AUDITING

(Dr Mohd Akhlak Hussain

(Associate Professor, Future University, Bareilly)

UNIT I

The term audit is derived from a Latin word “audire” which means to hear
authenticity(genuineness) of accounts is assured with the help of the independent review. Audit
is performed to ascertain the validity and reliability of information. Examination of books and
accounts with supporting vouchers and documents to detect and prevent error, fraud is the
primary function of auditing.

“Audit is defined as an investigation of some statements of figures involving examination of

certain evidence, so as to enable an auditor to make a report on the statement.” –Taylor and
Perry

Meaning of Auditing

Auditing is the process of examining and verifying the financial records and statements of an organization
to ensure they are accurate, reliable, and comply with the applicable laws and regulations. Think of it as a
"health check" for a company’s financial information, performed by an auditor who ensures that the
organization’s financial activities are transparent and trustworthy.

Concept of Auditing

Auditing revolves around the idea of independent verification. It involves systematically checking and
reviewing records to identify errors, fraud, or any misrepresentation. Auditors do this to provide

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assurance to stakeholders (like owners, investors, and government authorities) that the financial
statements present a true and fair view of the organization's financial performance and position.

The process typically involves:

1. Planning the audit (understanding the organization and its environment).

2. Examining records and internal controls.
3. Testing the accuracy of transactions and financial statements.
4. Forming and communicating an opinion on the fairness of the financial reports.

Auditing in India:

Prior to 1913, no qualification for auditors were prescribed, it was Indian Companies Act 1913 which had
for the first-time prescribed qualifications for an auditor. The growth of auditing in India can be related
with this Act which had made it compulsory for every company to get its accounts audited once in every
year. Prior to this the Provincial governments were authorized to issue certificates to accountants entitling
them to act as auditors. The Bombay Government was first to start a Diploma in Accountancy which was
known as Government Diploma in Accountancy (G.D.A). In 1932, Auditor’s Certificate Rules 1932 were
passed and with this all the control over accountancy profession was transferred to Central Government.
In 1949, the Chartered Accountants Act was passed, since then full autonomy has been granted to the
profession through Institute of Chartered Accountants. The Institute of Chartered Accountants of India
(ICAI) was established by the act of Parliament on July 1, 1949. It regulates the profession, conducts
examination and grants certificate of practice.

Objectives of Auditing

1. Primary Objective:
o To express an opinion on the accuracy and reliability of financial statements. Auditors
assess whether the financial records comply with accounting standards and legal
requirements.
2. Secondary Objectives:
o Detection of Errors and Frauds: Auditing helps uncover errors (unintentional mistakes)
and frauds (intentional manipulation of records) in financial statements.
o Prevention of Errors and Frauds: A robust auditing system acts as a deterrent for
potential fraudsters and minimizes careless errors.

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 o Verification of Assets and Liabilities: Auditors ensure that assets and liabilities
recorded in the books actually exist and are valued correctly.
o Ensuring Compliance: Auditing checks whether the company follows legal
requirements, such as tax laws and corporate governance norms.
o Improving Financial Efficiency: By identifying inefficiencies or weaknesses in
processes, auditing provides recommendations for better financial management.

Why is Auditing Important?

1. Builds trust with stakeholders.

2. Protects organizations from financial losses due to fraud or mismanagement.
3. Helps in making informed decisions by providing accurate financial information.
4. Ensures compliance with laws, preventing penalties or legal issues.

TYPES OF AUDIT

Audits can be categorized based on their purpose, scope, or methodology. Here are the common types of
audits:

I. Based on Purpose

1. Financial Audit:
o Focuses on verifying the accuracy and reliability of financial statements.
o Ensures compliance with accounting standards and legal requirements.
2. Compliance Audit:
o Examines whether the organization complies with laws, regulations, and internal policies.
o Common in government organizations or regulated industries.
3. Operational Audit:
o Assesses the efficiency and effectiveness of operations and processes.
o Identifies areas for improvement in performance.
4. Tax Audit:
o Conducted to verify whether an organization has paid the correct amount of taxes.
o Helps identify tax evasion or errors in tax filings.
5. Forensic Audit:
o Investigates financial records to detect fraud, embezzlement, or criminal activity.

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 o Often used in legal disputes or criminal investigations.

II. Based on Scope

1. Internal Audit:
o Conducted by the organization’s own staff or an internal audit team.
o Focuses on improving internal controls and governance.
2. External Audit:
o Performed by independent auditors from outside the organization.
o Primarily aims to provide an opinion on the fairness of financial statements.
3. Statutory Audit:
o Legally required audit performed under the provisions of applicable laws.
o For example, companies in India must undergo statutory audits as per the Companies Act,
2013.
4. Management Audit:
o Evaluates the efficiency and effectiveness of managerial practices and decisions.
o Focuses on achieving organizational goals.

III. Based on Methodology

1. Cost Audit:
o Reviews the cost records and accounts to ensure proper cost control and cost efficiency.
2. Performance Audit:
o Evaluates whether an organization is achieving its objectives effectively, economically, and
efficiently.
3. Social Audit:
o Assesses the impact of an organization’s activities on society and the environment.
o Common in non-profits or CSR-related initiatives.
4. Environmental Audit:
o Reviews compliance with environmental laws and the environmental impact of business
operations.

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AUDIT PROGRAM

An audit program is a detailed plan that outlines the steps and procedures an auditor will follow to
conduct an audit. It acts as a guide for the auditor to ensure that all necessary areas are covered and the
audit is conducted systematically.

Objectives of an Audit Program

1. To provide a structured approach to the audit process.

2. To ensure all aspects of the audit scope are covered.
3. To guide auditors on their tasks and responsibilities.
4. To create a documented record of the audit process.

Contents of an Audit Program

1. Objectives of the Audit:

o The goals to be achieved, such as verifying financial accuracy or compliance with laws.
2. Scope of the Audit:
o The specific areas to be covered, such as departments, time periods, or types of
transactions.
3. Audit Procedures:
o Detailed steps for reviewing records, testing controls, and collecting evidence.
o For example:
 Verifying cash and bank balances.
 Reviewing purchase invoices.
 Testing payroll records.
4. Time Frame:
o The schedule for completing various audit activities.
5. Allocation of Work:
o Assigning responsibilities to different audit team members.
6. Documents to be Reviewed:
o Listing the specific records and documents that need to be examined (e.g., balance sheets,
tax returns).
7. Checklists and Questionnaires:
o Tools for ensuring nothing is missed during the audit.

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Importance of an Audit Program

1. Systematic Approach: Ensures all aspects of the audit are covered.

2. Time Management: Helps in planning and completing the audit efficiently.
3. Accountability: Clearly defines tasks and responsibilities for audit team members.
4. Consistency: Provides a uniform procedure for audits across different periods or organizations.
5. Documentation: Acts as evidence of the audit process and the steps followed.

Example of a Simple Audit Program

Activity Steps Responsibility Deadline

25th Jan
Verify cash balance Compare cash book balance with physical cash count. Auditor A
2025

Review purchase Check accuracy, approvals, and compliance with 28th Jan
Auditor B
invoices purchase policies. 2025

Examine payroll Verify employee payments and statutory deductions 30th Jan
Auditor C
records like PF and taxes. 2025

Audit Notebook

What is an Audit Notebook?

An audit notebook is a tool used by auditors to record their observations, findings, and procedures
during the audit process. It serves as a running record of the auditor's activities and provides
documentation of the audit work performed. The audit notebook is also used to record any discrepancies,
errors, or concerns observed during the audit.

Components of an Audit Notebook

1. Date of Audit Activity:

o Each entry should be dated for reference and chronological tracking.
2. Details of Audit Procedures:

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 o A brief description of the procedures carried out (e.g., reconciliation of cash, review of
payroll).
3. Findings and Observations:
o A summary of key findings or issues identified during the audit, including errors, fraud,
or inefficiencies.
4. Supporting Documents:
o References to documents reviewed (e.g., invoices, contracts) and other evidence gathered
during the audit.
5. Conclusions and Recommendations:
o Notes on any final conclusions drawn from the audit work and possible suggestions for
improvements.
6. Signatures or Initials:
o Auditor’s signatures or initials to verify the authenticity of the recorded information.

Routine Checking and Test Checking

Routine Checking

Routine checking refers to the regular, detailed verification of every transaction, record, or process during
the audit. It involves reviewing all financial transactions or operations that occur within a specified
period.

Characteristics of Routine Checking:

1. Comprehensive: Every single transaction or entry is checked.

2. Time-Consuming: Requires a significant amount of time to verify each detail.
3. Suitable for Small Organizations: Often more practical for smaller companies where the
volume of transactions is manageable.
4. Detects Errors and Fraud: It is highly effective in identifying discrepancies and fraudulent
activities.

Advantages of Routine Checking:

 Thorough examination, ensuring that no transaction is overlooked.

 Helps in detecting small errors that may go unnoticed in large-scale reviews.

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Disadvantages of Routine Checking:

 Very time-consuming and expensive, especially in large organizations.

 Not practical for large volumes of transactions.

Test Checking

Test checking is a sampling method where the auditor checks a sample of transactions or records rather
than examining every single item. This method is used when the volume of transactions is too large for
routine checking to be practical.

Characteristics of Test Checking:

1. Selective Examination:
o The auditor randomly selects a sample of transactions or records to review.
2. Efficient and Cost-Effective:
o It saves time and reduces costs compared to routine checking.
3. Requires Professional Judgment:
o The auditor must decide on an appropriate sample size and ensure that the sample
represents the entire population.
4. Relies on Statistical Techniques:
o Auditors may use statistical methods to ensure that the sample is representative of the
entire population.

Advantages of Test Checking:

 Less time-consuming and more efficient than routine checking.

 Practical for large organizations with many transactions.

Disadvantages of Test Checking:

 May miss errors or fraud in the unchecked transactions.

 The results may not provide a complete picture if the sample is not representative.

When to Use Test Checking?

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  Test checking is suitable when the auditor believes that the system of internal control is strong
and the risk of errors is low. It is often used in larger organizations or in audits where many
transactions occur, such as in sales or purchasing.

Comparison Between Routine Checking and Test Checking

Aspect Routine Checking Test Checking

Scope Examines every transaction or record Examines a sample of transactions

Time and Effort Very time-consuming and detailed Time-saving and efficient
Accuracy High accuracy and thoroughness Less thorough, may miss errors
Cost Expensive, due to detailed work More cost-effective
Suitable for smaller organizations or Suitable for large organizations with many
Suitability
fewer transactions transactions

Conclusion

 Audit Program: A structured plan that guides auditors through the audit process.
 Audit Notebook: A record of the auditor’s activities, observations, and findings during the audit.
 Routine Checking: A comprehensive, detailed verification method suitable for smaller audits
with fewer transactions.
 Test Checking: A sampling method used when the volume of transactions is high, making it
more efficient and cost-effective.

Summary at a glance

1. Introduction to Auditing

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� Meaning: Independent examination of financial records to ensure accuracy and compliance.
�Objectives:

 Verify financial statements.

 Detect errors and fraud.
 Ensure operational efficiency.

2. Types of Audit

 Financial Audit: Examines financial statements.

 Internal Audit: Focuses on internal controls and risks.
 Compliance Audit: Ensures adherence to laws and regulations.
 Performance Audit: Reviews operational efficiency.

3. Internal Audit

Definition: Ongoing evaluation of internal controls, risk management, and governance.

Purpose: Improve processes, prevent fraud, and ensure compliance.

4. Audit Programme

What It Is: A structured plan outlining the steps, scope, and objectives of the audit.
Includes:

 Checklist of tasks.
 Schedule of activities.
 Allocation of responsibilities.

5. Audit Notebook

Definition: A detailed record of the auditor’s findings and observations during the audit.
Contents:

 Date and scope of procedures.

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  Findings and supporting documents.
 Conclusions and recommendations.

Routine Checking:

 Verifies every transaction in detail.

 Pros: Comprehensive and thorough.
 Cons: Time-consuming and costly.
Test Checking:

 Reviews a sample of transactions.

 Pros: Time-efficient and cost-effective.
 Cons: May miss errors or fraud.

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 Unit II:

1. Internal Check System

Definition:
The internal check system refers to the arrangement of duties and responsibilities within an organization
to ensure that one employee’s work is automatically checked by another. It is a crucial component of
internal control, aiming to prevent errors and fraud while promoting efficiency in operations.

Key Features:

 Division of Work: Tasks are divided among employees to avoid overlapping responsibilities.
 Automatic Checking: One person’s work is automatically verified by another through a chain of
operations.
 Prevention of Frauds: Reduces the opportunity for fraud by minimizing individual control over
complete processes.
 Timely Detection of Errors: Errors are identified and rectified promptly due to continuous
monitoring.

Importance of Internal Check:

 Ensures accuracy and reliability of financial records.

 Prevents manipulation, errors, and fraud.
 Enhances operational efficiency and accountability.
 Reduces the workload of auditors by maintaining preliminary checks.

Advantages:

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 1. Reduces the chances of errors and fraud.
2. Improves efficiency in operations by streamlining processes.
3. Acts as a preliminary check, reducing the workload of auditors.
4. Strengthens internal control mechanisms.

Limitations:

1. Can be expensive to implement in small organizations.

2. May cause delays in operations due to additional verification steps.
3. Effectiveness depends on the integrity and competence of employees

2. Internal Control

Definition:
Internal control is a broader concept that includes all measures, policies, and procedures adopted by an
organization to safeguard its assets, enhance the accuracy of financial records, and ensure compliance
with laws and regulations.

Components of Internal Control:

1. Control Environment: The overall attitude, awareness, and actions of management regarding
internal control systems.
2. Risk Assessment: Identifying and addressing risks that could affect the organization’s objectives.
3. Control Activities: Procedures to ensure directives are carried out (e.g., approvals,
reconciliations).
4. Information and Communication: Ensuring timely and accurate reporting of relevant
information.
5. Monitoring: Continuous assessment of internal controls for effectiveness.

Types of Internal Controls:

 Preventive Controls: Prevent errors before they occur (e.g., access restrictions).
 Detective Controls: Identify errors after they occur (e.g., audits, reconciliations).

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  Corrective Controls: Address and rectify detected errors (e.g., corrective entries).

Objectives of Internal Control:

 Safeguard assets.
 Enhance the reliability of financial information.
 Promote operational efficiency.
 Ensure compliance with applicable laws and regulations.

Importance:

An effective internal control system builds confidence among stakeholders, supports sound
decision-making, and enhances the overall governance of the organization.

Audit Procedure: Vouching

Definition:

Vouching is the process of examining documentary evidence to verify the authenticity, accuracy, and
legitimacy of transactions recorded in the books of accounts. It is a critical aspect of auditing that ensures
the financial records are free from material misstatements.

Objectives of Vouching:

1. Verify the authenticity of recorded transactions.

2. Confirm that transactions are authorized and approved.
3. Ensure compliance with accounting policies and regulatory requirements.
4. Detect errors or fraudulent activities.

Steps in Vouching:

1. Identification of Transactions: Select transactions from the books of accounts for examination.
2. Examination of Supporting Documents: Review invoices, receipts, agreements, and bank
statements.
3. Verification of Authorization: Ensure transactions have been approved by appropriate
personnel.

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 4. Comparison with Records: Match transactions with supporting documents for consistency.
5. Compliance Check: Confirm adherence to accounting standards and company policies.

Importance of Vouching:

 Provides assurance that recorded transactions are genuine.

 Detects fictitious or unauthorized transactions.
 Enhances the credibility and reliability of financial statements.

Limitations:

1. Relies heavily on the availability and integrity of supporting documents.

2. Cannot detect all types of fraud, especially collusion among employees.

Types of Vouching:

1. Routine Vouching: Examines day-to-day transactions, ensuring proper documentation and

authorization (e.g., petty cash payments).
2. Test Vouching: Selective examination of transactions, especially when the volume of
transactions is large.

Documents Commonly Checked During Vouching:

1. Cash Vouchers: Petty cash receipts, bank withdrawal slips.

2. Purchase Vouchers: Invoices, purchase orders, and goods received notes.
3. Sales Vouchers: Sales invoices, delivery challans, and customer acknowledgments.
4. Expense Vouchers: Employee reimbursements, travel expenses, and utility bills.

Tips for Effective Vouching

 Be Methodical: Follow a structured approach and verify all supporting documents.

 Use Sampling: In large organizations, focus on material and high-risk transactions rather than
vouching every entry.
 Remain Objective: Avoid assumptions; rely only on evidence to validate transactions.
 Leverage Technology: Use audit software to streamline the vouching process for efficiency.

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 Vouching is an important part of auditor’s duty. An audit must be very careful while vouching the
transactions. Points to be noted while vouching:

1. Must verify authenticity of transaction.

2. Accuracy of amount recorded.
3. Proper classification of accounts.
4. Date and serial number of vouchers.
5. If any voucher is doubtful, the auditor should proceed cautiously and use special ticks for such
vouchers.
6. Explanation from concerned official for any missing vouchers.
7. Auditor should examine that all expenses pertain to the business.
8. Amounts on the receipt should be shown in words and figures.
9. Receipt should indicate the period of time.
10. Should not take any help from client’s staff.
11. Distinction made between capital and revenue.
12. Vouching of books of a particular period must be completed in one sitting.
13. Any alterations in the vouchers must be supported by the concerned officer’s initials.
14. Auditors should use special ticks for vouching cash payments, receipts, purchases, sales etc.
15. If purchases are made on cash basis, transactions should be recorded only once.

Vouching of Cash Transactions

Cash transactions are highly scrutinized in an audit due to their potential for errors or fraud. Vouching
cash transactions involves verifying that every cash entry in the books is supported by valid and authentic
documentation. Here’s how to effectively perform vouching for cash transactions:
1. Types of Cash Transactions to Vouch
 Cash Receipts: Cash received from customers, refunds, loan advances, or other sources.
 Cash Payments: Payments made for goods, services, or any other business expenses.
 Cash Withdrawals: Withdrawals from the bank for business expenses.
 Cash Balances: Cash in hand and cash at the bank (reconciled balances).

Verify Cash Receipt Entries:

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  Check the Cash Receipts Journal: Ensure that all cash receipt entries are recorded in the cash
receipts journal and match the amounts recorded in the cash book.
 Obtain Supporting Documents: For each cash receipt, verify that there is supporting
documentation such as:
o Sales Invoices or Sales Orders for customer payments.
o Receipts for amounts received from customers or other third parties.
o Bank Deposit Slips or payment vouchers.
B. Cross-Check with Bank Statements (if applicable):
 Bank Deposits: If cash is deposited into the bank, verify the amounts and dates on the bank
deposit slips with the amounts recorded in the books.
 Payment Receipts: For payments received through bank transfers or cheques, ensure that they
are supported by the relevant documentation (e.g., bank remittance advice).
C. Check the Source of Cash Receipts:
 Verify the Source: Ensure that cash received is legitimate, whether it is from customers, loans,
refunds, or other income sources. Cross-check with customer statements, contracts, or bank
statements to confirm the source of the cash.
D. Ensure Authorization:
 Ensure that cash receipts are properly authorized by the management, such as the finance head or
cashier. Check for signatures or stamps on receipts or payment vouchers.

Verify Cash Payment Entries:

 Check the Cash Payment Journal: Ensure that all cash payments are recorded in the cash
payments journal and match the entries in the cash book.
 Obtain Payment Vouchers: For each cash payment, verify that there is supporting
documentation such as:
o Invoices or Bills for the purchases made.
o Receipts for expenses paid.
o Payment Vouchers for authorizing cash disbursements.
B. Cross-Verify with Other Records:
 Check with Purchase or Expense Records: Ensure that the payment is for an actual purchase or
service and corresponds to an entry in the purchase register or expense ledger.
 Bank Withdrawals: For payments made through bank withdrawals (i.e., if the company
withdraws cash from the bank for disbursements), verify with the bank withdrawal slips and
bank statements.

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C. Ensure Authorization:
 Just like with receipts, ensure that cash payments are authorized by the designated person in the
organization (e.g., finance manager, authorized signatory).
 Check for appropriate signatures or stamps on the payment vouchers or invoices.

Verify Cash Withdrawal Records:

 Bank Withdrawal Slips: Check the bank withdrawal slips to confirm that the amounts
withdrawn from the bank are recorded properly in the books.
 Bank Statements: Cross-check the amounts withdrawn with the bank statements to ensure the
withdrawal was properly recorded and deposited into the cash account.
B. Confirm Purpose of Withdrawal:
 Purpose of Withdrawal: Ensure that the withdrawal was for legitimate business purposes and
supported by relevant documentation, such as:
o Petty Cash Vouchers or advance receipts for petty cash withdrawals.
o Expense records or cash payment records for larger withdrawals.

Vouching Cash in Hand

A. Physical Verification:
 Physical Cash Count: Physically count the cash in hand and reconcile it with the cash book
balance.
 Cash Register: Ensure that there is a cash register or cash ledger where daily cash inflows and
outflows are recorded and verify the accuracy of this ledger.
B. Reconcile with Bank Balances:
 Bank Reconciliation Statement: Ensure that the cash book balance matches the bank
statement after taking into account deposits, withdrawals, and any bank charges.
 Ensure any discrepancies in the cash book and bank balance are accounted for and explained
(e.g., unpresented cheques, deposits in transit).

Vouching Petty Cash Transactions

A. Review Petty Cash Vouchers:
 Petty Cash Vouchers: For every small expenditure paid out of petty cash (e.g., for office
supplies), verify the petty cash voucher with the invoice and payment.
B. Reconcile Petty Cash Fund:

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  Ensure the petty cash balance matches the recorded balance in the petty cash book and reconcile
it periodically with the actual cash in hand.
Pay Attention to Specific Transactions

Certain types of transactions require additional scrutiny:

 Cash Transactions: Verify against cash memos and ensure compliance with cash handling
policies.
 Capital Expenditures: Confirm the existence and ownership of fixed assets purchased.
 Payroll: Match salary sheets with attendance records and payment vouchers.
 High-Value Transactions: Analyze contracts, quotations, and approval documents for accuracy.

Vouching Procedures: Verification of Assets and Liabilities

Definition:

Verification is the process of examining the existence, ownership, valuation, and proper disclosure of
assets and liabilities in financial statements. It ensures the accuracy and reliability of the organization’s
financial position.

Verification of Assets involves:

1. Physical Verification: Inspecting tangible assets like cash, inventory, and fixed assets to confirm
their existence.
2. Ownership Verification: Checking legal documents, such as title deeds or ownership
certificates, to verify ownership.
3. Valuation: Ensuring assets are valued in accordance with accounting standards (e.g., depreciation
for fixed assets).
4. Disclosure: Verifying that assets are properly classified and disclosed in financial statements.

Verification of Liabilities involves:

1. Existence: Confirming the validity of liabilities recorded in the books.

2. Valuation: Ensuring liabilities are valued accurately (e.g., outstanding loans, trade payables).

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 3. Compliance: Verifying that liabilities comply with contractual and legal obligations.
4. Disclosure: Checking that liabilities are appropriately disclosed in the financial statements.

Objectives of Verification:

 Provide assurance about the accuracy of financial statements.

 Detect misstatements, errors, or fraudulent activities.
 Ensure compliance with regulatory and legal requirements.

Procedures of verification of assets and liabilities

1. Verification of Assets

Assets are resources controlled by the company, expected to bring future economic benefits. Verification
ensures that the assets are genuine, properly valued, and appropriately classified.

A. Fixed Assets (Tangible Assets)

Steps for Verification:

1. Physical Inspection:
o Conduct a physical verification of fixed assets (e.g., machinery, buildings, office
furniture) to confirm their existence and condition.
o Compare the assets with the fixed asset register or asset listing.
2. Ownership and Title:
o Ensure that the company has legal ownership of the assets, supported by relevant
documentation like title deeds, purchase invoices, or contract agreements.
3. Depreciation Calculation:
o Verify the depreciation of assets by checking if it is calculated based on the company's
depreciation policy and the asset’s useful life.
o Cross-check the depreciation with the fixed asset register and the general ledger.
4. Reconciliation:

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 o Ensure that any additions, disposals, or impairments of assets are recorded correctly in
the asset register.
o Reconcile the total value of assets in the asset register with the amounts reported in the
balance sheet.
5. Valuation:
o Ensure that the assets are valued correctly, and any impairments or write-offs are justified
and properly documented.

B. Intangible Assets

Steps for Verification:

1. Documentation:
o Verify the existence of intangible assets (e.g., patents, trademarks, goodwill) by
reviewing agreements, contracts, and purchase documents.
2. Amortization:
o Check that amortization of intangible assets is done according to the company’s policy,
considering their useful life.
3. Valuation:
o Ensure that intangible assets are valued appropriately, particularly in the case of goodwill
and brand value.

C. Investments

Steps for Verification:

1. Confirm Existence:
o Obtain investment certificates, bank statements, or shareholding reports to confirm
the existence and value of investments.
2. Reconcile with Records:
o Cross-check the amount of investment recorded in the general ledger with the
investment register or portfolio statement.
3. Market Value:
o Ensure that investments are valued correctly, particularly if they are marketable
securities. Verify the market value with stock exchange reports or valuation reports.

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D. Current Assets (Inventories, Receivables, Cash)

1. Inventories:

 Physical Verification: Perform a physical count of inventory to confirm quantities on hand.

 Valuation: Ensure that inventories are valued at the lower of cost or net realizable value, using
appropriate methods such as FIFO, LIFO, or weighted average.
 Reconciliation: Compare the physical count with the quantities recorded in the inventory
records and general ledger.

2. Trade Receivables:

 Verify Balances: Confirm receivable balances with customers through confirmation letters.
 Aging Analysis: Ensure that overdue balances are appropriately aged and provision for bad
debts is correctly calculated.
 Verify Sales Transactions: Ensure the receivables are backed by valid sales invoices and there
are no fictitious or disputed balances.

3. Cash and Bank:

 Cash in Hand: Physically count the cash on hand and reconcile it with the cash book and
general ledger.
 Bank Reconciliation: Verify that bank balances are reconciled with the bank statements and
that any unpresented cheques or deposits in transit are accounted for.

2. Verification of Liabilities

Liabilities are obligations that the company is required to settle in the future. Verification ensures that
liabilities are accurately recorded, complete, and classified.

A. Long-term Liabilities (Loans, Borrowings)

Steps for Verification:

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 1. Loan Agreements:
o Review loan agreements to verify the amount, interest rate, repayment schedule, and
terms of loans.
o Ensure that any covenants or restrictions are adhered to.
2. Interest Expense:
o Verify the interest expense on loans by checking the interest calculation and
reconciling it with the loan agreement.
3. Loan Reconciliation:
o Compare the loan balances in the general ledger with the loan statements provided by
the lender or bank.

B. Current Liabilities (Accounts Payable, Accrued Expenses)

Steps for Verification:

1. Accounts Payable:
o Confirm the amounts owed to suppliers through vendor statements or confirmation
letters.
o Cross-check recorded payables with purchase invoices and goods receipt notes.
2. Accrued Expenses:
o Verify that accrued expenses (e.g., wages, utilities, taxes) are calculated correctly and
supported by relevant documentation.
o Ensure that these are recognized in the period in which they are incurred, even if payment
is made in a subsequent period.
3. Provisions for Liabilities:
o Check the provisions for contingent liabilities (e.g., legal cases, warranties) and ensure
they are based on reliable estimates and backed by legal opinions or supporting
documentation.

C. Contingent Liabilities

Steps for Verification:

1. Obtain Legal Opinions:

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 o Review legal correspondence and opinions from legal advisors to assess potential
contingent liabilities.
2. Disclosure:
o Ensure that all contingent liabilities are properly disclosed in the notes to the financial
statements, if applicable.

D. Trade Payables

Steps for Verification:

1. Verify Payables with Suppliers:

o Cross-check payables with suppliers’ statements of accounts to confirm balances.
2. Check Payment Terms:
o Ensure that the payment terms with suppliers are correctly recorded and consistent with
the terms stated in the purchase agreements.
3. Reconcile Payables:
o Reconcile the balances of accounts payable with the general ledger and ensure proper
classification between current and non-current liabilities.

3. Final Steps in Verification of Assets and Liabilities

A. Reconciliation and Cross-Checking:

 Ensure that the balances of all assets and liabilities are properly reconciled with supporting
documents and external confirmations (e.g., bank statements, customer/vendor confirmations).

B. Review of Disclosures:

 Verify that all required disclosures for assets and liabilities are included in the financial
statements, in compliance with the relevant accounting standards (e.g., IFRS, AS).

C. Ensure Proper Classification:

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  Ensure that assets and liabilities are appropriately classified as current or non-current based on
their expected realization or settlement.

D. Review with Management:

 Discuss with management any material discrepancies or uncertainties regarding the assets and
liabilities to ensure proper adjustments are made.

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