The focus of a statutory audit is to form an opinion on the financial statements of an

organization. An auditor verifies whether the financial statements are showing the true and
fair view of the affairs of the organization and that there are no material misstatements.

Once the client has had their discussions with the partners on the scope of the audit, and
engagement letter is signed. The partners, along with senior officials, decide the overall audit
strategy. Timelines for the audit engagement and the number of resources are decided. The
teams are then informed on the engagement they will be working on and an online workspace
is created in the firm’s internal system. Materiality is decided as per the firm’s policy so that
the engagement team focusses on understanding variances which would have a significant
impact on the financial statements.

Each member of the engagement team must fill out an independence declaration to show that
they have no interest in the company. The engagement team rolls out confirmations to third
parties like debtors, creditors, banks, etc., for positive confirmation on balances of the
company audited. The team uses various internal and external resources, like Assurance
database, EAC opinions, Guidance notes, Accounting Standards, Auditing Standards,
Companies Act, Firm Guidance etc., in performing the work.

The team understands the processes of different important accounts like Cash & Bank, Trade
Receivables and Payables, Revenue, Purchases, etc. They understand the controls in these
processes with the help of an example. They confirm the controls used by the client to
mitigate risks by referring to the Risk Control Matrix prepared by the company’s internal
auditors.

To test the controls, the team requests for the account ledgers from the client and chooses
samples as per the firm’s guidelines. To avoid prejudice on the team’s part, they use specific
tools designed to choose samples from the large pool of data given by the client. Once the
samples are received from the client, the team documents the data provided by the client and
matches it against the supporting documents they have obtained from the client. For example,
purchase journal entries would be checked against the purchase order sent, invoice received
on purchase and the goods received note.

Testing done in important areas:

1. Revenue - One of the most important points that show the company’s growth in an
industry is the revenue generated during a fiscal year. It is a more complex area than
the basic items as on the Statement of P&L as it contains certain additional
procedures. So, during the performance of test of control of Revenue, it is checked
that the sales are made after an order was raised through the proper channel, the
invoice captured all details required to make delivery, the commission and fees were
levied appropriately at the price stated, etc.
2. Purchases- The major cost in manufacturing entities arises from their production cost.
A three-way check is used to check that the transaction is properly created. The team
checks if there has been proper service agreements in place or if not, quotations to
choose from different vendors, purchase order has been raised, invoice has been
received from the vendor and a goods received note has been received during receipt
of goods/ services.
3. Cash and bank - A company makes payments during business. Proper debt collection
and receipt of due amount on invoices is of vital importance to any company as it
 enhances the company’s liquidity position and provides them with an opportunity to
employ additional funds elsewhere. The objective of testing this control was that to
ensure that all due payments and receipts are properly collected, and the transactions
are properly accounted for in the books of accounts of the company.
4. Statutory Payments-Statutory payments are those which as paid by an organization to
a government body. These payments are mandatory in nature and any delay would
lead to penalties being imposed and a negative remark during CARO reporting. These
include payment of T.D.S., Labour welfare fund, P.F., E.S.I, etc.

Substantive procedures are conducted at an account level to understand vital accounts which
could impact the financial statements. Procedures are performed to minimize the risk due to
the various assertions such as Completeness, Measurement, Existence, Occurrence, Rights &
Obligations, and Presentation & Disclosure. An internal tool is used to process the client’s
general ledger balances as the amount of transactions are too huge for a single team to check
100%. The internal tool processes the data and is checked by the engagement team if there
are transactions conducted on holidays or if there is cash being received for other than those
stated in the financial statements.

The team analyses variances of all profit and loss account items and arrives at a logical
conclusion for such variances by asking the client. They ensure full compliance under statute
& external statutory financial accounting requirements, record keeping & reporting the
auditing functions. The work is reviewed by senior officials who then give review notes to
be worked on and added in the workpapers prepared by the team. The partner verifies the
workpapers and signs off on the financial statements.