11 Balance Sheet & SCE

8/10/2019 11 Balance Sheet & SCE

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BALANCE SHEET &

SCE

Prof. Dr Safdar A. Butt


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Types of Assets

Fixed AssetsIntangible Assets

InvestmentsCurrent Assets


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Fixed Assets: Auditors interest

Properly acquiredPhysical existence

Proper recordsOwnership

Valuation


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Acquisition of fixed assets

Verify if procedure is laid down and isreliableInitiation of purchase request

Approval processEvaluation of purchase requestBudget provision

Actual purchase processReceipt and record


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Physical Existence

Physical inspection is the best technique: Verify existence Verify condition and usage

Annual fixed assets inventory takingexercise undertaken by client:

Attend it if possible Verify its proceedings and records


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Records

Fixed assets register or other form of listingMarking of Individual assets

Vouch it on test check basis

Fixed assets ledger, or relevant accounts ingeneral ledger.

Compare these with fixed assets register Audit in depth the entries for the year (not likely to bemany)

Usage records e.g. plant register, vehiclesregister


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Ownership

Documents:Purchase agreementTitle deed / log book, etc.

Original invoice / payment evidenceCompare all these documents with recordsIf ownership not in company name, certificatefrom named owner.

Verify if the asset is under charge or lien. If so,examine all relevant documents to assessreasonableness of the charge.


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Valuation

If at book value: Verify cost and accumulated depreciation b/fRe-compute depreciation for in the year

At valuation by external or internal expert: Vouch valuation reportCheck reasonableness

Disclosure of basis of valuation in balancesheet


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Intangible Assets

Represent amounts spent: Against which a right, rather than a physicalasset, is acquired e.g. copyright, patents, etc.Whose benefit will be received not in the yearof expense but over a long period of time e.g.preliminary expenses

It is prudent to write off intangible assetsas soon as possible.


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Auditing Intangible Assets

Goodwill Vouch the documents that give rise togoodwill.

Reasonableness of amount still carriedCopyrights, Patents & Trade Marks:

Valuation (generally at costs incurred)

Ownership documents Validity periodPreliminary Expenses


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Investments

Verification:Get a schedule of investments.Compare the schedule with actual instruments

(documents) held.If held by third party, obtain certificate.

Purchases & Sales during the year: Verify procedure for purchasing & selling investments Audit in depth selected purchases/ sales, in particularapprovals, prices and payments


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Investments 2

Valuation at cost Verify cost of items bought in the year Verify audited opening balanceIf cost is below market value, proper note tothis effect.

Valuation at market value

Verify market value from appropriate sourceEnsure basis of valuation shown in balancesheet


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Receivables

Trade Receivables covered in Lecture 8Other Receivables:

PrepaymentsDeposits

Advances (mainly to employees) Audit Steps:

Examine documents relating to payment,checking authorizationObtain certification where deemed necessary


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Cash at Bank

Check bank statementsRelate it to cash book

Check Bank reconciliation statements,particularly those relating to month beforeand after the year end. Trace items inyear- end BRS to next months cash book. Obtain direct certificate from the bankswhere balances are significant.


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Cash in Hand

Physical inspection is the best technique.Obtain a list of all floats.

As far as possible all petty cash floatsshould be audited at the same time.Where check at exact year-end is not

possible, do it a day before or after andwork-back to year end figure.


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Liabilities Side ofBalance Sheet

Equity Authorized Share CapitalPaid Up Share CapitalReservesUn-appropriated Profits

LiabilitiesLong Term LiabilitiesShort Term, or Current, Liabilities


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Authorized Share Capital

Meaning & DisclosureTypes of shares

Ordinary sharesPreference sharesOther types of shares

Source of verificationMemorandum of AssociationCertificate of Incorporation


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Issued & Paid Up Share Capital

Verify that Issued and Paid Up ShareCapital is within Authorized Share Capitallimit.If not issued during the year, check theopening balances from last years auditedbalance sheet.


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Issue of shares

Approval from appropriate quarters:ShareholdersSECP

Other authorities where necessary (e.g. SBP)Study the terms and mode of issue

Documents related to the issueIssue to public or placementIssue price: Par or Premium

Auditor must ensure that all legal requirements arebeing met even before the issue is made


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Issue of Shares Against Cash

Verify procedure for issue, particularly publicissue.If several banks are involved, check all

statements Verify entries in cash book and share capitalaccount.For shares issued on premium, ensure that the

premium is credited to Share Premium Accountand this is shown as a Capital Reserve inBalance Sheet.


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Issue of Shares:Consideration other than Cash

Need for such issues: AssetsFees and Re-imbursement of expenses

Verify the reasonableness of issueCheck if approvals are in place

Audit in depth of consideration Verify entries in share capital account andasset/expense accounts.


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Issue of Bonus Shares

Check if meets legal requirements Availability of profits Allowed by Articles of Association Approved by shareholdersDisclosure in related documents

Verify accounting entries Verify actual process of issue


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Share Transfers

Verify that all legal formalities are met. Verify share transfer requests, comparingthem with related documents like notefrom broker, CDC, share registrar, etc.

Verify that each document is approved byduly authorized official.

Verify entries in the share register


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Reserves: Types

Capital ReservesCannot be distributed as profit, e.g. sharepremium

Revenue Reservesgenerally created out of profits, remaindistributable at all times

Statutory ReservesCreated to meet some legal requirement.


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Auditing Capital Reserves

If created in previous years, verifyopening balance.If created during the year:

Check all relevant documents, e.g. revaluationcertificate, share issue offer at premium, etc.In case of share premium, also verify actualreceipt of premium.


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Auditing Revenue Reserves

Check opening balances Verify transfers from or to P & L Appropriation Account during the year:

Legality of transfers Approval of transfersReasonableness

Actual accounting entries


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Auditing Statutory Reserves

Check opening balances Verify transfers from or to P & L Appropriation Account during the year:

Legality of transfers Approval of transfersReasonableness

Actual accounting entries


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Audit ofLong Term Liabilities 1

If raised in previous years: Verify opening balances Verify payments during the year, if any Verify transfers to Current Liabilities, if any Verify if terms of the loan are being metDirect confirmation of balance


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If raised during the year:Check all loan documents

Loan agreementPublic floatation of debentures documentPledge or mortgage documents

Check related documents e.g.Companys Memorandum of Association

Articles of AssociationRelevant laws

Verify approvals from appropriate personsResolution at Board level for larger loans


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Verify actual receipt of fundsCash Book, bank statement, etc for directreceiptExternal confirmation where payment hasbeen made to a supplier

Verify if any discount or premium on issue, or

floatation costs are involved. If so, theseshould be in accordance with loan agreement.

Direct confirmation of balance


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Audit of Current Liabilities

Trade CreditorsBills Payable

Bank overdraft Accrued ExpensesUnearned Incomes


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Trade Creditors

Get a schedule of creditorsCompare it with Creditors Ledger

Vouch some balances in detail:Trace entries to nominal/stock ledgersEntries during the last/next few days

Seek direct confirmation


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Bank Overdraft

Verify loan agreementEssentially this would be covered underaudit of cash transactionsCheck and compare:

Balance per cash bookBalance per bank statementBank reconciliation statement

Direct confirmation


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Accrued Expenses

Check the documents giving rise to theliability, e.g. bills, invoices, serviceagreement, etc.Re-compute the amount being accrued.Check reasonableness of the amountFollow through in next month to ensurethat it is paid


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Unearned Incomes

Check the documents giving rise to thedemand, e.g. invoice, agreement, etc.Re-compute the amount being accrued.Check reasonableness of the amountFollow through in next month to ensurethat it is received, i.e. it was not a put upentry.


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Statement of Changes in Equity

All entries come from either incomestatement, cash flow statement oropening and closing balance sheets.Simply verify individual entries and checkthe arithmetical accuracy.

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Thank you

Dr Safdar A Butt

11 Balance Sheet & SCE

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Transcript of 11 Balance Sheet & SCE