical Verification of Fixed Assets
P hy s i c a l Ve r i f i c a t i o n Re p o r t

i. Check Physical Verification report of fixed assets for

5 Physical Verification identification of damaged assets and assets which do not
exist
 Title Deeds Verification

Title Check

6 Title Deeds

Verification of Title Deeds of Immovable

Properties owned by the Company
 Share Capital Testing

MCA Master Data

Directional Risk –
Companies desire strong equity positions

ROMM –
• Equity is intentionally overstated (fraud)
• Misclassified equity (error)

Testing –
1. Check MCA Master Data
2. Shareholders/ Members Register
3. Take Signed as on date shareholders detail from Company
Secretary
 DIRECTIONAL RISK
Inventory OVERSTATEMENT

What is Inventory? Valuation

Assets held for sale in ordinary course of

business (Finished Goods) Net
Cost Realizable
Value

Assets in the process of production for such

sale (WIP)

Assets to be consumed in production process

(Raw Materials)
LOWER
 Inventory

Checking on
Cut-off date
like 31.3

Sheet to
Floor Count
Inventory
Procedures to verify Existence Count
& Completeness (Stock-
take) Floor to
Sheet Count

Measure,
Weigh,
Open
 Session 8-
Payroll, Actuarial Testing
 Directional Risk & Primary Assertions

DIRECTIONAL RISK PRIMARY ASSERTIONS

1. Occurrence- To ensure that Expense has actually been

incurred or not?
UNDERSTATEMENT OR
OVERSTATEMENT???? 2. Accuracy- To ensure that expenses recorded are accurate
as per the supporting docs

3. Completeness- To ensure all expenses incurred have been

recorded and there are no unrecorded liabilities

Both 4. Cut Off- To ensure that expenses of period under audit

have been recorded aptly

Auditor’s Objective: To Gain Comfort for the assertions through audit testing and gathering evidences.
Low employee compensation: Potential Red Flag?
MANPASAND BEVERAGES
~ Rs. 7,000 Crs

~ Rs. 250 Crs

 Substantive Testing

S. No. Head Audit Procedures Assertion/ Risk Covered

Verify from Payroll Register: Accuracy and Completeness
i. Check Computation of components in payroll register for accuracy
1 Salary Register
ii. Disbursement check through bank advice
iii. Check Salary slips of sample employees
Attendance & i. Check attendance to identify fake employees if any
2
Leaves ii. Trace leaves availed and balance on sample basis Existence & Accuracy
3 Head Count
i. Headcount Reconciliation of employees Occurrence, Completeness

4 Joinees & Resignees

i. Test of Details of Joinees & Resignees on sample basis Occurrence, Accuracy
i. Draw an expectation of the salary expense and compare it with the
5 Salary Analytical
amount recorded in the books Accuracy, Completeness
i. Verified the Data sent to the Actuary for calculation
6 Actuarial Valuation
ii. Checked the provision made with the Actuarial Report Valuation & Accuracy
 Salary Computation & Disbursement
1) Payroll Register 2) Bank Advise 3) Salary Slip

Verify from Payroll Register:

i. Check Computation of components in payroll register for accuracy
1 Salary Register
ii. Disbursement check through bank advice
iii. Check Salary slips of sample employees
 Attendance & Leave Testing

Attendance Register

Attendance &
2
Leaves

i. Check attendance to identify fake employees if any

ii. Trace leaves availed and balance on sample basis
 Head Count Reconciliation

HEADCOUNT MOVEMENT

3 Head Count
i. Headcount Reconciliation of employees
 Joinees & Resignees TOD
Addition

Attrition

Joinees &
4
Resignees i. Test of Details of Joinees & Resignees on sample basis
 Salary Analytical

i. Draw an expectation of the salary expense and compare it with the

5 Salary Analytical
amount recorded in the books
 Actuarial Testing

Actuarial i. Verified the Data sent to the Actuary for calculation

6
Valuation ii. Checked the provision made with the Actuarial Report
 Session 9-
Borrowings & Interest, Prepaid
and Impairment Testing
 Overview of Breakdown by
Borrowings, Interest Instrument

• Borrowings are reflected in the Balance Sheet

Account on the liabilities side
• Interest Expense is reflected in the P&L Account on
the debit side Borrowings

• Types of loan
• Long Term Vs Revolving
Long Term Short Term
• Secured Vs Unsecured
• Fixed Vs Variable Rate
• Interest Bearing Vs Zero Coupon
• Single lender Vs Consortium Vs Debentures Term Loans Debentures
Working
Capital Loans
Bridge Loans
 Directional Risk & Primary Assertions

DIRECTIONAL RISK PRIMARY ASSERTIONS

1. Completeness- To ensure all loans & expenses are
accounted for and there are no unrecorded liabilities

UNDERSTATEMENT OR 2. Classification- To ensure the amounts are properly

displayed as
OVERSTATEMENT???? • Short-term or long-term
• Debt instrument is recorded as such (and not equity)

Understatement 3. Accuracy- To ensure that amounts recorded are accurate

as per the supporting documents

4. Obligation- Legally owed by the company and not another

entity

5. Cut Off- To ensure that expenses of period under audit

have been recorded aptly
Auditor’s Objective: To Gain Comfort for the assertions through audit testing and gathering evidences.
 Substantive Testing

S. No. Head Audit Procedures Assertion/ Risk Covered

1 Debt Covenants Summarize and test debt covenants Accuracy and Completeness
Loan Amortization
2
and Interest Re-computation of loan amortization and interest payment Existence & Accuracy
3 Classification
Determine if all debt is classified appropriately (as current or noncurrent) Occurrence, Completeness
Interest Expense &
4
Outstanding Interest Compute interest expense and accrued interest Occurrence, Accuracy
Reconciliation of Agree the end-of-period balances in the general ledger to the amortization
5
Interest schedules Accuracy, Completeness

6 Debt Confirmations Confirm all significant debt with lenders

Accuracy, Completeness
7 Collateral Collateral/Security Valuation & Accuracy
8 Market Sense Check Market interest rate referencing Accuracy
 Debt Covenants
FINANCIAL COVENANTS NON - FINANCIAL COVENANTS

1 Debt Covenants

Summarize and test debt covenants

 Loan & Interest Amortization Schedule

I N T E R E S T A M O R T I Z AT I O N S C H E D U L E

Loan Amortization
2
and Interest

Re-computation of loan amortization and

interest payment
 Loan Agreement Verification

LOAN AGREEMENT

Loan Amortization
2
and Interest

Re-computation of loan amortization and interest payment

Classification: Current vs Non -Current

3 Classification

Determine if all debt is classified appropriately (as current or

noncurrent)
 Interest Recomputation

INTEREST EXPENSE & INTEREST O/S Interest Expense &

4
Outstanding Interest

Compute interest expense and accrued interest

Reconciliation of
5
Interest

Agree the end-of-period balances in the general ledger to the

amortization schedules
Debt Confirmations

6 Debt Confirmations

Confirm all significant debt with lenders

Impairment
 Impairment

• Principle that explains a permanent reduction in an asset’s value • If the expected cash flow/ benefit of the asset is lesser
than Book Value (BV), the difference between the two is
• To test for impairment, written off
• the total profit,
• cash flow, or other benefit
expected from the asset

Impairment Impairment
Testing: Amount –
Compare –

If CV < RA If CV > RA
Carrying
Amount Recoverable
Amount
(Book Value)

Impairment Impairment
=0 = CV - RA
Fair Value less
Value in Use
costs to sell
 Impairment

• A Tangible Asset • Example – Separate Impairment work-sheet in

folder for Tangible, Intangible (Trademark), Goodwill
Prepaid Expenses
 Prepaid Expenses
• Prepaid expenses are future expenses that have
Types of Prepaid Expenses
been paid in advance

• Prepaid Expenses are reflected in the Balance Sheet

Account on the assets side
Prepaid Expenses
• Amount expensed off out of prepaid expenses is
reflected in the P&L Account on the debit side

Accounting Entries

At the time of payment:-

Prepaid Rent Prepaid Insurance
Prepaid Expenses XXX
To Bank A/C (XXX)

At the time of booking of expenses:-

Expenses XXX
To Prepaid Expenses (XXX)
 ROMMs, Controls and Audit Testing

ROMMs (What could go Wrongs) Assertions Controls Substantive Procedures

Item of Expense erroneously Accuracy Review and authorization at the 1. Test the prepaid schedule for the
booked in prepayment time of incurring the expense accuracy of calculation by performing
"Recomputation" in accordance with
Prepaid balance outstanding does Valuation, Cut Off Verify the period of expense and
the amounts paid and period to
not represent correct amount on check expense off calculation
which such payments relate to
account of wrong calculation
Expense off amount not timely Accuracy Timely review of expenses 2. Select sample for testing and Trace
charged to P&L resulting in the recorded costs to supporting
overstatement of Prepaid balance documents
 Session 10-
Provisions for expenses, Security
Deposits, Stat. Dues, Contingent
Liab. & Commitments
Provision for Expenses
 Overview of
General Provisions
Provisions
A Provision is a Liability of Uncertain Timing or Amount

There is
present
obligation Provisions
due to past
event

Provision for Other

Expenses Provisions

Conditions
for Rent,
Prov. for Bad
Prov. for
Telephone, Warranty Employee
Recognition Electricity etc.
Debts
Benefits
of Provision
A reliable Probability
estimate of outflow
can be of
made resources Covered Earlier
 Directional Risk & Primary Assertions

DIRECTIONAL RISK PRIMARY ASSERTIONS

1. Valuation- To ensure that basis of prov. and estimated

amount is reasonable
UNDERSTATEMENT OR
OVERSTATEMENT???? 2. Completeness- To ensure all expenses incurred have been
recorded and there are no unrecorded liabilities

3. Cut Off- To ensure that expenses of period under audit

have been recorded aptly

UNDERSTATEMENT

Auditor’s Objective: To Gain Comfort for the assertions through audit testing and gathering evidences.
 Audit Testing

S. No. Head Audit Procedures

Head wise Detail & • Obtain expense wise detail of provisions booked
1 • Check movement from opening balance
Movement
• Check Opening Provisions reversed during the year
2 Provision Reversals • Check basis for reversal
• Verify Supporting docs with supporting documents
• Check Basis of Provisions booked
3 Provisions booked
• Verify Supporting docs
Provisions • Check for long outstanding provisions in books, if any. Enquire for
4
Outstanding reasons and check if reversal/ additional provsion is required
Provision Movement

Head wise Detail &

1
Movement

• Obtain expense wise detail of provisions booked

• Check movement from opening balance
Provision Reversals

2 Provision Reversals

• Check Opening Provisions reversed during the year

• Check basis for reversal
• Verify Supporting docs with supporting documents
Provisions Booked

3 Provisions booked

• Check Basis of Provisions booked

• Verify Supporting docs
Provisions Outstanding

Provisions
4
Outstanding

• Check for long outstanding provisions in books, if any.

Enquire for reasons and check if reversal/ additional
provsion is required
Security Deposit
 Overview of Security
Some Types of SD
Deposit
Security Deposit is a sum given in Advance either:
• For Initial Part-payment or
• To ensure service provider against any default
Security Deposits
The same is refundable on termination of contract and (SD)
can be adjusted in case of any breach depending upon
contract details

SD with BSES for SD for Bidding

SD for Rent
Electricity contracts
Security Deposit given is shown as asset in the Balance
sheet
 Audit Testing

S. No. Head Audit Procedures

• Obtain party wise schedule of Security Deposits with dates of deposits
1 Party wise Schedule
given and purpose
• Obtain Direct Balance Confirmations from Major Parties to whom
2 Confirmations Security Deposits have been given by the Company
• Check movement from opening balance
3 Verify movement
• Check for Additions & Deletions from Bank Statement on sample basis
• Verify agreements and Receipt vouchers for sample SDs
Agreements and
4 • Check if the contract with the vendor has been terminated. If yes, then
Supporting Docs
why the SD has not been refunded
Statutory Dues
 Overview of Some Types of Stat.
Statutory Dues Dues

Statutory Dues are taxes and charges payable to

government or govt. authorities like TDS, PF etc. Statutory Dues

Statutory Dues are current liabilities to be deducted and

paid on monthly basis (mostly)

TDS, Advance Tax PF, ESI GST

Audit Objective: To ensure timely deduction and deposit of Statutory Dues

 Stat. Dues Substantive Testing

S. No. Head Audit Procedures

1 Month-wise Liability Schedule • Obtain month wise Liability Schedule of Various Stat Dues like TDS, GST etc.
• Verify amount paid and date of payment from monthly challans
2 Challan Verification • Identify delay if any
• Identify reasons for late payments and the same should be paid off with Interest

TDS Monthly Liability Schedule

Month TDS Interest Total Tax Diff Due date Challan Date of Delay Traced to
Deducted deposited of depsoit No. deposit Days Challan

Apr-18 897,583 - 897,583 - 7-May-18 10436 7-May-18 - a

May-18 6,341,132 - 6,341,132 - 7-Jun-18 7955 6-Jun-18 - a
Jun-18 8,037,070 - 8,037,070 - 7-Jul-18 7658 7-Jul-18 - a
Jul-18 6,598,445 - 6,598,445 - 7-Aug-18 18408 7-Aug-18 - a
Aug-18 4,700,603 - 4,700,603 - 7-Sep-18 9006 5-Sep-18 - a
Sep-18 7,375,219 - 7,375,219 - 10-Oct-18 7113 10-Oct-18 - a
Oct-18 4,490,263 - 4,490,263 - 7-Nov-18 18690 7-Nov-18 - a
Nov-18 7,528,632 - 7,528,632 - 7-Dec-18 11273 5-Dec-18 - a
Dec-18 5,979,577 - 5,979,577 - 7-Jan-19 281 7-Jan-19 - a
Jan-19 5,997,960 - 5,997,960 - 7-Feb-19 11606 6-Feb-19 - a
Feb-19 6,889,490 - 6,889,490 - 7-Mar-19 5548 5-Mar-19 - a
Mar-19 11,499,096 - 11,499,096 - 30-Apr-19 5614 30-Apr-19 - a
Total 76,335,068 - 76,335,068 -
Contingent Liabilities
 Contingencies

• Disclosed in the notes to accounts

Contingent
• Contingent liabilities Liability
Classified as:
(a) Claims not acknowledged as debt
(b) Guarantees
A present obligation
(c) Losses that are probable and estimable A possible obligation from past events
(d) Off-balance sheet financing, use of special purpose from past events but not recognized
because
entities (SPEs)

Examples
(i) Not probable that
• Loss on the guaranties made Whose existence will
there will be an
(ii) Obligation amount
be confirmed only by cannot be suitably
• Litigation as defendant the future events
economic outflow of
measured
resources
• Noncompliance/ violation of applicable laws
 Contingencies

Guarantees of Subsidiary Debt – Letters of Credit –

• The Co. occasionally guarantees repayment of • As of March 31, 2019 and 2018, ABC and affiliates had
obligations incurred by affiliated organizations. Such not drawn upon any letters of credit, which have been
loans are included as liabilities in the consolidated issued in the maximum amount of Rs 15,000,000 for
financial statements. repayment of bond obligations
• Those guarantees amounted to Rs 5,000,000 and Rs
4,000,000 as of March 31, 2019 and 2018, Environmental Guarantee –
respectively.
Litigation – • ABC and affiliates provided guarantees against any
environmental claims. The aggregate amount guaranteed is
• ABC and affiliates are named in various claims and legal Rs 18,000,000 and they expire in various years up to 2030
actions in the normal course of its activities
• An affiliate of the Co. is a plaintiff in a dispute regarding Loan Covenants –
construction defects. The dispute is expected to be
resolved in 2019 and outcome is not expected to have a Loan agreements contain various financial covenants. ABC
material impact on the combined financial statements and affiliates are in compliance with all such covenants.
Commitments
 Types of Commitments

Capital Commitments – Non- Cancellable Property Related Leases –

• Various affiliates have entered into construction • ABC leases property land, facilities, and commercial
contracts with unrelated parties, in the amount of Rs space under leases ranging from 30 to 55 years
14,750,000, for the construction of real properties • Rent expense totaled approximately Rs 2,000,000 and Rs
• At March 31, 2019; Rs 12,000,000 of such contract 3,000,000 for 2019 and 2018, respectively
commitments had not yet been incurred • Future minimum lease expenses (FMLP) under the
foregoing leases are:
Property Management –

• Property management on certain properties is

contracted annually subject to yearly increases. The
term of such non-cancelable contracts is generally for
one-year.
 Session 11-
Understanding Variance,
Sense Check,
Reasonableness & Ratio Analysis
 A process to think, of course

STEP 1: Develop an independent expectation Tasks:

1. Income Statement
STEP 2: Define a significant difference (or threshold) • Calculate COGS, Gross Profit, Operating
Income, PBT, Income Tax
• Variance with previous year (Absolute & %)
• % of Net Sales for Current Year
STEP 3: Compute difference
2. Balancesheet
• Calculate Quick Assets, Total CA, Total Assets,
STEP 4: Investigate significant differences and draw Total Liab., Total Equities and Total Liab. &
conclusions equities
• Variance with previous year (Absolute & %)

3. Identify Major Variances

Major Variances

S. No. Head Variance

1. Revenue 60%
7. Depreciation 10%
8. Direct Material Major
Cost & Change in Variance
Stock
9. Direct Expenses & 60%
Contractual Labour
Major Variances

S. No. Head Variance

2. Accounts Receivable 400%
3. Trade Payables 337%
4. Prepaid Assets 90%
5. Other Long Term Liab. 400%
6. Property Plant 7%
Equipment
Ratio Analysis

S. Ratios Affected Category

No.
1. Current Ratio, Quick Ratio, Cash Decrease in
Ratio Liquidity Ratios
2. Increase in Asset Turnover, Operating Ratios
Increase in Receivable and
Inventory Days but Decrease in
Operating Cycle (Working
Capital Days)
3. Gross Margin, EBIT, EBITDA, PBT Spurt in
& PAT Profitability
Ratios
4. Return on Equity, Return on Increase in
Common Equity Return Ratios
5. Interest Coverage Ratio, Debt to Solvency Ratios
Equity
Graph Analysis
Session 12-
Reporting
Key Aspects of Audit Report
Audit Opinion- on
True & Fair View of
Fin. St.

Specific Other
Legal Matters/ Basis of Opinion-
Requirements like SA’s, Ethics and
143(3), CARO and Audit Evidences
IFC

AUDIT
Going Concern-
REPORT
Key Audit Matters-
Assessing a
Most Significant
Company’s ability
matters under
to continue as a
audit
going concern

Auditor’s Resp.-
Obtain reasonable Mgt. Resp.-
assurance that FS Preparation of FS
are free from on true & fair basis
misstatements
 Types of Opinions

Clean/ Unmodified Opinion

Qualified Opinion

Adverse Opinion

Disclaimer Opinion
Clean/ Unmodified Opinion

Report Paras
When?
Affected

• No Material Mis- • Opinion Para

statements
• Basis of Opinion
• AND Para

• Sufficient &
Appropriate Audit
Evidence Obtained
 Qualified Opinion

When? Report Paras Affected

• Misstatements are • Opinion Para

material but not
pervasive • Basis of Opinion Para

• OR

• Unable to obtain
sufficient appropriate
audit evidence on which
to base the opinion, the
possible effects of which
could be material but
not pervasive
 Adverse Opinion

When? Report Paras Affected

• Mis-statements are both • Opinion Para

material and pervasive
• Basis of Opinion Para
 Disclaimer of Opinion

When? Report Paras Affected

• Unable to obtain sufficient • Opinion Para

appropriate audit evidence
on which to base the
opinion, and the auditor • Basis of Opinion Para
concludes that the possible
effects on the FS of
undetected misstatements,
could be both material and
pervasive

• OR

• Limitation on scope
imposed by the
management
Emphasis of Matter (EOM) Para

When? Report Paras Affected

• If the auditor considers it • Specific Para included in

necessary to draw users’ Report “Emphasis of
attention to a matter Matter”
presented or disclosed in
the FS that is of such
importance that it is
fundamental to users’
understanding of the FS
 CARO- Specific Reporting
•Maintenance of Proper records showing qty and situation of fixed assets
Fixed
•Regular Programme of Physical Verification of fixed assets
Assets •Title Deeds of Immovable Properties in name of the Company

•Physical Verification at reasonable intervals

Inventory •Discrepancies identified have been dealt with properly

•Terms and conditions of the grant of such loans are not prejudicial to the company’s interest
Loans To •Whether the repayments or receipts are regular
Related •State the total amount overdue for more than 90 days
Parties

Loans to •Compliance of Section 185 and 186 of the Companies Act

Directors &
Investments

Public
•Compliance of Sections 73 to 76 of Companies Act w.r.t. Public Deposits Accepted by the Company
Deposits

Cost
•Whether cost records have been made in accordance with section 148(1) of the Companies Act
Records

•Whether the Company is regular in depositing undisputed statutory dues like PF, Income Tax, GST etc.
Statutory
•If not, the extent of arrears outstanding for more than 6 months
Dues •Details of Dues not submitted on account of Disputes
 CARO- Specific Reporting
• Whether the company has defaulted in repayment of loans or borrowing to a financial institution, bank,
Default on government or dues to debenture holders? If yes, the period and the amount of default to be reported
Loans

• Whether moneys raised by way of initial public offer or further public offer and term loans were applied for
Money the purposes for which those are raised
Raised

• Fraud by/on the Company noticed or reported during the year

Fraud

Managerial • Compliance of Section 197 and Schedule V of the Companies Act

Remunerati
on

• Compliance of Section 177 and 188 of Companies Act

RPT
Transactio • Disclosure of RPT Transactions in FS as per Accounting Standards
ns

• Whether the company has made any preferential allotment or private placement of shares or fully or partly
Preferenti
al convertible debentures during the year
Allotment

• Whether the company has entered into any non-cash transactions with directors (Compliance of Section 192
Non Cash
Transactio of Companies Act
ns
Internal Financial Controls (IFC) - Report
Mgt. Resp.- Design,
implementation and
maintenance of
adequate IFC that
were operating
effectively

Audit Opinion- Auditor’s Resp.-

Company has Obtain reasonable
adequate IFC and assurance and provide
were operating Opinion on adequacy
effectively of IFC

IFC- Key
Aspects of
Report
Procedures-
Inherent Limitations
Understand IFC,
of IFC- Possibility of
assess risk of material
Collusion, Mgt.
weakness, Test D&I
override of Controls
and OE

Meaning of IFC
 L EA R N I N G M O D U L E

“ THINKING BRIDGE”

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