Trade Receivables:

Assertions to test: Existence, R&O, P&D, Completeness, Valuation, Cut- off

Existence: (5 points)

Completeness:

• Check the last few days + first few days of next accounting period are recorded accurately ie
in the period in which they occur
• Ensure that no goods dispatched after year end have been included in the receivables list by
tracing entries in sales and stock report of the next year
• Check the stock report and e-way bills, transporter receipts regarding actual movement of
goods. This will help determine actual movement of goods.

Valuation:

• Obtain the ageing report with the various ageing buckets (0-30…)
• Review the process followed by the company to provide for doubtful debts. There should be
consistency with that followed in the previous year.
• Check if provisions are made at the appropriate % in the ageing report
• Check if write offs are done with appropriate authority
• Scrutinize the analysis and identify those debtors which appear doubtful; discuss with
management about reasons as to why these debtors are not included in the provision for
bad debts. Perform further testing where any disputes exist

Presentation & Disclosure:

• Check if the disclosure for current / non-current trade receivables is appropriate as per
applicable financial reporting framework. All receivables expected within the year are to be
classified as current; else non-current
• Check if disclosure for receivables including the provision is per applicable FRF

Important elements in a control environment for Trade Receivables

• Only credit sales go to Trade receivable
• All such sales are recorded properly in BoA
• Debtors are collected on time; provided for as per company’s policy
• A proper system of follow up exists and if necessary, adequate provision for bad debt
should be made by preparing adequate ageing schedule of the debtors

Analytical Procedures for Trade Receivables:

• Comparison of TR of CY vs TR of Last year; Sales of CY vs Sales of Last year / Gross Margin %

• Comparison of Provided Amounts of CY vs LY; Sales of CY vs Sales of LY
• comparison of actual closing balances of trade receivables with the corresponding budgeted
figures, if available;
• comparison of significant ratios relating to trade receivables, with the similar ratios for other
firms in the same industry, if available;
 Cash and cash equivalents: (cash in hand + bank account + FD + Short term investments)
E, P&D, V, C

Existence:
• The auditor should carry out physical verification of cash at the date of the balance sheet.
However, if this is not feasible, physical verification may be carried out, on a surprise basis,
at any time shortly before or after the date of the balance sheet and reconcile the balance
shown in the financial statements with the results of the physical verification considering the
transactions for intervening period
• Incase there is more than 1 cash balance.. check all simultaneously
• It is desirable for the cashier to be present while cash is being counted and he should be
made to sign the statement prepared containing details of the cash balance counted along
with denomination of cash.
• Check if employee advances in cash are authorised + confirmed by employee
• The auditor should also perform a cash sensitivity analysis by compiling a summary of total
cash receipts and payments each month and analyzing the trends to see if there have been
variations in any specific month and request brief descriptions from the management.
• Confirmation (same as trade receivable)

Property Plant and Equipment (PPE)

Assertions: E, V, R&O, P&D, C

Existence:

• Review entity's plan for performing physical verification of PPE ie. whether performed by
own staff or by a third party and the policy regarding periodicity ie. whether physical
verification shall be done on annual basis or once in two years/three years
• Evidence of appropriate supervision of those performing physical verification of PPE should
be examined
• Obtain the PPE verification report and check if :
o Assess if all items of PPE are properly tagged and carry identification marks/numbers
and physical verification work papers do capture the asset identification numbers
for assets physically verified
o Reconcile PPE from date of PV vs date of closure of BoA
o Incase of discrepancy – check / inquiry with management and note how such
discrepancy was resolved

Completeness:

• Verify the movement in the PPE schedule compiled by the management i.e. Opening
balances + Additions during the period Deletions during the period Closing balances. Tally
the closing balance to the entity's books of account
• For additions:
o Verify if expense meets asset criteria per accounting standard
o Verify and ensure that items such as spare parts, stand-by equipment and servicing
equipment are recognised as PPE only if held for more than 1 accounting period
o Ensure that the entity is not recognizing costs of the day-to-day servicing in the
carrying amount of an item of PPE
 o Test the purchase invoice, installation certificate or report or other similar
documentation maintained by the entity to verify the date of addition, for all
additions samples of PPE during the period under audit
o Verify approvals
• For deletions:
o Management approval + discarded note
o Verify process of disclosure
o Verify the accounting entry and consequent profit / loss on sale of asset

Valuation:

• Depreciation charged on all assets

• Depreciation method (eg : SLM or WDV) should be in line with pattern of use of asset
• Verify if management had done a impairment assessment on the asset

Rights & Obligations:

• For all additions – check if invoice is in name of company + sale deed

• Title deed in case of immovable property
• Verify the registry of charges for charge against the asset
• Obtain a confirmation where original documents have been given in as a security for a
borrowing

Revenue

Assertions : O,C,M, P&D

Occurrence :

To check If sales are not overvalued, auditor should :

• Check if a single sale is recorded twice

• Test check sales invoices and match with entries
• Obtain confirmation from customers to confirm sales
• Check customer master to scan for ficticiuos sales
• Whether unearned is recorded as earned
• Whether any customer obligation is contingent on other actions (financing, resale etc)

Review the sequence of sales invoices

Review journal entries for unusual transactions

Calculate sales return ratio and compare it to previous years to identify anamolies

Check the sales return with sales invoices, challan, credit note etc
Completeness:

• Perform cut-off procedures to ensure that revenues are recognised in the current
accounting period and sales were not tampered towards the period end.
• Cut-off errors will usually arise when companies recognise revenue based on the date on
which the sales invoices are generated rather than the date on which the risks and rewards
are transferred to the buyer. In order to perform a robust sales cut-off test, auditors need to
understand and consider the specific cut-off error risk of each engagement
• Trace from the shipping documents to the sales journal
• Auditors should also verify the credit notes issued after the accounting period
• Check whether quantity is appearing in salesregister or not and check reconciliation of total
sales/goods dispatched as per stock records and financial records and statutory recordslike
GST

Measurement:

• Take a few invoices and test them from inception to completion

• Auditor must understand client's operations and related GAAP Issues eg. point of sale
revenue recognition vs. percentage of completion, wherever applicable
• Compare the rate of sales affected with related parties and review them for collectability, as
well as whether they were properly authorized and the value of such transactions were
reasonable and at arm's length

Consignment sales – See text book

Purchases:

Assertions : O,C,M, P&D

Occurrence :

• From inception to completion test check purchases and check whether ….

• For related party transactions, check if there is an agreement + board approval + arms length
• Whether goods arrived at factory and if there is any entry in security gate register
• Ficticious vendors have been booked or purchases have been recorded by reviewing the
vendor selection process followed by the entity and also performing procedures to ensure
existence of the vendors
• Whether the purchase invoice was approved as per delegation of authority.

Completeness:

• Perform cut-off test to ensure that purchases are recognised in the correct accounting
period. For the purpose, the auditor should examine material inward records, say, last 5
transactions at the period end to check that all corresponding invoices have been duly
entered in the Purchases book and none have been omitted.
• Ensure correct accounting treatment of goods-in-transit as per the agreed terms with the
vendor regarding transfer of risk and reward of ownership in goods
 • Obtain written representation from the management that all the purchases that took place
during the year have been properly recorded in the books

Analytical Procedures

• Ratios : GP, Purchase Return,

• Reconcile with inventory
• Consumption analysis