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CMA Intermediate · Corporate Accounting and Auditing

Audit of Various Items of Financial Statements for CMA Inter

Auditing items of financial statements means collecting enough reliable evidence that each balance or transaction is real, complete, owned, correctly valued and properly disclosed. For each item you state the assertion, name the audit procedure, and list the documents you would examine. Write answers as short, headed checklists.

What this chapter covers

This chapter takes the financial statements one line at a time and asks the same question of each: what could be wrong, and what evidence would show it? You cover revenue and receivables, purchases and expenses, fixed assets, inventories, investments, cash and bank, capital, reserves and borrowings, and finally contingent liabilities and provisions.

Two ideas run through every topic. Vouching checks a recorded transaction back to its supporting document, which tests that it happened. Verification and valuation check that an asset or liability exists, is owned or owed by the entity, and is stated at the right amount. Learn these once and the topics become variations on a theme.

The chapter links closely to the rest of the paper. The accounting side (Schedule III presentation, Ind AS and Accounting Standards treatment of fixed assets, inventories, investments and provisions) tells you what the correct figure should be. The auditing side (audit evidence, risk assessment, internal control, the auditor's report) tells you how to test it. Here you apply both together.

Questions from this chapter are practical and can be answered even when theory is unfamiliar, because the answer is a structured list of checks. That makes it a good scoring area for both the 2-mark MCQs and the 14-mark descriptive questions. Examiners often ask for the auditor's approach to a single item, such as inventories or contingent liabilities, and reward clear, organised steps. Time spent here also strengthens your understanding of the accounting chapters, since you see how each figure is supposed to be built.

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

  1. 1Audit of Revenue and ReceivablesStart here because it introduces assertions, vouching and confirmation, which every later topic reuses.
  2. 2Audit of Purchases, Payables and ExpensesIt mirrors the revenue topic from the other side, so you learn it quickly, including the focus on completeness and unrecorded liabilities.
  3. 3Verification and Valuation of Fixed AssetsThis brings in ownership, existence and valuation, with depreciation and impairment checks, and prepares you for inventories.
  4. 4Audit of InventoriesIt adds physical verification and valuation at the lower of cost and net realisable value, a favourite exam area.
  5. 5Audit of Investments, Cash and Bank BalancesVerification here relies on external evidence such as bank confirmations and custodian records, building on what you know about existence.
  6. 6Audit of Share Capital, Reserves and BorrowingsThese are liability and equity items checked against statutory records, resolutions and lender confirmations, so they come after asset topics.
  7. 7Audit of Contingent Liabilities and ProvisionsStudy it last because it needs judgement and the recognition rules for provisions, which are easier once you know the other balances.

How to prepare Audit of Various Items of Financial Statements

Treat this chapter as a set of checklists built on one framework. Prepare it in this way.

  1. Learn the core terms first: assertions, vouching, verification, valuation, audit evidence and confirmation. Write a one-line meaning for each in your own words.
  2. For each topic, make a one-page checklist with the same headings: objectives, documents examined, procedures, and disclosure points.
  3. Link each procedure to the assertion it tests, such as existence, completeness, rights and obligations, valuation or presentation. This lets you justify why you perform a check.
  4. Revise the matching accounting rules from your Schedule III, Ind AS and Accounting Standards notes so you know the correct treatment you are auditing against.
  5. Practise writing two or three answers in exam format: short heading, numbered points, one line of reasoning each. Keep to the time a 14-mark question deserves.
  6. Solve MCQs topic by topic and note why each wrong option is wrong, especially those that mix up vouching with verification.
  7. In the last week, reread only your checklists and the quick revision points.

Common mistakes in Audit of Various Items of Financial Statements

  • Writing a generic audit answer that could apply to any item.

    Fix: Begin each answer with the main risk for that item, then give procedures that address it, such as cut-off for revenue or completeness for payables.

  • Confusing vouching with verification.

    Fix: Remember that vouching starts from the book entry and goes to the document, while verification starts from the balance and asks if it exists, is owned and is fairly valued.

  • Ignoring valuation and disclosure.

    Fix: End each answer with how the amount is valued and how it must be presented under Schedule III and the applicable standards.

  • Treating contingent liabilities and provisions as the same thing.

    Fix: Provide where there is a present obligation from a past event, an outflow is probable and a reliable estimate exists. Disclose a contingent liability where there is a possible obligation, or a present obligation whose outflow is not probable or cannot be reliably estimated. Where the possibility of outflow is remote, make no disclosure.

  • Relying only on internal evidence for external items.

    Fix: For bank balances, receivables, borrowings and investments, always include external confirmation as the stronger evidence.

  • Writing long paragraphs in descriptive answers.

    Fix: Use short numbered points with a heading for each group of procedures so the examiner can award marks line by line.

Last-day revision: Audit of Various Items of Financial Statements

  • 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.

Audit of Various Items of Financial Statements practice questions

Audit of Various 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 Various Items of Financial Statements: frequently asked questions

Is this chapter more theory or practical?

It is theory applied to practical situations. You are not doing calculations, but you must describe specific procedures for each item. Structured checklists make it easy to write.

How should I answer a question asking how to audit an item?

Name the objective or risk first, then list documents examined and procedures in numbered points. Finish with valuation and disclosure. This format earns marks for each valid point.

How is this chapter linked to other chapters in the paper?

The accounting chapters give the correct treatment of each item, and the auditing chapters give the evidence and risk concepts. This chapter combines the two, so revising both sides helps.

Which topics are best to practise for MCQs?

Practise differences between vouching and verification, inventory valuation, bank reconciliation, and the provision versus contingent liability rules. These lend themselves to short, concept-based questions.