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Unit 10: Audit of Financial Statements

Notes
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Caution Most office equipment and furniture is classified as a five- or seven-year
depreciation. Computers and other machinery used in an office usually depreciate in five
years. Furniture and fixtures usually depreciate in seven years.

Self Assessment

State whether the following statements are true or false:
9. All cash collections are paid to the holders or lenders of beneficial interests in the SPV.

10. For PMS transactions separate serial number need not be maintained.
11. The objective of Investments are statutory requirements and to deploy surplus liquidity
and floats for generating optimum returns.

12. The originating bank transferring the assets to the SPV should not hold any interest, direct
or indirect in the Trustee Company.
13. Depreciable assets are defined as having a determinable life span exceeding one year and
for which a value can be calculated.

10.13 Summary

The auditor’s report must accompany the financial statements when they are issued to the
intended recipients.
The primary stages of an audit are: Planning and risk assessment; Internal controls testing
and Substantive financial procedures.

An income statement audit can help isolate mathematical errors and ledger discrepancies
Inventory audit procedures that auditors’ may follow: Cutoff analysis; Observe the physical
inventory count; Reconcile the inventory count to the general ledger; Test high-value
items; Test error-prone items; Test inventory in transit; Test item costs; Review freight
costs; Test for lower of cost or market; Finished goods cost analysis; Direct labor analysis;
overhead analysis; Work-in-process testing; Inventory allowances; Inventory ownership;
Inventory layers, etc.

In case of share capital issued by the company following points merit consideration of the
auditor: Authorization of the issue; Vouching share applications; Legal requirement;
Compilation requirements.
The procedures that are adopted by the auditor for auditing investments include: Internal
Control Evaluation; Verification of Transactions; Physical Verification; Examination of
Valuation or Disclosures; Analytical Procedures; Management Representations;
Documentation by the auditor.

The fixed asset balance, which deals with assets that can’t easily be converted into cash, is
a common material account balance on an entity’s financial statements. It is audited through
procedures that confirm the existence and valuation of the reported account balance.
The auditors must ensure that the guidelines issued by the RBI in regard to the Internal
Control System are strictly adhered to. There should be a clear functional separation of
(i) trading, (ii) settlement, monitoring and control and (iii) accounting.

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