CA Inter Audit by Shubham Keswani

Ch-9 Session 3 [MTP Apr/Mar-23 + Sep/Oct-22]

MTP Apr-23
1. Mayank Ltd. is covered u/s 135 of the Companies Act, 2013 i.e. Corporate Social Responsibility (CSR).
What matters shall be disclosed by the company with regard to CSR activities done by the company?
[4M] Session-1

2. CA Mehta is statutory auditor of ABC Ltd. While performing testing of additions during the year,
he wanted to verify that:
(i) All PPE (property, plant and equipment) are in the name of the entity he is auditing.
(ii) For all additions to land and building in particular, auditor desires to have concrete about the
ownership.
(iii) The auditor wants to know whether entity has valid legal ownership rights over PPE, where it is
kept as security for any borrowings.
Advise auditor on audit procedure to be undertaken by him to establish Rights and Obligations of
entity over the PPE. (3M)

Audit procedure to establish Rights and Obligations of the entity over PPE:
(i) In addition to procedures undertaken for verifying completeness of additions to PPE during period
under audit statutory auditor while performing testing of additions should also verify that all PPE
purchase invoices are in name of entity that entitles legal title of ownership to respective entity.
Verify whether the PPE additions have been approved by authorized personnel.
(ii) For all additions to land, building in particular, CA Mehta, statutory auditor of ABC Ltd, should
obtain copies of conveyance deed/ sale deed to establish whether the entity is mentioned to be the
legal and valid owner.
(iii) Auditor should insist and verify original title deeds for all immoveable properties held as at the
balance sheet date.
(iv) In case the entity has given such immoveable property as security for any borrowings and original
title deeds are not available with entity auditor should request entity’s management for obtaining a
confirmation from respective lenders that they are holding original title deeds of immoveable property
as security.
(v) In addition, auditor should also verify register of charges, available with entity to assess that any
charge has been created against PPE.

3. You are an auditor of Jagat Ltd. which has spent ₹ 15 lakhs on Research activities of product during
period under audit. BOD want to recognize it as an internally generated intangible asset. Advise and
discuss conditions necessary to be fulfilled to recognize intangible assets in F.S. [3M]

No Intangible asset arising from research (or from the research phase of an internal project) shall be
recognised. Expenditure on research shall be recognised as an expense when it is incurred since in the

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 CA Inter Audit by Shubham Keswani
research phase of an internal project, an entity cannot demonstrate that an intangible asset exists
that will generate probable future economic benefits. Thus, BOD of Jagat Ltd cannot recognize the
expense as internally generated intangible asset.

An intangible asset shall be recognised if, and only if:

(i) the said asset is identifiable
(ii) the entity controls the asset i.e. the entity has the power to obtain the future economic benefits
flowing from the underlying resource and to restrict the access of others to those benefits
(iii) it is probable that future economic benefits associated with the asset will flow to the entity
(iv) the cost of the item can be measured reliably

MTP Mar-23
1. Studymate Limited is a company engaged in the manufacture of stationery items. The company sells
its goods on credit. The debtors as on 31.03.2022, amounted to ₹ 10 crores. What is the disclosure
requirement for the company with respect to the ageing schedule of the trade receivables in terms of
Schedule III (Part I) to the Companies Act, 2013? [6M] Already covered in Session-1

2. While verifying the legal and professional expenses of the client company, what audit procedures
should the auditor perform? (3M)

While verifying legal and professional expenses of client company, auditor should perform following
audit procedures
Ø Obtain a month-wise and consultant-wise summary.
Ø In case of monthly retainership agreements, verify whether the expenditure for all 12 months has
been recorded correctly.
Ø For non- recurring expenses, select a sample and vouch for the attributes discussed above.
Ø Auditor should be cautious while vouching for legal expenses as the same may highlight a dispute
for which entity may not have made any provision and matter may also not have been discussed/
highlighted to auditor for his specific consideration

3. Name the assertion that the auditor will check by performing the following audit procedures.
(a) Employees benefit expense in respect of all personnel have been fully accounted for.
(b) Discounts on sales has been properly adjusted/ accounted for.
(c) Employee benefit expense recorded during the period relates to the current accounting period only.
[3M]
a) Completeness b) Measurement c) Cut Off

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 CA Inter Audit by Shubham Keswani
MTP Sep-22

1. XYZ Ltd made huge additions to Intangible assets during the period 01-04-2021 to 31-03-2022 i.e
period under audit. You have been appointed as an auditor and you want to verify additions made to
intangible assets during the period. Suggest the audit procedure to verify additions to intangible
assets. [MTP Apr-22]

1. Verify movement in the intangible assets schedule (asset class wise like software, designs/ drawings,
goodwill etc.) compiled by mgt i.e. Opening balances + Additions – Deletions = Closing balances. Tally
closing balances to the entity’s books of a/c.
2. Check the arithmetical accuracy of the movement in intangible assets schedule.

For additions during the period under audit, obtain a listing of all additions from the management and
undertake the following procedures:
(i) For all material additions, verify whether such expenditure meets criterion for recognition of an
intangible asset as per AS 26.
(ii) Ensure that no cost related to research (or from research phase of an internal project) gets
recognized as intangible asset.
(iii) Check the certificate or report or other similar documentation maintained by entity to verify date
of use of intangible which could be linked to date of commencement of commercial production/
economic use to entity, for all additions to intangible assets during period under audit.
(iv) Verify whether the additions (acquisitions) have been approved by appropriate entity’s personnel.
(v) Verify whether proper internal processes and procedures like inviting competitive quotations/
proper tenders etc. were followed prior to finalizing the vendor for procuring item of intangible assets
by testing those documents on a sample basis.
(vi) In relation to deletions of intangible assets,
ü Understand from mgt reason and rationale for deletion and manner of disposal.
ü Obtain management approval and disposal note authoring disposal of asset from its active use.
ü Verify process followed for sale of discarded asset, eg inviting competitive quotes, tenders and
basis of calculation of sales proceeds.
ü Verify mgt has accurately recorded deletion of intangible asset (original cost and accumulated
amortization up to date of disposal) and resultant gain/ loss on disposal in entity’s books of a/c.

2. Reserves are a vital source of financing by internal means. Explain and also discuss the meaning of
reserves along with revenue reserve and capital reserve. [MTP Oct-22]

Reserves are the amounts appropriated out of profits that are not intended
• to meet any liability,
• contingency,
• commitment or
• diminution in the value of assets known to exist as at the date of Balance Sheet.

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 CA Inter Audit by Shubham Keswani

Reserves are a vital source of financing by internal means. They are held for purpose of distribution
of dividend or financing expansion of Co. or strengthening the Co. financially. Co. utilizes reserves
according to nature and type of such reserve.

Reserves can be segregated as revenue or capital reserves.

Revenue reserves represent profits that are available for distribution to shareholders or below
purposes such as:
To supplement divisible profits in lean years, to finance an extension of business, to augment the
working capital of business or to generally strengthen the company’s financial position.

Capital Reserve represents a reserve which does not include any amount regarded as free for
distribution. They can be utilized only for certain limited purposes.
Example
Securities premium, capital redemption reserve.

Note: If a Co. appropriates revenue profit for being credited to asset replacement reserve with
objective that these are to be used for a capital purpose, such a reserve shall also be in the nature of
a capital reserve.

3. Explain how you would verify Employee Benefit Expense incurred by a Company. [MTP Oct-22]

Auditor shall verify that:

(i) EBE has been incurred during the period in respect of personnel employed by the entity. Employee
benefit expense doesn’t include cost of any unauthorized personnel. [O]
(ii) EBE in respect of all personnel have been fully accounted for. [C]
(iii) EBE recognized during the period relates to current accounting period only.[C]
(iv) EBE has been measured/ calculated accurately. Any adjustments such as tax deduction at source
have been correctly reconciled and accounted for. [A]
(v) Employee benefit expense has been fairly allocated between: [C]
— Operating expenses incurred in production activities
— General and administrative expenses and
— Cost of personnel relating to any self-constructed assets other than inventory.

MTP Nov-22
1. Securities premium account may only be applied by the Co. towards issue of unissued shares of the
company to the members of the company as fully paid bonus shares. Is the statement correct. Explain.

The statement is not correct.

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 CA Inter Audit by Shubham Keswani
The securities premium account may be applied by the Company for the following purposes:
(a) towards issue of unissued shares of Co. to the members of the company as fully paid bonus shares
(b) in writing off the preliminary expenses of Co.
(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares
or debentures of Co.
(d) in providing for the premium payable on redemption of any redeemable preference shares or of any
debentures of Co.
(e) for the purchase of its own shares or other securities under section 68.

2. Auditor has to ensure whether PPE has been valued appropriately and as per generally accepted
accounting policies and practices and also the entity has valid legal ownership rights over the PPE
claimed to be held by the entity and recorded in the financial statements . Explain how the auditor will
verify the same. [+ Dec’21]

Auditor has to ensure whether PPE has been valued appropriately and as per GAAP.

Value of fixed assets/ PPE depreciates due to efflux of time, use and obsolescence. Diminution of value
represents an item of cost to entity for earning revenue during a given period. Unless this cost in the
form of depreciation is charged to the accounts, profit or loss would not be correctly ascertained, and
values of PPE would be shown at higher amounts.

The auditor should:

Ø Verify that the entity has charged depreciation on all items of PPE unless any item of PPE is non-
depreciable like freehold land;
Ø Assess that the depreciation method used reflects the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity. It could be Straight line method,
diminishing value method, unit of production method, as applicable.
Ø The auditor should also verify whether mgt has done an impairment assessment to determine
whether an item of PPE is impaired as per AS 28 - Impairment of Assets.

To verify whether entity has valid legal ownership rights over the PPE claimed to be held by the entity
and recorded in F.S.
(i) In addition to procedures undertaken for verifying completeness of additions to PPE during period
under audit, auditor while performing testing of additions should also verify that all PPE purchase
invoices are in name of entity that entitles legal title of ownership to the respective entity.
(ii) For all additions to land and building in particular, auditor should check the conveyance deed/ sale
deed to verify whether entity is the legal and valid owner or not.
(iii) Auditor should insist and verify original title deeds for all immoveable properties held as at the
balance sheet date.
(iv) In case the entity has given such immoveable property as security for any borrowings and original
title deeds are not available with entity auditor should request entity’s management for obtaining a

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 CA Inter Audit by Shubham Keswani
confirmation from respective lenders that they are holding original title deeds of immoveable property
as security.
(v) In addition, auditor should also verify register of charges, available with entity to assess that any
charge has been created against PPE.

3. While checking sales of client, auditor has to ensure that all sales are accurately measured as per
applicable a/c standards and correctly journalized, summarized, and posted. Explain audit procedures
to ensure the same. [MTP Nov-22]

While checking sales of client, the auditor has to ensure that all sales are accurately measured as per
applicable accounting standards and correctly journalized, summarized, and posted.
The auditor can perform the following procedures to ensure the same.
• Trace a few transactions from inception to completion. (Examination in depth)
E.g: Take few sales transaction, and check from receipt of sales order to the payment of receivable
balance, every underlying document to ensure if it is properly recorded at every stage and
measured accurately taking into consideration all the incentives, discounts, if any. Recognition shall
be according to the revenue recognition policy of the entity.
• If the client is engaged in export sales, then compliance with AS 11 shall be ensured.
• Auditor must understand client’s operations and related GAAP issues e.g. point of sale revenue
recognition vs. percentage of completion, wherever applicable.
• Compare the rate of sales affected with related parties and review them for collectability, as well
as whether they were properly authorized and value of such transactions were reasonable and at
arm’s length.

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