Audit of Items of F.S.
Part-2 RTP May-23 + May/Nov-22+ Nov-21
RTP May-23
1. While verifying PPE, auditor also needs to consider whether PPE has been valued appropriately and
as per the generally accepted accounting principles and practices. Explain.
While verifying PPE, auditor also needs to consider whether PPE has been valued appropriately and as
per the GAAP.
Auditor should:
Verify that entity has charged depreciation on all items of PPE unless any item of PPE is non-
depreciable like freehold land
Assess that depreciation method used reflects the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity. It could be Straight line method, diminishing
value method, unit of production method, as applicable.
Auditor should also verify whether mgt has done an impairment assessment to determine whether
an item of PPE is impaired as per requirements of AS 28 - Impairment of Assets.
2. (a) What are the required disclosures for cash & Cash equivalents to be made by the company as per
Schedule III (Part I) to Companies Act, 2013? [Already done]
(b) CA Saurabh is statutory auditor of UVW Ltd. for the FY 20-21. While verifying purchases made
by UVW Ltd., CA Saurabh decided to perform analytical procedures to obtain audit evidence regarding
overall reasonableness of purchase quantity and price of purchases.
What analysis should CA Saurabh perform?
CA Saurabh should perform following analytical procedures to obtain audit evidence as to overall
reasonableness of purchase quantity and price:
(i) Consumption Analysis: He should scrutinize raw material consumed as per manufacturing a/c and
compare same with previous years, with closing stock and ask for the reasons from mgt if any
significant variations are found.
(ii) Stock Composition Analysis: He should collect the reports from mgt for composition of stock i.e.
raw materials as a percentage of total stock and compare the same with previous year and ask for
reasons from mgt in case of significant variations.
(iii) Ratios: He should compare creditors’ turnover ratios and stock turnover ratios of current year
with previous years. He should review quantitative reconciliation of closing stocks with opening stock,
purchases, and consumption.
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RTP Nov-22
PK Pvt Ltd, based in Moradabad, is engaged in export of brassware goods. The company has huge
export receivables as on 31st March 2022. It is also analysed from Export Sales account of the
company that large number of small shipments were almost despatched daily during month of March
2022. List out few audit procedures you would adopt as an auditor to verify completeness assertion
of export trade receivables. [Nov-22]
Completeness assertion in respect of account balances means that all balances which should have been
recorded have been recorded. The auditor needs to satisfy himself about cut off so that there is no
understatement or overstatement in account balances of export receivables.
In this context, while verifying completeness assertion of export trade receivables, following audit
procedures are required: -
(1) Check that in respect of invoices raised in last few days nearing the cut off date, goods have been
actually dispatched and not lying with the company.
(2) Check stock records, e-way bill, and transporter receipt regarding actual movement of goods. It
would provide assurance that export invoices in respect of which revenue was booked have been
actually moved out of company’s premises.
(3) Ensure that all goods invoiced prior to cut off date/year end have been included in export
receivables on test check basis.
(4) Ensure that no goods despatched after year end have been included in export receivables by tracing
entries in export sales, stock records of next year. The same can be verified from e-way bills also.
(5) Match invoices to despatch/shipping details. Further match invoices dates to despatch dates to
see if sales are being recorded in correct accounting period.
(6) Test invoices in receivable report. Select invoices from ageing report of export receivables and
compare them with supporting documentation to ensure that these are billed with correct names, dates
and amounts.
2. Name the assertions for the following audit procedures: [RTP May-22]
(i) Year-end inventory verification: Existence
(ii) Depreciation has been properly charged on all assets: Valuation
(iii) The title deeds of the lands disclosed in the Balance Sheet are held in the name of the company:
Rights & Obligations
(iv) All liabilities are properly recorded in the financial statements: Completeness
(v) Related party transactions are shown properly: Presentation & Disclosure
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RTP May-22
1. Explain how you will verify the items given while conducting an audit of an entity :
(a) Recovery of Bad debts written off
(b) Receipt of Insurance claims
(c) Payment of Taxes
(d) Sale proceeds of scrap material [+RTP Nov-21]
Recovery of Bad Debts written off: Recovery of bad debts written off is verified with reference to
relevant correspondence and proper authorisation.
(i) Ascertain total amount lying as bad debts and verify relevant correspondence with trade receivables
whose accounts were w/off as bad debt.
(ii) Ensure that all recoveries of bad debts have been properly recorded in the books of a/c.
(iii) Examine notification from the Court or from bankruptcy trustee. Letters from collecting agencies
or from a/c receivables should also be seen.
(iv) Check Credit Manager’s file for amt received and see that said amount has been deposited into the
bank promptly.
(v) Vouch acknowledgement receipts issued to a/c receivables or trustees.
(vi) Review the internal control system regarding writing off and recovery of bad debts
Receipt of Insurance Claims: Insurance claims may be in respect of fixed assets or current assets.
While vouching the receipts of insurance claims-
(i) Auditor should examine a copy of the insurance claim lodged, correspondence with insurance Co. and
with insurance agent should also be seen. Counterfoils of receipts issued to insurance Co. also be seen.
(ii) Auditor should also determine adjustment of amount received in excess or short of value of the
actual loss as per insurance policy.
(iii) The copy of certificate/report containing full particulars of amount of loss should also be verified.
(iv) The accounting treatment of amount received should be seen particularly to ensure that revenue
is credited with appropriate amount and that in respect of claim against asset, the Statement of Profit
and Loss is debited with the short fall of the claim admitted against book value.
Payment of Taxes:
(i) Obtain the computation of taxes prepared by auditee and verify whether it is as per Income Tax
Act/GST Act/ Rules/ Notifications/ Circulars etc.
(ii) Examine relevant records and documents pertaining to payment of advance income tax and self
assessment tax.
(iii) Payment on account of income-tax and other taxes like GST consequent upon a regular assessment
should be verified by reference to copy of the assessment order, notice of demand and receipted
challan acknowledging the amount paid.
(iv) The penal interest charged for non-payment should be debited to the interest account.
(v) Nowadays, electronic payment of taxes is also in trend. Such electronic payment of taxes by way
of internet banking facility or credit or debit cards shall also be verified.
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(vi) The assessee can make electronic payment of taxes also from the account of any other person.
Therefore, it should be verified that challan for making such payment is clearly indicating the PAN
No./TAN No./TIN No./GSTIN etc. of the assessee on whose behalf the payment is made.
Sale Proceeds of Scrap Material:
(i) Review the internal control on scrap materials, as regards its generation, storage and disposal and
see whether it was properly followed at every stage.
(ii) Ascertain whether organisation is maintaining reasonable records for sale and disposal of scrap
materials.
(iii) Review the production and cost records for determination of the extent of scrap materials that
may arise in a given period.
(iv) Compare the income from sale of scrap materials with corresponding figures of preceding 3 years.
(v) Check rates at which diff. types of scrap materials have been sold and compare same with rates
that prevailed in preceding year.
(vi) See that scrap materials sold have been billed and check calculations on the invoices.
2. While conducting audit of Air Space Ltd, the auditor observes that it has issued shares at discount
to its creditors when its debt is converted into shares in pursuance of debt restructuring scheme in
accordance with any guidelines specified by the Reserve Bank of India. Discuss explaining clearly the
provisions relating to discount on issue of shares and its verification by the auditor.
As per Sec 53 of the Companies Act, 2013,
(1) a company shall not issue shares at a discount, except in the case of an issue of sweat equity shares
given u/s 54 of the Companies Act, 2013.
(2) any share issued by a company at a discounted price shall be void.
(2A) Notwithstanding anything contained in sub-sections (1) and (2), a company may issue shares at a
discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution
plan or debt restructuring scheme as per any guidelines/directions/regulations specified by RBI under
RBI Act, 1934 or Banking (Regulation) Act, 1949.
(3) Where any company fails to comply with provisions of this section, such company and every officer
who is in default shall be liable to a penalty which may extend to an amount equal to the amount raised
through the issue of shares at a discount or ₹5L, whichever is less, AND the Co. shall also be liable to
refund all monies received with intt. at the rate of 12% p.a. from date of issue of such shares to the
persons to whom such shares have been issued.
The auditor needs to check
(i) the movement in share capital during the year and wherever there is any issue,
(ii) he should verify that the Co. has not issued any of its shares at a discount
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è by reading the minutes of meeting of its directors and shareholders authorizing issue of share
capital and the issue price.
(iii) Further, auditor should also verify that in case a company has issued shares at a discount to its
creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt
restructuring scheme as per any guidelines/directions/regulations specified by RBI under RBI Act,
1934 or Banking (Regulation) Act, 1949.
In given case of Air Space Ltd, it can issue shares to its creditors when its debt is converted into
shares in accordance with approved restructuring scheme.
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