The following is the text of the Guidance Note on Audit of Liabilities issued by the Auditing Practices Committee of the Council of the Institute of Chartered Accountants of India. This Guidance Note should be read in conjunction with the Statements on Standard Auditing Practices issued by the Institute.1

1. Para 2.1 of the Preface to the Statements on Standard Auditing Practices issued by the Institute of Chartered Accountants of India states that the "main function of the APC is to review the existing auditing practices in India and to develop Statements on Standard Auditing Practices (SAPs) so that these maybe issued by the Council of the Institute." Para 2.4 of the Preface states that the "APC will issue Guidance Notes on the issues arising from the SAPs wherever necessary." 

2. The Auditing Practices Committee has also taken up the task of reviewing the Statements on auditing matters issued prior to the formation of the Committee. It is intended to issue, in due course of time, SAPs or Guidance Notes, as appropriate, on the matters covered by such Statements which would then stand withdrawn. With the issuance of this Guidance Note on Audit of liabilities, Chapter 9 of the Statement on Auditing Practices, titled 'Liabilities', shall stand withdrawn. In due course of time, the entire Statement on Auditing Practices shall be withdrawn. 

INTRODUCTION

3. Liabilities are the financial obligations of an enterprise other than owners' funds. 

4. Liabilities include loans and borrowings, trade creditors and other current liabilities, deferred payment credits, instalments payable under hire purchase agreements, and provisions. Besides liabilities, this Guidance Note also deals with contingent liabilities, i.e., obligations relating to past transactions or other events or conditions that may arise in consequence of one or more future events which are presently deemed possible but not probable. 

5. Special considerations may apply in the case of audit of liabilities of specialised entities like banks, financial institutions and venture capital funds. 

6. Liabilities generally constitute significant proportion of the total sources of funds of an entity. The audit of liabilities is primarily directed at ensuring that all known liabilities have been properly accounted for, since material omission or mis-statement vitiates the true and fair view of the financial statements. 

7. An important feature of liabilities which has a significant effect on the related audit procedures is that these are represented only by documentary evidence which originates mostly from third parties in their dealings with the entity.  

8. In any auditing situation, the auditor employs appropriate procedures to obtain reasonable assurance about various assertions (see Statement on Standard Auditing Practices 5, Audit Evidence). In carrying out an audit of liabilities, the auditor is particularly concerned with obtaining sufficient appropriate audit evidence to satisfy himself that all known liabilities are recorded and stated at fair and reasonable amounts. 

INTERNAL CONTROL EVALUATION 

9. The auditor should study and evaluate the system of internal control relating to liabilities to determine the nature, timing and extent of his other audit procedures. He should particularly review the following aspects of the internal control relating to liabilities. 2

(a)   In respect of loans and borrowings (including advances and deposits)

i) As far as possible, the following should be clearly specified:

‑ the borrowing powers and limits;
‑ persons authorised and competent to borrow;
‑ terms of borrowings;
‑procedure for ensuring compliance with relevant legal requirements/internal regulations.

ii) Any variations in the terms of loans and borrowings should be duly approved/ratified in writing by competent authority. 

iii) Security offered against loans and borrowings should be properly recorded and periodically reviewed. 

iv) The records and documents should be kept in proper custody and reviewed periodically.

v) The system should bring out all cases of non‑compliance with terms and conditions including amounts of principal and/or interest which have become overdue.

vi) Confirmation of balances should be obtained at periodic intervals and the discrepancies, if any, should be duly investigated and reconciled.

vii) There should be a proper procedure for year‑end valuation of loans and borrowings, especially for those designated in foreign currencies.3

(b) In respect of trade creditors

i) The procedure should ensure proper recording& transactions and facilitate the linking of payments with outstandings. 

ii) The payments made to creditors should be in line with the approved policies of the entity. 

iii) There should be specific procedures for payments against duplicate invoices or other duplicate records as well as for payments against accounts which have remained unclaimed for quite some time. 

iv) There should be a procedure for preparation of schedules of trade creditors at periodic intervals; this should be reviewed by a responsible person and necessary action initiated on overdue accounts. 

v) Statements of account should be called for from creditors at periodic intervals and the discrepancies, if any, should be duly investigated and reconciled. 

vi) All adjustments in the creditors' accounts such as those relating to claims for returns, defectives, short receipts of goods, rebates, allowances and commissions etc., should require approval of competent authority. Similarly, any write‑back of creditors' balances and escalation claims should be approved by competent authority. 

vii) There should be appropriate cut‑off procedures in relation to transactions affecting the creditor accounts.

(c) In respect of other current liabilities, trade deposits and provisions

The internal control procedures as spelt out above for loans and borrowings and creditors broadly apply in relation to these items.

10. In respect of contingent liabilities, the auditor should examine the internal control system of the entity provides for a procedure for identifying and estimating such liabilities and for periodic review of the same.

VERIFICATION

    11. Verification of liabilities may be can by employing the following procedures:

(a) examination of records;

(b) direct confirmation procedure;

(c) examination of disclosure;

(d) analytical review procedures;

(e) obtaining management representations.

The nature, timing and extent of substantive procedures to be performed is, however, a matter of professional judgment of the auditor which is based, inter alia, on the auditor's evaluation of the effectiveness of the related internal controls.

EXAMINATION OF RECORDS

Loans and borrowings

12. The auditor should satisfy himself that the loans obtained are within the borrowing powers of the entity.  

13. The auditor should carry out an examination of the relevant records to judge the validity and accuracy of the loans. 

14. In respect of loans and advances from banks, financial institutions and others, the auditor should examine that the book balances agree with the statements of the lenders. He should also examine the reconciliation statements, if any, prepared by the entity in this regard. 

15. The auditor should examine the important terms in the loan agreements and the documents, if any, evidencing charge in respect of such loans and advances. He should particularly examine whether the requirements of the applicable statute regarding creation and registration of charges have been complied with. 

16. Where the entity has accepted deposits, the auditor should examine whether the directives issued by the Reserve Bank of India or other appropriate authority are compiled with.

17. In case the value of the security falls below the amount of the loan outstanding, the auditor should examine whether the loan is classified as secured only to the extent of the market value of the security. 

18. Where short‑term secured loans have been disclosed separately from other secured loans, the auditor should verify the correctness of the amount of such short‑term loans.

19. Where instalments of long‑term loans falling due within the next twelve months have been disclosed in the financial statements (e.g., in parentheses or by way of a footnote), the auditor should verify the correctness of the amount of such instalments.

20. The auditor should examine the hire purchase agreements for the purchase of assets by the entity and ensure the correctness of the amounts shown as outstanding in the accounts and also examine the security aspect. Future instalments under hire purchase of assets may be shown as secured loans.

21. The deferred payment credits should be verified with reference to the important terms in the agreement, including due dates of payments and guarantees furnished by banks. The auditor should also verify the copies of hundies/bills accepted separately.

Trade Creditors and Other Current Liabilities 

22. The auditor should check the adequacy of cut-off procedures adopted by the entity in relation to transactions affecting the creditor accounts. For example, the auditor may examine the documents relating to receipt of goods from suppliers during a few days immediately before the year‑end and verify that the related in     voices have been recorded as purchases of the current year. 

23. The auditor should check that the total of the creditors' balances agrees with the related control account, if any; the difference, if any, should be examined. 

24. The auditor should examine the correspondence and other relevant documentary evidence to satisfy himself about the validity, accuracy and completeness of creditors/acceptances. 

25. The auditor should verify that in cases where income is collected in advance for services to be rendered in future, the unearned portion, not applicable to the period under audit, is not recognised as income of the period under audit but is shown in the balance sheet as a part of current liabilities.

26. While examining schedule of creditors and other schedules such as those relating to advance payments, unclaimed dividends and other liabilities, the auditor should pay special attention to the following aspects:-

(a) long outstanding items;

(b) unadjusted claims for short supplies, poor quality, discount, commission, etc.;

(c) liabilities not correlated/adjusted against related advances;

(d) authorisation and correctness of transfers from one account to another.

Based on his examination as aforesaid, the auditor should determine whether any adjustments in accounts are required. 

27. In case there are any unusual payments around the year-end, the auditor should examine them thoroughly. In particular, the auditor should examine if the entries relating to any such payments have been reversed in the subsequent period. 

28. The auditor should review subsequent transactions to identify/confirm material liabilities outstanding at the balance sheet date. 

Provisions

29. The term 'provision' means amounts retained by way of providing for depreciation or diminution in value of assets or retained by way of providing for any known liability, the amount of which can not be determined with substantial accuracy. Provisions include those in respect of depreciation or diminution in the value of assets, product warranties, service contracts and guarantees, taxes and levies, gratuity, proposed dividend etc). This Guidance Note, however, does not deal with provisions for depreciation or diminution in the value of assets. 

30. The audit of provisions primarily involves examining the reasonableness and adequacy of the amounts provided for. The auditor should also examine that the provisions made are not in excess of what is reasonably required. 

Provisions for Taxes and Duties 

31. The adequacy of the provision for taxation for the year should be examined. The position regarding the overall outstanding liability of the entity as at the date of balance sheet should be reviewed. In respect of assessments completed, revised or rectified during the year, the auditor should examine whether suitable adjustments have been made in respect of additional demands or refunds, as the case may be. Similarly, he should examine whether excess provisions or refunds have been properly adjusted. The relevant orders received up to the time of audit should be considered and, on this basis, it should be examined whether any short pr visions have been made good. If there is a material tax liability for which no provision is made in the accounts, the auditor should qualify his report in this respect even if the reserves are adequate to cover the liability. 

32. If the entity disputes its liability in regard to demands raised, the auditor should examine whether there is a positive evidence or action on the part of the entity to show that it has not accepted the demand for payment of tax or duty, e.g., where it has gone into appeal under section 246 of the Income‑tax Act, 1961. Where an application for rectification of mistake (e.g., under section 154 of the Income‑tax Act, 1961) has been made by the entity, the amount should be regarded as disputed. Where the demand notice/intimation for the payment of tax is for a certain amount and the dispute relates to only apart and not the whole of the amount, only such amount should be treated as disputed. A disputed tax liability may require a provision or suitable disclosure (see Accounting Standard‑‑ (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date issued by the Institute of Chartered Accountants of India). In determining whether a provision is required, the auditor should, among other procedures, make appropriate inquiries of management, review minutes of the meetings of the board of directors and correspondence with the entity's lawyers, and obtain appropriate management representations.  

33. In case the entity has made e provision for taxation on the basis of the‑tax‑effect accounting method, the auditor should examine whether the method has been applied properly. 4

Provision for Gratuity

34. The auditor should examine whether the entity is required to pay gratuity to its employees by virtue of the provisions of the Payment of Gratuity Act, 1972 and/or in terms of agreement with employees and, if so, whether provision for accruing gratuity liability has been made by the entity.5 The auditor should examine the adequacy of the gratuity provision with reference to the actuarial certificate obtained by the entity. In case the entity has not obtained such an actuarial certificate, the auditor should examine whether the method followed by it for calculating the accruing liability for gratuity is rational.

Provision for Bonus

35. In the case of provision for bonus, the auditor should examine whether the liability is provided for in accordance with the Payment of Bonus Act, 1965 and/or agreement with the employees or award of competent authority. Where the bonus actually paid is in excess of the amount required to be paid as per the provisions of the applicable law/agreement/award, the auditor should specifically examine the authority for the same (e.g., resolution of the board of directors in the case of a company). 

Provision for Dividends

36. The auditor should examine that dividends are provided for as per applicable provisions of the relevant laws and rules framed thereunder, relevant agreements and resolutions. 

Other Provisions

37. Where provisions are made for liabilities that may arise on account of product warranties, service contracts, performance warranties etc., the auditor should examine whether the provisions made are in accordance with Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date, issued by the Institute of Chartered Accountants of India. The auditor should also examine the reasonableness of the basis adopted for quantifying the provision with reference to the relevant agreements.

Contingent Liabilities

38. The term 'contingent liabilities' refers to obligations relating to past transactions or other events or conditions that may arise in consequence of one or more future events which are presently deemed possible but not probable. Contingent liabilities may or may not crystallize into actual liabilities. If they do become actual liabilities, they give rise to a loss or an expense. The uncertainty as to whether there will be any legal obligation differentiates a contingent liability from a liability that has crystallized. Contingent liabilities should also be distinguished from those contingencies which are likely to result in a loss (i.e., a loss is not merely possible but probable) and which, therefore, require an adjustment of relevant assets or liabilities.6 Some of the instances 'giving rise to contingent liabilities are: 

(a) law suits, disputes and claims against the entity not acknowledged as debts;

(b) membership of a company limited by guarantee.

39. The following general procedures may be useful in verifying contingent liabilities.

 (a) Review of minutes of the meetings of board of directors/committees of board of directors/other similar body.

(b) Review of contracts, agreements and arrangements.

(c) Review of list of pending legal cases, correspondence relating to taxes, duties, etc.

(d) Review of terms and conditions of grants and subsidies availed under various schemes.

(e) Review of records relating to contingent liabilities maintained by the entity.

(0 Enquiry of, and discussions with, the management and senior officials of the entity.

(g) Representations from the management.

40. The auditor should verify that contingent liabilities do not include any items which require an adjustment of relevant assets or liabilities.

DIRECT CONFIRMATION PROCEDURE

41. The verification of balances by direct communication with creditors is theoretically the best method of ascertaining whether the balances are genuine, accurately stated and undisputed, particularly where the internal control system is weak. However, the utility of this procedure depends to a large extent on receiving adequate response to confirmation requests. Therefore, in situations where the auditor has reasons to believe, based on his past experience or other factors, that it is unlikely that adequate response would be received from the creditors, he may limit his reliance on direct confirmation procedure and place greater reliance on the other auditing procedures.

42. The auditor employs direct confirmation procedure with the consent of the entity under the audit. There may be situations where the management of the entity requests the auditor not to seek confirmation from certain creditors. In such cases, the auditor should consider whether there are valid grounds for such a request. For example, the management may explain the reason as being the fact that there is a dispute with the particular creditor and the request for confirmation may aggravate sensitive negotiations between the entity and the creditor. Before accepting a refusal as justified, the auditor should examine any available evidence to support the management's explanations, e.g., correspondence between the entity and the creditor. In such a case, alternative procedures should be applied to creditors not subjected to confirmation. In appropriate cases, the auditor may also need to reconsider the nature, timing and extent of his audit procedures including the degree of planned reliance on management's representations.

43. The confirmation date, the method of requesting confirmations, and the particular creditors from whom confirmation of balances is to be obtained are to be determined by the auditor. While determining the information to be obtained, the form of confirmation, as well as the extent and timing of application of the confirmation procedure, the auditor should consider all relevant factors such as the effectiveness of internal control, the apparent possibility of disputes, inaccuracies or irregularities in the accounts, the probability that requests will receive consideration, and the materiality of the amount involved.

44. The creditors may be requested to confirm the balances either (a) as at the date of the balance sheet, or (b) as at any other selected date which is reasonably close to the date of the balance sheet. The date should be settled by the auditor in consultation with the entity. Where the auditor decides to seek confirmation from the creditors at a date other than the balance sheet date, he should examine the movements in creditor balances which occur between the confirmation date and the balance sheet date and obtain sufficient evidence to satisfy himself that creditor balances stated in the balance sheet are not materially misstated.

45. The form of requesting confirmation from the creditors may be either (a) the 'positive' form of request, wherein the creditor is requested to respond whether or not he is in agreement with the balance shown, or (b) the 'negative' for of request, wherein the creditor is requested to respond only if he disagrees with the balance shown.

46. The use of the positive form is preferable when individual account balances are relatively large, or where the internal controls are weak, or where the auditor has reason to believe that there may be a substantial number of accounts in dispute or with inaccuracies or irregularities. An illustrative positive form of request letter is given in Appendix I to this Guidance Note.

47. The negative form is useful when internal controls are considered to be effective, or when a large number of small balances are involved, or when the auditor has no reason to believe that the creditors are unlikely to respond. If the negative rather than the positive form of confirmation is used, the number of requests sent and the extent of the other auditing procedures to be performed should normally be greater so as to enable the auditor to obtain the same degree of assurance with respect to the creditor balances. An illustrative negative form of request letter is given in Appendix II to this Guidance Note.

48. In many situations, it may be appropriate to use the positive form for creditors with large balances and the negative form for creditors with small balances.

49. Where the number of creditors is small, all of them may be circularised, but if the creditors are numerous, this may be done on a sample basis. The sample list of creditors to be circularised, in order to be meaningful, should be based on a complete list of all creditor accounts. While selecting the creditors to be circularised, special attention should be paid to accounts with large balances, accounts with old outstanding balances, and supplier accounts with debit balances. In addition, the auditor‑should select accounts in respect of which balances have been written back to the profit and loss account. In such cases, the auditor may decide that the balance as per the books of the entity may not be stated in the request letter sent to the creditors concerned; instead, the creditors may be asked to intimate the balance as per their records. The auditor may also consider including in his sample some of the accounts which have been fully squared up. The nature of the entity's business and the type of third parties with whom the entity deals, should also be considered in selecting the sample, so that the auditor can reach appropriate conclusions about the creditors as a whole.

50. Inappropriate cases, the creditor may be sent a copy of his complete ledger account for a specific period as shown in the entity's books. This procedure is more likely to reveal errors and fraud and may be particularly useful in the case of large accounts involving many entries, or where there is evidence that accounts are in dispute or are not being settled in accordance with the usual trade terms.

51. The method of selection of the creditors to be circularised should not be revealed to the entity until the trial balance of the creditors' ledger is handed over to the auditor. A list of creditors selected for confirmation should be given to the entity for preparing requests for confirmation which should be properly addressed and duly stamped. The auditor should maintain strict control to ensure the correctness and proper dispatch of request letters. I nthe alternative, the auditor may request the client to furnish duly authorised confirmation letters and the auditor may fill in the names, addresses and the amounts relating to creditors selected by him

and mail the letters directly. It should be ensured that confirmations as well as any undelivered letters are returned to the auditor and not to the client.

52. Where positive form of request is used, the auditor may, in appropriate cases, request the entity to follow up with a reminder to those creditors from whom he receives no replies. In exceptional circumstances, the auditor may also correspond directly with those significant creditors from whom he receives no replies despite reminders, with intimation to the entity. In the event of inadequacy of responses received, the auditor will have to increase the extent of examination of records and analytical review procedures beyond that planned originally.

53. Any discrepancies revealed by the confirmations received or by the additional tests carried out by the auditor may have a bearing on other accounts not included in the original sample. The entity should be asked to investigate and reconcile the discrepancies. In addition, the auditor should also consider what further tests he can carry out in order to satisfy himself as to the correctness of the amount of creditors taken as a whole.

EXAMINATION OF DISCLOSURE

54. The auditor should satisfy himself that the liabilities have been disclosed properly in the financial statements. Where the relevant statute lays down any disclosure requirements in this behalf, the auditor should examine whether the same have been complied with.

55. In some cases, loans are guaranteed by third parties in whose favour the assets of the entity are charged. The auditor should examine whether the disclosures concerning such loans are appropriate, e.g. they may be classified as secured with disclosure of the fact that the assets of the entity have been charged in favour of third parties which, in turn, have given guarantees to parties from whom loans have been obtained.

56. The auditor should recommend to the entity to disclose, in parentheses or in footnotes, the instalments of term loans, if any, falling due for repayment within the next twelve months.

57. The auditor should examine that the following have been disclosed in respect of contingent liabilities:

(a) nature of each contingent liability;

(b) the uncertainties which may affect the future outcome;

(c) an estimate of the financial effect or a statement that such estimate cannot be made.

ANALYTICAL REVIEW PROCEDURES

58. In addition to the audit procedures discussed above, the following analytical review procedures may often be helpful as a means of obtaining audit evidence regarding the various assertions:

(a) comparison of closing balances of loans and borrowings, creditors, etc. with the corresponding figures for the previous year;

(b) comparison of the relationship between current year creditor balances and the current year purchases with the corresponding figures for the previous year;

(c) comparison of actual closing balances of loans and borrowings, creditors, etc. with the corresponding budgeted figures, if available;

(d), comparison of current year's aging schedule of creditors with the corresponding figures for the previous year;

(e) comparison of significant ratios relating to loans and borrowings, creditors, etc. with the similar ratios for other firms in the same industry, if available;

(f) comparison of significant ratios relating to loans and borrowings, creditors, etc. with the industry norms, if available.

It may be clarified that the foregoing is only an illustrative list of analytical review procedures which an auditor may employ in carrying out an audit of liabilities. The exact nature of analytical review procedures to be applied in a specific situation is a matter of professional judgment of the auditor.

SPECIAL CONSIDERATIONS IN THE CASE OF A COMPANY

59. In addition to the procedures described above, the auditor should also employ the following procedures in the case of audit of a company.

(a) In determining whether the loans obtain by the company are within its powers, the auditor should scrutinise its memorandum and articles of association and also examine whether the provisions of sections 292 and 2930)(d) of the Companies Act, 1956 are complied with.

(b) The auditor should examine the register of charges to ensure that charges have been duly registered. He should also ensure that the description of such charges disclosed in the balance sheet agrees in substance with that stated in the documents creating the charges.

(c) The auditor should examine all loans taken from bodies corporate under the same management or from a company, firm or other party in which any director is interested and determine whether, in his opinion, the rate of interest and other terms and conditions of the loans are prima facie prejudicial to the interest of the company.7

(d) Where the company has accepted deposits, the auditor should examine compliance with the relevant legal provisions, e.g., section 58A of the Companies Act, 1956 and the rules framed thereunder/directions issued by the Reserve Bank of India.

(e) In respect of unclaimed dividends, the auditor should examine whether the company has complied with the provisions of section 205A of the Companies Act, 1956 and the rules framed thereunder regarding transfer of certain unpaid or unclaimed dividends to a special bank account/general revenue account of the Central Government.

(f) The auditor should examine whether any undisputed amounts payable in respect of income-tax, wealth-tax, sales tax, customs duty and excise duty are outstanding as at the balance sheet date for a period of more than six months from the date they became payable. If so, the auditor should report the amounts of such outstanding dues.8

(g) The verification procedure to be adopted by the auditor for audit of debentures would vary from year to year depending upon whether fresh debentures are issued and/or they are redeemed or converted into shares during the year. In case of fresh issue of debentures, the auditor should examine the memorandum and articles of association of the company and resolutions authorising the issue. He should also examine compliance with the requirements of the terms of issue and any variations thereof and necessary approvals/clearances for the issue from authorities concerned such as SEBI, RBI etc. The auditor should also examine that proper accounts are maintained with regard to amounts received towards application, allotment and calls and that the payments by way of refunds/interest and all other relevant accounts are duly reconciled. There debentures are issued at a premium/discount, the auditor should ensure that such sums are accounted for distinctly. In case of buy-back, conversion, re-issue or redemption of debentures, the auditor should examine that these are in accordance with the terms of the issue. The auditor should examine that the requirements relating to creation of debenture redemption reserve and, where applicable, sinking fund and its investment and other related requirements are complied with.

MANAGEMENT REPRESENTATIONS

60. The auditor should obtain from the management of the entity a written statement that all known liabilities have been recorded in the books and that all contingent liabilities have been properly disclosed. While such a representation letter serves as a formal acknowledgement of the management's responsibilities for proper accounting and disclosure of the relevant items, it does not relieve the auditor of his responsibility for performing audit procedures to obtain sufficient appropriate audit evidence to form the basis for the expression of his opinion on the financial statements. A sample management representation letter regarding liabilities and contingent liabilities is given in Appendix III to this Guidance Note. It may be mentioned that the representations made in the letter can alternatively be included, in the composite representation letter usually issued by the management to the auditor.

DOCUMENTATION

61. The auditor should maintain adequate working papers regarding audit of liabilities and contingent liabilities. Among others, he should maintain on his audit file the confirmations received as well as any undelivered letters of request for confirmation. The management representation letter concerning liabilities and contingent liabilities should also be maintained on the audit file.

APPENDIX I

ILLUSTRATIVE LETTER OF CONFIRMATION TO BE SENT TO CREDITORS ‑ POSITIVE FORM

[REF. PARAGRAPH 46]

[Letterhead of Entity]

[Date]

[Name and Address of Creditor]

Dear Sir,

    For audit purposes, kindly confirm directly to our auditors (name and address of the auditors) that

the balance of Rs._________ due by us to you as on ________   as shown by our books, is correct.

The details of the balance are as under:9

Invoice No. Date Order Reference Amount
      _________
    Total  
    Less: Payments made/other debits __________
    Net amount due by us (Rs.) __________
       

A stamped envelope addressed to our auditors is enclosed for your convenience.

If the amount shown is in agreement with your books, kindly strike‑out the paragraph marked (B) below. If the amount shown is not in agreement with your books, kindly furnish the details in the proforma given in the paragraph marked (B) below and strike‑out paragraph (A). In either case, kindly sign at the place provided below and return this entire letter directly to our auditors in the enclosed envelope. Your prompt compliance with this request will be appreciated.

Kindly return this form in its entirety.

Yours faithfully,

(Signature of responsible
official of the entity)


(Do not perforate the form at this point)

 [Name and Address of Entity] 

(A) We confirm that the above stated amount is correct as at _________.

                                                     OR

(B) We state that the above‑stated amount is not correct as per our records. The details of the balance as at ________ as per our records are as below:

Invoice No. Date Order Reference Amount
      _________
    Total  
    Less: Payments made/other debits __________
    Net amount due by us (Rs.) __________
       

(Signature of creditor/
responsible official)

  Date ............. .......

 APPENDIX II

ILLUSTRATIVE LETTER OF CONFIRMATION TO BE SENT TO CREDITORS ‑ NEGATIVE FORM
[REF. PARAGRAPH 47]

[Letterhead of Entity]

[Date]

[Name and Address of Creditor]

Dear Sir,

    For audit purposes, kindly write directly to our auditors (name and address of the auditors) if the

balance of Rs. _______ due by us to you as on _______, as shown by our books, is not correct,

giving details of the differences. The details of the balance are as under:10

Invoice No. Date Order Reference Amount
      _________
    Total  
    Less: Payments made/other debits __________
    Net amount due by us (Rs.) __________
       

 

If you do not notify our auditors of any difference within ten days of the date of this letter, it will be presumed that the balance stated above is correct.

A stamped envelope addressed to our auditors is enclosed for your convenience.

Yours faithfully,

(Signature of responsible
official of the entity)

 APPENDIX III

ILLUSTRATIVE REPRESENTATION LETTER FOR LIABILITIES AND CONTINGENT LIABILITIES
[REF. PARAGRAPH 60]

The following is a sample representation letter for liabilities and contingent liabilities. It might be used to supplement the general letter of representation or included therein. The letter should be modified where appropriate.

[Letterhead of Entity]

[Date]

[Name and Address of the Auditor]

Dear Sir,

In connection with your audit of the financial statements of X Ltd. as of ..19.., and for the year then ended, we confirm, to the best of our knowledge and belief, the following representations:

1. We have recorded all known liabilities in the financial statements.

2. We have ' disclosed in notes to the financial statements all guarantees that we have given to third parties and all other contingent liabilities.

3. Contingent liabilities disclosed in the notes to the financial statements do not include any contingencies which are likely to result in a loss and which, therefore, require adjustment of assets or liabilities.

4. Provisions have been made in the accounts for all known losses and claim of material amounts.

Yours faithfully,

(Signature of responsible
official of the entity)

 

 

1 With the formation of the Auditing Practices Committee in 1982, the Council of the Institute has been issuing a series of Statements on Standard Auditing Practices (SAPs). Statements on Standard Auditing Practices lay down the principles governing an audit. These principles apply whenever an independent audit is carried out. Statements on Standard Auditing Practices become mandatory on the dates specified in the respective SAPs. Their mandatory status implies that, while discharging their attest function, it will be the duty of the members of the Institute to ensure that the SAPs are followed in the audit of financial information covered by their audit reports. If, for any reason, a member has not been able to perform an audit in accordance with the SAPs, his report should draw attention to the material departures therefrom.
The Auditing Practices Committee has also been issuing, from time to time, guidance notes on issues arising from SAPs. The Guidance Notes provide guidance on procedures to be employed by an auditor in order to comply with the principles laid down in SAPs. It is recognised that in determining the nature, timing and extent of audit procedures to be employed in a specific situation, an auditor will have to exercise his professional judgment. The Guidance Notes, therefore, are recommendatory. A member should ordinarily follow the recommendations in a guidance note relating to an auditing matter except where he is satisfied that, in the circumstances of the case, it may not be necessary to do so.

2 The extent of review of controls would depend upon the facts and circumstances of each case. Reference may be made in this regard to the Internal Control Questionnaire, issued by the Institute of Chartered Accountants of India which contains, inter alia, an illustrative list of internal controls in relation to creditors and borrowings.

3 Reference may made in this regard to Accounting Standard 11, Accounting for the Effects of Changes in Foreign Exchange Rates, issued by the Institute of Chartered Accountants of India.

4 Reference may be made in this regard to the Guidance Note on Accounting for Taxes on Income issued by the Accounting Standards Board of the institute of Chartered Accountants of India.

5 Reference may be made in this regard to Accounting Standard (AS) 15, Accounting for Retirement Benefits in the Financial Statements of Employers, issued by the Institute of Chartered Accountants of India.

6 Reference may be made in this regard to Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date, issued by the Institute of Chartered Accountants of India.

7 Reference may also be made in this regard to the Statement on the Manufacturing and Other Companies (Auditor's Report) Order, 1988 issued by the Institute of Chartered Accountants of India.

8 Reference may also be made in this regard to the Statement on the Manufacturing and Other Companies (Auditor's Report) Order, 1988 issued by the institute of Chartered Accountants of India.

9 In case the list of invoices forming the balance is too large, these details may not be given.

10 In case the list of invoices forming the balance is too large, these details may not be given.