Section 3 - Internal Audit and Compliance Guides

3.1.1

Confirm the entity's Ind AS applicability under the Companies (Indian Accounting Standards) Rules - verify net worth computation and the holding/subsidiary/associate pull-in provisions.

Net worth computation; board minute recording applicability

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3.1.2

Verify that a documented, board-approved accounting policy manual exists and is consistent with current standards, including amendments effective in the period.

Signed policy manual; version control log

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3.1.3

Confirm the financial statements comply with Schedule III, Division II format, including all mandated sub-classifications and ageing schedules.

Schedule III compliance checklist; mapped trial balance

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3.1.4

Verify the going concern assessment covers at least twelve months from the reporting date and is supported by cash flow forecasts.

Board-approved forecast; covenant compliance computation

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3.1.5

Confirm disclosure of critical judgements (Ind AS 1.122) and sources of estimation uncertainty (Ind AS 1.125) is entity-specific and not boilerplate.

Note to accounts; supporting judgement memoranda

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3.1.6

Verify comparative information is presented for all amounts, and that any reclassification is disclosed with its nature and reason.

Prior period mapping schedule

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3.1.7

Confirm CFS is prepared where the entity has any subsidiary, associate or JV, per Section 129(3).

Group structure chart; consolidation workings

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3.1.8

Verify related party disclosures are complete and reconciled to Section 188 registers and audit committee approvals.

RPT register; audit committee minutes; Form AOC-2

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A.1

Verify the cost formula (FIFO or weighted average) is applied consistently to inventories of similar nature; confirm LIFO is not used.

Costing policy; system configuration report

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A.2

Recompute fixed overhead absorption using normal capacity; verify unabsorbed overhead in low-production periods is expensed and not capitalised.

Capacity study; absorption computation; production statistics

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A.3

Confirm excluded costs - selling, distribution, storage of finished goods, abnormal waste, administrative overhead - are not embedded in standard cost.

Standard cost build-up; variance analysis

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A.4

Test NRV on an item-by-item or similar-group basis; obtain post-year-end selling prices and recompute the write-down.

Post year-end sales invoices; NRV computation

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A.5

Review slow-moving and obsolete analysis; challenge the ageing bands and provisioning percentages against actual disposal experience.

Ageing report; historical scrap realisation data

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A.6

Verify reversals of prior write-downs are limited to the original write-down and are supported by evidence of NRV recovery.

Reversal computation; supporting price evidence

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A.7

Confirm GST input credit is excluded from cost where recoverable; verify treatment for blocked credits.

GST reconciliation; ITC ledger

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B.1

Test the capitalisation boundary - verify that costs of opening a facility, advertising, staff training, administrative overhead and initial operating losses are expensed.

Capex approval files; sample vouching of capitalised costs

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B.2

Verify component accounting is applied to significant parts with different useful lives; confirm major inspection components are separately identified.

Fixed asset register with component split; technical assessment

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B.3

Confirm useful lives are consistent with Schedule II, or that departures are supported by technical justification and disclosed.

Technical evaluation report; disclosure in notes

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B.4

Verify residual values and useful lives are reviewed at least annually, and that revisions are applied prospectively as a change in estimate.

Annual review documentation; recomputation of depreciation

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B.5

Test that depreciation commences when the asset is available for use, not when it is put into commercial production.

Commissioning certificates; asset ready-for-use dates

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B.6

For revalued assets, verify the entire class was revalued, valuations are sufficiently current, and increases/decreases were routed correctly between OCI and P&L.

Valuer's report; revaluation surplus movement schedule

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B.7

Verify derecognition on disposal removes both cost and accumulated depreciation, and that any revaluation surplus is transferred to retained earnings, not through P&L.

Disposal schedule; equity movement reconciliation

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B.8

Confirm decommissioning obligations are capitalised with a corresponding provision, and that the discount unwinding is charged as finance cost.

IAS 37 provision workings; unwinding computation

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C.1

Obtain the contract inventory and verify the five-step analysis is documented for each material contract type.

Revenue accounting position papers by contract type

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C.2

Challenge the identification of distinct performance obligations, particularly bundled licence-plus-service and licence-plus-implementation arrangements.

Contract analysis; distinctness assessment memo

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C.3

Verify stand-alone selling prices used for allocation are supported by observable evidence, or that the estimation method is documented and consistently applied.

SSP analysis; price list; discount analysis

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C.4

Test variable consideration estimates and confirm the constraint has been applied - that revenue is recognised only to the extent a significant reversal is highly probable not to occur.

Rebate, discount, return and penalty computations; historical accuracy analysis

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C.5

For over-time recognition, verify the IFRS 15.35 criterion relied upon and test the measure of progress for reasonableness.

Over-time assessment memo; cost-to-complete workings

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C.6

Perform principal vs agent analysis for any arrangement involving a third party; verify gross vs net presentation is supported by control indicators.

Control indicator assessment; contract terms

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C.7

Verify contract assets, contract liabilities and receivables are correctly distinguished and reconciled period on period.

Contract balance rollforward

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C.8

Test capitalisation and amortisation of incremental costs of obtaining a contract; confirm the amortisation period reflects expected renewals.

Commission capitalisation schedule; customer life analysis

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C.9

Perform cut-off testing around the reporting date in both directions, focused on the transfer of control rather than invoicing or dispatch.

Pre and post year-end shipping and acceptance documentation

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D.1

Verify the business model assessment and SPPI test are documented for each portfolio, and that classification follows the outcome.

Classification memoranda; portfolio-level documentation

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D.2

Challenge the entity's definition of significant increase in credit risk, including whether the 30-day rebuttable presumption has been rebutted and on what basis.

SICR policy; rebuttal justification; staging migration analysis

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D.3

Verify the default definition is consistent with internal credit risk management and the 90-day rebuttable presumption.

Credit policy; NPA reconciliation

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D.4

Test PD, LGD and EAD inputs for source, vintage and calibration; verify back-testing has been performed against actual loss experience.

Model documentation; back-testing results; validation report

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D.5

Evaluate forward-looking macroeconomic overlays - scenario selection, probability weights and their linkage to PD.

Scenario documentation; economist inputs; weighting rationale

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D.6

For trade receivables, verify the simplified approach is applied and test the provision matrix loss rates against historical realisation.

Provision matrix; historical write-off analysis

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D.7

Verify management overlays and post-model adjustments are governed, documented, approved and subsequently released on a defined basis.

Overlay approval minutes; release policy

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D.8

For NBFCs, reconcile Ind AS ECL to RBI IRACP provisioning and verify appropriation to the Impairment Reserve where required.

IRACP reconciliation; impairment reserve movement

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E.1

Obtain a complete lease inventory; test for completeness against rent ledgers, GST records and legal contract registers.

Lease register reconciled to rent expense and GST 2A/2B

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E.2

For each material contract, verify the identified asset and right to direct use tests - confirm service arrangements have not been incorrectly capitalised, and vice versa.

Lease vs service assessment memo

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E.3

Verify the lease term includes periods covered by extension options reasonably certain to be exercised, and test the economic-incentive analysis.

Lease term assessment; leasehold improvement analysis

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E.4

Test the discount rate - verify the incremental borrowing rate is entity-specific, currency-specific, term-matched and asset-adjusted.

IBR derivation; benchmark borrowing evidence

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E.5

Confirm variable payments linked to usage or sales are excluded from the liability and expensed as incurred.

Payment classification analysis

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E.6

Verify remeasurement on modification, reassessment of options, or index-linked rent revision has been performed.

Remeasurement workings; modification log

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E.7

Confirm application of short-term and low-value exemptions is policy-driven, consistently applied and disclosed.

Exemption policy; expense analysis

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F.1

Obtain the temporary difference schedule; recompute carrying amount versus tax base for each material item.

Deferred tax computation; tax WDV schedules

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F.2

Verify permanent differences have been excluded and that the initial recognition exemption has been correctly applied.

Reconciliation of accounting to taxable profit

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F.3

Challenge deferred tax asset recognition - obtain convincing evidence of future taxable profit, particularly where there is a history of losses.

Approved business plan; taxable profit projection; expiry analysis

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F.4

Verify MAT credit entitlement is recognised only to the extent utilisation is probable within the statutory carry-forward period.

MAT credit utilisation model

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F.5

Confirm deferred tax on items recognised in OCI or equity is presented in OCI or equity, not profit or loss.

Tax allocation working (backwards tracing)

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F.6

Verify the tax rate applied is enacted or substantively enacted, and that changes are reflected in the period of enactment.

Finance Act reference; rate change computation

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F.7

Test uncertain tax positions under Appendix C (IFRIC 23) - verify the unit of account, the detection assumption and the measurement method.

UTP register; expected value or most likely amount computation; counsel opinions

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F.8

Recompute the effective tax rate reconciliation and obtain explanations for material reconciling items.

ETR reconciliation

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G.1

Verify the acquired set meets the definition of a business; consider whether the concentration test results in asset-acquisition treatment.

Business definition assessment; concentration test computation

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G.2

Confirm identification of the acquirer and the acquisition date (the date control is obtained, not the agreement or closing date if different).

Control assessment; SPA; regulatory approval evidence

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G.3

Verify consideration transferred is at fair value, that contingent consideration is fair valued, and that acquisition-related costs are expensed.

Consideration computation; earn-out valuation; cost analysis

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G.4

Review the purchase price allocation - challenge the completeness of identified intangibles and the valuation methodology for each.

PPA report; valuation specialist's work

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G.5

Verify deferred tax on fair value uplifts is recognised and correctly affects goodwill.

Deferred tax on PPA computation

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G.6

Confirm the NCI measurement election is documented and consistently applied within the transaction.

NCI election memo

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G.7

For common control transactions, verify pooling of interests is applied per Appendix C - carrying amounts, capital reserve, and restated comparatives.

Common control assessment; capital reserve computation

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G.8

Verify any bargain purchase is routed to OCI and capital reserve per the Ind AS carve-out, not to profit or loss.

Bargain purchase reassessment documentation

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G.9

Confirm measurement period adjustments relate to facts existing at acquisition date and are within twelve months.

Measurement period adjustment log

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Cash flow forecasts

Must be based on the most recent budgets approved by management, covering a maximum of five years unless a longer period is justified. Exclude future restructurings not yet committed and future enhancement capex.

Board-approved budget; comparison of prior-year forecast to actual outcome (hindsight review)

Forecast accuracy / bias

Compare prior forecasts to actual results. Persistent over-optimism is a fraud risk indicator and a strong basis for challenge.

Multi-year forecast-versus-actual variance analysis

Terminal growth rate

Must not exceed the long-term average growth rate for the products, industries or country. A rate above long-run GDP growth is rarely supportable.

IMF/RBI long-term GDP forecasts; industry reports

Discount rate

Pre-tax rate reflecting current market assessments of the time value of money and asset-specific risks. Verify the WACC build-up: risk-free rate, equity risk premium, beta, size premium, cost of debt, capital structure.

Independent WACC computation; peer beta data; government security yields

Consistency

The discount rate must not double-count risks already reflected in the cash flows. Cash flows and rate must be on a consistent (both nominal or both real) basis.

Reconciliation of risk adjustments

CGU identification

The smallest identifiable group generating largely independent cash inflows. Aggregation to mask an underperforming unit is a common bias.

CGU determination memo; internal management reporting structure

■ Identify the estimate and assess the degree of ESTIMATION UNCERTAINTY

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◆ Is the estimation uncertainty HIGH?

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✖ NO → Standard substantive procedures; test method, data and assumptions

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✔ YES → Treat as a SIGNIFICANT RISK. Consider whether it is a fraud risk requiring an unpredictable element

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▸ ROUTE 1: Test how management made the estimate - method, model integrity, data reliability, assumption reasonableness

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▸ ROUTE 2: Develop an INDEPENDENT point estimate or range and compare to management's

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▸ ROUTE 3: Review events up to the audit report date providing evidence about the estimate

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◆ Perform RETROSPECTIVE REVIEW of prior-period estimates to detect MANAGEMENT BIAS

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■ Bias indicators present → Reassess risk; extend procedures; consider implications for other estimates

Valuation methodology

Confirm the method (DCF, market multiple, relief-from-royalty, option pricing) is appropriate to the asset and applied consistently. Challenge any change in method as a potential bias indicator.

Unobservable inputs

Test each significant input to source. For unlisted equity, evaluate whether a recent priced funding round is a reliable indicator and whether preference-share rights require an option-based allocation rather than a simple pro-rata split.

Discount for lack of marketability

Verify the DLOM is supported by empirical study data and is consistent period to period.

Valuation specialist

Where a specialist is used, evaluate competence, capability and objectivity; understand the work performed; and do not accept the report without testing the underlying inputs and assumptions.

Disclosure

Verify the Level 3 reconciliation, the quantitative disclosure of significant unobservable inputs, and the sensitivity analysis are complete.

Discount rate

Determined by reference to market yields on government bonds (in India) with a term consistent with the estimated term of the obligation. Verify the duration matching; a mismatched duration is the most common error.

Salary escalation rate

Compare to the entity's actual historical increments, approved HR policy and inflation expectations. A rate materially below actual experience understates the obligation.

Attrition / withdrawal rate

Compare to actual employee turnover statistics by age band and grade. High assumed attrition reduces the obligation and is a bias indicator where unsupported.

Mortality

Verify use of an appropriate current table (in India, the Indian Assured Lives Mortality table).

Actuary's competence and objectivity

Confirm the actuary's credentials and independence; verify that the data supplied to the actuary (headcount, salary, date of joining, date of birth) is complete and accurate - data errors, not assumption errors, are the most frequent cause of misstatement.

PRACTICE NOTE

In defined benefit valuations, the actuary's output is only as reliable as the census data provided. Independent reconciliation of headcount and payroll cost from the actuarial data file back to the HR system and the payroll ledger routinely identifies more misstatement than challenging the assumptions themselves.