Audit of explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
For liabilities the main audit question is completeness: is everything the entity owes in the books? For cash and bank the main question is existence. This article explains how auditors test trade payables, expenses, provisions and cash and bank, and what an accountant should prepare. Supplier and bank reconciliations are part of routine books of accounts and compliance support.
This article is based on the Standards on Auditing issued by ICAI as in force on 4 October 2026; ICAI may revise standards, so check the current text on icai.org. Each standard is explained in our linked posts; here they are applied to a group of balances.
The auditor's key risk on payables, expenses and provisions is understatement, so the work centres on the search for unrecorded liabilities. Bank balances are normally confirmed directly with the bank (SA 505, paragraph 7), and bank reconciliations are tested for old or unusual reconciling items. For litigation and claims, the auditor identifies matters through inquiry and records and, where the risk is assessed, writes to the entity's external legal counsel (SA 501, paragraphs 9 and 10). Subsequent payments are good evidence on completeness (SA 560).
The assertions and where the risk lies
| Balance | Main risk | Key assertions |
|---|---|---|
| Trade payables | Liabilities omitted or booked in the wrong period | Completeness, cut-off, accuracy |
| Expenses | Costs unrecorded or deferred; personal or non-business spending | Completeness, occurrence, classification |
| Provisions and contingencies | Too little provided, or reserves built up in good years | Completeness, valuation, presentation and disclosure |
| Cash on hand | Cash not there or not recorded | Existence, completeness |
| Bank balances | Differences hidden in reconciling items; unrecorded accounts or borrowings | Existence, completeness, rights and obligations |
Management often has an incentive to show lower liabilities, so the auditor starts from the position that the books may be incomplete. Our posts on SA 315 and SA 330 deal with identifying risks and designing responses.
The search for unrecorded liabilities
The auditor looks beyond the payables ledger, because the unrecorded items are not in it. Typical steps:
- Examine payments after year end, including cheques and transfers cleared in the first weeks of the next period, and trace each to the liability and the period it belongs to. Under SA 560, paragraphs 6 and 7, the auditor has to obtain evidence that events up to the date of the report that need adjustment or disclosure have been identified, and payments after year end are part of that evidence.
- Review unmatched goods received notes, service entry sheets and invoices received after year end, and expense invoices dated after year end that relate to the year.
- Compare supplier statements with the ledger for the main suppliers and investigate differences.
- Read board and committee minutes, contracts, correspondence with regulators and lenders for obligations not in the books.
- Compare expense categories with earlier years and with expectations; sharp falls in repairs, professional fees, freight or interest are a pointer to cut-off errors (see SA 520).
The auditor may also confirm balances with suppliers. SA 505 applies: the auditor controls the process, sends requests, handles non-replies with alternative procedures, and investigates exceptions (paragraphs 7, 12 and 14). Confirmations from suppliers are less common than from customers because the question is whether there are unrecorded items, and a supplier's reply covers only what is in the supplier's records. For the structure of ageing disclosure, see the ageing schedules post and, for accruals, the post on unbilled payables.
Expenses
Expenses are tested by vouching a sample to invoices, approvals and payment, checking classification between revenue and capital, and checking that payments to related parties, directors and unusual payees are supported and disclosed. Expense accruals at year end are tested for reasonableness against later invoices. The related-party side is covered by SA 550.
Provisions, contingencies, litigation and claims
For provisions the auditor checks the basis for each against the accounting standard, the most reasonable estimate of the amount and the disclosure of contingent liabilities; the principles are in AS 29. Estimates are tested under SA 540.
For litigation and claims, SA 501, paragraph 9, requires procedures to identify those that may give rise to a risk of material misstatement: inquiry of management and in-house counsel, review of minutes and correspondence with external counsel, and review of legal expense accounts. Where the risk is assessed or other matters may exist, paragraph 10 requires direct communication with the entity's external legal counsel through a letter of inquiry prepared by management and sent by the auditor. If management refuses permission or counsel does not respond appropriately and alternatives fail, the opinion is modified (paragraph 11), and written representations on litigation and claims are requested (paragraph 12). See our post on SA 501.
Cash and bank balances
| Test | What the auditor does | Evidence |
|---|---|---|
| Bank confirmation | Send a request to each bank the entity dealt with in the year, including accounts closed or with nil balance | Bank's direct reply on balances, facilities, charges, guarantees |
| Bank reconciliation | Recompute; check old uncleared cheques, items in transit, unusual transfers near year end | Reconciliation, bank statements, subsequent clearing |
| Cash count | Count cash on hand with management, or reconcile to a count made close to year end | Count sheet signed by custodian |
| Cut-off | Check that receipts and payments near year end are in the right period; look for window dressing between accounts | Bank statements before and after year end |
| Borrowings and rights | Use the bank reply to spot loans, charges and guarantees not in the books | Confirmation, loan files |
A bank is chosen as a confirming party because its reply is relevant and reliable, and the process must be under the auditor's control (SA 505, paragraph 7). A balance that is "confirmed" but whose reconciliation includes an item that stays uncleared for months should still prompt further questions.
Worked example (illustrative)
Vivek Polymers Pvt Ltd, an invented manufacturer, reports trade payables of Rs 14 crore and professional fees of Rs 18 lakh, down from Rs 31 lakh. The auditor reviews payments for April and May and finds Rs 22 lakh paid for services rendered in March that is not accrued; of that, Rs 15 lakh is legal fees on a dispute. The auditor then reads the legal expense account and writes to the external counsel, who reports a claim of an illustrative Rs 1.1 crore with an unfavourable view on part of it. Management had treated it as remote. After discussion, a provision is made for the part considered probable and the balance is disclosed as a contingency. Bank confirmations arrive for five banks; one shows a guarantee of Rs 60 lakh issued on the company's behalf that was not in the books of account or the notes, and this is added to the disclosures.
Documents to keep ready
- Supplier-wise payables ledger and reconciliations of major supplier statements.
- Goods received and service entry records not yet invoiced at year end.
- Payment details for the weeks after year end.
- Bank statements for all accounts for the year, reconciliations at year end, list of bank accounts with authorised signatories.
- Cash count certificate.
- List of litigation, notices and claims with status, and legal counsel details.
- Basis for provisions, with supporting calculations.
Common lapses
- Payables listing missing bills received late.
- Reconciling items that have sat uncleared for months with no action.
- Dormant or closed bank accounts left out of the list for confirmation.
- Claims known to the legal team but not communicated to the finance team.
- Provisions reversed in a good year with no support.
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Key takeaways
- On liabilities the main risk is omission, so the work is a search for unrecorded items.
- Payments after year end are strong evidence for completeness (SA 560).
- Bank confirmations cover every bank dealt with, including closed accounts.
- The auditor writes to external legal counsel where claims risk is assessed (SA 501, paragraph 10).
- Written representations on completeness and on litigation are requested (SA 580, paragraph 10; SA 501, paragraph 12).
Read next
- Audit of revenue and trade receivables
- Audit of share capital, reserves and borrowings
- SA 560, subsequent events
- Internal audit of treasury and related party transactions
Disclaimer: Based on the Standards on Auditing, the review, assurance and related services standards, the Compendium of Standards on Internal Audit (as on 1 October 2022) and the Compendium of Forensic Accounting and Investigation Standards (as on September 2025) issued by the Institute of Chartered Accountants of India, in the versions named in the article, as consulted on 4 October 2026. ICAI revises standards from time to time; check the current text and effective dates on icai.org and the Companies Act provisions referred to. This article is general information, not legal advice; check the official text before acting.