Here’s an easy explanation of the topics mentioned in the images:
Audit of Share Capital
The audit of share capital ensures that the company’s share capital is correctly recorded and
disclosed in its financial statements. The auditor checks whether the shares issued and paid-up
match the records and comply with legal requirements.
Assertions in the Audit of Share Capital
1. Existence: Verifies that the share capital recorded in the balance sheet actually exists.
2. Completeness: Ensures all issued shares are properly recorded.
3. Valuation: Checks whether the share capital is correctly valued in financial statements.
4. Presentation & Disclosure: Ensures that the required information is properly disclosed in
financial statements.
General Audit Procedure for Share Capital
1. Compare the authorized, issued, and paid-up capital with last year's records.
2. If there are no changes, obtain written confirmation from management.
3. If there are changes, check board meeting resolutions and approvals.
4. Verify legal forms (Form SH-7 for authorized capital increase, Form PAS-3 for issued shares).
5. Ensure that paid-up capital does not exceed authorized capital.
Issue of Shares at Premium
A company issues shares at a premium when it sells shares at a price higher than their face
value.
The extra amount received is credited to the Securities Premium Account and can be used
only for specific purposes like:
o Giving fully paid bonus shares to shareholders.
o Writing off expenses or commissions on share issuance.
o Redeeming preference shares.
o Buying back company shares.
Audit Procedures
Check whether the premium received is correctly recorded in the Securities Premium
Account.
Verify that the premium is used only for legally allowed purposes.
Issue of Shares at Discount
Generally, companies are not allowed to issue shares at a discount (i.e., sell shares below
their face value), except in special cases like issuing sweat equity shares.
If a company illegally issues shares at a discount, the company and officers may face
penalties.
The discount rule does not apply when shares are issued to creditors under a restructuring
plan.
Audit Procedures
Verify that no shares were issued at a discount, except where legally allowed.
Check board meeting minutes and regulatory approvals.
Issue of Sweat Equity Shares
Sweat equity shares are issued to employees or directors at a discount or for non-cash
consideration as a reward for their contributions (e.g., intellectual property, know-how, or
value additions to the company).
Audit Procedures
Verify that the issue of sweat equity shares is approved by a special resolution.
Ensure the details such as number of shares, price, and recipients are correctly recorded.
If the company is listed, confirm compliance with SEBI regulations.
Reduction of Share Capital
Reduction of capital occurs when a company lowers its share capital due to financial
restructuring, losses, or legal requirements.
It can be done through methods like:
o Canceling shares that are not fully paid.
o Reducing liability on unpaid shares.
o Paying off excess share capital to shareholders.
Audit Procedures
1. Verify that a special resolution was passed for capital reduction.
2. Check if the Articles of Association permit the reduction.
3. Examine approval from the Tribunal and ensure compliance with legal orders.
4. Verify accounting entries related to capital reduction.
5. Confirm that the company's documents, like the Memorandum of Association (MOA), are
updated to reflect the reduced capital.
This explanation simplifies the audit process while covering key aspects of share capital, issuance,
and reduction. Let me know if you need further clarifications! 😊
Audit of Reserves and Surplus (Other Equity) - Easy Explanation
What are Reserves?
Reserves are profits that a company sets aside instead of distributing them as dividends. These
reserves help the company in future financial needs, expansion, or strengthening its financial
position.
Types of Reserves
1. Revenue Reserves – These are created from profits and can be used for:
o Paying dividends in tough times.
o Funding business expansion.
o Supporting working capital.
o Strengthening financial stability.
2. Capital Reserves – These are made from capital profits (profits not related to regular
business activities) and cannot be used for general distribution. Example:
o Securities premium reserve.
o Capital redemption reserve.
o Profit from selling fixed assets or shares.
o These reserves are often used for writing off losses or issuing bonus shares.
Assertions in the Audit of Reserves and Surplus
These are checks to ensure the correctness of reserves and surplus in financial statements:
1. Existence – Ensuring that the reserves and surplus actually exist in the company’s accounts.
2. Completeness – Verifying that all reserves and surplus amounts are properly recorded.
3. Valuation – Checking that reserves and surplus are correctly valued in financial statements.
4. Presentation & Disclosure – Making sure that reserves and surplus are properly shown in
financial statements according to regulations.
Audit Procedure for Reserves and Surplus
1. Compare the opening and closing balances of reserves with last year’s financial statements.
2. If there is an addition or reduction in reserves, check the supporting documents:
o Profit and Loss Balance – Trace the movement of reserves in financial statements.
Verify dividend payments and tax deductions.
o Share Premium – Check whether the premium from share issuance is used correctly
as per laws (e.g., Companies Act, Sec. 52).
o Other Equity – Understand the reason for any changes in reserves.
This process ensures that reserves and surplus are correctly maintained, legally used, and properly
disclosed. Let me know if you need further clarification! 😊
Audit of Borrowings (Simplified Explanation)
The audit of borrowings ensures that all loans and debts of a company are recorded correctly and
comply with regulations. It helps verify that the company is managing its borrowings properly and
presenting them accurately in its financial statements.
Key Aspects Checked in Borrowings Audit:
1. Existence:
o The auditor ensures that all borrowings listed in the balance sheet are real and
represent actual loans from banks or other lenders.
o Board minutes and loan agreements are reviewed to confirm loan approvals.
o Independent confirmations are obtained from lenders to verify the recorded
borrowings.
2. Completeness:
o All loans must be accounted for and recorded in the company's financial statements.
o Short-term and long-term borrowings are reviewed to check if anything is missing.
o Bank confirmations and reconciliations are performed to verify outstanding loan
balances.
3. Valuation:
o The liability amount must be recorded correctly in financial statements.
o Loan balances, interest rates, and repayment terms are checked against agreements.
o Any unamortized loan discounts, premiums, or foreign currency exchange rates are
verified.
4. Presentation & Disclosure:
o Borrowings should be properly classified as short-term or long-term.
o Terms of loans, interest rates, collateral, and repayment schedules should be clearly
disclosed.
o Any loan covenants or restrictions must be followed and disclosed.
Audit Procedures for Borrowings:
Compare loan balances with previous years to check for changes.
Verify loan agreements, repayment schedules, and terms with lenders.
Ensure correct classification between short-term and long-term borrowings.
Review whether the company is complying with borrowing limits set by law.
Check if borrowed funds are used for the intended purpose.
This audit ensures transparency in financial reporting and prevents fraud or misstatements in the
company’s financial records.
18 Points of Audit of Valuation (Simplified Explanation)
The audit of valuation ensures that borrowings are recorded at the correct amount and classified
properly. Here’s a short and easy explanation of all 18 points:
1. Check Accounting Policies – Ensure that the company follows proper accounting rules for
recording borrowings.
2. Match Loan Balances – Compare loan amounts in records with the loan agreements to
confirm accuracy.
3. Adjust Discounts or Premiums – If a loan was issued at a discount or premium, make sure
the adjustment is done correctly.
4. Check Repayment Schedules – Verify that loan repayments are recorded correctly based on
the agreed terms.
5. Foreign Currency Loans – If the loan is in a foreign currency, ensure the exchange rate is
applied correctly at the year-end.
6. Review Loan Agreements – Read loan contracts to check for any hidden costs, penalties, or
special conditions.
7. Loan Classification – Ensure that short-term and long-term loans are classified correctly in
financial statements.
8. Upcoming Loan Payments – If any loan installment is due within the next 12 months,
confirm it is properly disclosed.
9. Loan Restrictions (Covenants) – Check if the company is following any special loan
conditions set by lenders.
10. Loan Security & Charges – Ensure that loans secured with company assets are properly
registered and disclosed.
11. Security Value Check – If a loan is secured by an asset, verify that the asset's value is enough
to cover the loan.
12. Hire Purchase Agreements – Check whether leased or hire-purchase assets are correctly
recorded in accounts.
13. Related Party Loans – Ensure loans from related parties comply with accounting standards
(AS 18 or IND AS 24).
14. Bank Liabilities – Verify that bank loans, discounted bills, or negotiated loans are recorded
correctly.
15. Borrowing Limits – Check whether the company has borrowed within its allowed limits, as
per legal rules.
16. Legal Compliance – Ensure the company follows laws related to borrowings, such as the
Companies Act.
17. Purpose of Borrowing – Verify that the loan is used for business needs and not for personal
or unrelated expenses.
18. Regulatory Compliance – Check if the company follows directives from RBI or other financial
authorities.
These steps help ensure that borrowings are recorded accurately and comply with laws, preventing
errors and fraud. 🚀
Audit of Trade Receivables (Easy Explanation)
Trade Receivables refer to the money a business is yet to receive from its customers for goods or
services sold on credit.
Auditing trade receivables involves checking whether the reported amounts are accurate, properly
recorded, and collectible. Here’s a simple breakdown:
1. Checking Internal Controls:
o Ensure sales are made only to genuine customers.
o Confirm all sales are recorded correctly in the accounts.
o Verify that payments are received only through authorized officials.
o Make sure debts are collected on time.
o Review if reminders or legal actions are taken for overdue debts.
o Assess whether a system is in place to handle bad debts.
2. Assertions to be Checked:
o Existence: Are the trade receivables real and still outstanding?
o Completeness: Have all trade receivables been recorded in the accounts?
o Valuation: Are they properly valued (e.g., reducing bad debts)?
o Presentation & Disclosure: Are they classified and shown correctly in financial
statements?
3. Audit Procedures to Verify Trade Receivables:
o Check if invoices are recorded correctly and not duplicated.
o Review accounts receivable reports and compare with financial statements.
o Confirm balances directly with customers (confirmation procedure).
o Verify if payments are received after the balance sheet date.
o Scrutinize any large outstanding balances for possible disputes.
o Compare current year data with past trends to detect anomalies.
The goal of auditing trade receivables is to ensure that a company’s reported receivables are
accurate, collectible, and in line with accounting standards.
Assertions Explained in Simple Terms
Auditors use different assertions to check if financial statements are correct. Here, we will explain
Existence, Completeness, and Valuation in simple words based on your images.
1. Existence (Does it really exist?)
Meaning:
👉 This checks whether an asset or transaction actually exists and is not fake.
For example, if a company says it has ₹10 lakh in trade receivables, the auditor checks if customers
actually owe this amount.
Why is it important?
✔️Prevents overstatement of assets.
✔️Ensures no fake transactions are recorded.
Audit Procedures (How to check it?)
✅ Checking supporting documents: Auditors verify invoices, purchase orders, and delivery notes.
✅ Customer confirmation: The auditor sends a letter to customers asking if they really owe money.
✅ Physical verification: For assets like inventory or fixed assets, auditors visit and check them.
✅ Bank confirmation: To check cash balances, auditors confirm with the bank.
❌ Risk if wrong:
The company may show fake sales, assets, or bank balances to look financially stronger.
Example: A company reports ₹5 lakh cash in its balance sheet, but when checked, there is
only ₹2 lakh in the bank.
2. Completeness (Is anything missing?)
Meaning:
👉 This ensures that everything that should be recorded is actually recorded. No transaction should
be left out.
For example, if a company made ₹20 lakh in sales, all ₹20 lakh should be in the books, not just ₹15
lakh.
Why is it important?
✔️Prevents understatement of revenue and assets.
✔️Ensures all expenses are recorded correctly.
Audit Procedures (How to check it?)
✅ Tracing from source to books: Checking if all invoices and purchase orders are recorded.
✅ Cutoff testing: Ensuring all transactions near the year-end are recorded in the correct period.
✅ Bank reconciliation: Matching bank statements with company records to ensure all cash
transactions are included.
✅ Checking unpaid liabilities: Ensuring all expenses (like rent, salaries) are recorded even if unpaid.
❌ Risk if wrong:
The company may hide sales or expenses to reduce tax or manipulate profits.
Example: A business sells goods worth ₹1 lakh on December 30 but records it in January to
delay tax payment.
3. Valuation (Are amounts correct?)
Meaning:
👉 This ensures that assets and liabilities are recorded at the correct value.
For example, if a company has old stock that cannot be sold, its value should be reduced. Similarly, if
a customer is unlikely to pay, we should make a bad debt provision.
Why is it important?
✔️Prevents overstatement of assets and income.
✔️Ensures financial statements show the true financial position.
Audit Procedures (How to check it?)
✅ Review of doubtful debts: Checking if the company has set aside money for customers who may
not pay.
✅ Stock valuation testing: Ensuring inventory is valued correctly (not overstated).
✅ Depreciation check: Ensuring assets are properly depreciated to reflect their real value.
✅ Fair value adjustments: If an investment's value has changed, it should be updated.
❌ Risk if wrong:
The company may overvalue assets or hide losses to attract investors.
Example: A company has ₹5 lakh in unpaid customer invoices, but ₹2 lakh is from
customers who may not pay. If the company does not make a bad debt provision, the
receivables are overstated.
Summary:
🔹 Existence: Checking if something really exists (e.g., real customers, real cash, real assets).
🔹 Completeness: Ensuring nothing is missing (all sales, expenses, and assets are recorded).
🔹 Valuation: Ensuring things are recorded at the correct value (bad debts, inventory, and assets).
Would you like more examples to make it clearer? 😊
Audit of Cash and Cash Equivalents (Simplified Explanation)
Auditing cash and cash equivalents ensures that the amounts reported in the financial statements
are accurate, complete, and fairly valued. This involves verifying cash balances, bank accounts, and
any liquid investments that can be easily converted into cash.
Assertions in the Audit of Cash and Cash Equivalents
Auditors check the following assertions to confirm the accuracy of cash-related financial information:
1. Existence
o Ensures that cash and cash equivalents reported in the financial statements actually
exist.
o The auditor physically verifies cash at the balance sheet date or conducts a surprise
check.
o All cash balances (e.g., main cashier, branch cashier, imprest balances) are checked
together to prevent fraud.
o The cashier should be present during verification and sign the cash summary.
o Any rough cash book should match the official cash book.
2. Completeness
o Ensures that all cash and cash equivalent balances are included in the financial
statements.
o The auditor checks whether any transactions have been omitted, such as
undeposited checks or cash collections.
3. Valuation
o Ensures that cash balances are correctly valued.
o The auditor ensures that all foreign currency balances are converted using the
correct exchange rates.
o Cash advances and IOUs (temporary advances) are properly authorized and
recorded.
4. Presentation and Disclosure
o Ensures that all necessary information related to cash and cash equivalents is
properly disclosed in the financial statements.
o Important disclosures include:
Cash at banks, cheques, drafts on hand.
Earmarked balances (e.g., unpaid dividends).
Security deposits or margin money.
Bank deposits with more than 12 months' maturity.
Restrictions on repatriation of funds.
Audit Procedures for Bank Reconciliation Statement (BRS)
The auditor verifies the Bank Reconciliation Statement (BRS) to ensure that bank balances are
correctly reported:
1. Verify Bank Balance
o Compare the balance in the cash book with the bank statement.
2. Check Outstanding Items
o Verify all uncleared cheques (both deposited and issued).
o If a cheque is stale (older than 3 months), it should not appear in the BRS.
3. Investigate Bank Deposits and Withdrawals
o Cross-check whether all deposits are credited and withdrawals are debited correctly
in the bank statement.
Direct Confirmation Procedure
The auditor directly confirms the bank balances with the bank to ensure accuracy.
The bank provides a direct confirmation of the company's account balances.
If discrepancies exist, the auditor investigates them and seeks clarifications.
If the bank does not respond, alternative procedures include:
o Checking the bank statement from online banking.
o Reviewing all available bank correspondence.
Summary
Existence: Verify cash physically and reconcile balances.
Completeness: Ensure all cash transactions are recorded.
Valuation: Check if cash is correctly valued, especially foreign currency.
Presentation & Disclosure: Ensure all necessary details are disclosed.
BRS Check: Reconcile book balances with the bank statement.
Direct Confirmation: Obtain bank confirmations to ensure correctness.
These procedures help prevent fraud and errors, ensuring that financial statements reflect the true
cash position of the business.
Audit of Inventories (Simplified Explanation)
The audit of inventories is done to ensure that the inventory reported in the financial statements is
accurate, complete, and valued correctly. It includes verifying the existence, completeness,
ownership rights, and valuation of the inventory.
1. Existence (6 Points)
The auditor ensures that the inventory physically exists at the year-end. Steps include:
1. Reviewing the company's plan for conducting the inventory count.
2. Checking that consigned goods (items held but not owned) are properly separated.
3. Participating in the inventory count along with management.
4. Performing test counts to confirm physical presence by:
o Observing employees during the count.
o Checking proper supervision.
o Watching for empty boxes, outdated items, or misplaced stock.
o Verifying cut-off documents like receiving reports.
o Ensuring third-party stock and damaged/obsolete stock are not included.
o Investigating any differences between physical stock and stock records.
5. Ensuring proper procedures are followed for periodic and perpetual inventory systems.
6. Confirming any inventory held with third parties.
2. Completeness (8 Points)
The auditor ensures that all inventory owned by the company is recorded in the financial statements.
Steps include:
1. Performing analytical procedures like trend analysis and turnover ratio calculations.
2. Comparing inventory details with financial expectations.
3. Checking non-financial records such as weight and measurements.
4. Verifying purchase and sales cut-off to ensure transactions are recorded in the correct
period.
5. Checking for any omitted transactions related to tagged inventory.
6. Reviewing the accuracy of inventory listings.
7. Reconciling physical inventory with perpetual records.
8. Ensuring consignment inventory is separately recorded and not mixed with company-owned
stock.
3. Ownership Rights (8 Points)
The auditor verifies that the company has legal ownership of the reported inventory. Steps include:
1. Checking supporting documents like purchase orders, invoices, and payment proofs.
2. Examining consignment agreements.
3. Reviewing client correspondence, sales records, and purchase documents.
4. Determining if any collateral agreements affect ownership.
5. Inspecting movement agreements.
6. Confirming invoices are in the name of the company.
7. Obtaining third-party confirmations (SA 501 standard).
8. Checking for inventory held by third parties, ensuring proper documentation.
4. Valuation (4 Subpoints)
The auditor ensures inventory is valued correctly according to accounting standards. Steps include:
1. Checking the valuation method used (FIFO, weighted average, etc.) and its appropriateness.
2. Comparing recorded costs with replacement costs.
3. Verifying that price lists are updated, and lower-cost or net realizable value (NRV) principles
are applied.
4. Calculating inventory turnover ratio to identify slow-moving or obsolete inventory.
Would you like any part of this simplified further? 😊