CA Intermediate · Auditing and Ethics

Audit of Items of Financial Statements: CA Intermediate Auditing and Ethics

Audit of Items of Financial Statements is about how an auditor gathers sufficient appropriate audit evidence for each item in the financial statements, such as revenue, expenses, assets, liabilities and share capital. To solve questions, name the assertion at risk, then state the procedure that tests it and the evidence it gives.

What this chapter covers

This chapter takes the general audit ideas you studied earlier, such as risk assessment, audit evidence, sampling and internal control, and applies them to individual items. For each item, you ask the same questions. What can go wrong? Which assertion is at risk? Which procedures give you evidence? What do you check in the documents?

The items follow the financial statements. You start with revenue and expenses from the statement of profit and loss. You then move to property, plant and equipment, intangibles, inventories, investments, receivables, loans, cash, and finally liabilities and share capital. The pattern is the same in every topic, so once you learn it, each new item is faster.

The chapter connects closely to other parts of the paper. Audit evidence and the relevant Standards on Auditing (SAs) give you the tools. Internal control gives you the starting point for test of controls. Written representations, going concern and reporting then use the findings from this chapter. Questions are usually short practical situations, so this chapter feeds both the MCQs and the descriptive answers.

This chapter turns theory into application, and ICAI often tests application through short scenarios and procedure-based questions. The topics are also predictable in structure, so a student who learns one clear pattern can answer many different questions. You can score well in both the 30 marks of MCQs, where you pick the right procedure or assertion, and the 70 marks of descriptive answers, where a structured list of procedures earns step marks. The effort is moderate because the logic repeats, so the return on your time is high.

Audit of Items of Financial Statements: topics in the order to study them

1Audit of Revenue and IncomeStart here because revenue is the most common area of risk, and it teaches you the assertions-and-procedures pattern that every later topic reuses.
2Audit of Expenses: Employee Benefits and Other ExpensesIt is the other half of the statement of profit and loss, and it uses the same cut-off and completeness thinking you just practised.
3Audit of Property, Plant and Equipment and IntangiblesYou now move to the balance sheet with the assets that have the clearest evidence trail: title, existence, depreciation and impairment.
4Audit of InventoriesIt builds on asset audit but adds physical verification and valuation, which are heavily tested, so study it once you are comfortable with existence and valuation.
5Audit of InvestmentsIt reuses existence, ownership and valuation from assets, with added focus on custody, classification and disclosure.
6Audit of Trade Receivables, Loans and CashIt links back to revenue through confirmations and recoverability, so it is easier after you have revised the revenue topic.
7Audit of Liabilities and Share CapitalFinish with liabilities, where completeness is the main risk, plus share capital checks against company records and law.

How to prepare Audit of Items of Financial Statements

Use one repeatable method for every item. This keeps you from memorising long lists and helps you write clear answers under time pressure.

For each item, write a one-page grid with four columns: risk, assertion, audit procedure, and evidence or document. Fill it in from your own understanding, not by copying.
Learn the assertions first, split into those for transactions, for balances and for presentation and disclosure. Link every procedure you learn to one of them.
Read the relevant SA wording in plain language for the topic, for example audit evidence, external confirmations, and inventory attendance, and note when each applies.
Practise short scenario questions. Name the risk, state the procedure, and say what the evidence proves, in that order.
Solve MCQs by identifying the assertion first. Then eliminate options that test a different assertion or that give weak evidence, such as only management inquiry.
Write two or three full descriptive answers per topic, using bullet points for procedures and a closing line on the conclusion for the auditor.
Revise with your grids, one topic per sitting, and recheck the points you got wrong the previous time.

Common mistakes in Audit of Items of Financial Statements

Listing generic procedures that fit any item instead of ones that fit the item in the question.
Fix: Begin every answer by naming the risk or assertion. Choose only the procedures that test it.
Mixing up the direction of risk, such as testing assets for understatement or liabilities for overstatement.
Fix: Remember that assets and income are usually at risk of overstatement, while liabilities and expenses are at risk of understatement. Test accordingly.
Relying on management inquiry as the only evidence.
Fix: Pair inquiry with inspection, confirmation or recalculation, and say the other evidence corroborates it.
Confusing the auditor's responsibility with management's, for example in the physical count of stock.
Fix: Management counts and values. The auditor attends, observes, tests and evaluates. Write it that way.
Ignoring disclosure and presentation requirements under Schedule III and the Accounting Standards.
Fix: Add a line on classification, disclosure and related party or contingent matters at the end of each answer.
Skipping MCQs practice because the chapter feels descriptive.
Fix: Practise MCQs on assertions, evidence reliability and procedure matching. Wrong answers carry no penalty, so always attempt every MCQ.

Last-day revision: Audit of Items of Financial Statements

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.

Audit of Items of Financial Statements practice questions

Audit of Items of Financial Statements in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit of Items of Financial Statements: frequently asked questions

How should I study Audit of Items of Financial Statements for CA Intermediate?

Use one grid for each item: risk, assertion, procedure and evidence. Study in the order of the financial statements, starting with revenue. Then practise short scenario answers that follow the same pattern.

Do I need to memorise all audit procedures for each item?

No. Learn the logic of the assertions and the types of procedure. Then pick the ones that fit the risk in the question. This is faster and safer than rote lists.

How is this chapter tested in MCQs?

Expect scenario-based questions asking which procedure suits a risk, which assertion is tested, or which evidence is more reliable. Identify the assertion first and eliminate options that test something else. There is no negative marking, so attempt all.

How do I score step marks in descriptive answers here?

Write each procedure as a separate bullet, link it to the risk, and mention the evidence you expect to get. End with a one-line conclusion for the auditor. This format lets the examiner award marks for each point.