Accounting Policies Audit Working Paper — ICAI Audit Working Paper
(Following draft may be used as an example)
Background
The purpose of this working paper is to depict how the client is disclosing various significant/ material accounting policies and policies having possible biasness in management judgment. This work paper documents our approach towards the data provided by the client for the purpose of audit.
Extracts of accounting policies followed by the client have been shown in Annexure 1.
Objective
The objective of this work paper is to understand:
Significant/ material accounting policies*
Policies showing indication of possible bias in management’s judgement.
* For reporting period beginning from April 01, 2023, all the Companies which are complying with Ind AS are required to disclose only material accounting policies in accordance with Ind AS 1. Earlier, Companies were required to disclose all significant accounting policies. For Companies which are preparing its financial statements as per Accounting Standards, significant accounting policies are required to be disclosed.
Our approach
While understanding accounting policies used by the client, we have noted some significant/ material accounting policies and policies where management biasness could be involved. Accordingly, appropriate audit procedures have been planned and explained in the respective field.
We have also planned to check whether all the significant/ material accounting policies have been disclosed by the Company.
Planned Audit Procedures
We have gone through the accounting policies followed for the preparation of Standalone and Consolidated Financial Statements.
We have checked whether the accounting policies adopted by the Subsidiary Company are in line with the holding Company’s accounting policies at the time of Consolidation. In case of any discrepancy, the same needs to be aligned and adjustments need to be made at the time of preparation of Consolidated Financial Statements of the Company.
We have compared the accounting policies adopted by the Company with the accounting policies adopted by the peers in the same industry to ensure the consistency and uniformity of the accounting policies adopted and applied by the Company.
We will perform testing in relation to reasonableness of estimates used in making accounting policies.
We will review whether accounting policies are being consistently applied.
Conclusion
We have noted that the accounting policies followed by the Company for the preparation of financial statements are in compliance with Indian Accounting Standards (Ind AS)/ Accounting Standards (AS).
It has been observed that the accounting policies are being consistently followed.
The accounting policies of the Company are broadly in line with the peers in the same industry.
| Chapter | 5.1a | | Name | Initial |
|---|
| Topic | Annexure to Audit Work Paper on Accounting Policies | Prepared | C | |
| The client | XYZ Company Private Limited | Reviewed | T | |
| Task | Statutory Audit | Approved | A | |
| Period | for the year ended March 31, 2xx3 | | | |
(Following draft may be used as an example – some more significant / material accounting policies may be included based on discussions with the management on case to case basis)
Annexure 1 (significant / material accounting policies)
| Accounting Policies | Basis |
|---|
| Revenue Recognition | The Company has recognized revenue in accordance with Ind AS 115 by applying the following steps:
Revenue from contracts with customers is recognized when control of the goods or services are transferred to the customer at an amount that reflects the consideration entitled in exchange for those goods or services.
Revenue towards the satisfaction of performance obligation is measured at the amount of transaction price (net of variable consideration) allocated to that performance obligation.
The Company has concluded that it is the principal in all of its revenue arrangements since it is the primary obligor in all the revenue arrangements as it has pricing latitude and is also exposed to inventory and credit risks.
The Company accounts for volume discount for pricing incentives to customers as a reduction of revenue based on estimate of applicable discount/incentives. |
| Investment in Subsidiaries, Associates and Joint Ventures | Investments in subsidiaries, associates and joint venture are carried at cost less accumulated impairment losses, if any in separate financial statements.
Where an indication of impairment exists, the carrying amount of the investment is assessed and written down immediately to its recoverable amount.
On disposal of investments in subsidiaries, associates and joint ventures, the difference between net disposal proceeds and the carrying amounts are recognized in the statement of profit and loss. |
| Share Based Payments | Employees (including senior executives) of the Company may also receive remuneration in the form of share-based payments, whereby employees render services as consideration for equity instruments (equity-settled transactions).
Equity-settled transactions
The cost of equity-settled transactions is determined by the fair value at the date when the grant is made.
That cost is recognised, together with a corresponding increase in share-based payment reserves in equity, over the period in which the service conditions are fulfilled in employee benefits expense.
The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company’s best estimate of the number of equity instruments that will ultimately vest.
The statement of profit and loss expense or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period and is recognised in employee benefits expense.
Service conditions are not taken into account when determining the grant date fair value of awards, but the likelihood of the conditions being met is assessed as part of the Company’s best estimate of the number of equity instruments that will ultimately vest.
No expense is recognised for awards that do not ultimately vest because service conditions have not been met.
Where an award is cancelled by the entity or by the counterparty, any remaining element of the fair value of the award is expensed immediately through profit or loss.
The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings. |
| Provisions for warranties | Provisions for warranty-related costs are recognized when the product is sold or service provided to the customer.
Initial recognition is based on the best estimate e.g. applying historical experience. The initial estimate of warranty-related costs is revised annually. |
| Inventories | Inventories are valued at the lower of cost and net realizable value.
Costs incurred in bringing each product to its present location and condition are accounted for as follows:
Raw materials and spares:
Cost includes cost of purchase and other costs incurred in bringing the inventories to their present location and condition. Cost is determined on weighted average basis.
Finished goods and work in progress:
Cost includes cost of direct materials and labour and a proportion of manufacturing overheads based on the normal operating capacity, but excluding borrowing costs. Cost is determined on weighted average basis.
Traded goods:
Cost includes cost of purchase and other costs incurred in bringing the inventories to their present location and condition. Cost is determined on first in first out basis.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. |
| Property, Plant & Equipment | Property, plant and equipment are stated at historical cost less accumulated depreciation and impairment losses if any. Cost directly attributable to acquisition are capitalized until the property, plant and equipment are ready for use, as intended by the management.
Subsequent costs are capitalised on the carrying amount or recognised as a separate asset, as appropriate, only when future economic benefits associated with the item are probable to flow to the Company and cost of the item can be measured reliably.
When significant parts of property, plant and equipment are required to be replaced in regular intervals, the Company recognises such parts as separate component of assets. All repair and maintenance are charged to statement of profit and loss during the reporting period in which they are incurred.
Depreciation on property, plant and equipment is provided on a straight-line basis over the estimated useful lives of the assets. For some assets useful life is different than Schedule II, management has derived useful lives based on the technical evaluation. |
