Chapter 5D

CA Rishabh Jain Statement of Profit & Loss Captions Chapter - 5D
STATEMENT
OF PROFIT AND
LOSS CAPTIONS
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Chapter - 5D Statement of Profit & Loss Captions CA Rishabh Jain
SALE OF PRODUCTS AND SERVICES
1) The sales and collections cycle in a business refers to the set of processes that begin when a
customer purchases goods or services and ends when the entity receives complete payment
against the sales.
2) As part of the year-end audit of an entity's financial statements, auditors test sales
transactions and the internal controls over those transactions to ensure that the entity is not
materially misstating its revenues or accounts receivable.
3) Auditor needs to obtain a clear understanding about the organization and its revenue centers.
To understand the same, he should consider the following:
a) An auditor needs to obtain an understanding of the management control (internal
control) in respect of sales process.
b) An auditor tests the controls the entity has set up for the sales cycle to determine how
strong and reliable they are. If they are strong and operating effectively, the auditor
can reduce the extent of substantive testing. Any deficiencies in the internal control shall
be communicated as per SA 265.
c) The auditor selects a random sample of transactions and examines the related customer
purchase orders, invoices and customer statements to ensure that the control being
tested is a numbered sales invoice. This will enable the auditor to determine the nature,
timing and extent of his substantive procedures to be applied.
d) Performing substantive audit procedures is must. Substantive analytical procedure will
consist of sales trend analysis, comparison with previous accounting period, category
wise sales analysis, any analysis the auditor may find relevant and most important of all
building a sales expectation and compare that with the client's sales records.
e) The auditor will need to know the sales prices of the products or services over the year,
monthly average sales price per product or service, discount policy.
The below table summarises the audit procedures generally required to be undertaken while
auditing sales:
Assertions Explanation
Occurrence Recorded sales represent goods shipped / services performed

during the period
Completeness & All sales made during the period were recorded and there in no
Cut-Off understatement or overstatement.
Measurement All sales are accurately measured as per applicable accounting

standards and correctly journalized, summarized, and posted
Presentation and Required disclosures for sales have been appropriately made
Disclosure
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Occurrence
1) Ensure revenue is not overstated by performing following audit procedures:
a) Check whether a single sales invoice is recorded twice or a cancelled sales invoice could
also be recorded.
b) Test check few invoices with their relevant entries in sales journal.
c) Obtain confirmation from few customers to ensure genuineness of sales transaction.
d) Whether any fictitious customer and sale has been recorded.
e) Whether any shipments were done without the consent and agreement of the
customer, especially at the year end to inflate the sales figure.
f) Whether unearned revenue recorded as earned.
g) Whether any substantial uncertainty exists about collectability.
h) Whether customer obligations are contingent on other actions (financing, resale, etc.).
2) Review sequence of sales invoices
3) Review journal entries for unusual transactions
4) Calculate the ratio of sales return to sales and compare it with previous year and enquire for
the reasons for increase/ decrease.
5) Check the sales return with sales invoice, challan, credit note, stock register, etc.
Completeness & Cut-Off

a) Perform cut-off test to ensure that revenues are recognised in the current accounting period
and sales were not tampered towards the period end.
b) Cut- off errors will usually arise when companies recognise revenue based on the date on
which the sales invoices are generated rather than the date on which the risks and rewards
are transferred to the buyer.
c) In order to perform a robust sales cut-off test, auditors need to understand and consider the
specific cut- off error risk of each engagement.
d) Auditors should also verify the “Credit notes” issued after the accounting period.
e) Sometimes sales team or sales personnel can make fictitious sales before the year-end to meet
performance target and cancel out those sales with a post year end credit note.
f) Trace from the shipping documents to the sales journal
g) Check whether quantity is appearing in sales register or not and check reconciliation of total
sales/goods dispatched as per stock records and financial records and statutory records like
GST.
h) Review GST tax and GST returns and ensure that the same are reconciled with revenue
reported in the profit and loss account. Verify reasonability say of GST by applying the
applicable rate to the gross sales value and compare the amount of GST as per statutory
returns and analyze the reasons for variance, if any.
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Measurement
a) Trace a few transactions from inception to completion. Example: Take few sales transaction,
and check from the 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. The recognition shall
be according to the revenue recognition policy of the entity.
b) If the client is engaged in export sales, then compliance with AS 11 shall be ensured
c) Auditor must understand client's operations and related GAAP issues e.g. point of sale
revenue recognition vs. percentage of completion, wherever applicable.
d) Compare the rate of sales affected with related parties and review them for collectability, as
well as whether they were properly authorized and the value of such transactions were
reasonable and at arm's length.
Presentation & Disclosure

1) Ensure whether the following disclosures as required under Schedule III (Part II) to
Companies Act, 2013 have been made:
(A) In respect of a company other than a finance company revenue from operations shall
disclose separately in the notes revenue from—
(a) Sale of products;
(b) Sale of services;
(ba) Grants or donations received (relevant in case of section 8 companies only),]
(c) Other operating revenues;
Less:
(d) Excise duty.
(B) In respect of a finance company, revenue from operations shall include revenue from—
(a) Interest; and
(b) Other financial services.
2) Revenue under each of the above heads shall be disclosed separately by way of notes to
accounts to the extent applicable.
a) Whether brokerage and discount on sales other than usual trade discount has been
disclosed.
b) Whether the transactions with related parties are appropriately disclosed in notes to
accounts.
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OTHER INCOME COMPRISING INTEREST INCOME, DIVIDEND

INCOME, GAIN / LOSS ON SALE OF INVESTMENTS ETC.
Any form of income earned by an entity which is not linked to the entity's core business operations
is generally classified as other income.
Examples – interest on excess funds parked in fixed deposits with banks (the entity not being a bank
or financial institution), interest on loans given to third parties/ within the group, return on mutual
fund investment etc.
1) Interest income on fixed deposits is recognized on a time proportion basis taking into account
the amount outstanding and the applicable interest rate.
2) Dividends are recognised in the statement of profit and loss only when:
a) the entity's right to receive payment of the dividend is established;
b) it is probable that the economic benefits associated with the dividend will flow to the
entity; and
c) the amount of the dividend can be measured reliably.
3) Gain/(loss) on sale of investment in mutual funds is recorded as other income on transfer of
title from the entity and is determined as the difference between the redemption price and
carrying value of the investments.
Assertions
Occurrence
Completeness
Measurement
Presentation
and Disclosure
Interest Income
For verifying interest income on fixed deposits:
a) Obtain a listing of fixed deposits opened during the period under audit along with the
applicable interest rate and the number of days for which the deposit was outstanding during
the period.
b) Verify the arithmetical accuracy of the interest calculation made by the entity by
recomputing i.e. multiplying the deposit amount with the applicable rate and number of days
during the period under audit.
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c) For deposits still outstanding as at the period- end, trace the same to the direct confirmation
obtained from the respective bank/ financial institution.
d) Obtain a confirmation of interest income from the bank and verify that the interest income as
per bank reconciles to the calculation shared by the entity.
e) Also, obtain a copy of Form 26AS (TDS withholding by the bank / financial institution) and
reconcile the interest reflected therein to the calculation shared by client.
Dividend Income
For Dividends, verify that the same are recognised in the statement of profit and loss only when the
entity's right to receive payment of the dividend is established.
Gain / (loss) on sale of Investment in Mutual Funds

Verify that Gain / (loss) on sale of investment in mutual funds is recorded as other income only on
a) transfer of title from the entity and
b) is determined as the difference between the redemption price and carrying value of the
investments.
For the purpose, obtain the mutual fund statement and trace the gain / loss as recorded in the
books of account to the gain / loss as reflected in the statement.
Presentation and Disclosure

Ensure whether the following disclosures as required under Schedule III (Part II) to Companies
Act, 2013 have been made:
Other income
Other income shall be classified as:
(a) Interest Income (in case of a company other than a finance company);
(b) Dividend Income;
(c) Net gain/loss on sale of investments;
(d) Other non-operating income (net of expenses directly attributable to such income).
NOTE: TO BE DISCLOSED AS ADDITIONAL INFORMATION
Undisclosed income
The Company shall give details of any transaction not recorded in the books of accounts that has
been surrendered or disclosed as income during the year in the tax assessments under the Income
Tax Act, 1961 (such as, search or survey or any other relevant provisions of the Income Tax Act,
1961), unless there is immunity for disclosure under any scheme and also shall state whether the
previously unrecorded income and related assets have been properly recorded in the books of
account during the year.
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PURCHASES
1) Purchases are another significant process of an entity. Similar to sales as discussed above,
purchases and disbursement cycle in a business refers to the set of processes that begin when
an order for buying goods or services is placed based on requirements of the production / user
department and ends when the entity received the product and makes complete payment to the
vendor.
2) As part of the year-end au dit of an entity's financial statements, auditors test purchase
transactions and the internal controls over those transactions to ensure that the entity is not
materially misstating its purchases or accounts payables.
3) Auditor needs to obtain a clear understanding about the organisation and its production
centres.
For Example: Type of services or products they procure that are used in the production /
rendering of services, sources of procurement whether domestic or overseas, general
availability and terms and conditions of purchase of the service or products, major vendors,
credit period, quality checks, purchase terms (Credit or cash purchase) etc.
Auditor should consider the following:

1) An auditor needs to identify the control points over purchases e.g.
a) whether segregation of duties exist,
b) whether competitive quotes are invited,
c) whether a purchase committee exists who authorises purchase price,
d) who issues and authorizes purchase orders,
e) when and how the goods are received and acknowledged,
f) who checks the quality, quantity and specifications of the goods received and prepares
Goods Receipt Note (GRN),
g) who approves the vendor invoice,
h) whether a 2 way / 3 way match process exists (i.e. tally between purchase order, GRN and
vendor invoice),
i) how the purchases have been recognized in the system.
2) An auditor tests the controls the entity has set up for the purchase cycle to determine
whether they are effective or not.
3) If the controls are effective, the auditor can reduce the extent of substantive testing.
4) Common internal controls over the purchase cycle include
a) inviting of competitive quotations for shortlisting the vendor,
b) numbered purchase orders,
c) purchase order authorization over a certain limit,
d) generation of GRN on receipt of goods,
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e) quality inspection of goods,

f) 2 way / 3-way match,
g) authorization of purchase invoices.
h) appropriate authority to recognise the purchases in the system.
5) The auditor selects a random sample of transactions and examines the related purchase
orders, GRN, purchase invoices, inward gate entry register and vendor reconciliation/
statements.
6) Performing substantive audit procedures is must. Substantive analytical procedure will
consist of purchase trend analysis, comparison with previous accounting period, category
wise purchases, any analysis auditor may find relevant and most important of all setting a
purchase expectation in relation to the sales made during the period under audit and compare
that with the client's purchase records.
7) The auditor would need to know the purchase prices of the products or services over the year,
monthly average purchase price per product or service etc.
For Example: If the purchase price is 100 and if 15000 units were received under multiple
orders during the year, the auditor expects the purchases to be 15,00,000. If there is a
variance in the amount recorded in the books, he shall check for additional details like discounts
received, change of purchase price for few orders due to excess demand etc.
The below table summarizes the audit procedures generally required to be undertaken while
auditing purchases:
Occurrence Recorded purchases represent goods actually received / services

availed during the period
Completeness & All purchases made during the period were recorded and there in
Cut-Off no understatement or overstatement.
Measurement All purchases have been measured appropriately
Presentation and Required disclosures for purchases have been appropriately made
Disclosure
Occurrence
Ensure purchases are not understated / overstated by performing following audit procedures:
a) Whether any fictitious vendors have been booked or purchases have been recorded by
reviewing the vendor selection process followed by the entity and also performing procedures
to ensure existence of the vendors.
b) Whether the goods were received at the factory gate and whether there exists an entry in
the security gate inward register
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c) Whether quality inspection of goods was done

d) Whether a goods receipt note was prepared and signed by an appropriate client personnel
e) Whether the purchase invoice was approved as per delegation of authority and whether a 3 or
2-way match (as discussed above) was done
f) Whether stock record has been updated by the stores personnel.
Special considerations during audit of purchases

a) The purchase invoice received should be the "Original" copy (and not photocopy / carbon copy)
against which the entity has recorded the purchase in its books of account.
b) Purchase invoice should have been booked only once risk and reward incidental to ownership
has been transferred to the entity. Specific consideration for cases where the terms of
delivery as agreed with vendor are F.O.B., C.I.F. etc.
c) Purchase invoice should be in the name of entity. However, in case of different branches, it
should be addressed to the appropriate branch.
d) Input tax component should have been booked in the input tax ledger, the auditor should obtain
a copy of the input tax returns filed with the authorities and tally the input tax as reflected in
the books to the amount disclosed in the returns.
e) In case of purchases made from related parties or allied and associated concerns, the auditor
needs to verify if requisite approval from Board of Directors (appropriate authority) has been
obtained and should verify the selected samples and perform analytical procedures in relation
to price of goods to confirm that the price charged is at arm's length.
f) The auditor should review whether purchases should be capitalized or expensed off in
Statement of Profit and loss according to his professional judgment.
g) Review journal entries for unusual transactions.
Completeness & Cut-Off

In addition to the procedures for establishing occurrence of purchases as discussed above, the
auditor should:
a) Perform cut-off test to ensure that purchases are recognised in the correct accounting
period.
b) For the purpose, the auditor should examine material inward records say last 5 transactions
at the period end to check that all corresponding invoices have been duly entered in the
Purchases book and none have been omitted.
c) Ensure correct accounting treatment of goods - in - transit as per the agreed terms with the
vendor regarding transfer of risk and reward of ownership in goods.
d) Obtain written representation from the management that all the purchases that took place
during the year have been properly recorded in the books.
Measurement
Perform analytical procedures to obtain audit evidence as to overall reasonableness of purchase
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quantity and price which may include:

a) Consumption Analysis: Auditor should scrutinize raw material consumed as per manufacturing
account and compare the same with previous years with closing stock and ask for the reasons
from Management If any significant variations found.
b) Stock Composition Analysis: Auditor to collect the reports from management for composition
of stock i.e. raw materials as a percentage of total stock and compare the same with previous
year and ask for reasons from management in case of significant variations.
c) Ratios: Auditor should compare the creditors turnover ratios and stock turnover ratios of the
current year with previous years.
d) Auditor should review quantitative reconciliation of closing stocks with opening stock,
purchases and consumption.

a) Whether purchases of stock-in-trade has been specifically disclosed
b) Whether changes in inventories of finished goods, stock–in-trade and work- in-progress have
been specifically disclosed.
c) Whether the transactions with related parties are appropriately disclosed in notes to
accounts.
EMPLOYEE BENEFITS EXPENSE
1) Employee benefits expenses or commonly called as payroll expenses represents the aggregate
sum an entity pays as a consideration to its employees for their labour / efforts, along with
associated expenses such as perquisites/ benefits, postemployment benefits like gratuity,
superannuation, leave encashment, provident fund contribution etc. as well as towards their
hiring, their welfare and training.
2) In many industries, employee benefit expense is the biggest expense category and hence, it is
critical for businesses to manage this expenditure shrewdly and for the auditors, to verify
and ensure that such expenditure is appropriate and has been accounted as per applicable
accounting standards and generally accepted accounting principles.
Auditor needs to obtain a clear understanding about the organisation and its hiring, appraisal
and retirement process in the following manner:
a) An auditor tests the controls the entity has set around employee benefit payment process to
determine how effective they are. If they are effective, the auditor can reduce the
substantive testing.
b) Common internal controls over the employee benefit payment cycle includes
(i) maintaining of attendance records,
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(ii) employee master,

(iii) authorisation and approval of monthly payroll processing and
(iv) disbursement,
(v) computation of employee deductions like payroll taxes,
(vi) accrual of other benefits like gratuity, leave encashment, bonus etc.
c) The auditor selects a random sample of transactions and examines the related appointment
letters, appraisal letters, attendance records, HR policies, employee master etc.
d) Performing substantive audit procedures is must. Substantive analytical procedure will consist
of monthly expense reasonability, comparison with previous accounting period, any analysis
auditor may find relevant and most important of all setting an expectation in relation to the
expense incurred during the period under audit and compare that with the client's business
operations and overall trend in the industry.
auditing employee benefits expense:
Occurrence Recorded emplyee

Recorded benefit
employee expenses
benefit werewere
expenses actually incurred
actually duringduring
incurred
the period
the period
Completeness Employee benefitexpenses

Employee benefit expenses pertaining
pertaining toperiod
to the the have
period have been
been
recorded appropriately.
recorded appropriately.
Measurement Employee
Employee benefit expenses
benefit have have
expenses been measured appropriately.
been measured appropriately.
There in no understatement or overstatement.
There in no understatement or overstatement.
Presentation and Required

Required disclosures
disclosuresforfor
employee benefit
employee expenses
benefit have been
expenses have been
Disclosure appropriately made
appropriately made
Occurrence & Completeness

a) Obtain an understanding of entity's process of capturing employee attendance.
b) There is always a risk that an entity could record expense for fictitious employees.
c) To address this risk, the auditor may choose to meet the employees in person, on a sample
basis.
d) Further, the auditor may choose to select a sample of employees and ask the payroll
department to share their bank details / identity proofs of the employees.
e) Obtain a list of employees as at the period- end along with a monthly movement split between
new hires, leavers and continuing employees.
f) For a sample (selected randomly) of new hires, obtain the appointment letter and verify
whether the salary for first month and subsequent months was processed as per the agreed
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terms.
g) For a sample (selected randomly) of resigned employees, obtain their full and final
computation and verify whether all their dues including post-retirement benefits like
gratuity, leave encashment have been paid and whether the respective employee's
acknowledgement on final computation has been obtained.
Measurement
a) Obtain the monthly salary registers for all 12 months. Compile a monthly payroll reasonability
by calculating the average salary per employee per month and compare with the previous year
and preceding month and analyses the reasons for variance which could be attributable to
annual increments, an employee at senior level joining/ leaving the entity, bonus pay-out etc.
b) Verify if accrual/ provision has been made for all employee benefits and obligations like
bonus, gratuity, leave encashment etc.
c) In case Provident Fund (PF), Employee State Insurance (ESI) are applicable to the entity,
compile a reasonability by applying the rate to the basic wages and comparing to the amount
recorded in books and analyses reasons for variance, if any.
d) Also, obtain monthly deposit challans to verify if the month on month liability was subsequently
deposited with the authorities and within the defined timelines.
e) Perform analytical procedures to obtain audit evidence as to overall reasonableness of
employee benefit expense which may include production per employee analysis.
f) Auditor should analyse units produced per employee and compare the same with previous years
and present industry trends and ask for the reasons from Management, if any significant
variations are found.

(a) Employee Benefits Expense [showing separately
(i) Salaries and wages,
(ii) Contribution to provident and other funds,
(iii) Expense on Employee Stock Option Scheme (ESOP) and Employee Stock Purchase Plan
(ESPP),
(iv) Staff welfare expenses].
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DEPRECIATION AND AMORTISATION

1) One of the key principles of accrual basis of accounting requires that an asset's cost is
proportionally expensed based on the period over which the asset is expected to be used.
2) Both depreciation and amortization are methods that are used to prorate the cost of a
specific type of asset over its useful life.
3) Depreciation represents systematic allocation of the depreciable value of an item of PPE
over its useful life while amortisation represents systematic allocation of the depreciable
amount of an intangible asset over its useful life.
4) Depreciation and amortisation generally constitute an entity's significant part of overall
expenses and have direct impact on the profit/ loss of the entity, hence, auditors need to verify
and ensure that such expenditure is appropriate, accurately calculated and has been
accounted as per applicable provisions of Companies Act or other statutes, to the extent
applicable on the respective industry and as per generally accepted accounting principles.
Auditor needs to consider the following attributes while verifying for depreciation and
amortisation expenses:
a) Obtain the understanding of entity's accounting policy related to depreciation and
amortisation.
b) Ensure the Company policy for charging depreciation and amortisation is as per the relevant
provisions of Companies Act/applicable accounting standards.
c) The accounting policy has been applied consistently year on year. Any change in the accounting
policy has been adequately disclosed.
d) Whether the depreciation has been calculated after making adjustment of residual value from
the cost of the assets.
e) Whether depreciation and amortisation charges are valid.
f) Whether depreciation and amortisation charges are accurately calculated and recorded.
g) Whether all depreciation and amortisation charges are recorded in the appropriate period.
h) Whether each part of an item of PPE with a cost that is significant in relation to the total cost
of the item have been depreciated separately.
For Example: It may be appropriate to depreciate separately the airframe and engines of an
aircraft, whether owned or subject to a finance lease.
I) Whether the most appropriate depreciation method for each separately depreciable
component has been used.
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auditing depreciation and amortization expense:
Assertions
Completeness
/
Measurement d
Occurrence y
Presentation and
disclosure
Completeness & Occurrence

a) Obtain an understanding of entity's process of charging depreciation and amortization.
b) Obtain the fixed asset register maintained by the entity.
c) There is always a risk that an entity could capitalize expense of revenue nature to increase
its profit or charge capital expenditure directly in income and expense statement to reduce
its profit.
d) To address this risk, the auditor may choose to check the nature of asset from fixed asset
register and further, there is always a risk that fake asset has been capitalized in the books
and to mitigate this risk, auditors should physically verify the fixed assets, at least the ones
that are material in value.
Measurement
a) Obtain a list of all additions / deletions along with their proper approval from the authorised
person for the same.
b) Select the sample of assets from the Fixed Assets Register, on materiality considerations and
verify the rates of depreciation, depreciation calculation.
c) Obtain the list of all the components identified by the management.
d) Ensure Intangible assets like patents, goodwill, copy rights have been properly amortized
over the period.
e) Ensure depreciation is charged on the assets from the date when it is ready to use. and not
from the date of actual usage. In other words, depreciation of an asset begins when it is
available for use, i.e., when it is in the location and condition necessary for it to be capable of
operating in the manner intended by the management.
f) Ensure depreciation on revalued amount has been properly accounted from revaluation
reserve.
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g) Depreciation computation as per Income tax Act, 1961- Ensure that additions are tallying
with the additions as per Companies Act and the opening WDV to the Tax audit schedule for
the assessment year preceding the previous year under audit.
h) Perform analytical procedures to obtain audit evidence as to overall reasonableness of
depreciation and amortisation expense- check the arithmetical accuracy of records and
perform independent calculations example- compute or re-compute the depreciation expense
for the year
i) Ensure that the depreciation and amortization has been charged as per the useful lives of PPE
and intangible assets.
j) Ensure that residual values have been properly verified as that impacts the computation of
depreciation.
k) Ensure that the depreciation and amortization has been computed prospectively whenever
there is any change in useful lives of PPE and intangible assets.

Ensure whether the following disclosures as required under have been made:
a) Accounting policy for depreciation and amortization
b) Useful lives of assets as per schedule II to the Companies Act, 2013.
c) Residual value of assets
d) Depreciation method
OTHER EXPENSES LIKE POWER AND FUEL, RENT, REPAIR TO

BUILDING, PLANT AND MACHINERY, INSURANCE, TRAVELLING,
LEGAL AND PROFESSIONAL, MISCELLANEOUS EXPENSES.
An entity in addition to making purchases and incurring employee benefit expenses also incurs on
other expenditure like rent, power and fuel, repairs and maintenance, insurance, travelling,
miscellaneous expenses etc., that are essential and incidental to running of business operations.
While the auditor may choose to analyse the monthly trends for expenses like rent, power and
fuel, an auditor generally prefers to vouch for other expenses to verify following attributes:
a) Whether the expenditure pertained to current period under audit;
b) Whether the expenditure qualified as a revenue and not capital expenditure;
c) Whether the expenditure had a valid supporting documents like travel tickets, insurance
policy, third party invoice etc.;
d) Whether the expenditure has been classified under the correct expense head;
e) Whether the expenditure was authorised as per the delegation of authority matrix;
f) Whether the expenditure was in relation to the entity's business and not a personal
expenditure.
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auditing other expenses:
Assertions
Occurrence
Completeness
Measurement
Presentation and y
Disclosure
Audit Procedures for specific expenses Rent expense

a) Obtain a month wise expense schedule along with the rent agreements.
b) Verify if expense has been recorded for all 12 months and whether the rent amount is as per
the underlying agreement.
c) Specific consideration should be given to escalation clause in the agreement to verify if the
rent was required to be recorded on a straight-line basis during the period under audit.
d) Also, verify if the agreement is in the name of the entity and whether the expense pertains to
premises used for running business operations of the entity.
Power and fuel expense

a) Obtain a month wise expense schedule along with the power bills.
b) Verify if expense has been recorded for all 12 months.
c) Also, compile a month wise summary of power units consumed and the applicable rate and
check the arithmetical accuracy of the bill raised on monthly basis.
d) In relation to the units consumed, analyse the monthly power units consumed by linking it to
units of finished goods produced and investigate reasons for variance in monthly trends.
Insurance expense
a) Obtain a summary of insurance policies taken along with their validity period.
b) Verify if the expense has been correctly classified between prepaid and expense for the period
based on number of days.
Legal and professional expenses

a) Obtain a month wise and consultant wise summary.
b) In case of monthly retainer ship agreements, verify if the expenditure for all 12 months has
been recorded correctly.
c) For non- recurring expenses, select a sample and vouch for the attributes discussed above.
d) The auditor should be cautious while vouching for legal expenses as the same may highlight a
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dispute for which the entity may not have made any provision and the matter may also not have
been discussed/ highlighted to the auditor for his specific consideration.
Travel, repair and maintenance, printing and stationery,

miscellaneous expenses
a) The auditor should select a sample and vouch for the attributes discussed above. Wherever
possible, the auditor and try to prepare a summary of expenditure on monthly basis and then
analytically compare the trends.
b) Perform analytical procedures to obtain audit evidence as to overall reasonableness of other
expense which may include expenditure per unit produced analysis.
c) Auditor should analyse expense per unit produced and compare the same with previous years
and present industry trends and ask for the reasons from Management If any significant
variations are found.
Presentation and Disclosure

Ensure other expense have been classified under:
a) Rent.
b) Insurance.
c) Power and fuel.
d) Repairs and maintenance- Building, Plant and machinery, others.
e) Legal and professional.
f) Printing and stationary.
g) Travel expenses.
h) Miscellaneous expenses.
IMPORTANT NOTES
Note 1: Corporate Social Responsibility (CSR)
Where the company covered under section 135 of the companies act, the following shall be disclosed
with regard to CSR activities:
a) amount required to be spent by the company during the year,
b) amount of expenditure incurred,
c) shortfall at the end of the year,
d) total of previous years shortfall,
e) reason for shortfall,
f) nature of CSR activities,
g) details of related party transactions, e.g., contribution to a trust controlled by the company in
relation to CSR expenditure as per relevant Accounting Standard,
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h) where a provision is made with respect to a liability incurred by entering into a contractual
obligation, the movements in the provision during the year should be shown separately.
Note 2: Details of Crypto Currency or Virtual Currency

Where the Company has traded or invested in Crypto currency or Virtual Currency during the
financial year, the following shall be disclosed:
a) profit or loss on transactions involving Crypto currency or Virtual Currency
b) amount of currency held as at the reporting date,
c) deposits or advances from any person for the purpose of trading or investing in Crypto
Currency/ virtual currency.
Note 3 : Details of Benami Property Held

Where any proceedings have been initiated or pending against the company for holding any benami
property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and the rules made
thereunder, the company shall disclose the following:-
a) Details of such property, including year of acquisition,
b) Amount thereof,
c) Details of Beneficiaries,
d) If property is in the books, then reference to the item in the Balance Sheet,
e) If property is not in the books, then the fact shall be stated with reasons,
f) Where there are proceedings against the company under this law as an abetter of the
transaction or as the transferor then the details shall be provided,
g) Nature of proceedings, status of same and company's view on same.
Note 4 : Relationship with Struck off Companies

Where the company has any transactions with companies struck off under section 248 of the
Companies Act, 2013 or section 560 of Companies Act, 1956, the Company shall disclose the
following details:-
Name of Nature of transactions Balance

struck off with struck off Company outstanding
Company
Investments in securities
Receivables
Payables
Shares held by stuck off

company
Other outstanding balances

(to be specified)
7507545533
Note 5: Following Ratios to be disclosed:

a) Current Ratio,
b) Debt-Equity Ratio,
c) Debt Service Coverage Ratio,
d) Return on Equity Ratio,
e) Inventory turnover ratio,
f) Trade Receivables turnover ratio,
g) Trade payables turnover ratio,
h) Net capital turnover ratio,
i) Net profit ratio,
j) Return on Capital employed,
k) Return on investment.
The company shall explain the items included in numerator and denominator for computing the above
ratios. Further explanation shall be provided for any change in the ratio by more than 25% as
compared to the preceding year.
7507545533
7507545533

Chapter 5D

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CA Rishabh Jain Statement of Proﬁt & Loss Captions Chapter - 5D

SALE OF PRODUCTS AND SERVICES

Occurrence Recorded sales represent goods shipped / services performed

Measurement All sales are accurately measured as per applicable accounting

Completeness & Cut-Off

Presentation & Disclosure

OTHER INCOME COMPRISING INTEREST INCOME, DIVIDEND

Gain / (loss) on sale of Investment in Mutual Funds

Presentation and Disclosure

NOTE: TO BE DISCLOSED AS ADDITIONAL INFORMATION

Auditor should consider the following:

e) quality inspection of goods,

Occurrence Recorded purchases represent goods actually received / services

Measurement All purchases have been measured appropriately

c) Whether quality inspection of goods was done

Special considerations during audit of purchases

Completeness & Cut-Off

quantity and price which may include:

Presentation & Disclosure

EMPLOYEE BENEFITS EXPENSE

(ii) employee master,

Occurrence Recorded emplyee

Completeness Employee beneﬁtexpenses

Presentation and Required

Occurrence & Completeness

Presentation & Disclosure

DEPRECIATION AND AMORTISATION

Completeness & Occurrence

Presentation & Disclosure

OTHER EXPENSES LIKE POWER AND FUEL, RENT, REPAIR TO

Audit Procedures for speciﬁc expenses Rent expense

Power and fuel expense

Legal and professional expenses

Travel, repair and maintenance, printing and stationery,

Presentation and Disclosure

Note 2: Details of Crypto Currency or Virtual Currency

Note 3 : Details of Benami Property Held

Note 4 : Relationship with Struck off Companies

Name of Nature of transactions Balance

Shares held by stuck off

Other outstanding balances

Note 5: Following Ratios to be disclosed:

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