Assam HS Skill Subject Accountancy and Auditing cheat sheet

Accounting equation: Assets = Liabilities + Capital. Every transaction changes at least two elements and the equation always remains balanced.

Golden rules: personal account - debit the receiver, credit the giver; real account - debit what comes in, credit what goes out; nominal account - debit expenses and losses, credit incomes and gains.

Fundamental qualitative characteristics: relevance and faithful representation. Enhancing characteristics: comparability, verifiability, timeliness and understandability.

Fundamental accounting assumptions as per AS 1: going concern, consistency and accrual. Prudence and materiality guide the selection and application of accounting policies.

Business entity and money measurement conventions: only monetary transactions of the entity are recorded; the owner's personal transactions are excluded from the books.

Capital expenditure yields benefit beyond one accounting year and is capitalised as an asset; revenue expenditure is consumed within the year and charged to profit or loss.

Matching principle: expenses incurred to earn revenue of a period are matched against that revenue, irrespective of when cash is received or paid.

Dual aspect concept: every debit has an equal and corresponding credit, which is the foundation of the double entry system.

Historical cost concept: assets are carried at acquisition cost, which forms the base for subsequent depreciation and valuation adjustments.

Journal column order: date, particulars (debit account first, credit account indented below), ledger folio, debit amount, credit amount, followed by a narration in brackets.

A compound journal entry records more than two accounts in a single entry when one transaction affects several accounts at the same time.

Subsidiary books: cash book, purchases book, sales book, purchase return book, sales return book, bills receivable book, bills payable book and journal proper.

The cash book serves as both journal and ledger; it has receipts (debit) and payments (credit) sides and is balanced like a ledger account.

Contra entry arises when cash is deposited into the bank or withdrawn for office use; both aspects appear in the same cash book and 'C' is written in the ledger folio column.

Under the imprest system the petty cashier receives a fixed float and is reimbursed for exactly the amount spent, restoring the float to its original figure.

The sales book records only credit sales of goods in which the firm deals; cash sales go to the cash book and sale of fixed assets goes to the journal proper.

Trial balance rule: total of debit balances must equal total of credit balances, and balances are taken from the ledger, not from the journal.

A trial balance fails to reveal errors of principle, complete omission, posting to a wrong account on the correct side, and compensating errors.

BRS format: start with the cash book balance (or pass book balance), add or deduct items appearing only in the other book, and arrive at the pass book (or cash book) balance.

Cheques deposited but not yet credited by the bank: deduct from the cash book balance when reconciling towards the pass book balance.

Cheques issued but not yet presented for payment: add to the cash book balance when reconciling towards the pass book balance.

Bank-only items: bank charges, interest allowed or charged, direct deposits by customers, standing orders, dividend collected and cheques dishonoured.

Favourable balance means a debit balance in the cash book and a credit balance in the pass book; an overdraft is the reverse in both books.

Errors affecting trial balance agreement are one-sided: wrong casting, posting to the wrong side, wrong amount posted, or omission of one account balance.

Errors not affecting trial balance agreement: error of principle, complete omission, compensating error, and posting to a wrong account on the correct side.

A suspense account is opened for the difference in the trial balance and is closed once every one-sided error has been rectified.

Rectification of an error of principle or of a complete omission needs a full journal entry through the affected accounts, not through the suspense account.

Depreciation allocates the depreciable cost of a fixed asset over its useful life; it is a charge against profit and not a cash outflow.

Causes of depreciation: wear and tear, obsolescence, passage of time, depletion of natural resources, and effluxion of time.

Straight line method: annual charge = (Cost − Estimated scrap value) ÷ Useful life in years, giving an equal charge every year.

Written down value method: a fixed percentage is applied to the opening book value, so the charge falls each year and the asset is never fully written off.

Profit or loss on sale of an asset = Sale proceeds − (Original cost − Accumulated depreciation up to the date of sale).

A provision is a charge against profit for a known liability or expected loss whose amount cannot be measured precisely; it is created even when the firm incurs a loss.

A reserve is an appropriation of profit created only out of profits to strengthen the financial position; it is not a charge against profit.

Provision for doubtful debts is computed as a percentage of debtors and is deducted from debtors on the assets side of the balance sheet.

A secret reserve arises when assets are understated or liabilities overstated, and it does not appear anywhere in the balance sheet.

Cost of goods sold = Opening stock + Purchases + Direct expenses − Closing stock. Gross profit = Net sales − Cost of goods sold.

Net profit = Gross profit + Other incomes − Indirect expenses; it is transferred to the proprietor's capital account.

Closing capital = Opening capital + Additional capital introduced + Net profit − Drawings.

The balance sheet is a statement, not an account, prepared on a specific date showing assets, liabilities and capital at that date.

Marshalling is the arrangement of balance sheet items in order of liquidity (cash first) or in order of permanence (fixed assets first).

In a partnership, interest on capital, partners' salaries and commission are debited to the Profit and Loss Appropriation Account, while interest on drawings and the year's profit are credited to it.

Interest on drawings is charged to the partners' capital or current accounts and credited to the appropriation account, being income for the firm.

Residual profit after appropriations is shared in the agreed profit sharing ratio; in the absence of a deed, partners share equally.

Where capital accounts are fixed, a separate current account records drawings, interest on capital, salary and the share of profit.

Prime cost = Direct material + Direct labour + Direct expenses.

Works (factory) cost = Prime cost + Factory overheads. Cost of production = Works cost + Administration overheads, adjusted for work in progress.

Cost of sales = Cost of production + Selling and distribution overheads; Sales − Cost of sales = Profit.

Cost accounting records and controls cost; management accounting is wider, serves decision making, has no prescribed format and is not bound by accounting standards.

Contribution = Sales − Variable cost. P/V ratio = Contribution ÷ Sales. Break-even point in units = Fixed cost ÷ Contribution per unit.

Break-even sales value = Fixed cost ÷ P/V ratio. Margin of safety = Actual sales − Break-even sales.

Cost behaviour classification: fixed costs stay constant in total, variable costs change with output, and semi-variable costs contain both elements.

A sunk cost is already incurred and irrelevant to a decision; opportunity cost is the benefit foregone by choosing one alternative over another.

Standard costing compares standard cost with actual cost, and a variance is favourable when it increases profit.

Auditing is the systematic and independent examination of books, accounts and records to enable the auditor to express an opinion on the truth and fairness of the financial statements.

Primary objective: report on whether the financial statements show a true and fair view. Secondary objectives: detection and prevention of errors and frauds, and prevention of waste and inefficiency.

Statutory audit is required by law; internal audit is performed by the entity's own employees; government audit covers government departments and public sector undertakings.

An error of principle is a recording made against accounting principles, for example capitalising revenue expenditure; clerical errors are those of omission, commission and compensating errors.

Misappropriation of cash is commonly concealed by teeming and lading, recording fictitious payments, or under-recording cash sales.

Under the Companies Act 2013, the first auditor of a company is appointed by the Board within 30 days of registration, failing which by members in an extraordinary general meeting within 90 days.

Auditing Standards (SAs) in India are issued by the Institute of Chartered Accountants of India and are mandatory for audits conducted by its members.

The auditor is neither a valuer nor an insurer; the duty is to exercise reasonable care and skill and to verify rather than guarantee.

Internal control comprises the plan of organisation and all methods adopted to safeguard assets, ensure accuracy and reliability of records and promote operational efficiency.

Internal check divides duties so that the record of one employee is automatically verified by the work of another; internal audit is a separate independent review function.

Internal audit is an independent appraisal activity within an entity that examines accounting, financial and other operations as a service to management.

Limitations of internal control: collusion between employees, management override, human error, and the cost of a control exceeding the benefit it provides.

Audit evidence must be sufficient in quantity and appropriate in relevance and reliability in order to support the audit opinion.

Reliability ranking: external evidence over internal, documentary over oral, evidence obtained by the auditor over that provided by the client, and original over photocopy.

Tests of control test the operating effectiveness of controls; substantive procedures detect material misstatements at the assertion level.

Analytical procedures compare ratios and trends with prior periods, budgets or industry data to identify unusual relationships and risks.

The auditor obtains reasonable, not absolute, assurance that the financial statements are free from material misstatement, whether caused by fraud or error.

Audit risk = Inherent risk × Control risk × Detection risk; detection risk is the only component the auditor controls, by varying the nature, timing and extent of procedures.

Audit planning requires establishing the overall audit strategy, preparing the audit plan, assessing risks and determining materiality at both quantitative and qualitative levels.

SA 700 prescribes the form of the unmodified opinion, SA 705 modified opinions, and SA 706 Emphasis of Matter and Other Matter paragraphs.

SA 570 requires the auditor to evaluate the appropriateness of management's going concern assumption and to report any material uncertainty.

SA 560 covers subsequent events up to the date of the auditor's report; there is no obligation to perform procedures after that date unless facts come to notice.

SA 505 deals with external confirmations and SA 510 with initial audit engagements including opening balances; SA 530 governs audit sampling.

Audit documentation under SA 230 must be retained for at least five years from the date of the auditor's report, and the final file is assembled within 60 days of that date.

Vouching tests the occurrence and accuracy of recorded transactions; verification tests existence, ownership, possession, valuation and disclosure as at the balance sheet date.

Cash payments are vouched with receipts, invoices and payee acknowledgements; cash sales are checked against counterfoils, cash memos and bank deposit slips.

Fixed assets are verified by physical inspection; cost includes purchase price, freight, installation and directly attributable borrowing costs, less accumulated depreciation.

Investments are verified by inspecting securities and obtaining confirmations from brokers or custodians; current investments are valued at cost or market value, whichever is lower.

Liabilities are verified from correspondence, contracts, confirmations and board minutes, and the auditor searches for unrecorded liabilities.

Contingent liabilities are disclosed by way of note and are not provided for unless the outflow is probable and can be reliably measured.

Intangible assets such as goodwill, patents and trademarks are verified from purchase documents and valuation reports, and the amortisation policy is examined.

Window dressing is manipulation of the balance sheet before its date, for example by postponing purchases or recording fictitious sales.

Standard contents: title, addressee, opinion, basis for opinion, going concern section where applicable, key audit matters for listed entities, responsibilities of management and of the auditor, signature with membership number and firm registration number, place, date and UDIN.

Unmodified (clean) opinion states that the financial statements give a true and fair view in accordance with the applicable financial reporting framework.

Qualified opinion is given where a matter is material but not pervasive ('except for'); adverse opinion where it is material and pervasive; disclaimer where sufficient appropriate evidence cannot be obtained and the effect is material and pervasive.

Emphasis of Matter and Other Matter paragraphs do not modify the opinion and are presented immediately after the basis for opinion section.

Key Audit Matters apply to audits of complete sets of general purpose financial statements of listed entities, and to other engagements where the auditor decides to communicate them.

The report is dated no earlier than the date on which the financial statements are approved by those charged with governance and the auditor has obtained sufficient appropriate evidence.

A separate section on going concern is required where a material uncertainty exists and adequate disclosure has been made in the financial statements.

CARO 2020 is annexed to the audit report of covered companies and states specified matters; it does not replace or modify the audit opinion.

Fundamental principles of professional ethics: integrity, objectivity, professional competence and due care, confidentiality, professional behaviour, and compliance with technical standards.

Threats to independence are classified as self-interest, self-review, advocacy, familiarity and intimidation; each must be evaluated and safeguards applied.

An auditor must not hold a financial interest in the client, must not accept percentage-based contingent fees for audit work, and must not solicit clients through advertising.

Confidentiality may be set aside where disclosure is permitted by law, required by a court or professional body, or necessary in legal proceedings.

Computerised accounting risks: unauthorised access, data loss, program tampering, absence of an audit trail, and concentration of incompatible functions in one system.

General IT controls operate across the whole environment: access security, program change management, backup and recovery, and segregation of duties within IT.

Application controls operate on individual transactions through input validation, batch totals, sequence checks, limit checks and exception reports.

CAATs include test data, parallel simulation, embedded audit modules, snapshot techniques and generalised audit software, and help test large volumes of electronic data.

Rule 3(1) of the Companies (Accounts) Rules 2014 requires companies using accounting software to have an audit trail feature, and Rule 11(g) of the Companies (Audit and Auditors) Rules requires the auditor to report on it.