Let’s Become a Statutory Auditor: Stat Audit Checklist

INTRODUCTION:

So, we are again at the close of the financial year 2020-21 and across our responsibility as an auditor of expressing our opinion on true and fair view of the financial statements. As a statutory auditor we are expected to check the compliances with respect to Companies Act,2013.

In this article we are going to discuss the check points for an auditor while conducting statutory audit. Although the audit procedures shall remain relevant to every entity, however they can be modified by the auditor as per the nature and size of the entity. Let’s start with the Balance sheet items and the checkpoints.

1. PROPERTY PLANT & EQUIPMENT: The auditor should start with checking the standard operating procedures of the company and the policies followed by the company. The auditor is expected to check the delegation of powers to understand the level of authority w.r.t additions, deletions and write offs. The auditor should obtain the block schedule of the financial year and reconcile to the general ledger account wise. The auditor should check the pre-budget set for investment in fixed assets during the year and whether the additions are in conformity with the budget during the year. The auditor should confirm whether titles to the assets are in the name of the Company, if not report

• On a sample basis, certain additions can be checked w.r.t the invoice, name of the supplier, taxes and duties levied and their entries should be matched in the fixed asset register and reconciled with the fixed asset general ledger.
• The auditor should confirm the date of capitalization I.e., on date they have been put to use and in case of ready to use, on the date of purchase of such assets.
• The auditor should also obtain the list of deletion of fixed assets during the year and verify that the disposal has been approved by the proper authority and any tax liability have been paid for. The disposed asset should also be deleted from the fixed asset register and the general ledger.
• In case of impaired assets, the auditor should verify how does the management assess the carrying value and the provision for impairment as per the accounting standards requirement.
• The auditor should ensure proper classification of expenditure with regard to fixed assets. For e.g., Revenue expenditure is not capitalized.
• The auditor needs to check whether physical verification of fixed assets have been carried out by the management and the auditor needs to perform a 2-way test verification of fixed asset register vs books to physical verification and physical verification to books. Any discrepancy also needs to mentioned in audit report.
• The auditor should reperform the calculations of depreciation for certain assets on sample basis and ensure that the depreciation as per the workings is reconciled to the fixed assets register as well as the General Ledger balances.
• The auditor should also check whether the management has reviewed the useful life of assets during the year and if there is a change in accounting estimate like change in rate of depreciation and its subsequent impact.
• The auditor should check deferred tax calculations in relation to depreciation of the assets.

2. INVENTORIES: The auditor needs to verify the existence and location of the inventory as reflected in the books of accounts and the valuation of inventory is as per AS-2 and all the costs incurred in bringing inventory to its present condition are included in the valuation. The auditor needs to verify the legal ownership of the inventory. Any unusual inventory movement entries such as recording of excess / shortage write offs, damaged stock disposals etc. should be made only by higher levels of authority

• The auditor needs to check whether for the goods in transit, the receipts have been subsequently traced.
• The auditor needs to verify the use and movement of the stock and ensure that they have been valued correctly and in the period to which it relates.
• The auditor should check the management’s analysis of obsolete, non-moving items and excess stock and the provisions have been adequately made for slow moving, non-moving, obsolete and damaged inventory.

3. INVESTMENTS:

• The auditor should confirm the balance of securities by ensuring that investments are backed by original certificates. The investments should be held in the name of the Company as per Sectin-187 of Companies Act,2013
• The auditor should confirm that the addition in investments is in compliance with Section-186 of Companies Act,2013 keeping in view investment up to two layers of investments. Two layers of investment would mean the flow of investment from a holding company to its 2nd step-down subsidiary.
• The disclosure requirements of investments as mentioned in Sch III.
• Investments are classified as current and non-current as appropriate.
• Non-current investments shall be classified as trade investments and other investments and further classified as: –

√ The investments shall be classified as Investment property, Equity, Preference shares, Government or Trust Securities, Debentures or bonds, Mutual funds or investment in partnership firms or other investments

√ Investments carried at other than at cost should be separately stated specifying the basis for valuation thereof.

√ The following shall also be disclosed: (a) Aggregate Amount of quoted investments and market value thereof; (b) Aggregate Amount of unquoted investments; (c) Aggregate provision for diminution in value of investments

√ Current investments are disclosed under Current Assets with further classifications as below: The investments shall be classified as Equity, Preference shares, Government or Trust Securities, Debentures or bonds, Mutual funds or investment in partnership firms or other investments.

√ The following shall also be disclosed: (a) The basis of valuation of individual investments (b) Aggregate amount of quoted investments and market value thereof; (c) Aggregate amount of unquoted investments; (d) Aggregate provision made for diminution in value of investments.

√ Under each classification, details shall be given of names of the bodies corporate (indicating separately whether such bodies are (i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled special purpose entities) in whom investments have been made and the nature and extent of the investment so made in each such body corporate.

√ Partly paid investments shall also be indicated properly.

√ The auditor is required to ensure the valuation of investments as per relevant Accounting standard and charge off Diminution if nay in long term investments to revenue account.

√ The auditor shall also keep in mind the enquiry mentioned under Section-143(1) c)- Where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company.

4. ACCOUNTS RECEIVABLE:

• The auditor should ask for customer confirmation directly and ask them to confirm the amounts of unpaid accounts receivable as of the end of the reporting period they are auditing. This is primarily for larger account balances, but may include a few random customers having smaller outstanding invoices.
• In case auditor does not receive confirmations, the auditor should inspect bank statements for subsequent period as to confirm the realization of revenue subsequently.
• Ensure that the system reports on aging are accurate. The auditor should test check with reference to few cases to confirm the aging. Also, the auditor should check whether debit and credit notes are not accounted back-to-back just to improve the ageing of debtors.
• The Auditor should review the company’s policy for allowance for doubtful debts and applying it to the receivables balances.

5. CASH AND BANK BALANCES:

• The auditor should ensure a receipts and payments are backed by relevant vouchers, all receipts and payments are authorized and are recorded in correct head.
• In the audit of cash, comparing balances to the prior-period is very useful to examine the fluctuation of cash between the two periods. This way, we can evaluate the reasons behind any major fluctuation of cash balances in order to alert to the risks involving cash.
• The auditor should obtain written authority from the client to have bank confirmation letter.
• The auditor should Review the last period bank reconciliation to see whether they are cleared or carried to the current period
• The auditor should get a cutoff bank statement that shows the transactions after the end of the period to trace and check on items such as deposits in transit and outstanding check to see if they have been cleared after year-end
• The auditor should verify that balances per accounting records shown on the reconciliation agree with the general ledger account balance the year-end and that this has been properly reflected in the financial statements.
• The auditor is also required to check cash payments and receipts according to statutory limits set under Section-40(a)(3), Section-269SS, Section-269 ST and Section269T of Income tax Act,1961.

6. LOANS AND ADVANCES:

• The auditor should verify All loans and advances should be backed by a policy or agreements in writing
• They should obtain ageing of long-term loans and advances to verify that loans are classified in correct categories, maturity has been correctly calculated, value of securities are available against each loan and check the subsequent recovery of loans.
• Ensure Compliance with Section 185 of the Act as well as the notification under Sec 462 for Private Limited Companies.
• The auditor should keep in mind the inquiries related to loans and advances with respect to section-143(1) as to whether loans and advances are properly secured, have not been shown as deposits and whether the terms are prejudicial to the interests of the company and its members.
• Auditor should select a sample of transactions and re-perform calculation of interest income to verify rate of interest from agreement and check the number of days for which interest income is charged.
• Auditor should send confirmation to related parties and match replies with the amounts outstanding against each party.
• The auditor should ensure compliance with CARO 2013 AND Section 269SS and Section 269ST of Income tax act.

We will get into being audit literate in the coming series on statutory audit. For now, we have finished with the audit of asset side of balance sheet. Remember, an auditor needs to exercise professional judgement and skepticism. Nothing can be exhaustive when it comes to an audit checklist.

For any queries, the author can be reached at [email protected] or [email protected].