Eye-opener: A profitable Balance Sheet can still contain serious accounting errors. Profit alone does not confirm that GST, TDS, loans, expenses, inventory and outstanding balances are correct.
Financial statements are important documents. Banks, tax authorities, investors, vendors and management may rely on them while making decisions.
For a company, the financial statements must present a true and fair view and comply with the applicable accounting standards and legal requirements. The Board approves the financial statements, while the auditor examines the records and reports in accordance with the applicable law and auditing standards.
Therefore, the business owner and management should understand the major balances before signing the accounts.
1. Bank balance does not match the bank statement
Obtain the Bank Reconciliation Statement for every bank account. Check old unpresented cheques, uncleared deposits, bank charges, interest, direct debits and unknown transactions.
A difference between the books and bank statement may indicate an unrecorded transaction, duplication or incorrect accounting entry.
2. Cash balance is unusually high or negative
A negative cash balance is normally not practical. A very high year-end cash balance should also be supported by the actual cash available and proper records.
The books show cash of ₹8 lakh, but the physical cash available is only ₹50,000 and there is no explanation for the difference.
3. GST turnover does not match the books
Reconcile the turnover reported in the financial statements with GSTR-1 and GSTR-3B. Review debit notes, credit notes, advances, exports, exempt supplies and amendments.
Also reconcile the input tax credit recorded in the books with GSTR-2B and identify blocked, ineligible or unreconciled credits.
4. TDS has not been deducted or deposited
Review professional fees, contractor payments, rent, commission, interest and other expenses that may attract TDS.
Verify whether TDS was deducted at the correct time and rate, deposited and reported in the relevant return. Non-compliance may result in interest, late fees, penalties and possible disallowance under the Income-tax Act.
5. Old receivables are still shown as recoverable
Review customer-wise ageing and identify balances that have remained unpaid for a long period. Obtain confirmations for material balances and check subsequent collections.
• Is the customer still operating?
• Is any invoice disputed?
• Was money collected after the year-end?
• Is a provision or write-off required?
6. Vendor balances are not confirmed
Match major creditor balances with vendor statements. Check unrecorded purchase invoices, duplicate entries, old advances, debit balances and payments made after the year-end.
Differences should be reconciled before the financial statements are approved.
7. Inventory is accepted without physical verification
The closing stock should be supported by quantity records, physical verification and valuation workings.
Match physical stock with accounting records.
Identify damaged, expired or slow-moving stock.
Apply the relevant accounting policy consistently.
8. Loans and advances do not have supporting documents
Obtain loan agreements, sanction letters, repayment schedules and balance confirmations. Check the interest rate, security, repayment terms and classification as current or non-current.
For companies, loans to or from directors, related parties and other entities should also be reviewed for disclosure and compliance under the applicable provisions.
9. Personal or capital expenditure is recorded as a business expense
Review large and unusual expenses. Personal payments should not be claimed as business expenses. Assets providing benefits over more than one period may require capitalisation instead of being fully charged as an expense.
Vehicle purchases, major machinery repairs, office renovation, computers, furniture, personal travel and payments without proper invoices.
10. Related-party transactions are not separately reviewed
Identify transactions with directors, partners, relatives, group entities and businesses under common control.
Check whether the transaction is properly authorised, supported, accounted for and disclosed under the applicable legal and accounting requirements.
Final checklist before signing
✓ All bank accounts are reconciled
✓ Cash balance is physically verified
✓ GST turnover and input tax credit are reconciled
✓ TDS compliance has been reviewed
✓ Receivables and payables are confirmed
✓ Inventory quantity and valuation are checked
✓ Loans are supported by documents
✓ Fixed assets and depreciation are reviewed
✓ Related-party transactions are identified
✓ Major audit observations are discussed and resolved
Signing without understanding is risky
Ask for explanations of major balances, changes from the previous year and unresolved audit observations. Management should approve the accounts only after understanding the financial position presented.
Need Professional Assistance With Your Accounts or Audit?
We can review your books, identify important reconciliation gaps and assist in completing the financial statements and audit requirements.
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