COMPLETE CHECKLIST ON STATUTORY AUDIT

CHECKLIST ON STATUTORY AUDIT

A statutory audit is the prudent and mandatory requirement of law for the review of a company’s financial statements. It records to determine whether financial statements provide an accurate and fair view of its state of affairs.

It is a very comprehensive exercise and requires expert knowledge and experience of Chartered Accountants to conduct a statutory audit professionally.

Statutory Audit means a type of audit mandated by the law or a statute to make sure that the book of accounts is true and fair which is presented to the public and regulators. If the business meets certain criteria, then the statutory audit is mandatory. Generally, statutory audit means financial audit.

Statutory Audit Procedure:-

Statutory audit is required by industry regulators and government agencies. The statutory audit procedure is varied which includes the understanding of the operating environment and controls of a business entity. The procedure includes:

Understanding the Operating Environment: Learning about the industrial guidelines and the regulation criteria, the auditor checks whether they are ethical. Statutory audit procedure includes sending of questionnaires, checklists, surveys and also formal notifications.

Understanding Controls: A business entity’s control of operations is learnt by an auditor by asking the employees or even external auditors. Even reading industry publications or previous year audit report and working papers of the company will give operation control knowledge to the auditor.

Test Controls: In the statutory audit process, evaluation of corporate procedures by a specialist conducting regulatory audit and also operating mechanisms for fraud or prevention of error are included. Then they agree with industrial practises and standard set by the regulators. Those operating controls are adequate, performed properly and understood by all the employees who are involved in the process and they are also checked by the auditor.

Test Account Balances: They perform a test on account balances to check if the financial reports are error-free and comply with the regulatory standards, statutory principles and industry practise.

Test Account Details: The auditor then performs tests of accounts and balances on a bank or insurance company or even the hedge fund’s account balances to check that the audited statutory financial statements are accurate and complete.

STATUTORY AUDIT CHECKLIST:-

                                                      Balance Sheet

  1. Share Capital 
  • Whether there is any change in Shareholder’s pattern, if yes obtain the certified copies of the relevant resolution passed at the meeting of Board of directors, shareholders authorizing the increase/decrease in authorized share capital, if required, or paid-up share capital.
  • In case of change in capital verify whether paid-up share capital as at the year-end is within the limits of authorized capital.
  • Obtain and verify copies of forms filed with MCA (Form-SH-7 for an increase in authorized share capital, Form PAS-3 for an increase in paid-up capital) and with Reserve bank Of India Form FCGPR in case of Foreign Direct Investment (FDI) by a Non-Resident shareholder) and verify the number of securities issued along with the issue price.

2. Share Application Money

  • If there is any receipt of Share Application Money during the year, obtain copies of Share Application Forms evidencing the receipt of Share Application Money, if any.
  • Whether Share application money received in Cash or through the bank Communication with the management is neccasery.

3. Secured Loans 

  • Obtain a List of Secured Loan outstanding at year-end & Security details against the Loan.
  • Whether resolution has been passed for Loans(Secured/Unsecured)  in a Board meeting (BR) / General meeting (SR) as the case may be, compliance with section 179/ 180 of The Companies Act 2013.
  • Whether new secured Loan obtained during the year, obtain a copy of the resolution authorizing bank borrowing. with the compliance of section 179/ 180 of The Companies Act 2013.
  • Whether the client violates any term of repayment of the Loan? If yes, please prepare a list of EMI bounced, interest unpaid and period of defaults?
  • Whether term loan has been used for which it was obtained?
  • Whether the Loan is taken from any NBFC or any institution other than a bank, please check TDS is deducted on the payment of Interest payment?

4. Unsecured Loans

  • Obtain a List of Unsecured Loan outstanding at the year ended & Ledger accounts of all the loans to be extracted.
  • Whether the Company is having Debentures in its books of accounts or issued during the year? – Please obtain necessary documentation, e.g. Debenture holder agreement, debenture holders registers, conversion ratio, etc.

5. Duties & Taxes

TDS

  • Obtain a Copy of TDS challans about liability outstanding as of March 31st of the year and previous year liability.
  • Obtain TDS return form 24Q, 26Q, 27Q and 27EQ for all the quarters – Consolidated file from Traces.
  • Calculate TDS liability (in total) and its payment by the 7th of every month.
  • Whether Company has made any TDS default during the financial year? See Traces website for default.
  • Compute Interest on TDS and TDS delay payments, if any.

PF/ESI

  • Check applicability & Calculation of contribution of employer & employee.
  • Obtain Copy of all challans/Return, computation to be tallied and reconciled Bonus Act/ Gratuity Act
  • Check applicability & Calculation.
  • Obtain a Copy of all Return computations to be tallied and reconciled.

GST

  • Reconciliation of GSTR-3B or GST returns with books accounts regarding Output tax liability and input tax credit obtained.
  • Review whether the Company has made payment to its vendors within 180 days from the date of invoice on which the Company takes ITC.
  • Copy of LUT to be obtained for the year under review.
  • Reconciliation of Input Credit – invoice-wise with GSTR-2A to be obtained
  • Reconciliation of Sales / Service Income – invoice-wise as per books with GSTR-1 to be obtained.

6. Trade Payable

  • List of creditors at year-end.
  • List of creditors having Debit Balance as of March 31st and reason for debit balances.
  • List out the Old Balance & Non-Moving Balances & whether they are payable or not to be discussed with the client.
  • Obtain Balance Confirmations as of March 31st Every Year
  • Whether any creditor filed a legal case suit against the Company. Ask details from management and legal status of the case and relevant documents for the matter.
  • Whether advance to supplier made during the previous year is adjusted in the current year – if not, reason thereof and Copy of agreement with a supplier for such advance to review.

7. Creditors against expenses

  • Whether any expenses are due on March 31st, but payment is to be made after March 31st.
  • Whether the proper provision of such expenses is made at year-end.
  • Example: Salary of March month due is made by Company.

8. Other current Liabilities

  • Check whether the Company appropriately portion bifurcated of long term loan into current maturities of long-term debt.
  • Demand EMI sheet of long term loan.
  • Whether Company passed entry of interest accrued but not due on borrowings.
  • Unearned Income – whether the Company has received any income in advance -, please obtain a copy of the invoice next year to review whether it is about the year under review or next year?
  • Imprest with employees – review on a sample basis of imprest of all employees and keep the same in audit file to ensure all the expenses/reimbursement upto March 31st of the year is considered in books.

9. Provision

  • Computation of Provision for Gratuity where employee limit exceeds 10. Whether Actuarial Valuation is obtained by the client for the same.
  • Whether the Company has got registered its Gratuity Trust with Income Tax Authorities
  • Disclosure of retirement benefit to be done in notes to Account of the balance sheet
  • Whether The Company does leave encashment – please obtain a Copy of leave policy, if any.
  • The Company makes provision for encashable leave as per its computation or actuarial valuation.
  • Whether the Company has invested such funds from provision created in any investment?

10. Deferred Tax Assets / Liabilities

  • Working of Opening DTA/DTL to be verified for its reversal items, if any
  • Computation for DTA/DTL as of March 31st for the year under review to be computed in last.

11. Fixed Assets:-

  • List of additions in fixed assets during the year under review and Copy of each invoice to be obtained from the client and to be documented and Copy of Ledger to be taken.
  • Obtain Updated Fixed Assets Registers as of March 31st Of the Year
  • Whether The Company conducts physical Verification of Fixed Assets or not
  • If there is any variation in physical verification and as per books – whether the proper entry is passed in books or not
  • Depreciation calculation sheet & Method of depreciation used, To be tallied with Fixed Assets Register – if available.
  • Is there any change in the Method of depreciation, If yes, then ask the reason for the change.
  • Check whether any decrease or increase in value has been adjusted correctly in books of accounts due to a change in depreciation method.
  • Whether Residual Value is 5% in all cases of Fixed Assets – if not, please specify the reason
  • The useful life of assets complies with Schedule VII of the Companies Act or not – if not, has the Company obtained technical advice for the same or not.

12. Investments

  • Obtain a list of all investments held by the Company.
  • In respect of investments in shares, verify the year’s balance sheets under audit in respect of Invested Companies.
  • In case of investment in listed shares – Copy of all contract notes from the brokers to be obtained
  • Capital Gain / (loss) computation to be obtained and to be tallied with books of accounts
  • Whether investment in shares in any related party complies with Companies Act, 2013

13. Sundry debtors

  • Obtain the list of debtors for receivable more than six months from the due date of invoice and less than six months
  • Obtain the Copy of agreements with significant debtors.
  • Is there any credit policy in writing, Basis and limits (quantitative or financial) upto which credit sale can be contracted
  • Debtors more than six months are doubtful, If yes, make provision for doubtful debts or bad debts as the case may be.
  • Is there a procedure for obtaining balance confirmation and reconciliation of customers accounts at periodic intervals
  • Whether there any receivable which has been written off during the year with the approval of management, Reasons to be noted.
  • Subsequent realization from the debtor post-March 31st upto the date of audit to be obtained (invoice-wise)
  • Need to review whether the Company receives amount receivable from the debtor as of March 31st in Subsequent years upto the audit date.

14. Loans and advances

  • Is there any loan granted to Directors? If yes, obtain the list in a detailed format.

(Loan cannot be given to director & any person to whom director is interested as per section 185 of Company Act, 2013.)

  • Whether Loan has been granted to related party and relatives
  • Any loan has been given to Shareholders or any other person under section 186, Is there any violation of this provision of the Companies Act?
  • Board resolutions copy for Loan granted to any director & persons whom director is interested as per section 185 & 186 of the Companies Act 2013
  • Whether it is required to report under CARO UNDER 3(III)?
  • Verify that provision of sec 2(22)(e) applies to co.? If yes, work out the amount covered u/s.
  • Whether BOD and Copy of agreement appropriately authorize Loan and advance made to other.
  • Suppose loans and advances are made to others, whether good interest or return received from such party. TDS deducted by party reflected in 26AS of the Company.
  • In case of default in repayment of principal and interest on Loan and advances, whether the Company takes proper action against the party.

15. Security

  • In case the Company gives security to the party, obtain a security agreement from the party.
  • Verify security is refundable or not. Verify the agreement whether there is an agreement regarding returns on security and such return recognized in the book of Account.

16. Advance to Employee

  • Advance to an employee is appropriately authorized and adjusted adequately from the Salary.
  • Check whether advance adjusted in case of employee resigned the Company.
  • Obtain balance confirmation from an employee regarding the closing balance due to the employee.

17. Balance with the revenue authority

  • List of Amount Receivable from Revenue Authorities and verify its recoverability
  • Check whether income tax refund of any preceding year is processed by IT department and matched. Check income Tax site.
  • Obtain Copy of advance income tax challan paid.
  • Check validity and possibility of any refund due from govt.

18. TDS Receivable

  • Reconciliation of TDS and Service Income and Interest as per Form 26AS vis-à-vis Profit and Loss account and its respective TDS receivable.

19. Prepaid Expenses

  • Opening Prepaid Booked – expensed off during the year or not?
  • List of prepaid expenses – computation of prepaid expenses.

20. Cash

  • State the periodicity for keeping denomination-wise details by the Cashier – whether at the closing as on March 31st
  • Cash Expenses More than Rs 10,000 to one party in a day is not allowed under section 40A(3) of Income Tax 1961 is to be noted ( For Tax Audit)
  • Cash Receipt of more than Rs 2,00,000 from one party in a day is not allowed under section 269ST of Income Tax Act 1961 & is to be noted.
  • Are cash collections deposited into banks daily or every week?
  • Daily Closing Cash should have Dr Balance.
  • Signed Cash Balance Certificate to be obtained from Cashier and Director as well as on March 31st

21. Bank

  • Prepare Reconciliation details
  • Bank Confirmation in original to be obtained as of March 31st in respect of Current Account balance, Fixed Deposit Balance, Loan outstanding balance, and interest accrued thereon, if any.
  • In case of cheques deposited but not credited by the bank for more than three months, furnish details of date, party’s name and amount.
  • In case of cheques issued but not responded by the bank for more than 3 months, whether they are transferred to Unclaimed Deposits or entries are reversed.

22. Inventory

  • Whether Physical Verification of inventory is conducted at regular intervals? – if yes, report for the physical verification required.
  • whether the proper entry has been passed for any variance in books of accounts
  • Whether inventory has been shown on Cost or net realizable value, whichever is lower (As per AS 2)?
  • Is there any of Non-Moving Stock or slow-moving stock? If yes, then a provision is made thereon or not?
  • Net Realisable Value Test- Finished goods / Traded Goods to be verified by its selling price post-March 31st vis-à-vis cost taken on March 31st. If Selling Price is low, then Net Realisable Value should be done – Invoices for few Major Items and few non-moving items to be obtained and documented.
  • FIFO Basis Test – Value of Stock to be verified with latest purchase prices – valuation cost should be equal to that value based on the FIFO method
  • Direct Cost – such as Inward Freight, Electricity exp. (in case of Manufacturing) are being considered in the valuation of inventories or not.
  • Whether inventories contain any stock transfer from the branch office of the Company – whether any mark-up is embeded in the valuation of inventories
  • Quantitative details of principal items of goods traded (For Tax Audit purposes)

Profit and Loss Account

1. Revenue from Operations

  • Obtain Invoice-wise sales register required
  • Check GST compliance on advances received from debtors & whether a proper entry has been made in Account books.
  • Copy of invoices at least 15 to 20 to be obtained for various months for records.
  • Copy of agreement with customers to be reviewed and to be reconciled with Milestone invoicing for that year.
  • Unbilled Income to compute
  • Copy of Sales invoices and its delivery acknowledgement from the customer or freight receipt for the last week of March to be reviewed – in respect of cut off sale transaction – AS-9.

2. FD Interest Income

  • Obtain Interest Certificate from management?
  • Calculate the accrued interest on FD?
  • Whether proper TDS receivable is booked?

3. Dividend Income

  • Verify the holding through the DEMAT Account?
  • Who is the actual beneficiary & whether an investment is in the name of the Company?
  • Check the Bank statement on which the Dividend income was received?

4. Profit/{Loss} on sale of fixed assets

  • Management approval for selling or disposal of Fixed Assets?

5. Discount Received

  • Whether discount received booked by any Dr Note or based on agreement policy?
  • Go through the agreement with a vendor to understand the discount policy?
  • Whether proper entry has been made in the books of accounts?

6. Foreign currency fluctuation

  • List out the Outstanding Balance at year-end.

7. Purchase

  • Obtain the major agreements with the party & go through this
  • Whether the list of suppliers is maintained for regular items
  • Whether Company is sending an enquiry for more than one vendor
  • The purchase order should be there for every purchase.
  • Vouching for April, May and March for the year under review and April & May for Next year to be done.
  • Copy of invoices at least 15 to 20 to be obtained for various months for records along with a Copy of GR receipt.
  • Please review whether relevant purchases/expenses for sales made in March month are accounted for in books or not.

8. Salary

  • Go through the HR Policy & randomly examine the Salary as per CTC structure.
  • Check the TDS Compliance and cross-examine the investments claimed as a deduction in the computation of employees’ tax.
  • Whether Personnel Department has maintained individual Employees files? If Yes, Check whether the file contained all the documentation of identity and another regulatory requirement for the individual.
  • Whether Salary is paid by Cash or through Banking channel? List out the payments made through Cash.
  • Whether Payslip issued to employees shows the breakup of the Salary & all the deduction over therein?

9. ESI/PF/Bonus /Contribution Funds

  • Check PF/ESI/Bonus/Pension Act applicable to the Company

Verify the Employer/Employee Contribution to fund (eg.-PF & ESI )& check the Calculation

  • for the whole year or a month .
  • Verify the challans of ESI/PF/other Statutory funds & trace entries in books of accounts (Obtain Copy of challans).
  • Prepare the details of all statutory Payments (also Used in Tax Audit).

10. Legal Cases

  • Obtain the list of legal obligations pending as of March 31st & examine whether liability is required to be shown under Provisions or Contingent Liability.

11. Gratuity/Leave Encashment/ Other Benefits long term

  • Whether a provision is made for gratuity/Leave Encashment/ other employees benefits? If Yes, then verify the basis on which provision is made?
  • Obtain the Actuarial valuation report, LIC or actual Calculation from the client, if any & go through with the assumptions made by the actuary?

12. Full & Final settlement

  • Obtain the list of employees who joined during the year and resigned during the year
  • Please review F&F settlement payable or recoverable properly disclosed in books or not in case of employee resigned before March, but F&F is done post-March.

13. Actuarial Certificate

  • Please review the database provided to Actuarial for verifying data, for example, number of employees, their salaries, increment assumption – other actuarial assumptions.

14. Finance Cost

  • Check the Apportionment of Principal & Interest amount as per Loan Amortisation Schedule.
  • Whether TDS under section 194A has been deducted on the interest payment to NBFC or Individuals or corporates?
  • Whether proper entry has been made in the books of accounts?
  • Verify Company has charged other borrowing costs (loan processing fees) charged in finance costs?
  • If Company taken Loan in foreign currency whether applicable net gain/loss on foreign currency transactions and translation taken in books of Account.
  • Whether Borrowing Cost about capital expenditure – adequately capitalized or not?
  • Whether Unutilized funds during the construction period of assets reduced from the value of assets – should not be credited to Profit and Loss Account
  • Interest accrued but not due up to March 31st should be accounted for in books.

15. Expenses

  • List out the prior period Expenses which are booked during the year.
  • List out the expenses on which GST reverse charge applied & entered adequately in books of accounts.
  • Checking of TDS Compliance concerning expenses under Chapter XVII
  • Prepare the list of expenses on which prepaid is made.
  • Vouching of Expenses, Whether expenses are correctly signed, dated, serial number, invoice wise, tax invoice type to claim GST input etc.
  • List of Unsupported Voucher, Ask management to arrange the invoice; otherwise, such expenses cannot be booked into Account.
  • Personal Nature/Charity donation/club Expenses (For tax audit purpose)
  • Examine expense occurs regularly., For Ex. Electricity Exp. Booked every month or Salary exp. Booked every month.
  • Examine whether Company had made expense due entry at the year-end, For Ex. Salary of march month booked.
  • Examine whether Company passed expenses entry on a due basis. If Company passed entry through bank/cash, then ask management to first due to the expenses entry.
  • Check any expenditure of capital nature charge in revenue expenses.
  • Check whether GST tax input claim on any expenses.
  • Check such input claim in GST return in GSTR 3b.
  • Identify the expenses which are disallowed under Income Tax Act, 1961.
  • Standard Sizing Ratio and another management ratio to be computed for analysis purposes.

Notes to Accounts

  • Prepare the working of Foreign Income and Expenditure incurred during the FY (For Notes to Account)
  • Prepare the Related Party Transactions during the FY.

CS Tanuj Saxena

is a Qualified Company Secretary from Lucknow having a rich and Core expertise in Secretarial compliances of Companies, Nclt matters and Corporate Litigation matters.

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