Exercise 1 - jb nagar cpe study circle of wirc of icai

Audit ChecklistIndexExercise 1 - Identification of Checklist Page 14Sample 1 - Transpose & Sorting Page 15Sample 2 - Review Comments Page 20Sample 3 - Responding to Audit Framework Page 22(Controls & Audit Evidence)Sample 4A - Compliance Testing Page 25Sample 4B - Substantive Testing Page 27Solution - Identification of Checklist Page 29Annexuresa. Accounting Standard Checklist Page 31b. CARO Checklist Page 7913 Rakesh Agarwal

Audit ChecklistExercise 1 - Identification of ChecklistType Staffing Level TimingGeneralAreasStandard/ Creati Updat Execu Review Interim Proactive FinalCustomize on e tion1 Auditing Standard Checklist2 CARO Checklist Standard + 1 2 3 1 Y Y3 Accounting Standard Checklist None 1 2 3 1 Y Y4 Company's Act Checklist5 Schedule VI5 Corporate Governance Checklist6 Firms Internal Protocol ChecklistSpecificAreas1 Share-Capital Customize2 Reserves and Surplus Customize3 Borrowings Customize4 Creditors Customize5 Outstanding Liabilities Customize6 Gratuity & Leave Provision Customize7 Taxation Customize8 Contingent Liabilities Customize9 Fixed Assets Customize10 Investments Customize11 Inventories Customize 1 2 4 2 Y Y12 Sundry Debtors Customize13 Current Assets Customize14 Profit and Loss Account Customize15 Profit and Loss Analytical Review Customize16 Specific Cycle – Purchase Customize17 Specific Cycle – Sale Customize18 Specific Cycle – Inventory Customize 1 2 4 2 Y YQuestion forParticipants1 Identify Checklist to be Responded as either Standard or Customize2 Identify Level of Staffing to be Deployed (1 Partner, 2, Manger, 3 Qualified, 4 Article) for Creation, Updateand Review3 Identify Timing for its Execution (Interim, Proactive, Final)14 Rakesh Agarwal

Audit ChecklistSAMPLE 1Transpose And Sorting - Section InventoryLevel of Effort – Delegated to an Experienced Articled TraineeSources – Material Collected from A, B, ICAI, CD, etc.15 Rakesh Agarwal

Audit ChecklistAudit Steps for Practices Followed in the Past1. Check Balances in Stock Register (audit program for validation stock register separatelyaddressed)2. Check Balances in physical stock take sheet (program from validating physical stockverification sheet separately addressed)3. Check approval of shortages/excesses in inventories4. Check Valuation of inventories --Cost or Market Value whichever is lowera. Components of includes;i. Purchase Priceii. Taxes not refundableiii. Freight inwardiv. Cost of storage before putting the inventory at its intended location for itssale or useb. Components of excludes;i. Modvatii. Cash discountiii. Discretionary discountsiv. General corporate administration expensesv. Selling expenses5. Check Calculation6. Trace it to Balance Sheet and P & L16 Rakesh Agarwal

Audit ChecklistFrom Accounting Standard ChecklistQUESTIONNAIRE FOR ASCERTAINING COMPLIANCE OF AS–21) (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 intoaccount loss ofcapacity 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 foreigncurrency loanobtained 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 ChecklistNone17 Rakesh Agarwal

Audit ChecklistFrom CARO ChecklistSL.NO.InventoryPARTICULARSYES/NO/N.A REMARKS1 Whether physical verification of inventory has been conducted, atreasonable intervals, by the management?2 Whether the procedures of physical verification of inventoryfollowed by the management is reasonable and adequate inrelation to the size of the company and nature of its business? Ifnot 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 suchverification? If so has it been properly dealt with in the books ofaccounts?From Co. Act ChecklistNoneFrom Corporate Governance ChecklistNoneDisclosure Requirements Under Schedule VIInventories are to be classified under the following heads• Stores and spare parts• Loose tools• Stock in Trade• Work in progressMode of valuation of stocks including WIP shall be stated and the amount in respect of rawmaterial shall also be stated separately where ever practicable.In case of the manufacturing companies, the value of raw material consumed giving item wisebreak up and indicating the quantities thereof has to be reported as part of notes on accounts. Inthis break up as far as possible all important basic raw materials shall be shown as separateitems.Intermediaries or components procured from other manufacturers may, if the list is too large to beincluded in the break up, be grouped under suitable headings without mentioning the quantities,18 Rakesh Agarwal

case the work in progress the amounts for which (such works have been completed) at the commencement and at the end of the accounting period. InAudit Checklistprovided that all those items which in value individually accounts for 10% or more of the totalvalue 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 stocksgiving break up in respect of each class of goods traded and indicating the quantities thereofshould be reported.19 Rakesh Agarwal

Audit ChecklistSAMPLE 2Review Comments - Section InventoryLevel of Effort – Partner and ManagerSources – Profession Knowledge, Various Material Collected, Knowledge ofBusiness.20 Rakesh Agarwal

Audit ChecklistReview Comments – First RoundMode of Delivery - CoachingGeneral1. 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 XX5. What questions you will include in your correspondence while ensuring compliance withrelying 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 therebyresponding to SA XX – Knowledge of business, and SA XX, Analytical Review7. 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 usedbut 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 file14. Raw Material Empties are not part of Stock15. 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 March31, 2007.17. Depict the Case Study (one time effort for one client)18. etc…..Immediate Action Point before Going Forward1. Interpret Seven Assertion of Audit Evidence and three characteristics of Control Cyclefrom SA XX (Time allotted 4 hours)2. Interpret Risk Environment from SA XX3. To train yourself for COSO Framework 1973 after understanding SA XX – Time allottedfor training 12 hours per day for 4 days continuously.4. etc….Remember Cardinal Lessons to Avoid Frustration During Building – Up Documentationfor First Time Use Office Hour (for Content collection, reading) Apply for following period and do not dig up last year files as to what shouldhave been done Manage one stop meeting with client Inquiry may done in first half of the day and in second half just sit ondocumenting it Use MS tools for Flow-charts (very easy to use) Finish it section by section.21 Rakesh Agarwal

Audit ChecklistSAMPLE 3Responding to Auditing Framework on(a) Controls and (b) Audit EvidenceSection InventoryLevel of Effort – Partner and ManagerSources – Navigation Skills22 Rakesh Agarwal

Audit ChecklistDepict 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 statementsb. Documents Involved;i. List of Various Source documents…ii. List of Various Voucher generatediii. List of reports generatediv. Number of copies of abovev. Specifying which copy is used for whatvi. Master data;1. Component of cost,2. Valuation per unit of Cost3. Stock Codes and description.c. Understanding of roles of various personnel involved ini. Flow of transactionsii. Documentation involvediii. Analysis made by them, if any,d. Understanding of Various Control Pointsi. Stock reconciliationii. Comparison of Book Record with Physical stock takeiii. Stock ageingiv. Analytical review with respect to Cost v/s NRVv. Identification of Cost components at the beginning of the yeare. Understanding of various layers of reviews including external, reviewsi. MISii. Internal Auditiii. Report to Bankeriv. Frequencies of above reviewsv. Subsequent impact of Observations23 Rakesh Agarwal

Audit ChecklistSA 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 ofcompliance- Review of Controls ….followed by its observationEffectiveness - Physical Stock take reveals nil exceptions- No pointers towards ineffectiveness (e.g. negative stock)- Nil Exception noticed during test of complianceContinuity - Physical stock take is done periodically- Samples selected for Test of Compliance were from throughoutthe period.Substantive Audit Test (Test of Transactions and Balances)Existence - Physical Stock take (refer separate audit program)- Subsequent sales and realizationRights andObligations- Clear title to inventory, (where hypothecated the fact disclosed)Occurrence - MRN - Receipt of Material (later tallied to Purchase bills or salesreturn)- GDN – Dispatch of Material (later tallied to sales bill or scrapnote)- Discrepancies – Physical Stock SheetCompleteness - Cut-off test (MRN, GDN and JV)- Linking Sales cut-off- Attempting Review of P.O. v/s MRN- Stock reconciliationValuation - Assessing Components of Cost- Comparison with NRV.Measurement(Accuracy)- Checking Calculations- Processing ControlsPresentation andDisclosure- Compliance with AS 2- Compliance with Schedule VI- Reporting Under Long form report24 Rakesh Agarwal

Audit ChecklistSample 4 ACompliance Testing - Interim Balance Sheet - StockS.r. No. Particulars E E C WP Reference /CommnetsISelect - one samples per months for all the sourcedocuments (MRN, GDN and JV)from Stock register andCheck the Following1.A Check the following for each MRN Y Checked MRN n.o……….a Pre-printed Serial Control Y Y NEb Date of Receipt of Material Y Y NEc Quantity in Delivery Challan Y Y NEd Quality Control Passing including date of passing and bywhom passedY Y NEe Stock coding in accordance with Description Y Y NEf Check Calculation Y Yg Authorisation of MRN by Stores Incharge Y Y NEh Entry in Stock Register/System Y Y NEI B Check the following for each GDNY Checked GDN n.o……….a Pre-printed Serial Control Y Y NEb Date of dispatch of with DC Y Y NEc Quantity in Delivery Challan Y Y NEd Reference to Sales Invoice or Credit Note (Actual Copy fromAccounts)Y Y NEe Stock coding in accordance with Description Y Y NEf Check Calculation Y Yg Authorisation of GDN by Stores Incharge Y Y NEh Entry in Stock Register/ System Y Y NEII 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 Y Y NEb Check that entries during the period are supported by itsSource documents (on a sample basis).Y Y NEc Confirm that there is no new category of source documents(say credit notes, )Y Y NEd Check Quantitative Reconciliation Y Y NEe Check Balances with Stock take sheet Y Y NEIIIReview flowchart and ensure the following (not to bedelegated)The segregation was reviewedbefore the start of field work butjust confirm the understanding25 Rakesh Agarwal

Audit Checklista Personnel Preparing MRN and QC and Purchase Y Y NEb Personnel preparing Dispatch note and Sales Bill Y Y NEc Personnel maintaining Stores register and Physical Stocktake sheetY Y NEd Check that there has been no change in procedure duringthe periodYIVReview procedures for stock take and ensure thefollowinga Stoppage of Stock Movement Y Y NEb Stoppage of generation of Source documents Y Y NEc Stock count is done by personnel other than from StoresdepartmentY Y NEd Stock count is done in the presence of personnel from Auditand Accountse The stock take sheet is tabulated and compared with bookrecordsf Discrepancies are approved by functional heads (may be byBoard)Y Y NEY Y NEY Y NEAudit PersonnelReviewed byConclusion1. Exception to be Reported2. Whether further audit steps required3. The extent to which changes in the system to be noted4. Control Weakness Points to be Reported26 Rakesh Agarwal

Audit ChecklistSample 4 BSubstantive Testing at Balance Sheet Date _ InventoryS.r. No. Particulars E R O C V M PD WP Reference /Commnets1 Is the inventory valued at lower of cost and netrealisable valuey y y2 Which is the cost formula used ? y y ya. Specific identification?b. FIFO?c. Weighted Average?Is the disclosure made to that effect inaccounting policy?y3 Have you ascertained whether cost includes y y ya. Cost of purchase (net of Modvatableduties)?b. Direct labour?c. Production over heads?d. Such other direct cost to bring inventory totheir present location and condition?4 Have you ascertained that cost of conversiondoes not include the following :y y ya. Interest, (Unless permitted by AS 16)?b. Administrative overheads?c. Selling and distribution cost?d. Abnormal wastage of material, labour andother production cost?5 Standard cost method is reviewedperiodically?y y y27 Rakesh Agarwal

Audit Checklist6 In arriving at cost of inventory, whether y ya. Inter-divisional profits eliminated?b. Foreign currency fluctuation excluded andcharged as expense in respect of foreigncurrency loan obtained against stock?7 Is physical verification of inventory taken atyear end?y y y y y8 In arriving at net realisable value , have youascertaineda. damaged/obsolete/non-moving stock?b. subsequent sale price after Balance SheetDate?yy9 Are the inventory in accounts classified into : ya. Raw material and components? yb. Stores and spares and tools? yc. Work-in-progress? yd. Finished Goods? y10 Has disclosure being made of following’ ya. the value of raw material consumed givingitem wise break up and indicating thequantitiesyb. opening and closing stock of goodsproducedyAudit PersonnelReviewed byConclusion1. Exception to be Reported2. Whether furthur audit steps requried3. The extent to which changes in the system to be noted4. Audit adjustments to be Reported28 Rakesh Agarwal

Audit ChecklistSolution Exercise 1 - Identification of ChecklistSr. No Type Staffing Level TimingGeneral AreasStandard/ Creatio Upda Execut ReviCustomize n te ion ewInterimProa Finalctive1 Auditing Standard Checklist None 1 2 3 1 Y2 CARO Checklist Standard + 1 2 3 1 Y Y3 Accounting Standard Checklist None 1 2 3 1 Y Y4 Company's Act Checklist Standard + 1 2 3 1 Y Y5 Schedule VI None 1 2 3 1 Y5 Corporate Governance Checklist Standard + 1 2 3 1 Y Y6 Firms Internal Protocal Checklist Standard 1 2 3 1 YSpecific Areas1 ShareCapital Customize 1 2 4 2 Y Y2 Reserves and Surplus Customize 1 2 4 2 Y Y3 Borrowings Customize 1 2 4 2 Y Y4 Creditors Customize 1 2 4 2 Y Y5 Oustanding Liabilities Customize 1 2 4 2 Y Y6 Gratuity & Leave Provision Customize 1 2 4 2 Y Y7 Taxation Customize 1 2 4 2 Y Y8 Contingent Liabilities Customize 1 2 4 2 Y Y9 Fixed Assets Customize 1 2 4 2 Y Y10 Investments Customize 1 2 4 2 Y Y11 Inventories Customize 1 2 4 2 Y Y12 Sundry Debtors Customize 1 2 4 2 Y Y13 Current Assets Customize 1 2 4 2 Y Y14 Profit and Loss Account Customize 1 2 4 2 Y Y15 Profit and Loss Anaytical Review Customize 1 2 4 2 Y Y16 Specific Cycle - Purchase Customize 1 2 4 2 Y Y17 Specific Cycle - Sale Customize 1 2 4 2 Y Y18 Specific Cycle - Inventory Customize 1 2 4 2 Y YQuestion for Participants1 Identify Checklist to be Responded as either Standard or Customize2 Identify Level of Staffing to be Deployed (1 Partner, 2, Manger, 3 Qualified, 4 Article) for Creation,Update and Review3 Identify Timing for its Execution (Interim, Proactive, Final)29 Rakesh Agarwal