Audit of Various Items of Financial Statements: formula sheet

Key formulas

Revenue assertions

Occurrence, Completeness, Accuracy, Cut-off, Classification

Use these as a checklist when asked what the auditor tests in sales.

Receivables assertions

Existence, Rights and obligations, Completeness, Valuation, Presentation and disclosure

Valuation means recoverable amount, net of provision.

Vouching trail for a sale

Customer order → Dispatch / delivery note → Invoice → Sales ledger → Cash receipt

Test both directions: from records to documents (occurrence) and from documents to records (completeness).

Revenue recognition test (Ind AS 115)

Recognise revenue when control passes to the customer

Look at delivery terms, acceptance and return rights near year end.

Net receivable

Gross trade receivables − Provision for doubtful debts (expected credit loss)

Check the provision basis is reasonable and applied consistently.

Positive vs negative confirmation

Positive: debtor replies in all cases. Negative: debtor replies only if they disagree

Positive gives stronger evidence. Negative suits many small balances with low risk of error.

Audit assertions for payables

Completeness, Existence (occurrence), Rights and obligations, Valuation (accuracy), Cut-off, Presentation

Name the assertion your procedure tests. For payables, completeness and cut-off carry the most risk.

Direction of testing

Overstatement: book to document. Understatement: document to book.

To check that recorded purchases are genuine, start from the ledger and go to the invoice. To check completeness, start from GRNs or later payments and go to the ledger.

Three-way match

Purchase order = GRN = Supplier invoice

Quantity, rate and party must agree before a purchase is accepted for payment.

Payables reconciliation

Balance per supplier statement ± reconciling items = Balance per ledger

Typical reconciling items are goods in transit, payments in transit, debit notes and disputed items.

Period-end identity

Closing payables = Opening payables + Purchases on credit − Payments − Returns and discounts

Use it as an analytical check on the reasonableness of the closing balance.

Verification vs valuation

Verification = existence + ownership + condition; Valuation = correct carrying amount

Use this one-line contrast whenever the question asks for the difference.

Carrying amount

Carrying amount = Cost − Accumulated depreciation − Accumulated impairment loss

With the revaluation model, start from the revalued amount instead of cost.

Straight-line depreciation

Annual depreciation = (Cost − Residual value) ÷ Useful life

Charge pro rata for part-year use where the policy requires it.

Written down value depreciation

Depreciation = Opening carrying amount × Rate

Rate is applied to the reducing balance each year.

Recoverable amount

Recoverable amount = Higher of (Fair value less costs of disposal) and (Value in use)

Impairment loss arises only if carrying amount exceeds recoverable amount.

Impairment loss

Impairment loss = Carrying amount − Recoverable amount

Recognised in profit or loss, unless the asset is carried at a revalued amount.

Profit or loss on disposal

Gain or loss = Net sale proceeds − Carrying amount at date of disposal

Check that depreciation was charged up to the date of sale.

Valuation rule

Closing stock = Lower of (Cost, Net Realisable Value), item by item or group by group

Ind AS 2 / AS 2. NRV = Estimated selling price − Estimated cost of completion − Estimated selling costs.

SA 501 attendance rule

If inventory is material → attend physical count (unless impracticable) and do alternative procedures if you cannot

If sufficient appropriate evidence is still not obtained, modify the opinion.

Movement test when count is before year end (common practice)

Stock at BS date = Stock at count date + Purchases (or receipts) after count − Sales (or issues) after count

This is an illustrative reconciliation used in audit practice, not an SA 501 formula. SA 501 only requires you to test that changes in inventory between the count date and the final inventory records are properly recorded. Test the movements between the count date and the balance sheet date.

Movement test when count is after year end (common practice)

Stock at BS date = Stock at count date + Sales (or issues) between BS date and count date − Purchases (or receipts) between BS date and count date

This is an illustrative reconciliation used in audit practice, not an SA 501 formula. Test the movements between the balance sheet date and the count date against supporting documents. Then compare the stock you arrive at with the stock in the books at the balance sheet date, and with management's count records if management counted on that date, and investigate differences.

Two-way test count

List → Floor (existence) and Floor → List (completeness)

State both directions in written answers.

Adjusted cash book balance from bank statement balance

Adjusted balance = Bank statement balance + Cheques deposited but not yet credited − Cheques issued but not presented

Use this when you start from the bank statement with a favourable balance. Reverse the signs for an overdraft. Items not in the cash book (interest, charges) are already in the bank statement, so do not use them to adjust the bank statement balance. Recompute from the stated figures in the question.

Adjusted cash book balance from cash book balance

Adjusted balance = Cash book balance + Bank credits not yet in cash book (e.g. interest) − Bank debits not yet in cash book (e.g. charges)

Use this when you start from the cash book. Cheques deposited but not credited and cheques issued but not presented are already in the cash book, so make no adjustment for them. Both routes should give the same adjusted balance.

Cash count reconciliation

Book balance on count date = Closing book balance ± Transactions between count date and balance sheet date

Used when cash is counted on a date other than the year end.

Assertions checklist

Existence, Rights and ownership, Completeness, Valuation, Presentation and disclosure

Link every procedure to an assertion in written answers.

Investment carrying amount rule

Carrying amount follows the applicable framework: current investments at lower of cost and fair value (AS 13); long-term at cost less permanent diminution

Under Ind AS the measurement depends on the classification of the financial asset. State the framework you are using.

Share capital checking chain

Authority (MOA/AOA, resolutions) → Application and allotment records → Bank receipt → Register of members and certificates → Disclosure

Use this order to structure any answer on shares. Every link must agree with the next.

Closing reserve reconciliation

Closing reserve = Opening reserve + Transfers in − Utilisations

Vouch each transfer and utilisation. The result must match the Balance Sheet and the Statement of Changes in Equity.

Loan balance reconciliation

Closing loan = Opening loan + Fresh drawals − Repayments (principal)

Agree to the lender's confirmation. Interest accrued but unpaid is shown separately from principal.

Debenture interest check

Interest = Face value × Coupon rate × Period ÷ 12

Recompute using the period in months. Check any tax deducted at source on the payment against the tax rules applicable.

Forfeiture of shares check

Amount forfeited = Amount actually received on those shares (credited to Forfeited Shares or Share Forfeiture Account)

If shares are reissued, the profit on reissue goes to Capital Reserve after adjusting any loss on reissue.

Provision recognition test (Ind AS 37)

Present obligation from past event + outflow probable + reliable estimate = recognise provision

All three conditions must be met. If any fails, move to contingent liability analysis.

Contingent liability treatment

Possible obligation, or present obligation not recognised (outflow not probable or not reliably measurable) → disclose; remote → no disclosure

Do not record it in the books. A present obligation with probable outflow and reliable estimate is a provision instead. Disclose the nature and an estimate of financial effect where practicable.

Capital commitments (not a contingent liability)

Estimated amount of contracts remaining to be executed on capital account, net of advances → disclose under Schedule III / Ind AS 16

Disclosed separately from contingent liabilities. Ind AS 37 still applies to onerous contracts, where a provision is needed.

Contingent asset treatment

Inflow virtually certain → no longer a contingent asset, recognise; inflow probable → disclose only; otherwise → no recognition or disclosure

Prudence: do not recognise a gain before it is virtually certain.

Best estimate of provision

Provision = best estimate of the expenditure required to settle the present obligation at the reporting date. Single obligation → most likely outcome, adjusted for other possible outcomes; large population → expected value (Σ probability × amount)

The best estimate is the amount the entity would rationally pay to settle the obligation or transfer it to a third party at the reporting date. Discount if the time value of money is material.

Key audit evidence set

Legal letter + board minutes + bank confirmations + subsequent events review + management representation

Together they support the completeness and classification assertions.

Quick revision

• Vouching checks recorded transactions against documents; verification checks the existence, ownership and value of assets and liabilities.
• Revenue audit stresses occurrence, cut-off and correct period recognition.
• Receivables are tested by balance confirmation, subsequent receipts and review of ageing for doubtful debts.
• For purchases and payables, the main risk is understatement, so test completeness and unrecorded liabilities.
• Fixed assets: check title documents, physical existence, additions, disposals, depreciation and impairment.
• Inventories: attend or review physical counts, test cost, and value at the lower of cost and net realisable value.
• Cash is verified by physical count; bank balances by bank statements, reconciliations and confirmations.
• Investments are verified through certificates, demat statements or custodian confirmations, along with ownership and valuation.
• Share capital is checked against the memorandum, articles, board and shareholder resolutions and registers.
• Borrowings are checked with lender confirmations, agreements, security created and interest accrued.
• A provision needs a present obligation, a probable outflow and a reliable estimate. A contingent liability is disclosed but not provided for; if the possibility of outflow is remote, neither a provision nor disclosure is needed.
• Always conclude with presentation and disclosure as required by Schedule III.

Common mistakes

• Listing procedures without linking them to assertions Fix: Tag each procedure with the assertion it tests, such as cut-off or existence.
• Forgetting cut-off testing Fix: Always check sales and returns documents a few days before and after year end, matching dispatch with the invoice date.
• Testing only recorded purchases and calling it a completeness test. Fix: For completeness, start from outside the ledger: GRNs, post-year-end payments, supplier statements and open purchase orders.
• Ignoring cut-off and checking only invoice dates. Fix: Use the date goods were received, shown on the GRN, as the basis for the period. Test the last few GRNs before year end and the first few after.
• Treating verification and valuation as the same thing. Fix: Say verification is about existence and title, valuation is about the amount. Give one example of each.
• Relying only on physical inspection to prove ownership. Fix: Inspection supports existence only. Ownership needs title deeds, registration certificates, invoices or lease documents.
• Writing that the auditor takes the physical stock count. Fix: State that management counts and the auditor observes and test-counts. Verification is management's responsibility.
• Testing only from the stock list to the floor. Fix: Add floor to list to prove completeness. Mention both directions every time.
• Treating the bank pass book alone as sufficient evidence of the bank balance. Fix: State that a direct confirmation from the bank is stronger evidence, as it comes from an external source.
• Counting cash on a different date without adjusting for transactions in between. Fix: Roll forward or roll back using receipts and payments to the year end and tie it to the book balance.

Exam tips

• For 14-mark questions, structure the answer by assertion. It earns step marks and shows exam-ready thinking.
• For MCQs, remember that external confirmation is stronger evidence than internal records, and that existence and valuation are different assertions.
• Always mention cut-off for sales, and ageing plus subsequent receipts for debtors. These are the points examiners look for.
• Use practical case language, such as 'year-end sales to a related party' or 'unusual credit notes after year end', to show you know the risk.
• Connect revenue to SA 240 fraud risk and confirmation to SA 505 where the question asks for standards.
• For 'how will you verify' questions, pair each procedure with a document. Marks are given for the document named.
• Always include cut-off and unrecorded liabilities when the question mentions payables. These are the points examiners expect.
• In MCQs, watch the direction: completeness points to starting from GRNs or later payments, while occurrence points to starting from the ledger.