BALANCE SHEET &

SCE
Prof. Dr Safdar A. Butt

Types of Assets

Fixed Assets
Intangible Assets
Investments
Current Assets

Fixed Assets:
Auditors interest

Properly acquired
Physical existence
Proper records
Ownership
Valuation

Acquisition of fixed assets

Verify if procedure is laid down and is

reliable
Initiation of purchase request
Approval process

Evaluation of purchase request

Budget provision

Actual purchase process

Receipt and record
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Physical Existence

Physical inspection is the best technique:

Verify existence
Verify condition and usage

Annual fixed assets inventory taking

exercise undertaken by client:

Attend it if possible
Verify its proceedings and records

Records

Fixed assets register or other form of listing

Fixed assets ledger, or relevant accounts in

general ledger.

Marking of Individual assets

Vouch it on test check basis

Compare these with fixed assets register

Audit in depth the entries for the year (not likely to be
many)

Usage records e.g. plant register, vehicles

register
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Ownership

Documents:

Purchase agreement
Title deed / log book, etc.
Original invoice / payment evidence
Compare all these documents with records

If ownership not in company name, certificate

from named owner.
Verify if the asset is under charge or lien. If so,
examine all relevant documents to assess
reasonableness of the charge.
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Valuation

If at book value:

At valuation by external or internal expert:

Verify cost and accumulated depreciation b/f

Re-compute depreciation for in the year
Vouch valuation report
Check reasonableness

Disclosure of basis of valuation in balance

sheet
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Intangible Assets

Represent amounts spent:

Against which a right, rather than a physical

asset, is acquired e.g. copyright, patents, etc.
Whose benefit will be received not in the year
of expense but over a long period of time e.g.
preliminary expenses

It is prudent to write off intangible assets

as soon as possible.
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Auditing Intangible Assets

Goodwill

Copyrights, Patents & Trade Marks:

Vouch the documents that give rise to

goodwill.
Reasonableness of amount still carried
Valuation (generally at costs incurred)
Ownership documents
Validity period

Preliminary 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 particular
approvals, prices and payments

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Investments 2

Valuation at cost

Verify cost of items bought in the year

Verify audited opening balance
If cost is below market value, proper note to
this effect.

Valuation at market value

Verify market value from appropriate source

Ensure basis of valuation shown in balance
sheet
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Receivables

Trade Receivables covered in Lecture 8

Other Receivables:

Prepayments
Deposits
Advances (mainly to employees)

Audit Steps:

Examine documents relating to payment,

checking authorization
Obtain certification where deemed necessary
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Cash at Bank

Check bank statements

Relate it to cash book

Check Bank reconciliation statements,

particularly those relating to month before
and after the year end. Trace items in
year-end BRS to next months cash book.
Obtain direct certificate from the banks
where 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 floats
should be audited at the same time.
Where check at exact year-end is not
possible, do it a day before or after and
work-back to year end figure.

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Liabilities Side of
Balance Sheet

Equity

Authorized Share Capital

Paid Up Share Capital
Reserves
Un-appropriated Profits

Liabilities

Long Term Liabilities

Short Term, or Current, Liabilities
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Authorized Share Capital

Meaning & Disclosure

Types of shares

Ordinary shares
Preference shares
Other types of shares

Source of verification

Memorandum of Association
Certificate of Incorporation
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Issued & Paid Up Share Capital

Verify that Issued and Paid Up Share

Capital is within Authorized Share Capital
limit.
If not issued during the year, check the
opening balances from last years audited
balance sheet.

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Issue of shares

Approval from appropriate quarters:

Shareholders
SECP
Other authorities where necessary (e.g. SBP)

Study the terms and mode of issue

Documents related to the issue

Issue to public or placement
Issue price: Par or Premium
Auditor must ensure that all legal requirements are
being met even before the issue is made
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Issue of Shares Against Cash

Verify procedure for issue, particularly public

issue.
If several banks are involved, check all
statements
Verify entries in cash book and share capital
account.
For shares issued on premium, ensure that the
premium is credited to Share Premium Account
and this is shown as a Capital Reserve in
Balance Sheet.
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Issue of Shares:
Consideration other than Cash

Need for such issues:

Assets
Fees and Re-imbursement of expenses

Verify the reasonableness of issue

Check if approvals are in place
Audit in depth of consideration
Verify entries in share capital account and
asset/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 shareholders
Disclosure 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, comparing
them with related documents like note
from broker, CDC, share registrar, etc.
Verify that each document is approved by
duly authorized official.
Verify entries in the share register

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Reserves: Types

Capital Reserves

Revenue Reserves

Cannot be distributed as profit, e.g. share

premium
generally created out of profits, remain
distributable at all times

Statutory Reserves

Created to meet some legal requirement.

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Auditing Capital Reserves

If created in previous years, verify

opening balance.
If created during the year:

Check all relevant documents, e.g. revaluation

certificate, share issue offer at premium, etc.
In case of share premium, also verify actual
receipt 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 transfers
Reasonableness
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 transfers
Reasonableness
Actual accounting entries

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Audit of
Long 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 met
Direct confirmation of balance

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Audit of
Long Term Liabilities 2

If raised during the year:

Check all loan documents

Check related documents e.g.

Loan agreement
Public floatation of debentures document
Pledge or mortgage documents
Companys Memorandum of Association
Articles of Association
Relevant laws

Verify approvals from appropriate persons

Resolution at Board level for larger loans

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Audit of
Long Term Liabilities 3

Verify actual receipt of funds

Cash Book, bank statement, etc for direct

receipt
External confirmation where payment has
been made to a supplier
Verify if any discount or premium on issue, or
floatation costs are involved. If so, these
should be in accordance with loan agreement.

Direct confirmation of balance

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Audit of Current Liabilities

Trade Creditors
Bills Payable
Bank overdraft
Accrued Expenses
Unearned Incomes

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Trade Creditors

Get a schedule of creditors

Compare it with Creditors Ledger
Vouch some balances in detail:

Trace entries to nominal/stock ledgers

Entries during the last/next few days

Seek direct confirmation

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Bank Overdraft

Verify loan agreement

Essentially this would be covered under
audit of cash transactions
Check and compare:

Balance per cash book

Balance per bank statement
Bank reconciliation statement

Direct confirmation
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Accrued Expenses

Check the documents giving rise to the

liability, e.g. bills, invoices, service
agreement, etc.
Re-compute the amount being accrued.
Check reasonableness of the amount
Follow through in next month to ensure
that it is paid

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Unearned Incomes

Check the documents giving rise to the

demand, e.g. invoice, agreement, etc.
Re-compute the amount being accrued.
Check reasonableness of the amount
Follow through in next month to ensure
that it is received, i.e. it was not a put up
entry.

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Statement of Changes in Equity

All entries come from either income

statement, cash flow statement or
opening and closing balance sheets.
Simply verify individual entries and check
the arithmetical accuracy.

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Thank you
Dr Safdar A Butt

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