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Unit 10: Audit of Financial Statements

14. Inventory allowances: The auditors will determine whether the amounts have recorded Notes
as allowances for obsolete inventory or scrap are adequate, based on company’s procedures
for doing so, historical patterns, “where used” reports, and reports of inventory usage (as
well as by physical observation during the physical count). If it does not have such
allowances, they may require you to create them.

15. Inventory ownership: The auditors will review purchase records to ensure that the
inventory in company’s warehouse is actually owned by the company (as opposed to
customer-owned inventory or inventory on consignment from suppliers).
16. Inventory layers: If you are using a FIFO or LIFO inventory valuation system, the auditors
will test the inventory layers that company has recorded to verify that they are valid.

Did u know? If the company uses cycle counts instead of a physical count, the auditors can
still use the procedures related to a physical count. They simply do so during one or more
cycle counts, and can do so at any time; there is no need to only observe a cycle count that
occurs at the end of the reporting period. Their tests may also evaluate the frequency of
cycle counts, as well as the quality of the investigations conducted by counters into any
variances found.

10.5 Audit Procedure for Share Capital

Points to be considered for audit of share capital. A private limited company has two types of
share capital:
1. Equity Share Capital: This type of share capital is that part of capital that is not a preferential.
In other words it is the basic kind of capital or an ordinary share capital.

2. Preferential Share Capital: This part of capital has the following characteristics:
It carries a preferential right as to the payment of dividend over other type of
capital.

It carries the preferential right as to payment of capital in case of winding up or
repayment of capital over the over the other type of capital.

Special Points in Audit of Share Capital

In case of share capital issued by the company following points merit consideration of the
auditor:
1. Authorization of the issue: Auditor should check the minutes of the meeting of the board
of directors to check the authorization of the terms of the terms of the issue of share
capital.
2. Vouching share applications: Auditor should test check the share application forms and
vouches their respective entries in the cash book.
3. Legal requirement: It should be checked that the legal requirements as laid down by the
companies act, SEBI and other regulatory bodies are met.
4. Compilation requirements: Auditor should check that various compilation requirement
of various statements with the registrar of companies are met with.
While doing the audit of share capital auditor should vouch the following carefully:
1. Memorandum of association
2. Articles of association

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