Page 160 - CA Inter Audit PARAM

CA Ravi Taori
If we examine the Balance Sheet of a company, at a given time, and deduct the total liabilities to
outside trade payables from the value of assets shown therein, the difference between the two
figures will represent the net worth of the company based on the book values of assets as on that
date. The same shall include the capital contributed by the shareholders as well as total
undistributed profit held either to the credit of the Statement of Profit and Loss or to reserves;

Reserves – Revenue v/s Capital
The reserves again will be segregated as revenue or capital reserves. Revenue reserves represent
profits that are available for distribution to shareholders held for the time being or any one or
more purpose.
• Examples- to supplement divisible profits in lean years, to finance an extension of business, to
augment the working capital of the business or to generally strengthen the company’s
financial position.

Capital Reserve
Represents a reserve which does not include any amount regarded as free for distribution through
the Statement of Profit and Loss
• Examples- share premium, capital redemption reserve.

It may be noted that if a company appropriates revenue profit for being credited to the asset
replacement reserve with the objective that these are to be used for a capital purpose, such
a reserve shall also be in the nature of a capital reserve.

Capital Reserve – Utilization
A capital reserve, generally, can be utilized for writing down fictitious assets or losses or (subject
to provisions in the Articles) for issuing bonus shares if it is realized.
But the amount of share premium or capital redemption reserve account can be utilized only for
the purpose specified in Sections 52 and 55 respectively of the Companies Act, 2013
Author’s Note
This is a master answer you can write the relevant aspect of the master answer as per what the
question is asking.

QNO B/S (Borrowings Existence)- Old Course – (M18M/N18M)
AIFS.23 Bhaskar CNO - AIFS-P1.100 New Course – (S24R)
Ongoing through the financial statements of PQR Ltd, its auditors Kamal Gagan and Associates observed
that company has taken Loans from banks and financial institutions. Further, the audit team discusses the
following about Liabilities: Liabilities are the financial obligations of an enterprise other than owners’ funds.
Liabilities include loans/ borrowings, trade payables and other current liabilities, deferred payment credits
and provisions. Verification of liabilities is as important as that of assets, for, if any liability is omitted (or
understated) or overstated, the Balance Sheet would not show a true and fair view of the state of affairs of
the company. Advise clearly stating the audit procedures generally required to be undertaken for
verification of existence of Borrowings.
OR
The financial statements of XYZ Limited show long-term borrowings from the banks, financial institutions,
leasing, and hire purchase companies. Additionally, the company has issued debentures to its 1000
members to raise funds in accordance with the provisions of the Companies Act, 2013. The money raised
by issuing debentures is also reflected in long-term borrowings. As the statutory auditor of XYZ Limited, CA
X wants to verify that all borrowings on the balance sheet represent valid claims by banks or other third
parties. Suggest a few audit procedures in this regard.
Answer ➢ Existence
Review board minutes for approval of new lending agreements.
Ensure that significant debt commitments should be approved by the board of directors.
During review, make sure that any new loan agreements or bond issuances are authorized.
Agree details of loans recorded (interest rate, nature and repayment terms) to the loan
agreement. Verify that borrowing limits imposed by agreements are not exceeded.
Agree details of leases and hire purchase creditors recorded to underlying agreement.

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