8 trial balance red flags juniors miss and partners spot in seconds

Give a junior and a partner the same trial balance. The junior checks that it totals, that cash is not negative and that the creditors have credit balances — useful work, and covered in our article on Tally ledger errors. The partner puts this year next to last year and looks at how the numbers relate to each other. Within minutes the partner has three questions for the client. This article is about those questions: eight signals in a trial balance as a whole that should change how you audit, why each one matters, what to ask, and the standard or law it ties to.

1. Sales grew, but debtors and GST did not follow

The signal. Revenue is up sharply on last year, while trade receivables are flat or down and the business has not changed its credit terms. Or the sales in the books do not move with the turnover in the GST returns.

Why a partner notices. In most businesses, more credit sales means more debtors at year end. When the two part company, either collections genuinely improved — which the client can usually show — or something in the revenue is not what it seems: sales booked in the last week, credit notes held back until April, or entries in revenue that are not sales at all. SA 240 requires the auditor to work on a presumption that there are risks of fraud in revenue recognition and to evaluate which types of revenue or assertions give rise to them. Its application material gives, as an example of an unusual relationship, income that is inconsistent with trends in cash flow from operations.

Ask the client. "Sales are up but debtors are not — what changed in collections? Please share the month-wise sales and the reconciliation of the books with GSTR-1 and GSTR-3B." Then look at March sales, April credit notes and the largest new customers.

2. The gross margin moved and nobody can say why

The signal. Gross margin is several points better or worse than last year, with no change in products, prices or suppliers. A close cousin: closing stock rises while sales fall, or falls while sales rise.

Why a partner notices. SA 520 names gross margin percentages as an example of a relationship expected to follow a predictable pattern based on the entity's experience. In a small company the closing stock figure is often management's own count and valuation, and it flows straight into the margin. A margin that jumped can be a stock figure that grew to deliver a profit; a margin that collapsed may be purchases booked without the matching sales, or slow-moving stock written down for the first time.

Ask the client. "Margin moved from X% to Y%. Which products or customers explain it? How was closing stock counted and valued, and what is the quantity reconciliation?" If the answer is vague, plan more work on inventory existence and valuation (SA 501 deals with attendance at physical counts).

3. Round-sum journal entries in the last days of March

The signal. Large, round amounts — ₹5,00,000 to "provision", ₹10,00,000 from one expense head to another, sales "adjustments" — passed as journal vouchers in the last week of the year or after the books were supposedly closed, often with no narration.

Why a partner notices. SA 240 requires journal entry testing in every audit, whatever the assessed risk of management override: the auditor must select journal entries and other adjustments made at the end of a reporting period and consider the need to test entries throughout the period. Its application material lists the characteristics of inappropriate entries, including entries recorded at the end of the period with little or no explanation, entries to seldom-used accounts, and entries containing round numbers or consistent ending numbers. The TB cannot show the entries, but a ledger that appeared only in March, or a suspiciously round balance, tells you where to look.

Ask the client. "Please send the journal register for 25–31 March and all entries passed after the first draft TB, with the basis for each." Document the selection and what you found; "journals checked" is not a working paper.

4. A new loan from a director or a new related-party ledger

The signal. Unsecured loans show a new lender with a surname you recognise from the Board, a director's current account has swung from debit to credit, or a new firm or company has appeared among the debtors or creditors.

Why a partner notices. Money from directors and their relatives sits close to several rules at once:

Ask the client. "Who is this lender and how are they related? Please share the declaration, the bank statement entries for receipt and repayment, and the Board's report disclosure." See our AS 18 checklist for the disclosure side.

5. "Other income" or "miscellaneous" doing too much work

The signal. Other income has doubled, or a "miscellaneous income", "sundry balances written back" or "miscellaneous expenses" ledger carries an amount that is material to the profit.

Why a partner notices. A catch-all head is where a write-back of old creditors, an insurance claim, a one-off settlement or a suspense clearance lands. Each can be legitimate, and each may need its own disclosure, tax treatment or audit evidence. Division I of Schedule III requires a company to disclose separately any item of income or expenditure that exceeds one per cent of revenue from operations or ₹1,00,000, whichever is higher — so a large "miscellaneous" line can itself be a disclosure gap. SA 240 also points to unusual year-end income as a relationship worth investigating.

Ask the client. "Please give the break-up of other income and miscellaneous expenses, with the source document for each item above [your threshold]." For creditors written back, ask why they are no longer payable.

6. Capital work-in-progress that never becomes an asset

The signal. CWIP is the same or larger than last year, the "new factory shed" has been in progress for three years, and depreciation has not moved.

Why a partner notices. Under AS 10 (Revised), depreciation begins when an asset is available for use. An asset that is in use but still sitting in CWIP understates depreciation and overstates profit. CWIP is also a convenient place for expenditure that should have been charged to profit. Division I of Schedule III now requires a CWIP ageing schedule (less than 1 year, 1–2, 2–3, more than 3 years) and, for projects whose completion is overdue or has exceeded its cost compared with the original plan, a completion schedule. Capital advances do not belong in CWIP; Schedule III places them under long-term loans and advances.

Ask the client. "Which projects are in CWIP, when did each start, when was it — or will it be — put to use? Please share the completion certificate or first-use evidence for anything already working."

7. Cash too low for a cash-heavy business — or too high

The signal. A retailer or restaurant reports large cash sales, but the year-end cash balance is a few thousand rupees and there are no regular bank deposits. The opposite also happens: a cash balance far above what the business needs, carried for months.

Why a partner notices. A low balance with high cash sales may mean unrecorded expenses paid from the till, or cash taken out without being recorded. A high balance may be a balancing figure that does not physically exist. Both point to a cash count at or near the year end and a look at the cash book for large receipts and payments. On the tax side, section 269ST of the Income-tax Act, 1961 bars receiving ₹2,00,000 or more otherwise than by account payee cheque, account payee draft or banking channels — in practice, in cash — from a person in a day, in respect of a single transaction, or for transactions relating to one event or occasion; where a tax audit applies, Form 3CD asks for details of such receipts and payments (clause 31(ba) to 31(bd)).

Ask the client. "Please share the cash count at year end, the daily cash summary for March, and the large cash receipts and payments during the year."

8. Statutory dues still outstanding at year end

The signal. GST payable, TDS payable, PF, ESI or professional tax ledgers show balances well above one month's liability, or balances that have barely moved since last year.

Why a partner notices. Old statutory dues usually mean a cash flow problem — which matters for going concern — and they carry reporting consequences:

• CARO 2020, clause 3(vii)(a): where CARO applies, the auditor reports whether undisputed statutory dues were deposited regularly and the arrears outstanding at the last day of the year for more than six months from the date they became payable. The ICAI Guidance Note notes that interest and penalty levied are covered within "amounts payable".
• Section 43B (Income-tax Act, 1961, for FY 2025-26): taxes, duties and the employer's contributions to PF and similar funds are allowed only on payment, with the deduction available if paid on or before the due date of the return. Employees' contributions deducted from salary are a stricter case — section 36(1)(va) allows them only if deposited by the due date under the relevant law (confirmed by the Supreme Court in Checkmate Services, 2022). Unpaid TDS falls under section 40(a)(ia) instead: 30% of the related expense is disallowed if the tax is not paid by the due date of the return. See our article on section 43B(h) for MSME dues.

Ask the client. "Please give the month-wise statement of each statutory due with the challan dates, and explain any balance older than six months." Compare the TDS payable with the TDS returns and the GST payable with the GSTR-3B.

What to do with a red flag

A red flag is not a finding. It is a question that needs an answer with evidence behind it. SA 520 requires that fluctuations or relationships that are inconsistent with other relevant information, or that differ significantly from what you expected, be investigated by inquiring of management, obtaining appropriate evidence for management's responses, and performing other procedures as needed. When the answer reveals a risk you had not identified, the plan changes — more testing on that area, not a note saying "explained by management".

Two more patterns are worth a look while you have the two years side by side: a provision (gratuity, warranty, doubtful debts) that was made last year and has been reversed or left out this year, and estimates that all lean the same way. SA 240 requires a review of accounting estimates for bias in every audit.

The habit that separates the partner's reading from the junior's is simple: always look at this year next to last year, and ask why each relationship changed. Teach the team to raise these questions before the file reaches review. Our SA 520 analytical review checklist and year-end query list help turn them into a routine.

Frequently asked questions

Sources

• ICAI — SA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements
• ICAI — SA 520 Analytical Procedures
• ICAI — SA 501 Audit Evidence — Specific Considerations for Selected Items
• ICAI — Guidance Note on CARO 2020 (Revised 2022 Edition)
• ICAI — Guidance Note on Division I – Non Ind AS Schedule III (Revised January 2022)
• Companies Act, 2013 — Schedule III, Division I, as amended (India Code)
• Companies Act, 2013 — sections 73–76 (India Code)
• Companies (Acceptance of Deposits) Rules, 2014 — rule 2(1)(c)(viii)
• Income-tax Act, 1961 — section 269ST (Income Tax Department)
• Income-tax Act, 1961 — sections 36(1)(va), 43B, 269SS, 269T
• ICAI — Accounting Standards (AS 10, AS 18)

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