Index. Exercise 1 - Identification of Checklist Page 14. Sample 1 - Transpose & Sorting Page 15. Sample 2 - Review Comments Page 20

Transcription

1 Index Exercise 1 - Identification of Checklist Page 14 Sample 1 - Transpose & Sorting Page 15 Sample 2 - Review Comments Page 20 Sample 3 - Responding to Audit Framework Page 22 (Controls & Audit Evidence) Sample 4A - Compliance Testing Page 25 Sample 4B - Substantive Testing Page 27 Solution - Identification of Checklist Page 29 Annexures a. Accounting Standard Checklist Page 31 b. CARO Checklist Page Rakesh Agarwal

2 Exercise 1 - Identification of Checklist Type Staffing Level Timing General Areas Standard/ Creati Updat Execu Review Interim Proactive Final Customize on e tion 1 Auditing Standard Checklist 2 CARO Checklist Standard Y Y 3 Accounting Standard Checklist None Y Y 4 Company's Act Checklist 5 Schedule VI 5 Corporate Governance Checklist 6 Firms Internal Protocol Checklist Specific Areas 1 Share-Capital Customize 2 Reserves and Surplus Customize 3 Borrowings Customize 4 Creditors Customize 5 Outstanding Liabilities Customize 6 Gratuity & Leave Provision Customize 7 Taxation Customize 8 Contingent Liabilities Customize 9 Fixed Assets Customize 10 Investments Customize 11 Inventories Customize Y Y 12 Sundry Debtors Customize 13 Current Assets Customize 14 Profit and Loss Account Customize 15 Profit and Loss Analytical Review Customize 16 Specific Cycle Purchase Customize 17 Specific Cycle Sale Customize 18 Specific Cycle Inventory Customize Y Y Question for Participants 1 Identify Checklist to be Responded as either Standard or Customize 2 Identify Level of Staffing to be Deployed (1 Partner, 2, Manger, 3 Qualified, 4 Article) for Creation, Update and Review 3 Identify Timing for its Execution (Interim, Proactive, Final) 14 Rakesh Agarwal

3 SAMPLE 1 Transpose And Sorting - Section Inventory Level of Effort Delegated to an Experienced Articled Trainee Sources Material Collected from A, B, ICAI, CD, etc. 15 Rakesh Agarwal

4 Audit Steps for Practices Followed in the Past 1. Check Balances in Stock Register (audit program for validation stock register separately addressed) 2. Check Balances in physical stock take sheet (program from validating physical stock verification sheet separately addressed) 3. Check approval of shortages/excesses in inventories 4. Check Valuation of inventories --Cost or Market Value whichever is lower a. Components of includes; i. Purchase Price ii. Taxes not refundable iii. Freight inward iv. Cost of storage before putting the inventory at its intended location for its sale or use b. Components of excludes; i. Modvat ii. Cash discount iii. Discretionary discounts iv. General corporate administration expenses v. Selling expenses 5. Check Calculation 6. Trace it to Balance Sheet and P & L 16 Rakesh Agarwal

5 From Accounting Standard Checklist QUESTIONNAIRE FOR ASCERTAINING COMPLIANCE OF AS 2 1) (a) Is the inventory valued at lower of cost and net realisable value? (b) Is the disclosure made to that effect in accounting policy? 2) (a) Which is the cost formula used (b) (i) (ii) (iii) Specific identification? FIFO? Weighted Average? Is the disclosure made to that effect in accounting policy? 3) Have you ascertained whether cost includes (a) (b) (c) (d) Cost of purchase (net of Modvatable duties)? Direct labour? Production over heads? Such other direct cost to bring inventory to their present location and condition? 4) Whether fixed overhead is worked out on normal production capacity; i.e., after taking into account loss of capacity due to planned maintenance? 5) Have you ascertained that cost of conversion does not include the following : (a) Interest, (Unless permitted by AS 16)? (b) (c) (d) Administrative overheads? Selling and distribution cost? Abnormal wastage of material, labour and other production cost? 6) If standard cost method followed to ascertain cost, whether standards reviewed periodically? 7) In arriving at cost of inventory, whether (a) Inter-divisional profits eliminated? (b) Foreign currency fluctuation excluded and charged as expense in respect of foreign currency loan obtained against stock? 8) (a) Is physical verification of inventory taken at year end? (b) In arriving at net realisable value, have you ascertained (i) (ii) damaged/obsolete/non-moving stock? subsequent sale price after Balance Sheet Date? 9) Are the inventory in accounts classified into : (a) (b) (c) (d) Raw material and components? Stores and spares and tools? Work-in-progress? Finished Goods? From Auditing Standard Checklist None 17 Rakesh Agarwal

6 From CARO Checklist SL. NO. Inventory PARTICULARS YES/NO/N.A REMARKS 1 Whether physical verification of inventory has been conducted, at reasonable intervals, by the management? 2 Whether the procedures of physical verification of inventory followed by the management is reasonable and adequate in relation to the size of the company and nature of its business? If not the inadequacies in such changes to be reported? 3 Whether the company is maintaining proper records of inventory? 4 Whether any material discrepancies were noticed on such verification? If so has it been properly dealt with in the books of accounts? From Co. Act Checklist None From Corporate Governance Checklist None Disclosure Requirements Under Schedule VI Inventories are to be classified under the following heads Stores and spare parts Loose tools Stock in Trade Work in progress Mode of valuation of stocks including WIP shall be stated and the amount in respect of raw material shall also be stated separately where ever practicable. In case of the manufacturing companies, the value of raw material consumed giving item wise break up and indicating the quantities thereof has to be reported as part of notes on accounts. In this break up as far as possible all important basic raw materials shall be shown as separate items. Intermediaries or components procured from other manufacturers may, if the list is too large to be included in the break up, be grouped under suitable headings without mentioning the quantities, 18 Rakesh Agarwal

7 provided that all those items which in value individually accounts for 10% or more of the total value of the raw material consumed shall be shown separately with quantities thereof. Opening and closing stock of goods produced giving break up in respect of each class of goods, should be reported. Further in the case of trading companies the purchases made and the opening and closing stocks giving break up in respect of each class of goods traded and indicating the quantities thereof should be reported. In case the work in progress the amounts for which (such works have been completed) at the commencement and at the end of the accounting perio d. 19 Rakesh Agarwal

8 SAMPLE 2 Review Comments - Section Inventory Level of Effort Partner and Manager Sources Profession Knowledge, Various Material Collected, Knowledge of Business. 20 Rakesh Agarwal

9 Review Comments First Round Mode of Delivery - Coaching General 1. We appreciate the efforts made for sources of material. 2. Where is SA XX Framework for Control? 3. Where is SA XX Framework for Assertions arising from Financial Statements? 4. I think work of experts is required for XX, ensure Compliance with SA XX 5. What questions you will include in your correspondence while ensuring compliance with relying on the work of internal Auditor SA XX and another auditor SA XX? 6. Have you assessed analytical review in line with your knowledge of business thereby responding to SA XX Knowledge of business, and SA XX, Analytical Review 7. Have you considered steps in relation to Fraud within expectation arising from SA XX. 8. Have you met the disclosure requirement of Schedule VI? 9. etc. Technical - (Read Bare Text After Developing Program) 10. NRV needs to be calculated as at balance sheet date. Subsequent sale price may be used but is not conclusive. 11. Abnormal cost are eliminated but not abnormal gains, 12. etc.. Client Specific (Settled in past) 13. Report of Valuer (expert) need to be on the file 14. Raw Material Empties are not part of Stock 15. Stock given on loans to be included as part of loans and advances. 16. Fill your Responses to audit checklist proactively for Client X for the year ending March 31, Depict the Case Study (one time effort for one client) 18. etc.. Immediate Action Point before Going Forward 1. Interpret Seven Assertion of Audit Evidence and three characteristics of Control Cycle from SA XX (Time allotted 4 hours) 2. Interpret Risk Environment from SA XX 3. To train yourself for COSO Framework 1973 after understanding SA XX Time allotted for training 12 hours per day for 4 days continuously. 4. etc. Remember Cardinal Lessons to Avoid Frustration During Building Up Documentation for First Time Use Office Hour (for Content collection, reading) Apply for following period and do not dig up last year files as to what should have been done Manage one stop meeting with client Inquiry may done in first half of the day and in second half just sit on documenting it Use MS tools for Flow-charts (very easy to use) Finish it section by section. 21 Rakesh Agarwal

10 SAMPLE 3 Responding to Auditing Framework on (a) Controls and (b) Audit Evidence Section Inventory Level of Effort Partner and Manager Sources Navigation Skills 22 Rakesh Agarwal

11 Depict the Case Study (one time effort for one client) a. Flow of Transactions; i. Initiation of transactions ii. Generation of source document.. iii. Processing of documents.. iv. Summarization in financial statements b. Documents Involved; i. List of Various Source documents ii. List of Various Voucher generated iii. List of reports generated iv. Number of copies of above v. Specifying which copy is used for what vi. Master data; 1. Component of cost, 2. Valuation per unit of Cost 3. Stock Codes and description. c. Understanding of roles of various personnel involved in i. Flow of transactions ii. Documentation involved iii. Analysis made by them, if any, d. Understanding of Various Control Points i. Stock reconciliation ii. Comparison of Book Record with Physical stock take iii. Stock ageing iv. Analytical review with respect to Cost v/s NRV v. Identification of Cost components at the beginning of the year e. Understanding of various layers of reviews including external, reviews i. MIS ii. Internal Audit iii. Report to Banker iv. Frequencies of above reviews v. Subsequent impact of Observations 23 Rakesh Agarwal

12 SA XX/XX - Audit Evidence (Extracts) Compliance Procedure (Test of Application Controls) Existence - Review of process flow followed by test of compliance - Review of documentation flow followed by test of compliance - Review of roles and responsibility followed by test of compliance - Review of Controls.followed by its observation Effectiveness - Physical Stock take reveals nil exceptions - No pointers towards ineffectiveness (e.g. negative stock) - Nil Exception noticed during test of compliance Continuity - Physical stock take is done periodically - Samples selected for Test of Compliance were from throughout the period. Substantive Audit Test (Test of Transactions and Balances) Existence - Physical Stock take (refer separate audit program) - Subsequent sales and realization Rights and Obligations - Clear title to inventory, (where hypothecated the fact disclosed) Occurrence - MRN - Receipt of Material (later tallied to Purchase bills or sales return) - GDN Dispatch of Material (later tallied to sales bill or scrap note) - Discrepancies Physical Stock Sheet Completeness - Cut-off test (MRN, GDN and JV) - Linking Sales cut-off - Attempting Review of P.O. v/s MRN - Stock reconciliation Valuation - Assessing Components of Cost - Comparison with NRV. Measurement (Accuracy) - Checking Calculations - Processing Controls Presentation and Disclosure - Compliance with AS 2 - Compliance with Schedule VI - Reporting Under Long form report 24 Rakesh Agarwal

13 Sample 4 A Compliance Testing - Interim Balance Sheet - Stock S.r. No. Particulars E E C WP Reference /Commnets I Select - one samples per months for all the source documents (MRN, GDN and JV)from Stock register and Check the Following 1.A Check the following for each MRN Y Checked MRN n.o. a Pre-printed Serial Control b Date of Receipt of Material c Quantity in Delivery Challan d Quality Control Passing including date of passing and by whom passed e Stock coding in accordance with Description f Check Calculation Y Y g Authorisation of MRN by Stores Incharge h Entry in Stock Register/System I B Check the following for each GDN Y Checked GDN n.o. a Pre-printed Serial Control b Date of dispatch of with DC c Quantity in Delivery Challan d Reference to Sales Invoice or Credit Note (Actual Copy from Accounts) e Stock coding in accordance with Description f Check Calculation Y Y g Authorisation of GDN by Stores Incharge h Entry in Stock Register/ System II Select - Two key stock codes to be audited in Depth Y Checked GDN n.o. a Check opening balances from p.y closing stock register b Check that entries during the period are supported by its Source documents (on a sample basis). c Confirm that there is no new category of source documents (say credit notes, ) d Check Quantitative Reconciliation e Check Balances with Stock take sheet III Review flowchart and ensure the following (not to be delegated) The segregation was reviewed before the start of field work but just confirm the understanding 25 Rakesh Agarwal

14 a Personnel Preparing MRN and QC and Purchase b Personnel preparing Dispatch note and Sales Bill c Personnel maintaining Stores register and Physical Stock take sheet d Check that there has been no change in procedure during the period Y IV Review procedures for stock take and ensure the following a Stoppage of Stock Movement b Stoppage of generation of Source documents c Stock count is done by personnel other than from Stores department d Stock count is done in the presence of personnel from Audit and Accounts e The stock take sheet is tabulated and compared with book records f Discrepancies are approved by functional heads (may be by Board) Audit Personnel Reviewed by Conclusion 1. Exception to be Reported 2. Whether further audit steps required 3. The extent to which changes in the system to be noted 4. Control Weakness Points to be Reported 26 Rakesh Agarwal

15 Sample 4 B Substantive Testing at Balance Sheet Date _ Inventory S.r. No. Particulars E R O C V M PD WP Reference /Commnets 1 Is the inventory valued at lower of cost and net realisable value y y y 2 Which is the cost formula used? y y y a. Specific identification? b. FIFO? c. Weighted Average? Is the disclosure made to that effect in accounting policy? y 3 Have you ascertained whether cost includes y y y a. Cost of purchase (net of Modvatable duties)? b. Direct labour? c. Production over heads? d. Such other direct cost to bring inventory to their present location and condition? 4 Have you ascertained that cost of conversion does not include the following : y y y a. Interest, (Unless permitted by AS 16)? b. Administrative overheads? c. Selling and distribution cost? d. Abnormal wastage of material, labour and other production cost? 5 Standard cost method is reviewed periodically? y y y 27 Rakesh Agarwal

16 6 In arriving at cost of inventory, whether y y a. Inter-divisional profits eliminated? b. Foreign currency fluctuation excluded and charged as expense in respect of foreign currency loan obtained against stock? 7 Is physical verification of inventory taken at year end? y y y y y 8 In arriving at net realisable value, have you ascertained a. damaged/obsolete/non-moving stock? b. subsequent sale price after Balance Sheet Date? y y 9 Are the inventory in accounts classified into : y a. Raw material and components? y b. Stores and spares and tools? y c. Work-in-progress? y d. Finished Goods? y 10 Has disclosure being made of following y a. the value of raw material consumed giving item wise break up and indicating the quantities y b. opening and closing stock of goods produced y Audit Personnel Reviewed by Conclusion 1. Exception to be Reported 2. Whether furthur audit steps requried 3. The extent to which changes in the system to be noted 4. Audit adjustments to be Reported 28 Rakesh Agarwal

17 Solution Exercise 1 - Identification of Checklist Sr. No Type Staffing Level Timing General Areas Standard/ Creatio Upda Execut Revi Customize n te ion ew Interi m Proa Final ctive 1 Auditing Standard Checklist None Y 2 CARO Checklist Standard Y Y 3 Accounting Standard Checklist None Y Y 4 Company's Act Checklist Standard Y Y 5 Schedule VI None Y 5 Corporate Governance Checklist Standard Y Y 6 Firms Internal Protocal Checklist Standard Y Specific Areas 1 ShareCapital Customize Y Y 2 Reserves and Surplus Customize Y Y 3 Borrowings Customize Y Y 4 Creditors Customize Y Y 5 Oustanding Liabilities Customize Y Y 6 Gratuity & Leave Provision Customize Y Y 7 Taxation Customize Y Y 8 Contingent Liabilities Customize Y Y 9 Fixed Assets Customize Y Y 10 Investments Customize Y Y 11 Inventories Customize Y Y 12 Sundry Debtors Customize Y Y 13 Current Assets Customize Y Y 14 Profit and Loss Account Customize Y Y 15 Profit and Loss Anaytical Review Customize Y Y 16 Specific Cycle - Purchase Customize Y Y 17 Specific Cycle - Sale Customize Y Y 18 Specific Cycle - Inventory Customize Y Y Question for Participants 1 Identify Checklist to be Responded as either Standard or Customize 2 Identify Level of Staffing to be Deployed (1 Partner, 2, Manger, 3 Qualified, 4 Article) for Creation, Update and Review 3 Identify Timing for its Execution (Interim, Proactive, Final) 29 Rakesh Agarwal