Audit of Items of Financial Statements
Weightage: Chapter 5 of ICAI's Paper 5 syllabus, roughly 14 marks — the largest single block in the paper and the most practical, converting every earlier chapter's abstractions into concrete procedures on real balances.
Why this chapter is where the paper becomes usable
Risk assessment, materiality, evidence and assertions are all, on their own, abstractions. This chapter is where they meet actual numbers on a trial balance. Every item covered below is organised the same way: identify the assertion most at risk for that item, and let the assertion tell you what procedure addresses it — exactly the discipline built in the previous chapter, now applied item by item.
Share capital and reserves
Verify the authorised, issued, subscribed and paid-up capital against the Memorandum and Articles of Association and board/shareholder resolutions authorising any changes during the year. Confirm compliance with the relevant provisions of the Companies Act, 2013 governing allotment, further issue, buyback (each developed fully in Paper 2). Verify movements in reserves — transfers, utilisation (particularly restrictions on the use of Securities Premium and Capital Redemption Reserve) — against board minutes and statutory requirements. The primary assertions at risk are existence/occurrence (was this share capital movement genuinely authorised and did it occur as recorded) and presentation (is it correctly classified and disclosed under Schedule III).
Property, plant and equipment
Verify existence through physical verification (inspection), directly addressing the existence assertion — the single most emphasised procedure for this item, because PPE misstatement risk concentrates heavily here.
Verify ownership/rights through title deeds, registration certificates, purchase invoices — addressing rights and obligations.
Verify valuation — cost includes purchase price and directly attributable costs (Paper 1's AS 10 material, examined here from the audit side); depreciation is computed on a consistent basis, using an appropriate method and rate; addressing accuracy, valuation and allocation.
Verify completeness of the register — a fixed asset register reconciled to the general ledger, and additions/disposals during the year vouched to supporting documentation, addressing completeness.
Capital versus revenue expenditure — verify that repairs and maintenance genuinely restoring or maintaining an asset (revenue expenditure) have not been capitalised, and that genuine improvements/additions (capital expenditure) have not been expensed — a classification risk that misstates both the balance sheet and the profit and loss account simultaneously if got wrong.
Inventory
Attend the physical inventory count — SA 501 requires the auditor to attend physical inventory counting, unless impracticable, to evaluate management's instructions and procedures, observe the performance of the count, inspect the inventory, and perform test counts — this is observation applied to the existence and completeness assertions directly.
Verify valuation — inventory is valued at the lower of cost and net realisable value (Foundation-level AS 2, examined here from the audit perspective): verify the costing methodology (FIFO, weighted average), test the computation of cost, and specifically test for items where net realisable value has fallen below cost (obsolete, slow-moving, or damaged stock) — addressing accuracy, valuation and allocation.
Cutoff — verify that goods received before year end are included in both inventory and payables, and goods dispatched before year end are excluded from inventory and included in sales, addressing the cutoff assertion specifically — this is a frequently tested point because inventory cutoff errors and sales cutoff errors are often the same underlying error viewed from two sides.
Where the auditor cannot attend the count (for instance, appointed after year end), alternative procedures such as attending a later count and rolling back/forward, or relying on well-documented perpetual inventory records, may provide sufficient appropriate evidence instead.
Receivables (trade receivables)
External confirmation (positive or negative) is a primary procedure, directly addressing existence — a positive confirmation requires the recipient to respond in every case; a negative confirmation requires a response only if the recipient disagrees with the stated amount, and is used where control risk is lower and the population is more homogeneous, since a lack of response is itself (weakly) interpreted as agreement.
Verify valuation through review of ageing, assessment of the adequacy of the provision for doubtful debts, and testing subsequent cash receipts (a strong form of evidence, since actual post-year-end cash collection is direct confirmation the receivable was genuine and collectible) — addressing accuracy, valuation and allocation.
Verify cutoff — sales recorded before year end genuinely relate to goods/services delivered before year end.
Revenue
Recognition criteria — verify revenue is recognised in accordance with the applicable standard (AS 9's transfer of significant risks and rewards, or equivalent), not merely on invoicing.
Cutoff testing is the most emphasised procedure here, directly connecting to inventory and receivables cutoff above — a sale recorded in the wrong period misstates revenue, receivables/inventory, and profit simultaneously.
Analytical procedures — comparing revenue trends against prior periods, budgets, and non-financial data (units sold, capacity utilisation) to identify unusual patterns warranting further investigation — directly connects to the risk-assessment-stage analytical procedures already covered, now applied at the substantive testing stage.
Liabilities — trade payables and provisions
Search for unrecorded liabilities is the primary procedure for payables, directly addressing completeness — examining payments made after year end to identify obligations that existed at the balance sheet date but were not yet recorded, precisely the technique developed in the evidence chapter's discussion of why completeness, not existence, is the primary concern for liability balances.
Provisions — verify recognition criteria are met (AS 29's present obligation, probable outflow, reliable estimate — Paper 1 material examined here from the audit side), and evaluate the reasonableness of the estimate against historical experience and available evidence.
Cash and bank balances
Bank confirmation, obtained directly from the bank, addressing existence and rights and obligations with high reliability (external, direct, documentary — the reliability hierarchy from the previous chapter applied).
Bank reconciliation statement review — verify reconciling items are genuine and are subsequently cleared, since unexplained or old, unreconciled items can indicate error or concealment.
Cash count, where physical cash balances are material, addressing existence directly through inspection.
Investments
Verify existence and ownership through physical inspection of share certificates (or confirmation from a depository for dematerialised holdings) and title documents.
Verify valuation — current investments at the lower of cost and fair value; long-term investments at cost, less provision for any decline that is other than temporary (Foundation-level AS 13 material, examined here from the audit perspective) — addressing accuracy, valuation and allocation.
The unifying discipline
Every item above follows the same pattern the previous chapter established: name the assertion, then let the assertion determine the procedure. A candidate answering a question on "what would you verify regarding a company's fixed assets" who simply lists everything they can remember about PPE, without organising the answer around which assertion each check addresses, is demonstrating recall without demonstrating the structured, assertion-driven thinking this whole paper is actually testing — and the difference in marks between the two kinds of answer is exactly the difference the method chapter's opening point about vocabulary and structure describes.
