CA Inter Audit & Ethics Notes

Chapter 5 – Audit of Items of Financial Statements

Part 5 – Audit of Loans & Advances, Current Liabilities, Provisions, Revenue & Expenses

3.9 AUDIT OF LOANS & ADVANCES

Meaning

Loans and Advances represent amounts given by the entity to employees, suppliers, subsidiaries, related parties or other parties, which are expected to be recovered in cash or adjusted in future.

Examples

Employee Loans
Security Deposits
Advances to Suppliers
Advances to Contractors
Loans to Subsidiaries
Inter-Corporate Loans

Audit Objectives

The auditor should ensure that loans and advances:

Exist.
Belong to the entity.
Are recoverable.
Are properly valued.
Are correctly disclosed.

Assertions

Existence
Rights & Obligations
Completeness
Valuation
Presentation & Disclosure

A. EXISTENCE

Auditor should verify

✔ Loan Register

✔ Loan Agreements

✔ Board Resolution

✔ Sanction Letters

✔ Bank Statements

✔ General Ledger

Fresh Loans

Verify:

Approval of Board
Purpose of Loan
Terms & Conditions
Rate of Interest
Security obtained

Employee Loans

Verify

Employee records
Recovery schedule
Salary deductions

B. RIGHTS & OBLIGATIONS

Ensure company has legal right to recover the amount.

Verify:

Loan Agreement
Promissory Note
Mortgage Documents
Guarantee Documents

C. COMPLETENESS

Ensure

All loans granted have been recorded.

Compare:

Loan Register

↓

General Ledger

↓

Financial Statements

D. VALUATION

Verify

Interest accrued
Interest received
Overdue balances
Provision for doubtful recovery

Related Party Loans

Verify compliance with

AS 18
Ind AS 24
Section 185
Section 186

Impairment

Where recovery appears doubtful,

ensure adequate provision has been created.

E. DISCLOSURE

Schedule III requires separate disclosure of:

Secured Loans
Unsecured Loans
Good Loans
Doubtful Loans
Related Party Loans

Exam Points

Verify:

✔ Interest calculation

✔ Security

✔ Documentation

✔ Compliance with Companies Act

3.10 AUDIT OF CURRENT LIABILITIES

Meaning

Current Liabilities are obligations payable within twelve months.

Examples

Trade Payables
Outstanding Expenses
Statutory Dues
GST Payable
Salary Payable
TDS Payable
PF Payable

Audit Assertions

Completeness (Most Important)
Existence
Valuation
Presentation

Why Completeness is Most Important?

Management generally prefers to understate liabilities to increase profits.

Hence,

Risk of Unrecorded Liabilities is high.

Audit Procedures

Trade Payables

Verify

Supplier Ledger

↓

Purchase Register

↓

Goods Receipt Note

↓

Invoices

Supplier Confirmation

Obtain direct confirmation from suppliers.

Subsequent Payments

Review payments made after Balance Sheet Date.

Purpose

Detect unrecorded liabilities.

Goods Received but Invoice Pending

Ensure provision is made.

Debit Balance in Creditors

Verify separately.

May represent advances.

Cut-off Testing

Purchases before year-end

Must be recorded.

Purchases after year-end

Must not be recorded.

Statutory Liabilities

Verify

GST
TDS
PF
ESI
Professional Tax

Ensure:

Amounts deposited within prescribed due dates.

Outstanding Expenses

Examples

Salary
Audit Fees
Electricity
Rent
Interest

Verify

Supporting calculations.

Bank Confirmation

Check

Interest accrued
Bank charges
Unrecorded liabilities

Disclosure

Verify Schedule III classification into:

Trade Payables
Other Financial Liabilities
Other Current Liabilities

3.11 AUDIT OF PROVISIONS

Meaning

Provision means

A liability of uncertain timing or amount.

Examples

Warranty
Leave Encashment
Bonus
Litigation
Income Tax
Gratuity

Relevant Standard

AS 29

(Ind AS 37)

Recognition Conditions

Provision should be recognised only if:

✔ Present obligation exists.

✔ Outflow of resources is probable.

✔ Reliable estimate can be made.

Audit Procedures

Verify

Basis of estimation
Previous year’s estimates
Legal opinions
Board Minutes
Management Representation

Litigation Provision

Obtain

Legal confirmation from advocate.

Warranty Provision

Compare

Current year

↓

Previous years

↓

Actual claims

Bonus Provision

Verify

Employment agreements.

Leave Encashment

Verify actuarial valuation where applicable.

Contingent Liability

Ensure

Not recognised.

Only disclosed.

Disclosure

As per AS 29

Disclose:

Nature
Timing
Amount
Uncertainty

3.12 AUDIT OF REVENUE

Audit Objective

Revenue should be:

Genuine
Complete
Correctly measured
Recorded in proper period

Assertions

Occurrence
Completeness
Cut-off
Measurement
Disclosure

Audit Procedures

Verify

Sales Invoice
Dispatch Documents
Customer Order
E-way Bill
GST Invoice

Cut-off

Very important.

Sales before year-end

Included.

Sales after year-end

Excluded.

Sales Returns

Review

Returns after Balance Sheet Date.

Discounts

Verify

Trade Discount

Cash Discount

Sales Incentives

Credit Notes

Verify

Approval

Timing

Reason

Analytical Procedures

Compare

Gross Profit
Sales Trend
Monthly Sales
Industry Trend

Investigate unusual fluctuations.

Related Party Sales

Verify

Arm’s Length Price.

Revenue Recognition

Verify compliance with:

AS 9

Ind AS 115

Disclosure

Verify

Revenue Classification
GST Treatment
Other Operating Income

3.13 AUDIT OF EXPENSES

Objective

Ensure

Expenses:

Actually incurred
Completely recorded
Correctly measured
Properly classified

Audit Procedures

Vouching

Verify

Expense

↓

Invoice

↓

Approval

↓

Payment

Cut-off

Expenses relating to current year

Must be recorded.

Outstanding Expenses

Verify

Provision made.

Capital vs Revenue

Ensure

Capital expenditure not charged to Profit & Loss.

Revenue expenditure not capitalised.

Payroll Expenses

Verify

Employee records
Attendance
Salary Register
Bank Transfer

Interest Expense

Recalculate

Interest on borrowings.

Depreciation

Verify

Schedule II

Companies Act.

Analytical Review

Compare

Expense Ratios

Current Year

↓

Previous Year

Investigate significant changes.

Common Errors Detected

❌ Fictitious Expenses

❌ Duplicate Payments

❌ Wrong Accounting Period

❌ Personal Expenses

❌ Capital Expenses treated as Revenue

One-Day Revision

Loans & Advances

✔ Agreements

✔ Board Approval

✔ Interest

✔ Recoverability

✔ Related Party Loans

Current Liabilities

✔ Supplier Confirmation

✔ Subsequent Payments

✔ Cut-off

✔ GST

✔ Outstanding Expenses

Provisions

✔ AS 29

✔ Present Obligation

✔ Probable Outflow

✔ Reliable Estimate

✔ Legal Opinion

Revenue

✔ Invoice

✔ Dispatch

✔ Cut-off

✔ Sales Return

✔ AS 9 / Ind AS 115

Expenses

✔ Vouching

✔ Outstanding Expenses

✔ Capital vs Revenue

✔ Payroll

✔ Depreciation

Important Standards & Sections

Standard / Section	Topic
AS 29 / Ind AS 37	Provisions & Contingent Liabilities
AS 9 / Ind AS 115	Revenue Recognition
AS 18 / Ind AS 24	Related Party Transactions
Section 185	Loans to Directors
Section 186	Loans & Investments
Schedule III	Presentation & Disclosure

Exam Mnemonics

Loans & Advances – LIRD

L – Loan Agreement
I – Interest Verification
R – Recoverability
D – Disclosure

Current Liabilities – SCUP

S – Supplier Confirmation
C – Cut-off
U – Unrecorded Liabilities
P – Subsequent Payments

Revenue – ICDM

I – Invoice
C – Cut-off
D – Dispatch
M – Measurement

Expenses – VCAP

V – Vouching
C – Cut-off
A – Analytical Review
P – Payroll & Provisions

Part 5 covers the remaining major balance sheet and profit & loss items. The final part (Part 6) should include a complete chapter revision, ICAI exam questions, memory charts, assertion-wise audit procedures, and a 15–20 page rapid revision sheet for the entire Chapter 5.