CA Intermediate · Auditing and Ethics

Audit of Items of Financial Statements: formula sheet

Full chapter guide

Key formulas

Occurrence test direction: Ledger/sales register → order, dispatch note, invoice; Tests that recorded sales are real. Guards against overstatement.
Completeness test direction: Dispatch notes / goods outward records → invoice → sales ledger; Tests that all genuine sales are recorded. Guards against understatement.
Cut-off check: Sales recorded in period = sales where risks and rewards (AS 9) or control (Ind AS 115) passed under the sale terms on or before the year-end date; Delivery or dispatch is usually the point, depending on terms such as FOB destination or ex-works. Dispatch date is evidence, not the rule. Check the last few days before and first few days after year-end, including returns and credit notes.
Net revenue: Revenue = Gross invoice value (incl. GST) − GST collected − trade discounts − returns; GST collected for the government is not the entity's income. Schedule III requires disclosure of revenue from operations, which excludes GST.
Fraud presumption: SA 240: significant risk of fraud in revenue recognition is presumed; The auditor may rebut it only with documented reasons.
Purchases (derived figure): Purchases = Cost of goods sold + Closing stock − Opening stock; Use for an analytical check of recorded purchases. Estimate cost of goods sold from sales and the expected gross profit margin (Cost of goods sold = Sales − expected gross profit), then compare the derived purchases with the recorded figure.
Expense for the year (accrual check): Expense = Cash paid + Outstanding at end − Outstanding at start + Prepaid at start − Prepaid at end; Use to test whether rent, insurance and similar items are recorded on an accrual basis.
Net pay recomputation: Net pay = Gross pay − Statutory deductions − Other authorised deductions; Recompute this for a sample of employees and agree totals to payroll control accounts.
Vouching approach: Entry → Voucher → Authorisation → Payment → Correct period and head; Trace each sampled entry through all five points to cover the main assertions.
Cost of PPE (AS 10): Cost = Purchase price (incl. import duties and non-refundable taxes, less trade discounts) + directly attributable costs to bring the asset to working condition; Excludes general overheads, and excludes input tax credit that is available to the entity.
Straight-line depreciation: Annual depreciation = (Cost − Residual value) ÷ Useful life; Pro-rate for part-year use. Useful life and residual value follow Schedule II to the Companies Act, 2013 or are justified by management.
Written down value method: Depreciation for the year = Opening WDV × Rate; Rate is applied on the reducing balance, not on original cost.
Profit or loss on disposal: Profit or loss = Sale proceeds − Carrying amount (WDV) at date of sale; Recognised in the statement of profit and loss, not adjusted against the asset's cost.
Impairment: Impairment loss = Carrying amount − Recoverable amount, where Recoverable amount is the higher of net selling price and value in use (AS 28); Recognised only when carrying amount exceeds recoverable amount. Under Ind AS 36, recoverable amount is the higher of fair value less costs of disposal and value in use. Net selling price is the AS 28 term.
Intangible recognition (AS 26): Recognise only if: identifiable, controlled, future economic benefits probable, cost measurable reliably; Research is expensed. Development is capitalised only when the AS 26 criteria are all shown to be met.
Valuation rule (AS 2): Inventory value = Lower of (Cost, Net Realisable Value); Apply item by item or to groups of similar items, not to the grand total of all stock.
Net realisable value: NRV = Estimated selling price − Estimated costs of completion − Estimated costs necessary to make the sale; Use selling price evidence close to the year end, including post year-end sales.
Roll-forward from count date: Book stock at year end = Stock counted on count date + Purchases (receipts) after count date − Issues / cost of goods sold after count date, at cost; Use when the count is before year end. For a manufacturer, include production movements: raw material receipts and issues to production, and finished goods transferred in from production and sold out. For a count after year end, the movements are reversed (roll-back): stock at year end = count stock − purchases (receipts) after year end + issues / cost of goods sold after year end.
SA 501 core requirement: Material inventory → attend physical count (unless impracticable) → else alternative procedures → else modify opinion; Attendance covers evaluating instructions, observing, inspecting and performing test counts.
Cut-off test: Last goods received and issued note before year end and first note after year end must match the period of the related purchase or sale entry; Check both inward and outward movements, plus goods in transit.
Current investments valuation (AS 13): Carrying amount = Lower of (Cost, Fair value); Applied to each investment, or to each category, but not to the total of all current investments taken together.
Long-term investments valuation (AS 13): Usual carrying amount = Cost, less provision for decline other than temporary; A temporary fall in market price does not require a write-down. An increase to fair value is allowed only in special circumstances, such as a restructuring of an enterprise involving revaluation. Otherwise, cost less provision is the treatment.
Cost of acquisition: Cost = Purchase price + brokerage, fees and duties directly attributable; Check that these are not charged to the statement of profit and loss wrongly.
Classification test: Current if readily realisable and intended to be held for not more than one year; otherwise long-term; Decide on the intention and the nature, not just on the maturity date.
Interest income: Interest = Principal × Rate × Time; Accrue on a time basis, and check that it agrees with the coupon or contract terms.
Bank reconciliation: adjusted bank balance and adjusted cash book: Adjusted bank balance = Bank statement balance + Cheques deposited not yet credited − Cheques issued not yet presented ± Bank errors. Adjusted cash book = Cash book balance ± Direct entries not yet recorded in the cash book; Bank-side items adjust the bank statement balance. Book-side items (direct credits, charges, interest) adjust the cash book. After all adjustments the two should agree. Use only as a reconciliation check, and adjust signs correctly when the balance is an overdraft.
Net trade receivables: Net receivables = Gross receivables − Provision for doubtful debts (or expected credit loss under Ind AS 109 where applicable); Auditor tests whether the provision is reasonable and based on ageing and subsequent receipts.
Positive vs negative confirmation: Positive: the debtor is asked to reply directly to the auditor stating whether they agree with the balance or to provide the information requested. Negative: the debtor replies only if they disagree; Negative confirmations alone are not sufficient appropriate evidence for a risk that is assessed as significant.
Cash count reconciliation: If the count is after the balance sheet date: Cash at balance sheet date = Cash counted + payments made after the balance sheet date − receipts after the balance sheet date. If the count is before the balance sheet date, reverse the adjustment: Cash at balance sheet date = Cash counted + receipts − payments between the count date and the balance sheet date; Used when the count is not on the balance sheet date. Agree the resulting figure to the cash book balance at the balance sheet date.
Core risk for liabilities: Main assertion = Completeness (risk of understatement); Design procedures to find unrecorded liabilities, not only to check recorded ones.
Provision recognition test (AS 29): Present obligation + past event + probable outflow + reliable estimate = Provision; All conditions must be met. Otherwise it is a contingent liability or nothing.
Contingent liability treatment: Possible obligation, or not probable / not measurable = Disclose, do not recognise; If outflow is remote, no disclosure is needed.
Trade payables test: Supplier statement balance ± reconciling items = Ledger balance; Use reconciliations and subsequent payments to test completeness and cut-off.
Share capital checks: Issued capital ≤ Authorised capital; allotment valid; money received; Verify with Memorandum, resolutions, share register and bank statements.

Quick revision

Completeness is the main risk for liabilities and expenses. Existence and overstatement are the main risks for assets and revenue.
Evidence from external sources and from the auditor's own work is generally more reliable than internal evidence or inquiry alone.
Inspection, observation, external confirmation, recalculation, reperformance, analytical procedures and inquiry are the standard procedure types.
Cut-off testing checks that revenue, expenses and stock are recorded in the correct period.
For revenue, check recognition against the applicable Accounting Standard, the terms of sale and the point at which control passes.
For PPE, check title documents, existence by physical verification, depreciation method and impairment.
For inventories, attend the physical count, test count procedures and check valuation at lower of cost and net realisable value.
For investments, check existence and ownership through custody records or confirmations, and check valuation and classification.
For receivables, use balance confirmations, subsequent receipts and ageing to judge recoverability.
For share capital, check against the Memorandum, Articles, board and shareholder approvals, and statutory registers.
For liabilities, search for unrecorded liabilities through subsequent payments and supplier statements.
In descriptive answers, state the procedure, the assertion tested and the conclusion.

Common mistakes

Mixing up the direction of testing for occurrence and completeness. Fix: Remember: start at the ledger to test occurrence; start at the source documents to test completeness.
Writing only 'check invoices' as the vouching procedure. Fix: Name the chain: order, dispatch note, invoice, delivery proof, and receipt, and compare quantity, price, date and customer.
Treating vouching and verification as the same thing. Fix: Say that vouching examines documents behind transactions, and verification confirms existence, valuation and presentation of items. Use the right term in the answer.
Ignoring cut-off when auditing purchases and expenses. Fix: Always check goods received notes and invoices near year-end, and review payments made after year-end for unrecorded liabilities.
Saying the auditor must physically verify every asset. Fix: Write that management verifies physically at reasonable intervals, and the auditor reviews the programme, observes or tests a sample, and checks reconciliation to the register.
Treating physical inspection as proof of ownership. Fix: Keep existence and rights separate. For ownership, check title deeds, registration certificates, invoices and charge records.
Writing that the auditor conducts the physical count. Fix: Write that management counts and the auditor attends, observes, inspects and performs test counts.
Doing test counts only from the stock list to the floor. Fix: Do both directions. List to floor tests existence. Floor to list tests completeness.
Applying lower of cost and fair value to long-term investments. Fix: Remember: current means lower of cost and fair value; long-term usually means cost less a decline that is other than temporary.
Treating verification as only checking the certificates exist. Fix: Also check ownership, pledge or lien, and whether the investment is in the entity's name.

Exam tips

Whenever a scenario shows a sudden rise in sales near year-end, write cut-off and fraud risk together.
Use headings like Vouching, Cut-off, Recognition and Analytical procedures. They make your answer easy to mark.
Show both directions of testing if the question asks for completeness and occurrence.
For income items such as interest or dividend, add a recomputation step: rate × principal × time, or dividend declared × shares held.
Keep MCQs quick. Look for key words: fictitious, omitted, year-end, returns and pick the matching test.
Link procedures to the assertion they test, such as occurrence for vouching and completeness for unrecorded liabilities.
For payroll questions, always include ghost employees, authorisation, deductions and the payment of wages.
In employee benefit questions, mention AS 15, accruals and the use of an actuary's work.