Audit Practice Manual

Audit Practice Manual (Revised)
Volume 2
Audit Practice Manual Revised
CONTENTS
PRE ENGAGEMENT PHASE
1. 2. Prospective Client Acceptance Memorandum Existing Client Continuation/ Retention Memorandum
Part A Client relating matters Part B Professional risk related matters Conclusion
1
1 6
6 6 7
PLANNING PHASE
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3. 4.
Suggested Engagement Letter Audit Strategy and Planning Document

I Client Overview
(a) Client History and Background (b) Client Business Objectives and Related Business Strategies (c) Client Business Components
8 11
12
12 12 13
II External Business Forces III Strategic Management Process IV Business Control Environment V Computer Information Systems (CIS) VI Financial Reporting Environment VII Critical Audit Areas / Significant Financial Statement Components VIII Involvement of specialists and other parties IX Audit programme overview X Logistical plan XI Management Span XII Audit Materiality
15 20 21 24 25 27 31 34 40 42 43
5.
Control Overview and Risk Assessment Document

I Introduction II Risk
(a) Control environment (b) Entitys risk assessment process (c) Information system, and business processes for financial reporting, and communication (d) Control activities (e) Monitoring of controls
45
45 45
46 50 51 52 55
6.
Fraud Risk Assessment Document

I Introduction
(a) Fraud (b) Responsibilities
57
57
57 58
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II Discussions with Management

(a) Results of enquiries of management (b) Discussions with those charged with governance
58
59 60
III Fraud Risk Factors and Response

(a) Audit Team Discussions (i) Fraudulent financial reporting (b) Overall consideration (c) Consideration at the account balance, class of transaction and assertion level (d) Specific responses- Fraudulent financial reporting (e) Specific responses- Misappropriation of assets
61
61 62 66 67 67 68
IV Procedures when Circumstances Indicate a Possible Misstatement

(a) Circumstances that may indicate the possibility of fraud or error (b) Audit procedures
69
69 71
V Evaluation and Disposition of Misstatements
71
7.
Computer Information Systems Questionnaire
72
I. Level of Dependence the Entity has on Computer Information Systems (include a list of the entitys computer information systems) 72 II. Application Controls (ERP, Supply Chain, CRM, Logistics) III. Computer information systems skills and resources VI. Information Security V. Reliability of Computer Information Systems VI. Degree and Rate of Change in Computer Information Systems VII. Dependence on External Computer Processing VIII. Direction and Operation of Computer Information Systems 73 74 75 77 80 81 82
8.
General Purpose CIS Checklist

I Purpose II Preparation and Staffing III Questions IV Conclusion
(a) Organisation and Management Policies
84
84 84 84 85
85
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(b) Segregation of Duties (c) Logical Access Controls (d) Physical Access Controls (e) Systems Development and Program Change Controls (f) Business Continuity and Computer Operations
88 91 93 94 97
(g) User Management e.g. Finance Director / Financial Controller / Chief Accountant 100
V CIS Control Reliance
102
9.
Analytical Review Ratio Analysis

Suggested Format of Financial Performance Review
(a) Summary Financial Data Period Ending (Indicate) (b) Profitability of Operations (c) Financial Leverage (d) Asset Turnover (e) Liquidity
106 110
111
111 111 111 112 112
10. Review of Financial Performance of the Client
11. Internal Audit Function Evaluation

Section IPreliminary assessment of the internal audit function Section IIEvaluate and test the work of internal auditing
(a) Evaluate (b) Test
113
114 115
115 116
Section IIIObtaining direct assistance Conclusion
117 118
12. Using the Work of Another Auditor

Section I
Professional competence of the other auditor Professional competence of the other auditor
119
120
120 121
Section II - Main areas of judgment

(a) Critical audit objectives and significant audit areas (b) Significant features of the years results (c) Evaluation of internal control
122
122 123 124
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(d) Errors and exceptions (e) Matters of judgment brought to the partners attention (f) Matters giving arise to a qualification in the audit report (g) Other items attesting the accounts / disclosures
126 126 127 127
13. Minimum Hourly Charge Out Rates For Audit Work By Practicing Members
ATR 14 (Revised)
129
129
14. Staff Planning and Time Allocation 15. Time Sheet 16. Client Profile 17. List of Authorised Signatories 18. Notes of Meeting With Client
Agenda for Meeting
132 135 136 137 138

139
19. Notes of Review of Correspondence File 20. Points Forward to Next Year
Assess Client Satisfaction and Team Debriefing
143 144
145
EXECUTION PHASE
146
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21. General Instructions for Documentation of Audit Execution File 22. Sampling
I Definition of sampling II Importance of sampling III Risks
(a) Appropriateness of sample to the objective (b) Completeness of sample population
146 147
147 147 147
148 148
IV Planning The Sample

(a) The Audit Objectives (b) The Population (c) The Sampling Unit (d) Defining Tolerable Error (e) Setting the sample size for substantive tests of transactions and balances
148
148 148 149 149 149
V Sampling methodology VI Sampling techniques

(a) Statistical sampling (b) Judgemental sampling
150 150
151 151
VII Using Sampling in Auditing

(a) Some Precautions before Undertaking Statistical Sampling (b) Worksheet for Evaluation of Statistical Sample for Attributes
152
152 154
23. Sample Audit Programs

I Balance Sheet Assets
(a) Fixed assets (tangible, intangible & CWIP) (b) Investment properties (c) Investments (subsidiaries, associates, and others) (d) Long term loans and advances (e) Long term deposits and prepayments (f) Stores, spares and stock-in-trade (g) Advances, Deposits, Prepayments & Other receivables (h) Trade debts (i) Cash and bank balances
155
157
158 165 172 178 183 187 192 198 202
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II Balance Sheet Liabilities

(a) Accrued Expenses (b) Contingencies & Commitments (c) Deferred Liabilities (d) Direct Taxation (e) Dividend Payable (f) Equity (g) Liabilities Against Assets (h) Long Term Debt (i) Long Term Deposit (j) Payables (k) Short Term Borrowings (l) Surplus on Revaluation
206
207 217 220 225 229 231 237 241 250 252 265 274
III Profit & Loss

(a) Sales (b) Cost of Sales (c) Admin Expense (d) Financial Charges (e) Other Income
278
279 282 285 288 291
IV Others
(a) WWF / WPPF (b) Laws and Regulations
294
295 297
24. Leads 25. Leads Schedule 26. Format of Confirmation

I Bank Confirmation II Debtors / Creditor Confirmation III Lease Confirmation IV Legal Confirmation V Loan Confirmation VI Tax Confirmation
302 303 304

304 308 309 310 311 312
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27. Inventory Count Attendance Programe

I Guidelines for observation of physical inventories II Production Costs and Inventories
(a) Observation of Physical Inventory Count Checklist (b) Conclusions
313
313 316
316 319
28. Going Concern Assessment 29. Related Party Transactions Checklist 30. Companies Ordinance Compliance Checklist
I. Secretarial Formalities
321 328 333

333
II. Disclosure and Other Requirements Under The Companies Ordinance, 1984 337
31. Income Tax Provision Checklist 32. Labour Laws Compliance Checklist
I Gratuity II Workers Profit Participation Fund
340 360
361 364
33. Tax Position 34. Adjusting Entries
369 370
REPORTING PHASE
371
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35. Financial Statements 36. Working of Cash Flow Statement 37. Final Analytical Review Procedures 38. Reclassification Entries 39. Manager Review Notes & Queries 40. Partner Review Notes & Queries 41. Audit Issues Control Document 42. Points for Next Year 43. Assess Client Satisfaction and Team Debriefing 44. Summary Review Memorandum 45. Audit Completion and Reporting 46. Audit Completion Checklist Part I
I Engagement Partner Sign-off II Computer Information System (CIS) Specialist Sign-off III Considerations and Procedures
371 372 373 375 376 377 378 380 381 382 384 386
387 389 390
47. Audit Completion Checklist Part II 48. Subsequent Events Review Checklist 49. Format of Representation Letter 50. Exceptions and Control Weaknesses 51. Suggested Letter to the Board of Directors (BOD) 52. Auditors Report To The Members - Form 35A
399 401 404 410 415 416
53. Auditors Report To The Members or Directors in Case of Branches of Foreign Banks - Form 35B 418 54. Auditors Report To The Members of a Non-Life Insurance Company 55. Auditors Report To The Members of a Life Insurance Company 56. Auditors Report To The Certificate Holders - Form No. XI 420 422 424
57. Auditors Report To The 1Trustees / Board of Governors / Management Committee 426
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58. Auditors Report To The 1Trustees / Board of Governors / Management Committee 427 59. Auditors Report on Consolidated Financial Statements - Form 35C 428
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Acceptance and Retention of Client New Client Evaluation
PRE ENGAGEMENT PHASE Prospective Client Acceptance Memorandum

Client: Period WP Ref.: Prepared by: Date:
Purpose
The purpose of the prospective client acceptance memorandum is to assess whether the client is one with which the auditor wishes to associate and to document a consideration of the issues influencing the decision to accept or reject an invitation to act as auditor. The prospective client evaluation process seeks to determine this through an examination of the professional risk that may result from providing services to a client. The evaluation also seeks to identify higher-risk clients. This memorandum should be filled and signed before accepting all new audit engagement. i. Prospective client identity and source (consider following questions)
n n n
What has been auditors experience with the client or member of the same group? Has the work been referred by a long-standing professional contract? Is the prospective client a foreign-office referral?
ii.
Background information on the business (consider following questions)

n n n n
What is known about the prospective business client? What is known about the parties associated with the business? What is the reason of auditor selection? What is the business reputation of the prospective client, its owners, and its management? How capable is management? What is known about the integrity of the principal owners and management ? What is the financial status of the prospective client (particularly liquidity and viability)? What is known about the industry in which the prospective client operates and the risks it presents? What is the prospective clients relationship with other professional audit firms/auditors? Has the auditor contacted the predecessor auditor for information including any reason for the change?
n n n
iii.
Results of inquiries with third parties Enter details of discussions with third parties.
iv.
Auditors association with the prospective client (consider following questions)

n
Are there any relationship that may impair auditors objectivity or ability to meet any relevant independence requirements? Are there any potential conflict of interest affecting auditors ability to accept the engagement? Does the auditor has sufficient information about the clients expectations form the engagement? Are the relevant skills to carry out the work available with the auditor? Have any relevant statutory or other regulatory provision been identified, including any implications on the auditors ability to act for the client? Consider that no conflict of interest arise in respect of services being provided as a result of accepting audit of a listed company in view of listing regulations. Conflicts of interest Enter details of issues that might lead to potential conflict of interest.
n n
1.
2.
Expertise Enter details of the skills and experience the auditor has that makes it a suitable for this client.
3.
Fee recovery Enter details of estimated fees, and confirm that an acceptable level of recovery is expected.
4.
Other services Comment on the potential for providing other services to the client and suggest actions for taking advantage of these.
v.
Initial assessment of risk associated with the prospective client Specify the areas of concern that the client presents and explain how the risk will be managed.
vi.
Result of enquiries with predecessor auditor Document the results of enquiries with predecessor auditor and comment on the same.
vii.
Other Enter details of any other areas of concern or issues for consideration.
viii.
Conclusion On the basis of the above, we conclude that there is no reason to believe that the overall level of risk associated with__________________________-is sufficient to prevent the client from being accepted and there are no other circumstances of which we are aware associated with __________ _________________that suggest that the client should not be accepted.
Signed Engagement partner Date
Senior partner
Date
Acceptance and Tetention of Client Existing Client Evaluation
Existing Client Continuation/ Retention Memorandum

Instructions This section has to be completed by the engagement partner. However, the engagement partner may delegate some of the evaluation procedures to other partner or professional staff. In case of yes attach details.
Part A Client relating matters

1. 2. 3. Is there a significant change in the circumstances of the client or in the terms or conditions of the engagement? Is there a request by another partner for re-evaluation of the engagement? Is there any new legal, regulatory or professional requirements that alter the reporting responsibilities and the nature, timing or extent of the audit procedures? Is there a significant change in the nature, size or structure of the client's business? Is there a significant change in management or other personnel? Yes/No Yes/No
Yes/No Yes/No Yes/No
4. 5.
Part B Professional risk related matters

1. 2. 3. Is there any reason to question or be concerned about the reputation, character, or integrity of management and/or the owners of the prospective client? Would the member or representative firm's association with the client be likely to affect the firm's image adversely either currently or in the future? Are there any features of the business generally or the way the particular client operates which present unacceptable professional risks or call for special attention if the engagement is continued? Is there any known problem of independence by reason of activities or relationships of partner or professional staff in relation to the client? Is there any potential for adverse publicity? Is the client involved in any significant current or possible litigation? Yes/No Yes/No
Yes/No Yes/No Yes/No Yes/No
4. 5. 6.
Acceptance and Tetention of Client Existing Client Evaluation
Conclusion
I believe the firm should / should not continue our client engagement and I have considered all the factors mentioned.
Engagement Partner
________________________________________ _________ (Signature) (Date)
Planning Phase Engagement Letter
PLANNING PHASE Suggested Engagement Letter

Addressee (To the Board of Director or appropriate Senior Management Person) Date Dear Sir Sub: Audit for the year ending _____________ You have requested that we audit the financial statement of ________ comprising of balance sheet as at ________, and the related profit and loss account, cash flow statement and statement of changes in equity for the year then ending together with the notes forming part thereof. We are pleased to confirm our acceptance and our understanding of this engagement by means of this letter. Our audit will be made with the objective of our expressing an opinion on the financial statements. At the outset you agree that the responsibility for the preparation of financial statements including adequate disclosure is that of the management of the company. This includes the maintenance of adequate accounting records and internal controls, the selection and application of accounting policies, and the safeguarding of the assets of the company. Our responsibility is to express an opinion on these financial statements based on our audit. We will conduct our audit in accordance with International Standards on Auditing as applicable in Pakistan with the objective of expressing an opinion whether the financial statements conform with approved accounting standards as applicable in Pakistan, and, give the information required by the Companies Ordinance, 1984, in the manner so required and respectively give a true and fair view of the state of the Corporations affairs as at ------ and of the profit, its cash flows and changes in equity for the year then ended. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatements may remain undiscovered. In addition to our report on the financial statements, we expect to provide you with a separate letter concerning any material weaknesses in accounting and internal control systems, which come to our notice during the course of our normal audit work. We are not required by auditing standards to make an examination of internal controls beyond that which we make in determining the nature, extent and timing of our other audit procedures, and we have not been engaged to report on the company's internal control structure. As part of our audit process, we 8
will request from management written confirmation concerning representations made to us in connection with the audit. As part of our audit, we are also required by the Companies Ordinance, 1984 to form our opinion on whether: a) proper books of account have been kept by the company as required by the Companies Ordinance, 1984; b) the balance sheet and profit and loss account together with the notes thereon have been drawn up in conformity with the Companies Ordinance, 1984 and are in agreement with the books of account and are further in accordance with accounting policies consistently applied; c) the expenditure incurred during the year was for the purpose of the companys business; d) the business conducted, investments made and the expenditure incurred during the year were in accordance with the objects of the company; and e) zakat deductible at source under the Zakat and Ushr Ordinance, 1980, was deducted by the company and deposited in the Central Zakat Fund established under section 7 of that Ordinance. In addition, International Standard on Auditing ISA 240, The Auditor's Responsibility to consider Fraud and Error in an Audit of Financial Statements, requires that we obtain specific written representations from management that:
n
it acknowledges its responsibility for the implementation and operations of accounting and internal control systems that are designed to prevent and detect fraud and error, it believes the effects of those uncorrected financial statements misstatements aggregated by us during the audit are immaterial, both individually and in the aggregate, to the financial statements taken as a whole, it has disclosed to us all significant facts relating to any frauds or suspected frauds known to management that may have affected the entity, and it has disclosed to us the results of its assessments of the risk that the financial statements may be materially misstated as a result of fraud.
These specific items will be included in our request for written confirmation concerning representations made to us in connection with the audit. In addition to the above management also is responsible for identifying and ensuring that the Company complies with laws and regulations applicable to its activities. If you require us to complete our work under this engagement contract or, any part of it, by a specific date or time, you will inform us in writing of your requirement. Whilst we will make every effort to complete such work by the date specified, you acknowledge that meeting any
such requirement will rely on you providing reasonable notice of your requirement and the timely provision of such information, as we may need to complete the work concerned. We agree that we will treat as such all confidential proprietary information obtained from you and will not disclosed such information to others, except to those persons engaged in providing services to you, or use such information except in connection with the performance of the services agreed to this letter. This undertaking shall not apply to any of the information that we are required by law or by the requirements of any regulators or by specific professional standards to disclose, that is in, or hereafter enters the public domain. We wish to inform you that our working papers files for the audit of the financial statements of your company would be subject to review by the Institute of Chartered Accountants of Pakistans Quality Control Review Committee without any further reference to you. We look forward to full cooperation with your staff and we trust that they will make available to us whatever records; documentation and other information including minutes of all management, board of directors, committees and shareholders meetings are requested in connection with our audit. We shall request sight of all documents or statements, including the Chairmans statement and directors report (if any) required to be issued with the financial statements. Our fees, which will be billed as work progresses, are based on the time required by the individuals assigned to the engagement plus out-of-pocket expenses. Individual hourly rates vary according to the degree of responsibility involved and the experience and skill required. This letter will be effective for future years unless it is terminated, amended or superseded. Unless we hear from you to the contrary, we will assume your concurrence with the contents of this letter.
Please sign and return the attached copy to indicate that it is in accordance with your understanding of the audit arrangements.
Yours truly Firms Name
10
Planning Phase Strategy and Planning Document
Audit Strategy and Planning Document

Client: Period:
WP Ref.: Prepared by: Date:
Purpose
The purpose of this working paper is to obtain an understanding of the entitys business. It documents:
n
the entitys objectives, strategies and the components of its business (i.e., markets, products/services, customers, alliances) the entitys relevant external business drivers (i.e., general business environment, specific industry characteristics and managements response to the expectations of significant constituencies). how the entity formulates and implements its objectives and strategies (strategic management process) the business control environment management has created to support its objectives and strategies how computer information systems facilitate business processes and are utilised by the entity the financial reporting environment Critical Audit Areas / Significant Financial Statement Components Involvement of specialists and other parties Logistical plan
n n
This understanding will assist in understanding business risks that threaten the entitys objectives. Such as understanding should be reviewed with the entitys management.
11
Client Overview
(a) Client History and Background
Provide a description of relevant client background
(b)
Client Business Objectives and Related Business Strategies

Management responds to external business drivers by developing objectives and strategies to achieve those objectives. Provide a summary of the objectives, strategies and method of implementing the strategies. Business Objectives 1. 2. 3. Related Business Strategies
12
(c) Client Business Components

Feasible objectives and strategies need to reflect a clients existing circumstances and take into account its markets, products and services, relationship with customers and alliances (including relationship with suppliers). Provide a description of these components (i) Major Markets
(ii)
Major Products and Services
13
(iii)
Major Customers
(iv)
Major Competitors
(v)
Alliances (including suppliers) and other relationships
14
(vi)
SWOT Analysis (entity's and competitors') Competitors
Entity Strengths
n n
n n
Weaknesses
n n n n
Opportunities
n n n n
Threats
n n n n
II
External Business Forces

External business drivers are forces created by a clients:
n
general business environment (PEST) and specific industry characteristics (Porters Five Forces); significant stakeholders.
15
General business environment and specific industry characteristics (PEST and Porters Five Forces) Provide a discussion of current forces facing the client that may have an impact on the client achieving its objectives and the relevance of those aspects of the environment to the client, given its chosen strategies. Consider the following forces in analysing the general business environment and specific industry characteristics
n
PEST - political, economic, social, and technology forces; Porters Five Forces - threat of new entrants, bargaining power of suppliers, bargaining power of buyers, substitute products or services, rivalry amongst existing competitors. General Business Environment (PEST Analysis) 1. Political Relevance to the Client
Forces
2.
Economic Relevance to the Client
Forces
16
3.
Social Relevance to the Client
Forces
4.
Technological Relevance to the Client
Forces
Specific Industry Characteristics (Porter's Five Forces) 1. Threat of New Entrants Relevance to the Client
Forces
17
2.
Bargaining Powers of Suppliers Relevance to the Client
Forces
3.
Bargaining Powers of Buyers Relevance to the Client
Forces
4.
Substitute Services/ Products Relevance to the Client
Forces
18
5.
Rivalry Among Existing Competitors
Forces
Relevance to the Client
Significant Constituencies Management may have incentives to manipulate the results of the business and the impression given by the financial statements considering significant stakeholders. Provide a discussion of individual stakeholders that management perceives as significant and discuss how management responds to expectations of significant stakeholders.
Constituency/ Stakeholders
Management Response to the Expectations
19
III
Strategic Management Process
When analysing the clients strategic management process understand how management:
n n
sets the overall direction for the client; monitors the external environment and assesses the strategic implications of potential opportunities and threats; monitors the extent to which strategies have been implemented; understands the strategies and capabilities of the major competitors; analyses the clients strengths and weaknesses; allocates resources, including capital, people and facilities to its business processes; aligns process objectives with strategic objectives.
n n n n
20
IV Business Control Environment

When analysing the business control environment understand the clients:
n
business structure; culture and ethics; remuneration management; personnel profiles; communication of information; risk assessment process; control environment monitoring and control activities
Business structure
21
Culture and ethics
Remuneration management
Personnel profiles
22
Communication of information
Risk Assessment Process
Control Environment
Monitoring and Control Activities
23
Computer Information Systems (CIS)

Business processes are often facilitated by computer information systems. Obtain an understanding of the:
n
level of dependence the client has on computer information systems (include a list of the clients computer information systems); computer information systems personnel structure and skills; security of computer information systems; reliability of computer information systems; degree and rate of change in computer information systems; dependence on external computer processing; direction and operation of computer information systems.
24
VI Financial Reporting Environment

Financial reporting environment involves understanding what management does to bring together financial information to prepare the financial statements. Obtain an understanding of the:
n
accounting policies applied by the entity and applied within the industry; potential impact of managements reporting strategy upon specific aspects of the financial statements.
Financial Reporting Issues Consider the following for identification of financial reporting issues to be addressed while carrying out research or consulting with coleagues, experts:
n
client's accounting practices and policies; new accounting pronoucements;
25
the going concern assumption; legal and regulatory changes Financial reporting issue Reason for identification
26
VII Critical Audit Areas / Significant Financial Statement Components

Critical audit areas are generally those where judgment is involved and significant estimation is used. The approach to those areas and resulting impact on the financial statements relating to the audit is documented. It also includes consideration of previous years brought forward issues. Following are some of the critical areas for only guidance purposes. Other critical areas may be included in this section as per the auditor's assessment.
Critical Audit Areas/ Objective V of Receivables VP of Investments CEA of Taxation VP of Defined benefit plans VP of Litigation & Claims V of Inventories CVP of Related party transactions V Impairment of assets Reason for identification Management Response Proposed Audit Approach
27
Examples of other major critical areas may include: Review of other significant estimates made
New borrowings with extra-ordinary terms and conditions
28
Discontinuation of major suppliers
Acquisition of a significant asset
29
Discontinuation of a major customer
Loss of a significant market share
30
VIII Involvement of specialists and other parties

Description iclude a summary of the issue, why it is considered significant and its potential financial statement effects. Depending on the phase of the audit workflow in which the issue is identified, the financial statement assertion to which the issue relates may or may not have been combined into an audit objective yet. As a result, the issue may be included as a significant issue on the basis that the potential financial statement effect may be a significant non-routine transaction, requires a great deal of judgement or is complex, and not necessarily that it has been confirmed as a critical audit objective. Involvement of: Computer Information System (CIS) Specialist
Description of basis, nature, extent and conclusions related to the involvement of CIS Specialist: [Description]
Findings
31
Involvement of:
Taxation
Description of basis, nature, extent and conclusions related to the involvement of taxation: [Description]
Findings
32
Involvement of:
Other specialist or other party involved in the audit e.g.Actuary, Valuers, Internal audit, Co-auditor
Description of significant issue and decision related to the involvement of others: [Description]
Findings
33
IX Audit programme overview

Financial Statement Caption Principal Audit Objectives Risk Assessment IR Fixed assets VOP CR ROSM Inspect assets & trace to records Vouch additions & deletions with supporting documents. Examine documents of title. Recompute gain/loss on disposals. Check/recalculate depreciation charge. Check impairment. Review board minutes regarding significant additions. Verify cost incurred with supporting documents. Borrowing cost capitalized are directly attributable to construction, acquisition or production. Principal substantive procedures
n n
Capital work in progress
EAV
34
Financial Statement Caption
Principal Audit Objectives
Risk Assessment IR CR ROSM
Principal substantive procedures
Long term loans
CEAP
n n
Review agreements Circularise direct confirmations. Recompute interest and exchange loss. Check subsequent repayment Check disclosure. Inspect securities in hand and evidence for title of securities held. Review investments for income reconciliation. Vouch sale and recompute gain/loss. Review classification and description. Vouch purchases made during the year. Perform physical cash count. Circularize direct confirmations. Obtain reconciliation statements. Review age analysis of long outstanding cheques.
n n
Investments
EVP
Cash & Bank Balances
CEA
n n
35
Long term deposits
EP
Vouch deposits made during the year. Review classification and description. Perform physical count/inspection. Investigate reasons for any difference between the physical and records. Check valuation as per companys policy. Identify slow moving items.
Store & Spares
CEV
Trade Debtors
CAV
Circularise direct confirmations. Check subsequent clearance. Perform age analysis. Obtain list of commitment and contingencies Circularise direct confirmations to legal advisors. Review legal fees. Review minutes of Board of Directors meeting.
n n
Commitment and Contingencies
CEA
n n
36
Creditors
CEA
Circularise direct confirmations. Check subsequent clearance. Perform age analysis. Review agreements Circularise direct confirmations. Check interest and exchange effects. Check subsequent repayment Check disclosure. Obtain actuarial report and assess reasonableness of assumptions Vouch payments during the period to ensure completeness Ensure disclosure requirement of IAS 19
n n
Loans
CEAP
n n
n n
Deferred LiabilitiesGratuity/ Pension
CEAP
37
Taxation-Current & deferred
CEAP
n n
Review updated tax position Check working of provision for taxation Vouch payments. Check working of deferred taxation Ensure disclosure with IAS 12
n n
Sales
CEA
n n
Perform analytical review Vouch sales on sample basis
Cost of sales
CEA
n n
Perform analytical review Vouch purchases on sample basis Ensure classification in appropriate heads Vouch consumptions made during the period Ensure calculation of overhead on reasonable basis Ensure appropriate treatment of difference of actual cost with standard cost
38
Admin & General Expenses
CEA
n n
Perform analytical review Ensure classification in appropriate heads Vouch expenses incurred during the period Perform reasonableness test on salary expense
39
Logistical plan
Engagement team Engagement Partner Engagement Manager Job-in-Charge Team members
Key management personnel Chief Executive Finance Director/CFO Manager Finance Factory Manager Sales Manager
Staff and allocation of work Staff Allocated area
40
Key dates and deadlines Activity Kick off meeting Initial meeting with client Confirmation circularisation Manager review Partner review Covering letter/Management Letter Board meeting and Audit report Reportings/ deliverables: Location of client: Telephone: Fax: Email: Web site: Date
41
XI Management Span
Board of Directors (BOD)
President and Chief Executive
IT Executive
GM Centralised Operations
Financial Controller
GM Credit Card Operations
HR Executive
Compliance and Internal Audit
Manager Administration
Manager Operations
Planning Manager
Finance Manager
In-house Legal Advisor
Manager Underwriting Centralised Operations
Manager Collections Centralised Operations
Manager Disbursements
Manager Payments
Manager Underwriting Credit Cards Operations
Manager Collections Credit Crads Operations
42
XII Audit Materiality

There are two aspects to materiality - Planning materiality, and Reporting materiality. Planning materiality is concerned with whether a misstatement, or an aggregation of misstatements, in an underlying financial statement item, account balance or class of transaction, is likely to result in a material misstatement in the financial statements as a whole. Auditors use planning materiality to determine which financial statement items, account balances and transactions to test and which to not test. Financial statement items, account balances and transactions, which equal or exceed their materiality level are selected for testing. Level of Aggregation Financial statement level Materiality Level A misstatement of a financial statement item is material when the misstatement, aggregated with misstatements of other financial statement items, is likely to equal or exceed the level of reporting materiality. A misstatement of an account balance underlying a financial statement item is material when the misstatement, aggregated with misstatements in other account balances underlying the financial statement item, is likely to result in a material misstatement of the financial statement item. A misstatement of a transaction underlying an account balance is material when the misstatement, aggregated with misstatements in other transactions underlying the account balance, is likely to result in the material misstatement of the account balance. Evaluation Materiality at the financial statement level may be evaluated by reference to (i) reporting materiality and (ii) the expected nature, number and value of financial statement items included in the financial statements. Materiality at the account balance level is evaluated by reference to (i) materiality at the financial statement level and (ii) the expected nature, number and value of account balances underlying the financial statement item.
Account balance level
Class of transaction level
Materiality at the class of transaction level is evaluated by reference to (i) materiality at the account balance level and (ii) the expected nature, volume and value of transactions underlying the account balance.
Whereas planning materiality is primarily concerned with the judgments of the auditor, reporting materiality is primarily concerned with the auditor's evaluation of the judgments of users of financial statements.
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Reporting materiality refers to the extent of a misstatement. Reporting materiality is concerned with whether a misstatement of a financial statement item, or an aggregation of such misstatements, is likely to affect the judgments of users of financial statements. It requires an evaluation by the auditor in both the client acceptance/ retention stage and the opinion formulation stage. In the client acceptance stage the auditor evaluates whether, if the client is accepted or retained, the audit risk (the risk of a material misstatement in the audited financial statements) can be reduced to an acceptable level. In this, the initial audit stage, "a material misstatement" refers to the level of reporting materiality. Similarly in the final opinion formulation stage, the auditor evaluates the likelihood of the audited financial statements containing a material misstatement. Again, this evaluation is based on the level of reporting materiality. Auditors to assess reporting materiality use the following materiality guidelines: Pre-tax income Net (or after-tax) income Gross revenue Equity Total assets 5-10% 5-10% 0.5-1% 5-10% 0.5-1% (This chart is only for guidance purposes) Where an entity's results are expected to be "normal", then reporting materiality is based on after tax income amounts. However, where the entity incurs losses, has potential going concern problems or the results are in other ways unusual, materiality may be based on one or more of the other factors referred to above. For example, if the entity is incurring losses, both before and after tax, the auditor may use total assets or total revenue, whichever is the greater. The final assessment of reporting materiality is subjective and depends on the auditor's perception of, for example, what information is relevant, who the users of the financial statements are, what decisions the users may make and what would influence those decisions. Note that financial statements may be materially misstated as a result of either a quantitative misstatement (in relation to its monetary value) or a qualitative misstatement (in relation to its accuracy of presentation, disclosure, description).
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Planning Phase Control Overview and Risk Assessment
Control Overview and Risk Assessment Document

Client: Period:
Introduction
The purpose of this document is to:
n n
obtain an understanding of client and its environment document the assessment of risk of material misstatement
Documentation may be included in this working paper, or other working papers (with cross-reference to the Control Overview and Risk Assessment Document). Summary of our understanding of internal control Does the control environment appear to be satisfactory? Does the entity's risk assessment process appear to be satisfactory? Does the information system, and business processes for financial reporting, and communication appear to be satisfactory? Does control activities appear to be satisfactory Does monitoring of controls appear to be satisfactory YES YES YES YES YES NO NO NO NO NO
II
Risk
Audit risk means the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated. Control risk is the risk that a misstatement, that could occur in an account balance or class of transactions and that could be material individually or when aggregated with misstatements in other balances or classes, will not be prevented or detected and corrected on a timely basis by the accounting and internal control systems.
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Internal control system means all the policies and procedures adopted by the management of an entity to assist in achieving management's objective of ensuring, as far as practicable, the orderly and efficient conduct of its business, including adherence to management policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information. Control procedures means those policies and procedures in addition to the control environment which management has established to achieve the entity's specific objectives.
(a)
Control environment
The control environment includes the attitudes, awareness, and actions of management and those charged with governance concerning the entitys internal control and its importance in the entity. The control environment also includes the governance and management functions and sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for effective internal control, providing discipline and structure. Communication and enforcement of integrity and ethical values Consider
n n n
What are entitys ethical and behavioral standards How they are communicated How they are reinforced in practice.
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Commitment to competence Consider

n n
Managements consideration of the competence levels for particular jobs How those levels translate into requisite skills and knowledge
Participation by those charged with governance Consider

n n n n n n
Independence from management Their experience and stature The extent of their involvement and scrutiny of activities The appropriateness of their actions The information they receive The degree to which difficult questions are raised and pursued with management Their interaction with internal and external auditors
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Managements philosophy and operating style Consider

n n
Managements approach to taking and monitoring business risks Managements attitudes and actions toward financial reporting (conservative or aggressive selection from available alternative accounting principles, and conscientiousness and conservatism with which accounting estimates are developed) Managements attitudes toward information processing and accounting functions and personnel
Organizational structure Consider

n n
Key areas of authority and responsibility Appropriate lines of reporting
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Assignment of authority and responsibility Consider

n n
How authority and responsibility for operating activities are assigned How reporting relationships and authorization hierarchies are established.
Human resource policies and practices Consider

n n n
Standards for recruiting the most qualified individuals Training policies that communicate prospective roles and responsibilities Promotions driven by periodic performance appraisals
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(b)
Entitys risk assessment process

An entitys risk assessment process is its process for identifying and responding to business risks and the results thereof. For financial reporting purposes, the entitys risk assessment process includes how management
n n n n
identifies risks relevant to the preparation of financial statements estimates their significance, assesses the likelihood of their occurrence, and decides upon actions to manage them.
Once risks are identified, management considers their significance, the likelihood of their occurrence, and how they should be managed. Management may initiate plans, programs, or actions to address specific risks or it may decide to accept a risk because of cost or other considerations. When documenting the entitys risk assessment process risks can arise or change due to circumstances such as the following
n n n n n n n n n
Changes in operating environment New personnel New or revamped information systems Rapid growth New technology New business models, products, or activities Corporate restructurings Expanded foreign operations New accounting pronouncements
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(c)
Information system, and business processes for financial reporting, and communication
An information system consists of infrastructure (physical and hardware components), software, people, procedures, and data. Infrastructure and software will be absent, or have less significance, in systems that are exclusively or primarily manual. An information system encompasses methods and records that:
n n
Identify and record all valid transactions. Describe on a timely basis the transactions in sufficient detail to permit proper classification of transactions for financial reporting. Measure the value of transactions in a manner that permits recording their proper monetary value in the financial statements. Determine the time period in which transactions occurred to permit recording of transactions in the proper accounting period. Present properly the transactions and related disclosures in the financial statements.
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(d)
Control activities
Control activities are the policies and procedures that help ensure that management directives are carried out. Control activities, whether within IT or manual systems, have various objectives and are applied at various organizational and functional levels. Certain control activities may depend on the existence of appropriate higher-level policies established by management or those charged with governance. For example, authorization controls may be delegated under established guidelines, such as investment criteria set by those charged with governance; alternatively, non-routine transactions such as major acquisitions or divestments may require specific high level approval, including in some cases that of shareholders Performance reviews Consider how management:
n
Reviews and analyses of actual performance versus budgets, forecasts, and prior period performance Relating different sets of data operating or financial to one another, Analyses of the relationships and investigative and corrective actions Comparing internal data with external sources of information Review of functional or activity performance
n n n n
52
Information processing Controls are performed to check accuracy, completeness, and authorization of transactions.
n
Application controls apply to the processing of individual applications. These controls help ensure that transactions occurred, are authorized, and are completely and accurately recorded and processed. Examples of application controls include checking the arithmetical accuracy of records, maintaining and reviewing accounts and trial balances, automated controls such as edit checks of input data and numerical sequence checks, and manual follow-up of exception reports. General IT-controls are polices and procedures that relate to many applications and support the effective functioning of application controls by helping to ensure the continued proper operation of information systems. General IT-controls commonly include controls over data center and network operations; system software acquisition, change and maintenance; access security; and application system acquisition, development, and maintenance.
53
Physical controls These activities encompass the physical security of assets, including adequate safeguards such as secured facilities over access to assets and records; authorization for access to computer programs and data files; and periodic counting and comparison with amounts shown on control records (for example comparing the results of cash, security and inventory counts with accounting records).
Segregation of duties Ensure that following three activities are separately assigned:
n n n
authorizing transactions recording transactions, and maintaining custody of assets
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This would reduce the opportunities to allow any person to be in a position to both perpetrate and conceal errors or fraud in the normal course of the persons duties.
(e)
Monitoring of controls
It is management responsibility is to establish and maintain internal control on an ongoing basis. Managements monitoring of controls includes considering whether they are operating as intended and that they are modified as appropriate for changes in conditions. Examples are:
n
managements review of whether bank reconciliations are being prepared on a timely basis internal auditors evaluation of sales personnels compliance with the entitys policies legal departments oversight of compliance with the entitys ethical or business practice policies.
Consider:
n
assessment and reassessment of design and operation of controls on a timely basis necessary corrective actions
55
ongoing monitoring activities (activities are built into the normal recurring activities) separate evaluations
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Planning Phase Fraud Risk Assessment Document
Fraud Risk Assessment Document

Client: Period:
Introduction
The purpose of this document is to:
n
obtain an understanding of managements assessment of the risk that the financial statements may be materially misstated as a result of fraud, and the accounting and internal control systems in place to address such risk and prevent and detect error document the results of team discussions and enquiries with management concerning fraud and error document the fraud risk factors identified that indicate the possibility of either fraudulent financial reporting or misappropriation of assets, and our response document circumstances that we have encountered that may indicate that there is a material misstatement in the financial statements resulting from fraud or error and the audit procedures performed to determine whether the financial statements are materially misstated.
Documentation may be included in this working paper, or other working papers (with cross-reference to the Fraud Risk Document). Preparation of this document is started when fraud risk factors are initially identified during the planning phase of the audit and updated during the substantive procedures, evaluation and reporting stage if additional fraud risk factors are identified that cause us to believe that additional audit procedures are necessary. (a)
Fraud
Fraud refers to an intentional act by one or more individuals among management (management fraud), those charged with governance, employees (employee fraud), or third parties involving the use of deception to obtain an unjust or illegal advantage. Two types of intentional misstatements are relevant to the auditor's consideration of fraud (a) fraudulent financial reporting involves intentional misstatement or omission of amounts and disclosures in financial statement to deceive financial statement users (b) misappropriation of assets involves the theft of an entity's assets. Fraud involves (a) motivation to commit fraud; and (b) a perceived opportunity to commit fraud.
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(b)
Responsibilities
The primary responsibility for the prevention and detection of fraud rests with those charged with governance and the management of an entity by setting the proper tone, creating and maintaining a culture of honesty and high ethics, and establishing appropriate controls to prevent and detect fraud within the entity. However, systems of accounting and internal control system may reduce but cannot eliminate the risk of misstatements caused by fraud hence management assumes responsibility for any remaining risk. An audit conducted in accordance with ISAs is designed to provide reasonable assurance (not absolute assurance) that the financial statements taken as whole are free from material misstatement hence an auditor is not and cannot be held responsible for the prevention (not detection) of fraud. An auditor plans and performs an audit with an attitude of professional skepticism, which is necessary for the auditor to identify and evaluate matters that increases the risk of fraud, circumstances that make the auditor suspect that the financial statements are materially misstated and evidence obtained that brings into question the reliability of management representation. Discovery of a fraud subsequent to an audit does not, in and itself, indicate (a) a failure to obtain reasonable assurance, (b) inadequate planning, performance or judgment (c) absence of professional competence and due care, or (d) failure to comply with ISAs. Whether an auditor has performed an audit in accordance with ISAs is determined by the (a) adequacy of the audit procedures performed in the circumstances and (b) the suitability of the auditor's report based on the results of those procedures.
II
Discussions with Management

During the planning phase of an audit, auditor makes enquiries of management concerning fraud and error. We may also seek the views of those charged with governance. Matters that may be discussed as part of these enquiries include:
n
whether there are subsidiary locations, business segments, types of transactions, account balances or financial statement categories where the possibility of error may be high, or where fraud risk factors may exist, and how they are being addressed by management the work of the entitys internal audit function and whether internal audit has identified fraud or any material weaknesses in the system of internal control how management communicates to employees its view on responsible business practices and ethical behaviour, such as through ethics policies or codes of conduct.
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If the entity has established a programme that includes steps to prevent and detect fraud, we enquire of those persons overseeing such programmes as to whether the programme has identified fraud risk factors.
(a)
Results of enquiries of management

Document the results of our enquiries below. State which member of management we enquired of and the date of the enquiry. Managements fraud risk assessment Document our understanding of managements assessment of the risk that the financial statements may be materially misstated as a result of fraud.
Accounting and internal control systems Document the results of our enquiries of management concerning the accounting and internal control systems management has put in place to address the risk of material misstatement due to fraud, and to prevent and detect error.
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Fraud and error Document the results of our enquiries to determine whether management is aware of any known or suspected fraud and discovered any material errors.
(b)
Discussions with those charged with governance

Following our enquiries, consider whether there are matters of governance interest to discuss with those charged with governance of the entity
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III
(a)
Fraud Risk Factors and Response

Audit Team Discussions
During the audit, the team should discuss the susceptibility of the entity to material misstatements in the financial statements resulting from fraud or error. Based on these discussions, we:
n n
consider where errors may be most likely to occur or how fraud may by perpetrated gain a better understanding of the potential for material misstatements in the financial statements resulting from fraud or error in the specific areas of the audit assigned to team members gain a better understanding of how the results of the audit procedures that are performed may affect other aspects of the audit decide which members of the audit team will conduct certain enquires or audit procedures decide how the results of our enquiries and audit procedures will be shared.
We may also discuss matters that were taken into consideration during our Client Acceptance or Client Continuance procedures as they relate to fraud risk. Fraud risk factors During the audit, we consider whether events or conditions that provide an opportunity, a motive or a means to commit fraud, or indicate that fraud may already have occurred, are present. Such events or conditions are referred to as fraud risk factors. We identify fraud risk factors that may indicate the possibility of either fraudulent financial reporting or misappropriation of assets. Response Our response to fraud risk factors is influenced by their (a) nature and (b) significance. In some cases, our judgment may be that the audit procedures, including both tests of control and substantive procedures already planned, are sufficient to respond to the fraud risk factors. In other circumstances we may need to modify the nature, timing and extent of substantive procedures to address fraud risk factors present. In these circumstances, consider whether the assessment of the risk of significant misstatement calls for (a) an overall response, (b) a response specific to a particular account balance, class of transactions or assertion, or (c) both types of responses.
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(i)
Fraudulent financial reporting

Fraud risk factors Fraud risk factors relating to fraudulent financial reporting may be grouped as follows: (a) Management Characteristics and Influence over the Control Environment
n
Significant portion of management compensation contingent upon achieving aggressive targets etc. Excessive interest by management in maintaining or increasing the entity's share price or earning trends through the unusual practices Domination by single person/ small group without compensating controls Setting of unduly financial target and expectations for operating personnel Display of significant disregard for regulatory authorities Employing ineffective accounting, IT or internal auditing staff Participation of non-financial management in selection of accounting principles etc. High turnover of management staff or board members Strained relationship with existing/ predecessor auditor including frequent disputes, unreasonable demands, restriction on auditors and domineering management behaviour Weak or ineffective corporate governance structure
n n n
n n
(b)
Industry Conditions
n
New regulatory etc. requirements, which may impair entity's stability or performance Increasing competition and market saturation and declining margins/ customer demands
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n n
Declining industry with increasing business failures Rapid changes in industry like rapidly changing technology / rapid product obsolescence
(c)
Operating Characteristics and Financial Stability

n n
Reporting earning/ growth while inability to generate cash flows Balances and/ or transactions based on significant estimates involving unusually subjective judgments/ uncertainties Significant related party transactions out of normal course of business Significant, unusual, or complex transaction particularly at or near the year-end Significant bank account or business locations without clear business justification Over complex organisational structure involving various/ unusual legal entities, lines of authority or contractual arrangements without apparent business purpose Unusual rapid growth/ profitability as compare to competitors/ industry Dependence on debt, marginal ability to pay debt and difficult to maintain debt covenant Threat of imminent bankruptcy, foreclosure, or hostile takeover Adverse consequences on significant pending transactions if poor results are reported A poor or deteriorating financial position when management has personally guaranteed significant debts of the entity
n n
n n
n n
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Document the fraud risk factors identified, for example while obtaining or updating our understanding of the business, as a result of our enquiries of management or during our audit team discussions, that may indicate the possibility of fraudulent financial reporting.
Response Document our response to the fraud risk factors identified. Consider the examples of possible responses in ISA 240, Appendix 2.
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(ii)
Misappropriation of assets Fraud risk factors Fraud risk factors relating to misappropriation of assets may be grouped as follows: (a) Susceptibility of Assets to Misappropriation
n n
Large amounts of cash on hand or processed Inventory and other assets' characteristics such as small size with high value and high demand accompanied with lack of ownership identification Easily convertible assets such as bearer bonds, diamonds or computer chips
(b)
Susceptibility of Assets to Misappropriation

n n
Lack of management oversight Lacking to screen job applicants for positions where employees have access to assets susceptible to misappropriation Inadequate record keeping for assets susceptible to misappropriation Lack of appropriate segregation of duties Lack of appropriate system of authorization and approval of transactions Poor physical safeguards over assets susceptible to misappropriation Lack of timely and appropriate documentation Lack of mandatory vacations/ job rotations for employees performing key control functions
n n n
n n n
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Document the fraud risk factors identified, for example while obtaining or updating our understanding of the business, as a result of our enquiries of management or during our audit team discussions, that may indicate the possibility of misappropriation of assets.
Response Document our response to the fraud risk factors identified. Consider the examples of possible responses in ISA 240, Appendix 2.
(b)
Overall consideration
Professional skepticism:
Assignment to the audit team members:
Accounting principles and policies:
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Controls:
Modification in nature, timing, and extent of audit procedures:
(c)
Consideration at the account balance, class of transaction and assertion level

Specific responses to the auditor's assessment of the risk of fraud will depend upon the types or combinations of fraud risk factors or conditions identified, and the account balance, class of transaction and assertion may affect.
(d)
Specific responses- Fraudulent financial reporting

Revenue recognition
Inventory quantities
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Non-standard journal entries
Others
(e)
Specific responses- Misappropriation of assets

Differing circumstances would necessarily dictate different responses. Document the specific responses.
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IV Procedures when Circumstances Indicate a Possible Misstatement

When we identify any audit difference, we consider whether it may be indicative of fraud. If there is such an indication we bring the matter to the attention of the engagement partner and manager. We consider the implications in relation to other aspects of the audit, particularly the reliability of management representations. During the course of the audit, when we encounter circumstances that may indicate that there is a material misstatement in the financial statements resulting from fraud or error, we perform audit procedures to determine whether the financial statements are materially misstated.
(a)
Circumstances that may indicate the possibility of fraud or error

Document circumstances that we have encountered that may indicate that there is a material misstatement in the financial statements resulting from fraud or error. Consider the example circumstances in ISA 240, Appendix 3.
Examples:
n n n n
Unrealistic time deadlines for audit completion imposed by management Reluctance by management to engage in frank communication with third parties Imposing limitation on audit scope Identification of important matters not previously disclosed by management
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n n n n
Significant difficult-to-audit figures in the accounts Aggressive application of accounting principles Conflicting or unsatisfactory evidence provided by management or employees Unusual documentary evidence such as handwritten alteration to document or handwritten documentation which is ordinarily electronically printed Information provided unwillingly or after unreasonable delay Seriously incomplete or inadequate accounting records Unsupported transactions Unusual transactions, by virtue of their nature, volume or complexity Transactions not recorded in accordance with managements specific or general authorization Significant unreconciled differences between control account and subsidiary records or between physical count and the related account balance which were not appropriately investigated and corrected on timely basis Inadequate controls over computer processing Significant differences from expectations disclosed by analytical procedures Fewer confirmation responses than expected or significant differences revealed by confirmation responses Evidence of an unduly lavish lifestyle by officers or employees Unreconciled suspense accounts Long outstanding account receivable balances
n n n n n
n n n
n n n
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(b)
Audit procedures
Document the additional audit procedures performed as a result of the circumstances noted above.
Evaluation and Disposition of Misstatements

When we confirm that the financial statements are materially misstated as a result of fraud, or is unable to conclude whether, we consider the implication for the audit in accordance with ISA 320 Audit Materiality paragraphs 12-16 and ISA 700 The Auditors Report on Financial Statements paragraphs 36-46.
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Planning Phase CIS Questionnaire
Computer Information Systems Questionnaire
W.P.Ref. Prepared by Date
Business processes are often facilitated by computer information systems. In planning the audit, we obtain an understanding of the: W.P. Ref
I. Level of Dependence the Entity has on Computer Information Systems (include a list of the entitys computer information systems)
1. Obtain an overview of the Companys IT infrastructure platform and architecture, including network, servers, firewalls, EDI/Internet, extranet, operating systems and versions, database management systems and versions, etc. (addresses architecture and inventory of applications). Obtain a wide area network diagram. Obtain a descripton of the e-Business infrastructure. Where are the main data centers located? Does the Company have other significant IT centers? What are the Companys mission-critical systems and applications? What functions do these systems perform? What platform are the systems on and where are they located? Which of the systems and applications are network-centric, i.e., depend on the network for user, customer, vendor, or partner access? What data is maintained on I.T. systems that would be considered intellectual properties of the company?
2. 3. 4. 5. 6. 7. 8. 9.
72
W.P. Ref
II.
Application Controls (ERP, Supply Chain, CRM, Logistics)

1. Please describe the primary application(s), including interface(s).
n
For example, if the company uses an ERP system (SAP, PeopleSoft, Oracle, JD Edwards, BaaN) then note the version in use as well as modules implemented. Include other significant applications, such as bolt-ons and reporting tools (Siebel, Manugistics, i2, Commerce One, Ariba, Hyperion, Crystal)
2. Please describe how the application is used by the business, i.e., is it a transaction processing engine or is it used to enable a competitive business practice such as Supply Chain Management or Customer Relationship Management, or both? 3.
n n
Please describe how the application is supported. Such as: IT staff, superusers, business analysts. Is vendor support provided? (note that in some cases it is possible to have the vendor support expire if the version is not upgraded, for example in SAP versions prior to 3.1I and in Oracle Applications 10.7) Are patches and fixes current?
4. Please describe the interaction between IT and users, for example Business Analysts (IT staff in each functional department) and Help Desk. 5. Please describe any changes made to the application(s) or interface(s) during the last year including controls used.
n
For example, data conversion and migration from an existing Legacy system to the application, upgrades. Controls would include testing, balancing, etc.
6. Please describe future plans for the applications during the next 1-2 years. For example, upgrades, adding new functionality (CRM, SCP, Web), use of a data mart/warehouse, migrating to a new application (BaaN customers), developing an in-house application (make vs. buy).
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W.P. Ref
III. Computer information systems skills and resources

1. Please provide an overview of the IT organizations management (governance) structure, including roles and responsibilities. Note if a separate Information Security Officer role is used or planned. 2. 3. 4. 5. What is the number of IT staff? Where is most time spent by the IT department? What training is provided for IT staff? How is it tracked? What is the process and timing for performance reviews?
6. Please describe how segregation of duties is accomplished (for example, developer should not migrate program to production).
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W.P. Ref
VI. Information Security

1.
n
What is the approach to network security? For example, use/restrictions of analog lines and other telecom entry points into the network, security policies and procedures for using the company network, Internet access policies, firewall configuration (external services permitted/offered/available and monitoring of violations), controls to ensure segregation of Internet/Intranet.
2. How is access to the Companys systems from inside and outside the Company campus secured?.
n
For example, use of a Virtual Private Network, RAS servers How are database(s) secured. How are operating systems secured?
3. 4.
5. What logical security mechanisms and procedures are in place at the Company?
n
For example, password conventions (length, expiration, characteristics), unsuccessful user login lock-outs, automatic logoff if inactive user, all users must have unique IDs, generic IDs are not used.
6. What are the security administration procedures for establishing, changing and deleting user access to the network and to applications. 7. What role does the Help Desk have to assist in administering and/or enforcing security? 8. What level and type of access is permitted to external parties (customers, vendors)? 9. What virus scanning and detection techniques and procedures have been implemented? 10. What physical security controls have been established for the IT environment. Obtain a description of access security, environmental controls, etc.
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W.P. Ref 11. How is intellectual property secured (logically on the system, and physically for other media)? Do employees who work with intellectual property sign non-disclosure and non-compete agreements? 12. Are shredders or secure recycling services provided for secure disposal of confidential documents? 13. How is data privacy is achieved?
14. How are developers are restricted from altering production data? 15. How does the Company ensure its security controls (policies, access procedures, maintenance) remain relevant and effective?
n
For example, with a migration to e-commerce, web-enabled systems.
16. Please describe monitoring and review procedures, i.e., is network scanning performed every quarter? Do internal IT Auditors perform an annual review?
76
W.P. Ref
V.
Reliability of Computer Information Systems

1. How does the company ensure that its IT environment (technologies, platforms and architecture) can support its business strategy?
n
High availability (critical for some companies, downtime is expensive) Systems/data recovery
2.
What redundancy and diversity have been built into the wide area network? How is the network monitored and how frequently? Do automated alarms and/or notifications signal support personnel in case part of the network fails? What recoverability capability exists for identified mission critical systems and applications? Please describe the current systems development procedures (if software is internally developed). If the procedures are documented, please provide a copy. What change management policies, standards, and procedures are implemented? What software tools support change management? What is the scope of changes managed (applications, systems, networks, all changes)? What is the organization scope (corporate site, domestic, international, everywhere)? What are the procedures for emergency changes? Please describe the current approach for application software changes. Include change initiation, review and approval, development, testing (unit, system and user), and implementation. If the approach is documented, please provide a copy.
n
3. 4.
5.
6. 7.
Please indicate whether there are separate persons involved in migrating approved objects to production. Please describe procedures and controls that apply to application objects, database objects, and batch scripts.
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W.P. Ref
n
Please describe security and control over source objects, and procedures for version control. What project control mechanisms are followed for such projects? Such as: project management methodology, systems development methodology, capital authorization processes, project plans, status reports, etc. Try to determine if there are any issues in this area, companies may have flavor of the month projects (issue of need to prioritize initiatives by executives)
9.
Are changes tracked and trended in total volume, and by project or type of change? Is any analysis performed to identify ways to reduce the volume of changes? Are applications subject to version control with changes accumulated for version release? How are changes communicated to affected users? What are the most significant recurring types of changes? What problem management policies, standards, and procedures are implemented? What software tools support problem management? What is the scope (applications, systems, networks, all problems in I.T., all problems)? What is the organizational scope (corporate site, domestic, international, everywhere)? Are problems tracked and trended in total volume, and by project or type of problem? Is any analysis performed to identify recurring problems and implement permanent corrections? What are the most significant types of problems? 13. What are the data file backup procedures, including frequency, retention, and storage location of back-up media? What objects are included in the back-up procedures (source, scripts, database objects, etc.)?
10.
11.
12.
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W.P. Ref 14. Does I.T. have documented contingency plans including such things as:
n n n n n
Individual hardware components failures Software failures Network failures Power interruption Voice communications failure
15. 16. 17. 18. 19.
Does the Company have an I.T. Disaster Recovery Plan (provide a copy if possible) including; Prioritization of mission critical systems and data System availability strategy and standards, including the use of any outsourced service providers, if applicable. Schedule for testing the plan and results of the last test Do the sites and business units have a business resumption plan, including plans for recovery from:
n n
Loss of office facilities Significant interruption in I.T. services.
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W.P. Ref
VI. Degree and Rate of Change in Computer Information Systems

1. Have there been significant changes to the IT environment in the past year?
n
Note any physical changes such as data center relocations or logical changes such as migration of data from legacy systems to new databases
2. 3. 4.
Has the company made significant expansions or experienced downsizing? How often are mission critical applications upgraded? When was the last upgrade? What significant projects are currently in progress, or planned?
n
For example:
n
new applications/packages being implemented and deployed, changes or upgrades to applications or packages, new development projects (e-business, data warehouse, privacy, enterprise security architecture, new platform) shift to a Citrix-based platform (all products run from server, not on users PCs)
n n
6.
What is the business case for the significant IT projects? What benefits are to be derived?
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W.P. Ref
VII. Dependence on External Computer Processing

1. 2. Does the company depend on any outsourcing (including Application Service Provider) arrangements? Have Third Party Reports (SAS 70) been obtained and reviewed? What steps have been taken to assess and act on any client control considerations or signficant weaknesses identified in the reports? Review the reports for the following:
n
any control weaknesses noted which could present a strategic business risk any user control considerations that the Company has not adequately addressed.
3. 4. 5. 6.
What procedures and controls are use to establish third-party providers/contract services? What procedures are established to monitor service levels? What procedures are established to assure processing integrity? How are licenses monitored?
81
W.P. Ref
VIII.Direction and Operation of Computer Information Systems

1. 2. Are the current system(s) meeting the business needs? What are the relevant IT KPIs for management reporting (availability, response time, projects on budget/time) and how are they used? What is the history of meeting KPIs and SLAs? What are the business risks, concerns and issues you have focused on during the past year?
n
New strategy (moving to an e-commerce platform, web-enabled self service access, developing strategic alliances, outsourcing/ASP, or bringing functions in house) Mergers, acquisitions (may have experienced issues with integrating systems) Budget cuts, layoffs, downsizing (impacts ability to maintain environment)\ Projects
4. 5.
What are the key business drivers and how does IT enable them? Who determines the direction of IT and the IT strategy? 1. For example:
n n n
Chief Technology Officer IT Steering Committee IT Project Management Office
82
W.P. Ref 6. What is the current business strategy?

n n
Note if e-business is part of the Companys strategy. Note if achieving the Companys strategy involves significant changes, new risks may be introduced to the Company as a result. Consider: magnitude of impact of the changes, time frame to accomplish the changes, and velocity of change.
7. 8.
What is the current IT strategy? If an IT strategy document exists, please provide a copy. What is the annual IT budget? How is the budget developed (benchmark, percent of sales)? 9. What technology and security policies, standards, and procedures are published. How are they communicated (for example, on an Intranet or employee handbook)? How are they enforced? Obtain a list, and obtain and review key policies, standards, and procedures to confirm existence. Obtain copies of relevant sections or parts to support evidence of existence or findings.
83
Planning Phase General Purpose IT Control Checklist
General Purpose CIS Checklist
WP Ref.: Prepared by Date Reviewed by Date
Client: Period:
Purpose
Completion of General Purpose CIS Checklist should be considered in planning an audit. Where a more detailed review of the IT control environment is required, other CIS questionnaires should be completed. This checlist assists in a high level evaluation of the IT control environment to identify any control weaknesses for discussion with the client. It also assists in forming a preliminary assessment as to whether reliance on CIS controls may be possible. The output of this checklist is a Client IT Discussion Agenda (CDA).
II
Preparation and Staffing
The involvement of a computer audit specialist is typically not necessary. However, a computer audit specialist might be considered, for example, on new engagements, clients undergoing IT expansion or development, or perhaps on a three year cyclical basis. The answers to the questions on this worksheet would usually be determined by observation and enquiry, based primarily on discussions with the client's IT staff.
III
Questions
The worksheet is divided into seven sections, consisting of generic questions applicable to all computing environments. Each section is headed by a control objective. Supporting questions provide information to assist the auditor in assessing the stated objective. For most of the supporting questions, there is a 'Consider', providing the reviewer with issues to think about when answering the question. The 'Consider' points are not mandatory; their aim is to provide guidance only. The questions are designed as an aid to evaluating the IT control environment. The auditor will usually describe the relevant control features in narrative in the 'Comments / WP Ref.' column, cross-referenced to supporting working papers as necessary. The 'Y/N' column is used to highlight overall conclusions and the 'CDA' column to flag items for discussion with the client.
84
Guidance notes are included on the facing page of each question, including the implication of a 'No' answer which is noted in italics. These notes are for guidance only in completing the questionnaire and do not necessarily cover all relevant issues.
IV Conclusion
If issues are raised from this document, a decision should be made whether to include points, specifically for 'No' answers, in the Client IT Discussion Agenda, for discussion by the engagement partner with the client. This should be indicated in the column marked 'CDA'.
(a)
Organisation and Management Policies
Objective Satisfied Y/N
Summary of findings
1.
To ensure that organisational policies and management procedures are in place to enable the IT function to be properly controlled.
Y/ N IT Strategy 1.1 Is there a formal documented plan for IT covering systems to be developed or enhanced over the next 1 - 3 years? Is there an IT Steering Committee? Consider
n
CD A Y/N
Comments / WP Ref.
1.2
Other, less formal, means of establishing and communicating IT strategy User management representation
85
Y/ N Computer Security Policy 1.3 Is there a formal computer security policy? Consider
n n n n n
CD A Y/N
Comments / WP Ref.
Approval at board level Objectives Scope and coverage Responsibility for monitoring or update Distribution to staff
1.4
Is there an end user computing policy? Consider

n n n n n
Software licencing or copyright Use of standard software Anti-virus procedures Security Distribution to staff
86
Y/ N Internal Audit 1.5 Is there an internal audit department? Consider

n n n n n
CD A Y/N
Comments / WP Ref.
Terms of reference Organisation chart Independence Expertise in IT Training or experience
Control Consciousness 1.6 Is the attitude of management and the structure of the organisation conducive to control consciousness?
87
(b)
Segregation of Duties
Summary of findings
2.
To ensure there is reasonable segregation of duties for staff, both within the IT department and between the IT and user functions, to prevent and/or detect errors or irregularities.
Y/N
CD A Y/N
Comments / WP Ref.
2.1
Is there an organisation chart for the IT department? (Obtain a copy)
88
2.2
Is segregation of duties within the IT department appropriate for the size of the organisation? Consider
n
Segregation of functions e.g.

n n n n n n n
Number of IT staff Systems programmers Application programmers Database administrator IT operations Data input Network security
n n
Reliance on key personnel Reliance on contract staff
89
Y/N
CD A Y/N
Comments / WP Ref.
2.3
Do IT staff only have responsibilities for functions within the IT department? Consider
n
Responsibility for initiating or authorising transactions Custody of valuable or moveable assets Amendments to master files Correction of input errors
n n n
90
(c)
Logical Access Controls
Summary of findings
3.
To ensure that unauthorised access cannot be gained to sensitive data or programs. Y/N CD A Y/N Comments / WP Ref.
3.1
Have sensitive data or applications been identified?
3.2
Have appropriate security measures been implemented to restrict users' access to data and programs? Consider
n n n
User-id and passwords Menu facilities Management approval of menu options
3.3
Are passwords changed regularly? (Note how often)
91
Y/N
CD A Y/N
Comments / WP Ref.
3.4
Are development staff prevented from accessing data and software in the production environment? Consider
n
Segregation of production and test environments Procedures for emergency changes eg

n n
documentation review
3.5
Is the allocation, authorisation and use of powerful user-ids or passwords controlled and monitored? (Note to whom these passwords are assigned)
92
(d)
Physical Access Controls
Summary of findings
4.
To ensure that the risk of accidental or malicious damage to, or theft of, computer equipment or media is minimised.
Y/N
CD A Y/N
Comments / WP Ref.
4.1
Is there adequate physical security over computer equipment, data, media and documentation? Consider
n
Buildings (including the protection of terminals) Computer room Communications equipment Fire proof storage for magnetic media Fire prevention or detection Off-site storage
n n n n n
93
(e)
Systems Development and Program Change Controls
Summary of findings
5.
To ensure that systems development and program changes are authorised, tested, documented and operate as designed.
Y/N
CD A Y/N
Comments / WP Ref.
5.1
In-house developments For in-house developed systems, is there a formal methodology? Consider
n
Note the methodology eg

n
SSADM (Structured Systems Analysis & Design Methodology)
Internal procedures developed by the systems development team Prototyping software Programming standards
n n
94
Y/N
CD A Y/N
Comments / WP Ref.
5.2
Packages Is the business dependent on externally supplied and maintained application systems? Consider:
n n
Maintenance agreement with the supplier Changes and upgrades checked and tested before installation Source code provided
n
Measures to prevent unauthorised access to the software
If the software is owned by the supplier, is there an escrow agreement?
5.3
Are users appropriately involved in the systems development process? Consider

n n n n n n n
Specification of requirements Contribution to priority setting User sign offs User acceptance testing Training Formal approval before implementation Development of user manuals etc.
95
Y/N
CD A Y/N
Comments / WP Ref.
5.4
Are development staff restricted from implementing new program versions into the production environment?
5.5
Is comprehensive systems and program documentation produced? Consider

n n n n
Compliance with standards System documentation Operating instructions User documentation
5.6
Are there program change control procedures? Consider

n n n n
Program change documentation Management authorisation Test procedures User involvement in authorising and testing
96
(f)
Business Continuity and Computer Operations
Summary of findings
6.
To ensure that the business will be able to resume effective operations (within a reasonable period of time) in the event that the existing processing facilities are no longer available. Y/N CD A Y/N Comments / WP Ref.
Back Up Procedures 6.1 Are back up copies of data files and programs taken regularly? (Note the back up cycle) Consider
n n
Data at end of day, week, month, year Programs taken once modification is implemented
6.2
Are back up copies held in a secure location remote from the computer site? Consider
n n n n n n n
Data files Programs Systems software Systems documentation Operating procedures User procedures Disaster Recovery Plan
97
Y/N
CD A Y/N
Comments / WP Ref.
6.3
Are back up versions taken offsite regularly?
6.4
Have the back up and recovery procedures been tested? Consider

n
Time taken to recover
Disaster Recovery Planning 6.5 Have the business's critical systems been identified? Consider
n
How long could the business operate effectively without their critical computer systems? eg. hours, < 7 days, etc.
6.6
Has a disaster recovery plan been developed, documented and tested? Consider
n
Regular review and update of the plan (Note when it was last updated) Periodic testing (Note when last tested)
98
Y/N
CD A Y/N
Comments / WP Ref.
Insurance 6.7 Does the organisation have adequate insurance cover relating to its IT risks? Consider
n n n n n
Loss of computer equipment and data Consequential loss Additional cost of working Denial of access Exclusion clauses
Operations 6.8 Are operating procedures documented? Consider

n n n n n
Processing requirements Recovery or restart procedures Emergency changes Incident reporting Housekeeping
99
(g)
User Management e.g. Finance Director / Financial Controller / Chief Accountant
Summary of findings
7.
To ensure that IT systems satisfy the business needs.
Y/N
CD A Y/N
Comments / WP Ref.
7.1
Are users satisfied with the critical accounting systems? Consider

n n n n n
Management information Timeliness of reporting On-line help facilities User friendly facilities Response times
7.2
Are users satisfied with the service from the IT function? (Explain any problems experienced) Consider
n n n n
Help desk Program change Ad hoc requests Turnaround speed on user requests
100
7.3
Are the systems stable? Consider

n
Few modifications since, say, six months before the start of the accounting period New systems planned
101
CIS Control Reliance
Summarise the internal control weaknesses identified during our review which have an impact on the following control objectives, for consideration when planning reliance on CIS controls. 1. Personnel duties, both within the IT department and between the IT and user functions, are reasonably segregated to prevent and/or detect errors or irregularities. _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ 2. Access to sensitive data or programs is restricted to authorised personnel only. _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ 3. Systems development and program changes are authorised, tested and documented, and should operate as designed. _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________
102
Client: CLIENT IT DISCUSSION AGENDA
1.
IT strategy. _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________
2.
Computer security policy and procedures. _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________
3.
Segregation of duties in the IT department. _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________
4.
Controls over access to the computer systems. _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________
103
5.
Physical security over computer equipment. _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________
6.
Systems development and program change procedures. _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________
7.
Back up copies of data and programs. _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________
8.
Disaster recovery plan. _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________
104
9.
User satisfaction with IT. _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________
10.
Other (eg relevant issues from the Engagement Overview and Client IT information form)
n n
Critical Business Areas Reliance on key personnel
_____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________
105
Planning Phase Analytical Procedures at Planning Stage Analytical Review Ratio Analysis
Analytical Review Ratio Analysis

FORMULA A. 1. 2. 3. 4. 5. PERFORMANCE ANALYSIS Installed Capacity Capacity utilized Production in units i.e. Kgs. metres etc. Production after conversion, if any. Gross Sale in % - Local Y1 Y2 Y3 Y4
Local Gross Sales Gross Total Sales Export Gross Sales Gross Total Sales Gross Profit Net Sales Consumption Cost Cost of goods manufactured Total Purchase Price of Raw material total units purchased Conversion Cost unit produced Conversion Cost without depreciation units produced Labour Cost units produced Store & Spares consumption in rupees units produced Electricity consumption in rupees units produced
- Export
6.
Gross Profit % to Net Sales
7. 8.
Raw material consumption cost to cost of goods manufactured. Average raw material purchase price per unit.
9. 10.
Average conversion cost per unit of production Conversion cost without depreciation per unit
11.
Labour cost per unit of production
12.
Store and spares consumption per unit of production. Electricity consumption per unit of production
13.
14.
Packing material cost per unit of production
Packing material cost units produced
15.
Administrative expenses / unit of production
Administration Expenses units produced
16.
Selling expenses per unit sold.
Selling Expenses units sold
106
FORMULA
Y1
Y2
Y3
Y4
17. 18.
Financial charges Net Profit / (Loss) per unit sold
in rupees Net Profit / (Loss) unit sold Net Profit / (Loss) Sales X one hundred
19.
Net profit (Loss) percent of sales
20.
Production in % Finished goods in production Visible waste Invisible waste
Finished goods produced in units raw material consumed in units 100
21.
Average selling rate per unit Local Local Sales Total Units Sold Export Sales Total Units Sold
Export
In case of Textile B. 1. PROFITABILITY RATIOS Return on assets (ROA) Net Profit after tax Average total assets Net Profit after tax Average total capital employed Net profit available to equity holder Number of ordinary shares outstanding
2.
Return on Capital Employed (ROCE)
3.
Earning per share (EPS)
Reasons for Fluctuations: ______________________________________________________________________________________________ ______________________________________________________________________________________________ ______________________________________________________________________________________________ ______________________________________________________________________________________________
107
FORMULA 4. 5. 6. 7. 8. 9. C. 1. Earning yield Price Earning Ratio Operating Expenses ratio (administrative Expenses ratio) Administrative Expenses ratio Selling Expenses ratio Financial Expenses ratio ACTIVITY RATIOS Inventory Turnover i. ii. iii. 2. 3. 4. 5. Raw Material Turnover Work in process turnover Finished goods turnover Cost of raw material used Avg. raw material inventory Cost of good manufactured Avg. Work in process inventory Cost of good sold Avg. finished goods inventory Credit Sales Debtors Months (days) in a year Debtor turnover Cost of good sold Average total assets Cost of goods sold Average fixed assets Cost of good sold Average current assets Cost of good sold Net working capital Earning per Share Market value per share Market price as a Share Earning per Share Operating Expenses Net Sales Administrative Expenses Net Sales Selling Expenses Net Sales Financial Expenses Net Sale
Y1
Y2
Y3
Y4
Debtor turnover Average debt collection period Assets turnover Fixed assets turnover
6. 7.
Current assets turnover Working Capital turnover
108
FORMULA D. 1. 2. 3. E. 1. 2. 3. LIQUIDITY RATIOS Current Ratio Acid - Test quick ratio Creditors LEVERAGE / CAPITAL STRUCTURE RATIOS Debt - Equity ratio Equity Turnover Owners stake in the fixed assets Total debt Share holders equity Sales Net worth Fixed assets Net worth Current assets Current liabilities Quick assets Current liabilities Net credit purchase Average creditors
Y1
Y2
Y3
Y4
Reasons for Fluctuations: ______________________________________________________________________________________________ ______________________________________________________________________________________________ ______________________________________________________________________________________________ ______________________________________________________________________________________________
109
Planning Phase Analytical Procedures at Planning Stage Review of Financial Performance of the Client
Review of Financial Performance of the Client

Summarize results of financial performance review and discuss its impact on audit (see attachment). ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________
110
Suggested Format of Financial Performance Review

(a) Summary Financial Data Period Ending (Indicate)
SALES COST OF SALES GROSS PROFIT OPERATING EXPENSE OPERATING INCOME OTHER INCOME (Expense) PRE-TAX INCOME PROVISION FOR INCOME TAX NET INCOME X1 X2 X3 X4
(b)
Profitability of Operations
GROSS MARGIN PERCENTAGE OPERATING INCOME PERCENTAGE EFFECTIVE TAX RATE NET INCOME PERCENTAGE EPS
(c)
Financial Leverage
DEBT TO EQUITY RATIO
111
(d)
Asset Turnover
RATIO REVENUE TO TOTAL ASSETS RECEIVABLES TURNOVER RATIO INVENTORY TURNOVER RATIO
X1
X2
X3
X4
(e)
Liquidity
WORKING CAPITAL OPERATING CASH FLOW CURRENT RATIO QUICK RATIO INTEREST AND DIVIDEND COVERAGE
112
Planning Phase Internal Audit Function Evaluation
Internal Audit Function Evaluation

Client: Period:
Introduction
This working paper is relevant when auditor consider the work of internal auditing to:
n n
provide audit evidence and when internal auditing provides direct assistance.
We consider how the internal audit function affects the entitys accounting and internal control systems and develop an effective audit approach in the following manner. Approach Understand internal audits activities Documentation Strategy and Planning Document We obtain and document an understanding of the internal audit function, to the extent that it operates as part of managements control system. Perform a preliminary assessment Section I of this working paper We document our information obtained, and preliminary assessment of the internal audit function. Modify nature, timing and extent of audit procedures Strategy and Planning Document If it is determined that utilising internal auditing will have a significant effect on the planning and scoping of the audit then we document our use of internal auditing. Section II of this working paper When we intend to use specific work of internal auditing we document our evaluation and testing of the effectiveness of internal auditings work. Obtaining direct assistance Section III of this working paper If we request direct assistance from internal auditing we document our procedures. Refer to ISA 610, Considering the Work of Internal Auditing for further guidance.
Evaluate and test work of internal auditing
113
Section IPreliminary assessment of the internal audit function

When it appears that internal auditing is relevant to the external audit of the financial statements in specific audit areas, we make a preliminary assessment of internal auditing by obtaining information about matters such as:
n n
the nature and extent of the internal audit function's assignments whether management acts on internal auditing's reports and recommendations and how this is evidenced the technical competence of the internal audit function the due professional care of internal auditing, especially whether the work is adequately planned, supervised and reviewed the objectivity of internal auditing.
n n
Comments/Preliminary Assessment
114
Section IIEvaluate and test the work of internal auditing

When we intend to use specific work of internal auditing, we evaluate and test that work to confirm its adequacy for our purposes.
(a)
1.
Evaluate
We consider whether:
n n n
the work is performed by people with adequate technical training and proficiency the work of assistants is properly supervised, reviewed and documented sufficient appropriate audit evidence is obtained to afford a reasonable basis for the conclusions reached conclusions are appropriate in the circumstances and reports are consistent with the results of the work performed any exceptions or unusual matters disclosed by internal auditing are properly resolved by management.
Evaluation
115
(b)
Test
List any of the procedures below relating to testing of internal auditing that may be considered given specific client circumstances. Our tests of the internal audit function's work may include the following procedures.
n n n
Observe the internal audit function perform audit procedures Enquire of the internal audit function about the nature of its work Re-perform some of the audit procedures previously performed by the internal audit function For example, we may test the same controls, transactions or balances as the internal audit function tested.
Perform different audit procedures For example, we may test controls, transactions or balances other than those the internal audit function tested.
Examine internal auditing's working papers. [List any other procedures relating to internal auditing issues that may be considered given specific circumstances. Our procedures, and the documentation of those procedures, are to be sufficient to support our decision to rely on internal auditings work.] # Procedure(s) Done by and date W/P Ref.
116
Section IIIObtaining direct assistance

We may request direct assistance from the internal audit function. When the internal audit function provides direct assistance, we: 1. Perform a preliminary assessment of the internal audit function
2.
Inform internal auditing of their responsibilities, the objectives of the procedures they are to perform and matters that may affect the nature, timing and extent of audit procedures
3.
Supervise the work and review the working papers that the internal audit function prepares on our behalf
117
Conclusion
118
Planning Phase Guidelines for Observation of Physical Inventories
Using the Work of Another Auditor

Client: Period:
Introduction
This document should be prepared by an auditor when:

n n
the audit is to be carried out with co-auditor; or financial statement of component (any entity whose financial information is included in the financial statement of the client) are audited by some other auditor
Documentation may be included in this document, or other working papers (with cross-reference to this document). Details of co-auditors / components and their auditor S. No. Description of component (subsidiary, associate, joint venture, division, branch or others) Co-auditor/Auditor
119
Section I
Professional competence of the other auditor
Consider: (1) (2) (3) membership with professional organization membership or affiliation with other audit firm result of inquires and discussion with other auditor and banker(s)
Advise the other auditor at planning stage and obtain written representation about: (1) (2) (3) (4) (5) compliance with independence requirements with respect to client/ component the use that is to be made of other auditor work areas requiring special attention timetable for completion of audit the accounting, auditing and reporting requirements
Discuss with other auditor: (1) (2) audit procedures applied by them review other auditor's procedures (questionnaires/ checklists)
Consider re-performing these procedures. Nature, timing and extent will depend on circumstance of the engagement and professional competence of other auditor. Consider the significant findings of the other auditor and discuss with management and other auditor.
120
Professional competence of the other auditor
121
Section II - Main areas of judgment

(a) Critical audit objectives and significant audit areas
Please identify critical audit objectives (audit objectives involving a significant risk of material misstatement, or requiring a considerable degree of judgment, or involving difficulty in obtaining audit evidence or applying audit procedures) and significant audit areas and give details of the audit approach adopted in respect of these including the extent of testing in terms of numbers and values and the leave of materiality above which items were tested. Critical / significant audit area Audit approach
122
(b)
Significant features of the years results

Please give details of significant features of the years results and of significant changes from previous years profit and loss account and balance sheet and reasons for major variations. Significant features and financial statement captions with significant changes Comments and explanations
123
(c)
Evaluation of internal control

Please identify all areas where you have relied on internal controls in restricting your substantive tests, and provide details of work done to ascertain that the controls are reliable.
Please provide details of areas where you have documented the companys system by means of flowcharts and / or notes indicating for each area the method used.
124
Please provide details of all significant weaknesses in the companys system of internal controls or deficiencies in the accounting records. If these have been reported in writing to the companys management please attach a copy of this report together with the companys response if any.
Where significant elements of the accounting records are processed by EDP systems, describe your audit approach (e.g. use of specialists or other suitably trained staff; use of enquiry programs or other computer assisted techniques) and explain how you have satisfied yourselves about the operation of any internal controls with EDP elements upon which you have relied.
125
(d)
Errors and exceptions

Please provide details of significant errors and exceptions found and whether the financial statements have been adjusted for these. Details of Errors and exceptions Disposition
(e)
Matters of judgment brought to the partners attention

Please provide details of matters of judgment, which were formally brought to the partners attention during the audit and how these were resolved. Matters of judgment How resolved
126
(f)
Matters giving arise to a qualification in the audit report

Please provide full details of matters, if any, which resulted or will result in the audit report being qualified.
(g)
Other items attesting the accounts / disclosures

Please provide details of any other areas, which have a significant bearing on the amounts and / or disclosures, stated in the accounts (e.g. related party transactions, going concern problems) where you have had difficulty in determining whether these amounts and/or disclosures are fairly presented.
127
Please provide details of any transactions (e.g. purchase and sale of assets, loans, guarantees, contracts, etc.) with the directors of the company, the parent company, other group companies or other related parties and indicate whether these are disclosed.
Conclusions:
Signed _________________________
Date _________________________
128
Planning Phase Audit Administration Minimum Hourly Charge Out Rates for Audit Work
Minimum Hourly Charge Out Rates For Audit Work By Practicing Members
ATR 14 (Revised)
1. The Council in its meeting held on 14 April 2003 reconsidered the minimum hourly charge out rates for audit work by practicing members and decided to suitably increase the same. The Council has authorized the following minimum hourly rates, which it considers reasonable under the present conditions, as an indication, of the range of professional charges for audit work presenting no exceptional characteristics. These are exclusive of travelling, hotel expenses, out of pocket expenses and other disbursements: Rupees 3,500 2,100 1,400 500 350 285 175
Partner Qualified Assistants Senior (5 years and above) Junior (0-5 years) Supervisor Senior Semi-Senior Junior 2.
The level of fee is to be mutually agreed between the auditor and his client, which largely depends upon the volume of work involved and estimated time to be incurred by the auditor. The Council whilst recognizing this principle is however, of a view that there has to be minimum threshold of audit fee. To achieve the desired objective, the following parameters are being prescribed which shall govern the determination of a minimum prescribed audit fee (which may be increased by consent having regard to specific circumstances of a company) based on the applicability of any two parameters within a category. In case of applicability of a combination of parameters in a specific situation, the highest prescribed minimum audit fee shall be applicable.
Category Turnover Equity Fixed Assets Rupees in million Prescribed minimum Audit fee Listed Other Companies Companies Rs. 60,000 Rs. 75,000 Rs. 100,000 Rs. 125,000 Rs. 40,000 Rs. 50,000 Rs. 60,000 Rs.100,000
3.
A B C D
Up to Rs. 10 Rs.10 50 Rs.50 100 Over Rs.100
Up to Rs. 10 Rs.10 30 Rs.30 50 Over Rs. 50
Up to Rs. 10 Rs.10 50
Rs.50 100 Over Rs. 100
129
Note: i) The terms turnover, and fixed assets shall have the meanings assigned to them in the Fourth Schedule to the Companies Ordinance, 1984 and the term equity as defined in IASC Framework for the Preparation and Presentation of Financial Statements. Considering the practical difficulties being faced by various practicing members in the determination of audit fee, the Council has decided that the prescribed minimum audit fee shall be charged without any exception. However, in case of an existing audit client, the present audit fee shall be enhanced to the aforesaid prescribed level over a period of three years with mutual consent provided it is not less than 60% of the prescribed minimum in the first year. Nevertheless, in case of acceptance of an audit client by a practicing member for the first time the prescribed fee levels shall be strictly observed.
ii)
4.
Minimum Audit Fee in Certain Circumstances For audit engagements of clients in the pre-incorporation / pre-operation stages or in case where less than two of the aforesaid parameters are attracted for whatever reason including sickness of the project or closed operations or discontinuation of business, the prescribed minimum audit fee chargeable by the practicing members shall be as under. Listed Companies Minimum audit fee Rs. 25,000 Other Companies Rs. 15,000
5.
The Code of Corporate Governance requires the auditors to:

n n
Attend the Audit Committee Meetings of clients Issue a Review Report on Statement of Compliance with Best Practices Corporate Governance Issue Review Report on half yearly financial statements Special certification required by regulators over and above normal scope audit. of of
n n
The minimum audit fee prescribed above is exclusive of the above additional services to be rendered by a statutory auditor and professional fee for such services shall be charged separately by mutual consent.
130
6. 7. 8. 9. 10.
In case of joint audits, fee may be shared among the auditors as may be mutually agreed between them. The fee may be reviewed annually to cover inflationary effects in costs. The hourly rates and fee are exclusive of traveling and hotel expenses, out of pocket expenses and other incidental costs which would be reimbursable to auditors at actual. In case of a religious or charitable institution or a company not for profit, the practicing members may undertake to do the audit on a token fee or on an honorary basis. At the time of quality control review, the reviewer will ensure the compliance of this ATR. This ATR supersedes ATR 14 (revised) issued pursuant to the Council's decision of 30 July 2001.
131
Planning Phase Audit Administration Detail Performance Summary
Staff Planning and Time Allocation

n n
Detailed Performance Summary Time Budget
132
Planning Phase Audit Administration Detail Time Budget
CLIENT : PERIOD OF ACCOUNT : DETAILED TIME BUDGET Prepared by Budget Reviewed by Approved by Staff :
BUDGET (hours) Sup. Strategic plan Detailed planning Audit program & budget INTERIM WORK Cost of goods sold/manufacturing expenses Purchases Wages and salaries Administration and general expenses Sales and other Income P&L Other Sr. S.Sr. Jr. Total Sup. Sr.
ACTUAL (hours) S.Sr. Jr. Total
Cash and bank Debtors (incl. Circulatization) Fixed assets Stock and work-in-progress Physical stock taking General ledger and journal Internal control memorandum Travelling Supervision General
TOTAL INTERIM WORK
133
Planning Phase Audit Administration Detail Time Budget
BUDGET (hours) Sup. FINAL WORK Share capital/dividends Reserves Deferred liabilities Loans Creditors - ourchases Outstanding expenses Taxation Contingent liabilities Fixed assets and depreciation Invenstments Stock and work-in-progress Trade debtors Advances, deposits and prepayments Cash and bank balances Sales and other income Manufacturing expenses Selling and administration expenses Sr. S.Sr. Jr. Total Sup. Sr.
ACTUAL (hours) S.Sr. Jr. Total
Travelling Supervision Reports/Memoranda Review Memorandum Standard Schedule for Audit Summary file General Conferences with client
TOTAL FINAL WORK TYPING COMPARING GRAND TOTAL (hours) Rate per unit Valuation Manager Partner COST FEE OVER (UNDER) RECOVERY
134
Planning Phase Audit Administration Daily Time Control / Staff Attendance Sheet
Time Sheet
n
Daily Time Control / Staff Attendance Sheet
135
Planning Phase Client Profile / Client Prepared Scheduled Request
Client Profile
n
Nature of client business Number of Branches (if any) Company Secretary Legal Advisor(s) Tax Advisor Major Banks Organizational Charts, etc. ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________
136
Planning Phase List of Authorised Signatories
List of Authorised Signatories

Name ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ Designation __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ Monetary Limit Allowed _____________________ _____________________ _____________________ _____________________ _____________________ _____________________ _____________________ _____________________ _____________________ _____________________ _____________________ Signature ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________
Note : Information shall be used in performing audit procedures (e.g. Test of Controls & Substantive Testing). If there are no significant changes since previous audit, this may be transferred to the permanent file.
137
Planning Phase Notes of Meeting with Client
Notes of Meeting With Client

(for recurring audits) CLIENT NAME
DATE VENUE TIME
FIRM REPRESENTATIVES
Name
Designation
CLIENT REPRESENTATIVES
Name
Designation
CONCLUDING REMARKS
Sign off Prepared by Reviewed by
Date
Date
138
Agenda for Meeting

Latest audited accounts Coordinating persons Information about Other Auditors/ Co-auditors(if any) Availability of Accounting manuals and any changes Areas Requiring special attention Physical Existence Verification Approx. Value Stock Cask Investment Others Clients expectation of Completion of Interim audit Expected date of Client to prepare financial statements Clients expectation of completion of audit Clients expectation of receipt of audited accounts Details of branches / Operations Any significant accounting and audit issues identified during the last audit which are brought forward Date Location(s) Coordinator(s) Name Designation
139
Involvement of internal audit
a. b. c. d. e.
No. of staff Name of department head Reporting authority Type of reports issued Frequency of reports
Confirmation circularization dates

n n n n n n
Banks Debtors Creditors Legal Advisors Tax Advisors Other
Changes in economic conditions Changes in industry and operations Significant Changes in Business since Last year Changes in key finance and operations managers Changes in management / Stake holders / Owners Business objectives and whether they are being met Changes in market strategies
140
Availability of latest cash flows / budgets Actual results to date (comment generally) Financial restriction placed by debt covenants Risk / Probability of breach of debt covenants Changes in credit terms for customers since last year Changes in information systems and technology in use Changes in significant accounting processes Effects of any recent or pending government legislation / actions Effects of outcomes of litigation since last year Effect of any new tax rules / legislation New competitors in product lines of the company Changes in market share Significant changes in major customers / suppliers Acquisitions / disposals of associates or any anticipation thereof Changes in internal reporting formats Changes in capital structure of the entity
141
Names of key financiers and changes thereto. Significant changes in system of internal controls since last year Significant changes in accounting policies Effect of new accounting pronouncements Clients international reporting requirements and changes thereto Miscellaneous
142
Planning Phase Notes of Review of Correspondence File
Client:_____________________________ Accounting Period:___________________
Prepared by:____________ Reviewed by:___________
Date:______________ Date:______________
Notes of Review of Correspondence File

Letter Dated Addressed To From Particulars
Note: Only document those significant matters, which needs to be communicated to the audit staff except for those matters documented in Instruction from client.
143
Planning Phase Points Forward to Next Year
Client:_____________________________ Accounting Period:___________________
Prepared by:____________ Reviewed by:___________
Date:______________ Date:______________
Points Forward to Next Year

S. No. Schedule Reference Description of issue Service Improvement Plan
144
Planning Phase Points Forward to Next Year
145
Execution Phase General Instructions for Documentation of Audit Execution File
EXECUTION PHASE General Instructions for Documentation of Audit Execution File

1. 2. Planning file must be completed, reviewed and signed by at least a senior audit staff before commencement of field work. The job incharge should ensure that following has been done / completed before presenting the file for review: 2.1 2.2 2.2 2.3 Total of the lead schedules for each head agrees with the accounts. Lead schedules must be supported by the audit evidence gathered during the course of the audit Lead schedules adequately cross-referenced to supporting schedules. There should be a conclusion preferably on the lead schedule on each financial statement component, signed by the person who has executed the work as well as the reviewer. Lead schedules and sub-schedules are initialled and dated by auditor who has prepared the schedule and carried out the work. List of final outstanding points and exceptions with their disposals should be stated in un-ambiguous terms and cross-referenced to working paper files. Audit symbols used must explain the work performed and ensure that percentage of work completed must be stated for each financial statement component, which is not fully verified. If sampling procedures used by the auditor, ensure that steps are properly correlated with the materiality threshold determined at the planning stage All audit program steps should be cross-referenced with the schedules containing work done. A copy of the relevant audit program is to be filed with each significant financial statement component
2.4 2.5 2.6
2.7 2.8 3.
Auditor must ensure that observations relating to internal control weaknesses (revealed during test of controls / cut off procedures) are properly addressed in draft management letter or internal control memorandum.
146
Execution Phase Sampling
Sampling
I Definition of sampling
Para 3 of AS 19, 'Audit sampling and other selective procedures' states that: "Audit sampling (sampling) involves the application of audit procedures to less than 100% of items within an account balance or class of transactions such that all sampling units have a chance of selection. This will enable the auditor to obtain and evaluate audit evidence about some characteristic of the items selected in order to form or assist in forming a conclusion concerning the population from which the sample is drawn. Audit sampling can use either a statistical or a non-statistical approach."
II
Importance of sampling
Bulks of business transactions do not justify a review or audit of the entire account balances and class of transactions. An auditor must apply various methods and techniques in selection of a limited size of population to verify or review. Selected sample helps the auditor in forecasting conclusion on the entire population based on the selected sample. Based on sample size may be varied based on the conclusion. Appendix 1 of AS 19, 'Audit sampling and other selective procedures' depicts the following examples of factors in framing sample size for Test of controls. Factors Effect on sample size Increase Increase Decrease
An increase in the auditor's assessment of inherent risk An increase in the auditor's assessment of control risk An increase in the use of other substantive procedures directed at the same financial statement assertion An increase in the auditor's required confidence level (or conversely, a decrease in the risk that the auditor will conclude that a material error does not exist, when in fact it does exist) An increase in total error that the auditor is willing to accept (tolerable error) An increase in the amount of error the auditor expects to find in the population
Increase
Decrease
Increase
III
Risks
The risk associated with the sampling is the fact that the incorrect fake / fraudulent transaction or procedure may not be selected in sampling. This may result in drawing incorrect conclusions / opinion based on the result of the samples being selected.
147
The question is how to encounter these risks associated with sampling? The auditor has to consider the following factors and sampling methodology in selection of a sample:
(a)
Appropriateness of sample to the objective
Sampling procedures applied shan be consistent with the objectives of the auditor.
(b)
Completeness of sample population
In order to achieve the objective of sampling the auditor shall ensure that population is complete in all respects. For example, if the auditor intends to select a sample of payment vouchers from a file, conclusions cannot be drawn unless the auditor is satisfied that all vouchers have in fact been filed. Whichever form of sampling is used by the auditor all the population shall have a chance of selection. Further, as the purpose of sampling is to draw conclusions about the entire population, the internal auditor shall endeavor to select a representative sample by choosing samples, which have characteristics typical of the population.
IV Planning The Sample

When planning the sample, the following needs to be considered:
(a)
The Audit Objectives
In particular, this would be whether tests are for over or under statement of an account balance or class of transactions.
(b)
The Population
The parameters of the population to be tested need to be determined. It must be ensured that the population from which the sample is to be drawn, is appropriate for the specific audit objective (for example, if testing debtors, the population should be the debtors balances listing; if testing creditors, the population should be subsequent disbursements, or unpaid invoices or suppliers statement). When defining a population, the following should be remembered: the results of a test on a sample can only be evaluated to form a conclusion on the population from which the sample is taken sampling from a population does not establish the completeness of that population (i.e. for completeness other specific tests are performed e.g. checking subsequent period expense vouchers, delivery challans / good receiving notes before and after year end etc.). the extent of key or high value items must be considered the different considerations that apply to debit or credit balances within an account balance the extent of key or high value items must be considered the different considerations that apply to debit or credit balances within an account balance 148
the extent to which a population can be divided into smaller populations, each of which is a group of sampling units with similar characteristics (that is, how stratified the population can be). e.g. In net debtors, we have some credit balances alongwith debit balances, thus, the population is stratified into two, (a) Credit Balances and (b) Debit Balances.
(c)
The Sampling Unit
The sampling unit needs to be defined, as the selection of the sample and the evaluation of the test results depend on the unit selected. The value of all units must equal the total value of the account balance or class of transactions. Often the population can be divided into sampling units in a variety of ways (for example, in debtor balances confirmation requests, customer balances, individual invoices or items on invoices can be used).
(d)
n
Defining Tolerable Error

in substantive testing, the tolerable error is the maximum amount or level of monetary error which can be accepted to still conclude that the audit objective has been achieved. Tolerable error is considered at the planning stage and, for substantive procedures, is related to judgement on materiality. The smaller the tolerable error, the greater the sample size will need to be. All errors found from all tests should be recorded on an overall summary of error schedule; the cumulative effect of all errors found from all audit tests may be material, even if, on an individual test basis, errors are less then the tolerable error level. Consideration should also be given as to what level or amount of error is expected from the test. A high expected error rate will imply that a larger sample should be taken. Presently, we are considering a medium risk factor i.e. 1.8 as we heavily rely on the results of our substantive procedures.
(e)
n
Setting the sample size for substantive tests of transactions and balances
The following factors are particularly important when setting a sample size:
n n n n n
the sampling risk the tolerable error rate the expected error rate the population value (substantive tests of account balances only) the number of items in the population (small populations only)
sampling risk Sampling risk is the risk that the conclusion, based on the sample tested, would differ from the conclusion that would be reached if the entire population were subject to testing.
149
Sampling risk will always be present if a sample is tested, rather than 100% of a population; the key factor is to decide the level of sampling risk to accept. The vital element in this decision is how much reliance is being placed on the test. The reliance on the test will be low if:
n n n n
the population tested is inherently unlikely to contain errors reliance is being placed on analytical procedures, or reliance is being placed on internal controls.
The lower the risk the auditor is willing to accept, the greater the sample size will need to be and lesser the transaction will be selected for verification. Therefore, the level of sampling risk to accept will be decided by his assessment of inherent, analytical and control risk. Presently based on our experience with clients and management attitude of companies, we are setting risk factor to 1.8. Sampling risk can be contrasted with non-sampling risk, which occurs during any audit procedures, since most evidence is persuasive rather than conclusive. The auditor may use inappropriate procedures or misinterpret evidence and fail to recognise an error and he attempts to reduce non-sampling risk by appropriate planning, supervision and review procedures.
Sampling methodology
Sample shall be drawn from the most current period that is from the immediately ended quarter. Drawing of sample could be extended to a full year in circumstances where the result of tests signifies nonconformity with the internal controls assessed during the preliminary review stage. In these cases the best practice shall be to draw majority of samples from the most recent period. Various techniques may be used in selection of a sample depending on the nature, size of population and judgment of auditor. The following are some of the examples of sampling techniques.
VI Sampling techniques
Sampling is classified as probabilistic (statistical sampling) or non-probabilistic.
n
A probabilistic sample must be unbiased so that each element of the population has the same chance of selection, and the probability of selection is known. The result can then be statistically evaluated, objectively interpreted, and precision and reliability can be calculated. Bias can be avoided by choosing samples using a randomization process. Non-probability sampling techniques result in samples that may not contain each element of the population. There is also no attempt to control bias, as the auditor decides which item to select.
Sample plans are necessary for any audit as they document:

n
The testing objectives; 150
the population size and composition (the population is the class of transactions being tested, and a sampling unit is an individual element in the population); the method of sampling and the sample size; and interpretation of the results.
n n
(a)
Statistical sampling
Statistical sampling provides a method to arrive at an informed opinion of the whole population, on the basis of mathematical concepts. The major advantage of statistical sampling will be evident if the auditor has to justify the methods used, as statistical sampling provides an objective, acceptable methodology to determine the sampling risk, sample size, and an evaluation of the results. The most practical use of statistical sampling is in the testing of attributes to determine whether prescribed control procedures are in use. For example, attributes to be tested in a sample of vouchers would include the verification that each was appropriately authorised. The methods used for selecting the statistical sample include: Random selection The most appropriate method of selection is by use of random numbers. Random number tables or computer program can provide the numbers. Each item in the population is equally likely to be selected and the result can be statistically evaluated. Systematic selection The main characteristic of this method is the use of an interval, for example, selecting every tenth item in a sequence. There is a potential bias as only the first item is selected randomly. Therefore a statistical evaluation of the sample selected is not appropriate. Rupee unit sampling This method has the simplicity of attributes sampling but provides a statistical result in rupees. It tests details of balances to determine whether the account balance being audited is fairly stated. The population is the recorded aggregate rupee amount of the entire population, and a sample unit is an individual account balance in rupees.
(b)
Judgemental sampling
The selection of a judgemental sample requires professional judgement. It is more efficient and economic to use judgement where the sample sizes are small, or where randomisation is not expected to provide representative samples. If a preliminary survey indicates that the quality of control in a system is of a high standard, a review of a small judgemental sample may provide an assurance that the system is actually in operation. This approach is appropriate in areas where the transaction populations are relatively small, and the auditor has prior knowledge of the population.
151
In order to ensure that a judgemental sample is representative, the auditor shall consider the following:
n n n
Ensure that each major type of transaction is included. Include transactions processed by each person employed during the period. Test high value items more heavily than the smaller ones. If these are error free there is a high chance that the more normal transactions will also be error free.
If errors occur in the sample, judgement is required to arrive at an opinion on the total population. There may be a need to extend or even abandon a sampling procedure. Other non-probabilistic sampling includes: Block sampling Several items are selected in sequence. When the first item is selected, the remainder are chosen automatically. A sample of 100 items could consist of 5 blocks of 20. For example, a block sample might include all input forms in a daily batch. The limitation of the approach is that the sample is not necessarily representative. Haphazard selection Such sampling is performed without any regard to the size of the sample population, source or other distinguishing characteristics. The most serious limitation is that the selection cannot be performed without some bias, especially if the auditor is seen to select items that are easily located. On the basis errors found in the sample of the population the auditor shall project monetary errors for the whole population.
VII Using Sampling in Auditing

(a) Some Precautions before Undertaking Statistical Sampling
The use of sampling in this section is restricted to the following two stages: a) b) Determine Sample Size Use Statistical Technique
We, now, make out a simple table for calculating Sample Size: Table A Extract of sample sizes for Sampling Attributes Expected Rate of occurrence not over 5% Confidence Level 95%.
152
Desired Precision Number of items in population 1% 8000 9000 10000 15000 20000 1485 1517 1543 1626 1672
2% 431 434 436 43 446
3% 198 198 199 200 201
Table A meats that the auditors would like a 95% level of assurance or confidence that his results will be within 2% (say) precision level of the actual amount. At this point, it would be noteworthy that the auditor can use a spreadsheet package in computer to calculate random numbers. This is illustrated below: Step 1: Step 2: Step 3: Step 4: Step 5: Step 6: Step 7: Open a blank worksheet in the LOTUS-123 spreadsheet package. Write down the total sample size in cell A1. Co to cell A3. Press / Range Format Fixed A3..A20 Enter. In cell A3, Type @Rand*$A$1 and press Enter key. Press / Copy A3 Enter A4..A20 Enter. Note Down the random number in cells A3 to A20. Change the total sample size figure in A1 and all figures will automatically change.
Explanation: The @RAND is the random number function. It is dependent upon time and will change each time you type it. The $A$1 is the absolute address of cell A1, which if copies, will not change relatively. Step 3 is necessary to format the range to zero decimal places. The @RAND give a number between 0 and 1 (say 0.0235). This is multiplied by sample size to get random number. An exhaustive illustration of audit sampling of attributes: An example of the application of sampling techniques on an attributes problem is give below: The population: (field) The audit procedure being following is the sending of letters to selected customers to obtain confirmation of their balances. The client has approximately 15,000 customers. Balances range from small amounts to seven digit figures. Over 80% of replies have been received in the past. As to the balance 20%, it is assumed that the auditors gets satisfaction equivalent to the receipt
153
of a signed confirmation from a no reply because there exist certain customers who will not reply no matter how persuasive the request might be. So, the sample will be considered to comprise all requests not only the replies.
(b)
1 .
Worksheet for Evaluation of Statistical Sample for Attributes

The Population Total Population Number 15000 Amount Rs. 32,375,000
2 .
The Sample a) Sample Size b) Errors found c) Percentage of total sample d) Amount of total error e) Average Error per account f) We assume that Standard Error is negligible: g) Applying Average error per account to total number of accounts: (46.28 x 15000) Rs. 694,200 443 (Table A) 42 (42 / 443) x 100 Rs. 20,500 Rs. (20,500 / 443) Rs. 46.28 9.48% 2% precision
This implies that the total error will range around Rs. 7 lakhs. Thus the auditor may modify his audit programme accordingly.
154
Execution Phase Sample Audit Programs Assets
Sample Audit Programs

As per ISA 300 Planning, the auditor should develop and document an audit program setting out the nature (what), timing (when) and extent (how much) of planned audit procedures required to implement the overall audit plan. In preparing the audit programs, the auditor would consider the specific assessments of inherent (IR) and control risk (CR) and the required level of assurance to be provided by the substantive procedures. The audit programs should be revised as necessary during the course of the audit because of changes in conditions or unexpected results of audit procedures. The reason for significant changes would be recorded. The following table shows how the acceptable level of detection risk (shaded area) may vary based on assessments of inherent and control risk. Auditor's Assessment of control risk is: High Auditor's Assessment of inherent risk is: High Medium Low Purpose The purpose of an audit program is to group management assertions in the form of financial statements into auditor's audit objectives and then link the understanding obtained during the planning phase related to the financial statement assertions to the assessment of the risk of significant misstatement (ROSM) and planned audit procedures. It documents:
n
Medium Lower Medium Higher
Low Low Higher Highest
Lowest Lower Medium
A summary of the audit objectives related to this process and whether the audit objectives are critical Financial statement assertions that were combined into each audit objective The assessment of ROSM for each audit objective Planned procedures to gain audit evidence to support ROSM for each audit objective (may also include results of the procedures) Planned substantive audit procedures for each audit objective (may also include results of the procedures).
n n n
The enclosed list contains possible suggested audit procedures for different financial statement components (mostly for the manufacturing concern). All of these procedures will rarely be selected to minimize the detection risk to an acceptably low level.
155
The following alphabets have been used to indicate the assertion addressed in a step: Assertion Alphabet Class of transaction and events Account balances at period end Presentation and disclosure
Occurrence Completeness Accuracy Cut off Classification Existence Rights and obligation Valuation Allocation Understandability
O C A T L E R V K U
156
I
S. No. 1. 2. 3. 4. 5. 6. 7. 8.
Balance Sheet Assets

Financial Statement Caption Fixed assets (Tangible, intangible and CWIP) Investment Properties Investments Long term loans and advances Long term deposits and Prepayments
Stores, spares and stock-in-trade
Reference No.
Page No.
Trade debts Advances, Deposits, Prepayments & Other receivable Cash & Bank Balances
9.
157
Audit Program
(a) Fixed assets (tangible, intangible & CWIP)
WP Ref.: Prepared by: Date: Reviewed by Date
Client: Period: Subject:
Fixed assets (tangible, intangible & CWIP) Amount in Rs.
Account balances: Tangible fixed assets (owned and leased) Intangible fixed assets CWIP Classes of transactions: Depreciation Amortisation Loss/ gain on disposal S. No. Audit Objectives Assertions IR 1. Fixed assets are completely and accurately recorded All recorded fixed assets actually exist. Fixed assets are recorded at appropriate values. Fixed assets recorded are owned by the client and title is also in the name of client. Depreciation /amortisation expense and gain/ loss on disposal has been accurately calculated and appropriately disclosed. Fixed assets are presented and all disclosures have been given in accordance with the Fourth Schedule of the Companies Ordinance, 1984 and relevant IASs. Risk Assessment CR ROSM
CA E V
2. 3. 4.
5.
OCATL
6.
OCAL RVU
158
S. No. Test of Controls 1.
Audit Procedures
Objective
Done by
W. P. Ref.
Assess the reasonableness of design of system of internal control by enquiring relevant client personnel and documenting the same (if not a documented system manual has been developed by the client). A walk through test would be necessary to confirm the understanding as documented. Identify the preventive (exercised before incurrence of transactions and event) and detective (exercised after incurrence of transactions and event) controls established by management to support its assertions. Check on sample of selected transactions covering the whole period that all preventive controls are exercised on all transactions. Check that proper fixed assets register has been maintained and entries are made in the register on prompt and consistent basis and the same is reconciled with general ledger and physically verified assets on periodical basis in accordance with TR-6 of ICAP. Check on a sample of transactions that detective controls are appropriately been exercised and in case of any detection of error/ fraud, proper steps have been taken to avoid recurrence of the same. Ensure that management does not override the designed controls by
n n
ALL
2.
ALL
3.
ALL
4.
CE
5.
Enquiring from the designated staff person -Remain skeptical during performing test of design and test of effective operation N/A
6.
Document the conclusion after performing test of controls and required level of assurance from substantive procedures.
159
Analytical Procedures 1. Assess the appropriateness of depreciation/ amortisation method and rate in view of the flow of economic benefits and life of the assets. Check the reasonableness of depreciation expense by applying depreciation rate to closing cost/ carrying value as per the method adopted Document logical commercial reasons for major additions and disposal made during the year Compare current year balances and expense with last year balances and ensure that any significant variation should be properly and logically reasoned. U
2.
CAL
3.
AU
4.
CEA
160
Test of Details 1. Obtain movement schedule of tangible and intangible fixed assets and Capital work-inprogress both for cost and accumulated depreciation. Check casting and cross casting of the schedule. Trace opening balances from fixed assets register, general ledger and last years working papers. Make a selection of fixed assets held by client at year-end and physically inspect them to ensure that: (a) (b) 4. Asset is owned and held by client. Remaining useful life appears to be correct CEV CEA
2.
CE
3.
CEV
For selected additions during the current period: (a) For purchases in current year, capital expenditure approvals and vendors invoices. Ensure that additions to fixed assets do not include any amount of a nature of revenue expenditure. Ensure that where full payment has not been made for what so ever reason, asset is recorded at full cost and balance has been recognized as liability.
(b)
(c)
161
5.
For selected assets disposed of during the current period: (a) (b) Examine documents authorizing disposal. Examine documents supporting amounts for which assets were sold e.g. cash receipts Calculate gain or loss on disposal of fixed assts
OAL
(c) 6.
To check depreciation expense: (a) Determine the reasonableness of accounting policy and depreciation method, rates and their consistency with prior years. Check calculation of depreciation of selected assets. Assess the reasonableness of allocation to manufacturing costs, admin cost etc.
OCAL
(b) (c) 7.
Ensure that none of the assets is impaired or the recoverable amount of an asset is not less than its carrying amount. If the carrying amount of an asset is more than its recoverable amount, that same should be reduced to recoverable amount recognising the reduction as impairment loss Ensure that any subsequent addition should be depreciated over remaining life and not simply depreciated by applying the depreciation rate.
8.
Inspect evidence of ownership e.g. vehicle registration, property documents, machinery import documents etc. Ascertain the nature of each significant intangible asset by inquiry or reviewing information contained in prior-years working papers.
9.
162
10.
Ensure that all intangible assets fully comply with the recognition criteria of the IAS 38 i.e. (a) (b) Flow of economic benefits to enterprise is expected in future, and Cost of the asset may be determined
EVR
11.
For selected intangibles additions during the year: (a) Trace the recorded value to supporting documents e.g. independent valuation for purchases in current year. Obtain authorization or board minutes.
(b) 12.
For selected intangible assets disposed-off during the year: (a) (b) Examine supporting documents (e.g. cash receipts). Calculate gain or loss on sale of assets
CEV
13.
Determine that client's accounting policies for amortization are appropriate and applied consistently and are not inconsistent with the IAS 38. For additions in leased assets during the year, check from lease agreements that the lease is a finance lease in substance. Ensure that depreciation on leased assets is calculated on the same rates as for owned assets. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the assets should be fully depreciated over the shorter of the lease term or its useful life.
14.
CEKR
15.
OCV
163
16.
For selected additions to CWIP during the year: (a) Check supporting documents like vendors' invoices, contractor bills, and other evidences. Check proper authorization and approval.
(b) 17.
For selected transfers to fixed assets during the year, check contractor certificates of completion of project and proper approval thereof and examine the stage of completion. For items stuck-up for considerable period of time, inquire about its status from the management. Compute provisions if required and ask for management representations. In case of revalued assets ensure that
n n
18.
19.
Entire class of assets has been revalued on periodical basis Any asset's revaluation results in deficit should not be adjusted against other assets' surplus but should be immediately charged. N/A
20.
Ensure that closing balances as per our working paper file are in match with general ledger. Determine that disclosures have been made in accordance with the requirements of Fourth Schedule to the Companies Ordinance, 1984 and the applicable IASs.
21.
OCAL RVU
164
Audit Program
(b) Investment properties
Investment properties Amount in Rs.
Account balances: Investment properties
Classes of transactions: Depreciation / gain/ loss due to change in fair value
S. No.
Audit Objectives
Assertions IR
Risk Assessment CR ROSM
1.
Investment properties are completely and accurately recorded All recorded investment properties actually exist. Investment properties are recorded at appropriate values. Investment properties recorded are owned by the client and title is also in the name of client. Depreciation expense / gain /loss due to change in fair value and gain/ loss on disposal has been accurately calculated and appropriately disclosed.
CA
2.
3.
4.
5.
OCATL 165
S. No.
Audit Objectives
Assertions IR
6.
Investment properties and all disclosures have been given are presented in accordance with the Fourth Schedule of the Companies Ordinance, 1984 and relevant IASs.
OCAL RVU
Note:
Steps should be carried out on the basis of model (cost or fair value) adopted by the client.
166
Audit Procedures
Objective
Done by
W. P. Ref.
Assess the reasonableness of design of system of internal control by enquiring relevant client personnel and documenting the same (if not a documented system manual has been developed by the client). A walk through test would be necessary to confirm the understanding as documented. Identify the preventive (exercised before incurrence of transactions and event) and detective (exercised after incurrence of transactions and event) controls established by management to support its assertions. Check on sample of selected transactions covering the whole period that all preventive controls are exercised on all transactions. Check that proper subsidiary records have been maintained and entries are made in the same on prompt and consistent basis and the same is reconciled with general ledger. Separately identifiable assets like lifts, electric installations and other fixtures etc. should be physically verified on periodical basis and any adjustment is accounted for both in subsidiary records and general ledger. Check on a sample of transactions that detective controls are appropriately been exercised and in case of any detection of error/ fraud, proper steps have been taken to avoid recurrence of the same. Ensure that management does not override the designed controls by
n n
ALL
2.
ALL
3.
ALL
4.
CE
5.
Enquiring from the designated staff person Remain skeptical during performing test of design and test of effective operation
167
S. No. 6.
Audit Procedures Document the conclusion after performing test of controls and required level of assurance from substantive procedures.
Objective N/A
Done by
W. P. Ref.
Analytical Procedures 1. Assess the appropriateness of depreciation/ amortisation method and rate in view of the flow of economic benefits and life of the properties. Check the reasonableness of depreciation expense by applying depreciation rate to closing cost/ carrying value. Document logical commercial reasons for major additions and disposal made during the year Compare current year balances and expense with last year balances and ensure that any significant variation should be properly and logically reasoned. U
2.
CAL
3.
AU
4.
CEA
Test of Details 1. Obtain movement schedule of investment properties both for cost and accumulated depreciation. Check casting and cross casting of the schedule. Trace opening balances from investment properties' subsidiary records, general ledger and last years working papers. Ensure that: (a) (b) Properties are owned and held by client. Remaining useful life appears to be correct CEA
2.
CE
3.
CEV
168
S. No. 4.
Audit Procedures If a client holds property partly held to earn rentals or for capital appreciation and partly held for own use then the property should be classified as investment property only if these portions could be sold separately (or leased out separately under a finance lease) or if an insignificant portion is held for own use. Ensure the compliance with requirement of IAS 40. Ensure that a property is classified as investment property only if its cost may be determined. Under construction properties should not be classified as investment properties. For selected capitalsations during the current period: (a) (b) Appropriate approvals and bills/ invoices and certificates. Ensure that expenditure relating to an investment property should be debited to the investment property when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing investment property, will flow to the enterprise. All other expenditure should be recognised as an expense in the period in which it is incurred. .
Objective K
Done by
W. P. Ref.
5.
6.
CEV
169
S. No. 7.
Audit Procedures For any property disposed of during the current period: (a) (b) Examine documents authorizing disposal. Examine documents supporting amounts for which sale was affected e.g. cash receipts Calculate gain or loss on disposal of fixed assts
Objective OAL
Done by
W. P. Ref.
(c) 8.
To check depreciation expense: (a) Determine the reasonableness of accounting policy and depreciation method, rates and their consistency with prior years. Check calculation of depreciation.
OCAL
(b) 9.
Ensure that none of the property is impaired or the recoverable amount of any property is not less than its carrying amount. If the carrying amount of an asset is more than its recoverable amount, that same should be reduced to recoverable amount recognising the reduction as impairment loss. Inspect property documents to ensure ownership. Ensure that where fair value model has been adopted the fair value of investment property should reflect the actual market state and circumstances as of the balance sheet date, not as of either a past or future date. Ensure that valuer's assumptions are reasonable.
10. 11.
R V
12.
170
S. No. 13.
Audit Procedures Ensure that there is no restrictions on the realisability of investment property or the remittance of income and proceeds of disposal. Ensure that closing balances as per our working paper file are in match with general ledger. Determine that disclosures have been made in accordance with the requirements of Fourth Schedule to the Companies Ordinance, 1984 and the IAS 40.
Objective
Done by
W. P. Ref.
14.
N/A
20.
OCAL RVU
171
Audit Program
(c) Investments (subsidiaries, associates, and others)
Investments (subsidiaries, associates, and others) Amount in Rs.
Account balances: Investments

n n n n
In subsidiaries and associates Held to maturity Available for sale Held for trading
Classes of transactions: Dividend Interest Gain/ loss on revaluation Gain/ loss on disposal S. No. 1. 2. 3. 4. 5. Audit Objectives Investments are completely and accurately recorded. All recorded investments actually exist. All investments are appropriately valued. All investments are owned by the client and title is also in the name of client. Dividend and interest income, gain/ loss on revaluation and gain/ loss on disposal has been accurately calculated, completely recorded and appropriately disclosed. Investments are presented and all disclosures have been given in accordance with the Fourth Schedule of the Companies Ordinance, 1984 and relevant IASs. Assertions Risk Assessment IR CR ROSM
CA E V R
OCATL
6.
OCAL RVU
172
Audit Procedures
Objective
Done by
W. P. Ref.
Assess the reasonableness of design of system of internal control by enquiring relevant client personnel and documenting the same (if not a documented system manual has been developed by the client). A walk through test would be necessary to confirm the understanding as documented. Identify the preventive (exercised before incurrence of transactions and event) and detective (exercised after incurrence of transactions and event) controls established by management to support its assertions. Check on sample of selected transactions covering the whole period that all preventive controls are exercised on all transactions. Check that proper subsidiary records have been maintained and entries are made in the same on prompt and consistent basis after proper approval and appropriate authorisation. Check on a sample of transactions that detective controls have appropriately been exercised and in case of any detection of error/ fraud, proper steps have been taken to avoid recurrence of the same. All investments in subsidiaries and associates should with the board's specific approval and in accordance with requirements of section 208 of the Companies Ordinance, 1984.
ALL
2.
ALL
3.
ALL
4.
CE
5.
Laws and Rgulation
173
S. No. 6.
Audit Procedures Ensure that management does not override the designed controls by
n
Objective
Done by
W. P. Ref.
Enquiring from the designated staff person Remain skeptical during performing test of design and test of effective operation N/A
7.
Analytical Procedures 1. Document logical commercial reasons for major additions and disposal made during the year Compare current year balances and income with last year amounts and ensure that any significant variation should be properly and logically reasoned. AU
2.
CEA
Test of Details 1. Obtain a movement schedule of investments (shares, TFCs and PIBs) both for numbers and amounts. Trace the opening balances from the general ledger, subsidiary records, and last year working papers. CE
2.
174
S. No. 3.
Audit Procedures Trace the carrying value of selected investments to supporting documents e.g. (a) Broker's notes for investments purchased in the current year, to confirm date of purchase description and number of shares. Carrying costs in our prior years working papers
Objective E
Done by
W. P. Ref.
(b) 4.
Check the computation of valuation of investments in subsidiaries, joint ventures and associates is made as per the accounting policies of the company. Obtain and recompute amortisation schedule and check its accuracy for fixed interest securities whether purchased at premium or discount. Re-perform the marked to market valuation of PIBs and TFCs at year-end to check the valuation of these securities. Where any lien marked on the investments, check the disclosure thereof. Perform cut-off at year-end. Check redemptions of principal during the year and obtain supports to ascertain the overdue instalments. Check if such payments were as per the terms of the redemption agreement. Check that brokerage expenses are accurately recorded.
5.
OCAL
6.
7. 8. 9.
U T EV
10.
AO
175
S. No. 11.
Audit Procedures For selected shares disposed of during the year: (a) Examine supporting documents of investments sold e.g. brokers notes and cash receipts records. Confirm the date of disposal, description, and number of shares. Calculate the gain or loss on sale of investment and trace the amount transferred to the profit and loss account.
Objective COA
Done by
W. P. Ref.
(b) (c)
12. 13.
Test the casting and cross casting of the schedule. Obtain the schedule of capital gain earned / interest income received during the year and vouch few transactions on test basis. Check the accrual of interest and amortization of premium / discount on fixed income securities with the one calculated on IRR basis. Ensure that closing balances of investments in working papers agree with the general ledger. For investments held by client at period end, perform the following: (a) (b) Physically inspect selected securities held by the client. For selected securities not held by the client, circularize confirmation requests to the custodian. Compare replies to recorded investments.
CE O
14.
CVT
15. 16.
N/A RE
176
S. No. 17.
Audit Procedures For selected investments, compute market value as under: (a) For quoted investments, trace market value from independent published quotations. For unquoted investments, calculate breakup value of shares from respective company's financial statements.
Objective V
Done by
W. P. Ref.
(b)
18.
Ensure that investments are presented and all disclosures have been given in accordance with the Fourth Schedule of the Companies Ordinance, 1984 and relevant IASs. As per IAS 39 all investments should be properly classified in Held for trading, available for sale and held to maturity. Investment Income
OCAL RVU
19.
Obtain a schedule showing opening and closing balances of accrued income and income earned and received during the year Trace opening balance of accrued income from general ledger/ trial balance. Ensure that accrual of dividend income is made only where AGM is held before yearyen. Ensure proper accounting treatment of bonus share received and right shares subscribed. Make a selection of accruals and examine documents supporting the amounts of investment income (e.g. rates from published quotations, dividend warrants). Examine subsequent receipts of income accrued at period-end. Ensure that closing balances of accrued income in working papers agree with general ledger.
CE
20. 21
C RA
22. 23.
V E
24. 25.
EV N/A
177
Audit Program
(d) Long term loans and advances
Long term loans and advances Amount in Rs.
Account balances: Long term loan and advances Provision against long term loan and advances Classes of transactions: Interest income
S. No.
Audit Objectives
Assertions IR
1. 2. 3.
Long term loans and advances are completely and accurately recorded All recorded long term loans and advances actually exist. Long term loans and advances are recorded at appropriate values and all bad and doubtful balances have been provided for/ written off. Long term loans and advances recorded are the right of the company. Long-term loans and advances to associated undertaking were in accordance with legal requirements. Long term loans and advances are presented and all disclosures have been given in accordance with the Fourth Schedule of the Companies Ordinance, 1984 and relevant IASs.
CA E
V R Laws & Regulation
4. 5.
6.
OCAL RVU
178
Audit Procedures
Objective
Done by
W. P. Ref.
Assess the reasonableness of design of system of internal control by enquiring relevant client personnel and documenting the same (if not a documented system manual has been developed by the client). A walk through test would be necessary to confirm the understanding as documented. Identify the preventive (exercised before incurrence of transactions and event) and detective (exercised after incurrence of transactions and event) controls established by management to support its assertions. Check on sample of selected transactions covering the whole period that all preventive controls are exercised on all transactions. Check that proper subsidiary records have been maintained and entries are made in the same on prompt and consistent basis and the same is reconciled with general ledger. Check on a sample of transactions that detective controls are appropriately been exercised and in case of any detection of error/ fraud, proper steps have been taken to avoid recurrence of the same. For sample of disbursements made during the year: (a) (b) Check approval of appropriate level of management. Check that the employee has fulfilled all formalities necessary before disbursement of loans.
ALL
2.
ALL
3.
ALL
4.
CE
5.
EV
179
S. No. 6.
n
Objective
Done by
W. P. Ref.
7.
Analytical Procedures 1. Compare current year balances and expense with last year balances and ensure that any significant variation should be properly and logically reasoned. CEA
Test of Details 1. Obtain a employee-wise movement schedule of principal amount of loans and advances and interest thereon and trace the opening balances from the general ledger, subsidiary records, and last year working papers. Check casting and cross casting of the schedule. For disbursements made during the year check disbursements of funds with disbursement register and bank statement. CE
2.
180
S. No. 3.
Audit Procedures For a sample of repayments made during the year: (a) Ensure that amount and date of repayment was accordance with repayment schedule or agreement. Check receipt of funds with receipt records and bank statement. Recovery of interest is in accordance with the policy (i.e. along with principal or after recovery of full principal, as the case may be).
Objective EVR
Done by
W. P. Ref.
(b) (c)
4.
Circularize confirmations to selected parties. Match replies with the amounts outstanding against each party. Obtain age-analysis of long-term loans and advances and perform the following:(a) (b) (b) Verify that loans have been classified in correct categories. Current maturity has been appropriately calculated and separately disclosed. Consider the value of securities available against each loan for the purpose of calculation of provision for doubtful loans and advances.
CER
5.
VK
6. 7.
Check subsequent recovery of loans etc. Ensure that all loans and advances to associated undertakings are granted after due compliance with legal requirements.
EV Laws etc.
181
S. No. 8.
Audit Procedures Ensure that none of the loans and advances are impaired or the recoverable amount of a loan or advance is not less than its carrying amount. If the carrying amount of a loan/ advance is more than its recoverable amount, then same should be reduced to recoverable amount recognising the reduction as impairment loss For items stuck-up for considerable period of time, inquire about its status from the management. Compute provisions if required and ask for management representations. Ensure that loans and advances should be measured at amortised cost using the effective interest rate method. Re-perform calculation of interest income on test basis: (a) (b) Verify rate of interest from agreement/ policy. Check the number of days for which interest is to be charged.
Objective V
Done by
W. P. Ref.
9.
10.
11.
OATE
12.
Test check loan agreement and legal documents to verify the terms and conditions of the advances Ensure that closing balances as per our working paper file are in match with general ledger. Determine that disclosures have been made in accordance with the requirements of Fourth Schedule to the Companies Ordinance, 1984 and the applicable IASs.
RU
13.
CE
14.
OCAL RVU
182
Audit Program
(e) Long term deposits and prepayments
Long term deposits and prepayments Amount in Rs.
Account balances: Long term deposits and prepayments Provision against long term deposits and prepayments
Classes of transactions:
S. No.
Audit Objectives
Assertions IR
1.
Long term deposits and prepayments are completely and accurately recorded All recorded long term deposits and prepayments actually exist. Long-term deposits and prepayments are recorded at appropriate values and all bad and doubtful balances have been provided for/ written off. Long-term deposits and prepayments recorded are the right of the company. Long-term deposits and prepayments are presented and all disclosures have been given in accordance with the Fourth Schedule of the Companies Ordinance, 1984 and relevant IASs.
CA
2.
3.
4.
5.
OCAL RVU
183
Audit Procedures
Objective
Done by
W. P. Ref.
Assess the reasonableness of design of system of internal control by enquiring relevant client personnel and documenting the same (if not a documented system manual has been developed by the client). A walk through test would be necessary to confirm the understanding as documented. Identify the preventive (exercised before incurrence of transactions and event) and detective (exercised after incurrence of transactions and event) controls established by management to support its assertions. Check on sample of selected transactions covering the whole period that all preventive controls are exercised on all transactions. Check that proper subsidiary records have been maintained and entries are made in the same on prompt and consistent basis and the same is reconciled with general ledger. Check on a sample of transactions that detective controls are appropriately been exercised and in case of any detection of error/ fraud, proper steps have been taken to avoid recurrence of the same. For sample of deposits and prepayments made during the year: (a) (b) Ensure the commercial and logical reason. Check approval of appropriate level of management.
ALL
2.
ALL
3.
ALL
4.
CE
5.
EV
184
S. No. 6.
n
Objective
Done by
W. P. Ref.
7.
Analytical Procedures 1. Compare current year balances and expense with last year balances and ensure that any significant variation should be properly and logically reasoned. CEA
Test of Details 1. Obtain a party-wise movement schedule of deposits and prepayments and trace the opening balances from the general ledger, subsidiary records, and last year working papers. Check casting and cross casting of the schedule. For deposits and prepayments made during the year check disbursements of funds with disbursement voucher and bank statement. For a sample of refund of deposits during the year: (a) (b) Ensure that amount and date of refund was in accordance with agreement. Check receipt of funds with receipt records and bank statement. CE
2.
3.
EVR
185
S. No. 4.
Audit Procedures Circularize confirmations to selected parties. Match replies with the amounts outstanding against each party. Obtain age-analysis of long-term deposits and perform the following:(a) (b) Verify that deposits have been classified in correct categories. Current maturity has been appropriately identified and separately disclosed.
Objective CER
Done by
W. P. Ref.
5.
VK
6. 7.
Check subsequent recovery of deposits and adjustment of prepayments etc. Ensure that none of the deposits or prepayments are impaired or the recoverable amount of same is not less than its carrying amount. If the carrying amount of a deposits or prepayments is more than its recoverable amount, then same should be reduced to recoverable amount recognising the reduction as impairment loss For items stuck-up for considerable period of time, inquire about its status from the management. Compute provisions if required and ask for management representations. Ensure that closing balances as per our working paper file are in match with general ledger. Determine that disclosures have been made in accordance with the requirements of Fourth Schedule to the Companies Ordinance, 1984 and the applicable IASs.
EV V
8.
9.
CE
10.
OCAL RVU
186
Audit Program
(f) Stores, spares and stock-in-trade
Stores, spares and stock-in-trade Amount in Rs.
Account balances: Stores Spares Raw material Work-in-process Finished goods Classes of transactions:
S. No.
Audit Objectives
Assertions IR
1.
Stock-in-trade is completely and accurately recorded All recorded stocks-in-trade actually exist. Recorded stocks-in-trade are valued appropriately. Recorded stock-in-trade are owned by the client and title is also in the name of client. Stock-in-trade are presented and all disclosures have been given in accordance with the Fourth Schedule of the Companies Ordinance, 1984 and relevant IASs.
CA E
2. 3.
4.
5.
OCAL RVU
187
Audit Procedures
Objective
Done by
W. P. Ref.
Assess the reasonableness of design of system of internal control by enquiring relevant client personnel and documenting the same (if not a documented system manual has been developed by the client). A walk through test would be necessary to confirm the understanding as documented. Identify the preventive (exercised before incurrence of transactions and event) and detective (exercised after incurrence of transactions and event) controls established by management to support its assertions. Check on sample of selected transactions covering the whole period that all preventive controls are exercised on all transactions. Check that proper inventory listing has been maintained and entries are made in the same on prompt and consistent basis and the same is reconciled with general ledger and physically verified inventories on periodical basis at least on annual basis. Check on a sample of transactions that detective controls are appropriately been exercised and in case of any detection of error/ fraud, proper steps have been taken to avoid recurrence of the same. Ensure that management does not override the designed controls by
n
ALL
2.
ALL
3.
ALL
4.
CE
5.
Enquiring from the designated staff person Remain skeptical during performing test of design and test of effective operation
188
S. No. 6.
Audit Procedures Document the conclusion after performing test of controls and required level of assurance from substantive procedures.
Objective N/A
Done by
W. P. Ref.
Analytical Procedures 1. Assess the appropriateness of purchases and consumptions method and rate in view of the flow of economic benefits. Check the reasonableness of consumption allocated to inventories at different stages. Document logical commercial reasons for purchases and consumption made during the year Check the appropriateness of compilation of overheads and allocation basis of the same to different products. Compare current year balances and expense with last year and ensure that any significant variation should be properly and logically reasoned. U
2. 3.
CAL AU
4.
OAL
5.
CEA
Test of Details 1. Observe physical counting of inventories carried out by the client at year-end or at any other date and perform tests of intervening transactions to ensure existence and conditions unless impracticable. Also check on sample basis some items to ensure reliability. Check that third party inventories are identified and excluded from physical count. For items owned by client but not physically held, obtain independent confirmations from custodians. CE
2. 3.
CR ER
189
S. No. 4.
Audit Procedures Obtain final inventory compilation schedule and perform the following: (a) (b) (c) (d) Test casting and calculation of schedule. Trace balances to the general ledger. Trace quantities from physical stock take working papers. Trace prices used to build up the average cost to purchase invoices.
Objective C
Done by
W. P. Ref.
5.
To test check cut-off of inventory, select transactions from purchases, purchase returns and sales (stock outs) of some days before and after the year end and ensure proper recording of transactions in correct period. Determine that the basis of valuation of e.g. FIFO or average cost is appropriate and followed consistently. Obtain stock card of some items and ensure that cost formula is correctly applied on receipts and issues. Compare cost of closing stock with its NRV by comparing raw material with last invoice from supplier, WIP with expected cost to completion and finished goods with market value less expenses necessary to make the sale. Obtain aging of inventories and compute provision for obsolete, damaged, or slow moving stocks, if any. Ensure that raw material of loss making and discontinued products are adequately provided for. Ensure that stores and spares related to specific machinery should lie longer than the machine.
CO
6.
7.
AC
8.
9.
10.
190
S. No. 10.
Audit Procedures Ensure that closing balances as per our working paper file are in match with general ledger. Determine that disclosures have been made in accordance with the requirements of Fourth Schedule to the Companies Ordinance, 1984 and the applicable IASs.
Objective N/A
Done by
W. P. Ref.
11.
OCAL RVU
191
Audit Program
(g) Advances, Deposits, Prepayments & Other receivables
Advances, Deposits, Prepayments & Other receivables Amount in Rs.
Account balances: Advances
Deposits Prepayments Other receivables Provision against advances, deposits, prepayments & other receivables
Classes of transactions: Payments of advances, deposits, prepayments & other receivable Refund/ adjustment of advances, deposits, prepayments & other receivable Provision for the year against bad and doubtful balances
S. No.
Audit Objectives
Assertions IR
1.
Advances, deposits, prepayments & other receivables are completely and accurately recorded All recorded advances, deposits, prepayments & other receivables actually exist. Advances, deposits, prepayments & other receivables are recorded at appropriate values and all bad and doubtful balances have been provided for/ written off.
CA
2.
3.
192
S. No.
Audit Objectives
Assertions IR
4.
Advances, deposits, prepayments & other receivables recorded are the right of the company. Advances to associated undertaking were in accordance with legal requirements. Advances, deposits, prepayments & other receivables are presented and all disclosures have been given in accordance with the Fourth Schedule of the Companies Ordinance, 1984 and relevant IASs.
R Laws & Regulation
5.
6.
OCAL RVU
193
Audit Procedures
Objective
Done by
W. P. Ref.
Assess the reasonableness of design of system of internal control by enquiring relevant client personnel and documenting the same (if not a documented system manual has been developed by the client). A walk through test would be necessary to confirm the understanding as documented. Identify the preventive (exercised before incurrence of transactions and event) and detective (exercised after incurrence of transactions and event) controls established by management to support its assertions. Check on sample of selected transactions covering the whole period that all preventive controls are exercised on all transactions. Check that proper subsidiary records have been maintained and entries are made in the same on prompt and consistent basis and the same is reconciled with general ledger. Check on a sample of transactions that detective controls are appropriately been exercised and in case of any detection of error/ fraud, proper steps have been taken to avoid recurrence of the same. Ensure that management does not override the designed controls by
n
ALL
2.
ALL
3.
ALL
4.
CE
5.
6.
194
S. No. Analytical Procedures 1.
Audit Procedures
Objective
Done by
W. P. Ref.
Compare current year balances and expense with last year balances and expense and ensure that any significant variation should be properly and logically reasoned.
CEA
Test of Details 1. Obtain a party-wise movement schedule of advances, deposits, prepayments & other receivables and trace the opening balances from the general ledger, subsidiary records, and last year working papers. Check casting and cross casting of the schedule. For disbursements made during the year check disbursements of funds with disbursement register and bank statement. For a sample of repayments made during the year: (a) Ensure that amount and date of repayment was accordance with repayment schedule or agreement. Check receipt of funds with receipt records and bank statement. CER CE
2.
3.
EVR
(b) 4.
Inquire about the nature of trade deposits. Corroborate movements in trade deposits with supporting documents
195
S. No. 5.
Audit Procedures Obtain age-analysis of advances, deposits, prepayments & other receivables and perform the following:(a) (b) Verify classification in correct categories. Current maturities of advances, deposits, prepayments, & other receivables has been appropriately calculated and separately disclosed. Consider the value of securities available if any, for the purpose of calculation of provision for doubtful loans and advances.
Objective VK
Done by
W. P. Ref.
(c)
6. 7.
Check subsequent realizations / adjustments etc. Ensure that all loans and advances to associated undertakings are granted after due compliance with legal requirements. Ensure that none of the advances, deposits, prepayments & other receivables are impaired or the recoverable amount is not less than its carrying amount. If the carrying amount is more than its recoverable amount, then same should be reduced to recoverable amount recognising the reduction as impairment loss For items stuck-up for considerable period of time, inquire about its status from the management. Compute provisions if required and ask for management representations. Document the nature of other receivables, check the movement with supporting documents and compute the amount of provision for doubtful receivables, if required.
EV Laws etc.
8.
9.
10.
196
S. No. 11.
Audit Procedures For short-term loans and advances to staff, review companys policies for disbursement and recoveries thereof, and ensure the same with supporting documents. Verify on a test basis deductions from advances to staff from their respective payroll register. Test check loan agreement and legal documents to verify the terms and conditions of the advances Ensure that closing balances as per our working paper file are in match with general ledger. Determine that disclosures have been made in accordance with the requirements of Fourth Schedule to the Companies Ordinance, 1984 and the applicable IASs.
Objective CEV
Done by
W. P. Ref.
12.
RU
13.
CE
14.
OCAL RVU
197
Audit Program
(h) Trade debts
Trade debts Amount in Rs.
Account balances: Trade debts
S. No.
Audit Objectives
Assertions IR
1.
Trade debts are completely and accurately recorded All recorded trade debts actually exist. Trade debts are appropriately valued. Trade debts recorded are owned by the client. Trade debts are presented and all disclosures have been given in accordance with the Fourth Schedule of the Companies Ordinance, 1984 and relevant IASs.
CA E V R
2. 3. 4. 5.
OCAL RVU
198
Audit Procedures
Objective
Done by
W. P. Ref.
Assess the reasonableness of design of system of internal control by enquiring relevant client personnel and documenting the same (if not a documented system manual has been developed by the client). A walk through test would be necessary to confirm the understanding as documented. Identify the preventive (exercised before incurrence of transactions and event) and detective (exercised after incurrence of transactions and event) controls established by management to support its assertions. Check on sample of selected transactions covering the whole period that all preventive controls are exercised on all transactions. Check that proper party wise subsidiary ledger has been maintained and entries are made in the same on prompt and consistent basis and the same is reconciled with general ledger. Check on a sample of transactions that detective controls are appropriately been exercised and in case of any detection of error/ fraud, proper steps have been taken to avoid recurrence of the same. Ensure that management does not override the designed controls by
n n
ALL
2.
ALL
3.
ALL
4.
CE
5.
6.
199
S. No.
Audit Procedures
Objective
Done by
W. P. Ref.
Analytical Procedures 1. Assess the appropriateness of discount and credit policy in view of the flow of economic benefits. Check the reasonableness of impairment expense. Document logical commercial reasons for major balances' additions and deletions made during the year Compare current year balances and expense with last year balances and ensure that any significant variation should be properly and logically reasoned. U
2. 3.
CAL AU
4.
CEA
Test of Details 1. Obtain a party-wise movement schedule and trace the opening balances from the general ledger, subsidiary records, and last year working papers. Check casting and cross casting of the schedule. Make a selection of customers' balances and circularize confirmations of selected parties. Compare replies to requests. Ensure that reconciling items, if any, are properly supported and appropriately adjusted. Check subsequent clearance. Inquire into significant disputed balances, if any. Obtain a movement schedule of allowance for doubtful debts and ensure completeness. Obtain aging of debtors and ensure that no unreasonably delayed balances are appearing. CE
2.
EVR
3. 4. 5. 6.
ER V C V
200
S. No. 7.
Audit Procedures Ensure the recoverability of the debtors considered good. No subsequent event has raised any doubts about their recoverability. Assess the reasonableness of methods used by management in the business circumstances of the client to estimate that the doubtful debts are appropriate and ensure that the same is applied consistently. Calculate provision for doubtful debts based on age-analysis of debtors. Review documents, supporting correspondence and authorization for selected write-offs during the year. Obtain board approval for write-offs. Select transactions from sales invoices and customer returns notes pertaining to some days prior to and after year-end and ensure that they have been recorded in the correct period. Ensure that closing balances as per our working paper file are in match with general ledger. Determine that disclosures have been made in accordance with the requirements of Fourth Schedule to the Companies Ordinance, 1984 and the applicable IASs.
Objective V
Done by
W. P. Ref.
8.
9. 10.
V E
11.
12.
N/A
13.
OCAL RVU
201
Audit Program
(i) Cash and bank balances
Cash and bank balances Amount in Rs.
Account balances: Cash in hand Cash at bank- Current - PLS
S. No.
Audit Objectives
Assertions IR
1.
All cash and bank balances are completely and accurately recorded All recorded cash and bank balances actually exist. All cash and bank balances are recorded at appropriate values. All cash and bank balances recorded are owned by the client and title is also in the name of client. All cash and bank balances are presented and all disclosures have been given in accordance with the Fourth Schedule of the Companies Ordinance, 1984 and relevant IASs.
CA
2.
3.
4.
5.
OCAL RVU 202
Audit Procedures
Objective
Done by
W. P. Ref.
Assess the reasonableness of design of system of internal control by enquiring relevant client personnel and documenting the same (if not a documented system manual has been developed by the client). A walk through test would be necessary to confirm the understanding as documented. Identify the preventive (exercised before incurrence of transactions and event) and detective (exercised after incurrence of transactions and event) controls established by management to support its assertions. Check on sample of selected transactions covering the whole period that all preventive controls are exercised on all transactions. Check on a sample of transactions that detective controls are appropriately been exercised and in case of any detection of error/ fraud, proper steps have been taken to avoid recurrence of the same. Check that proper bank reconciliations are prepared, checked and approved. Long outstanding items are followed up and proper disposition of such items is made. Proper segregation of duties between custodian and accounting and approving personnel exist. Payments vouchers are appropriately prepared and properly approved by designated authority.
ALL
2.
ALL
3.
ALL
4.
ALL
5.
CE
6.
ECA
203
S. No. 7.
n
Objective
Done by
W. P. Ref.
8.
Analytical Procedures 1. Document logical commercial reasons for new bank accounts opened and closed during the year. Compare current year balances with last year balances and ensure that any significant variation should be properly and logically reasoned. AU
2.
CEA
Test of Details 1. 2. 3. Attend year-end cash count and deposit verification. Circularize direct confirmations to all banks. Trace opening balance in general ledger from last year working papers. E ER CE
204
S. No. 4.
Audit Procedures Obtain and examine bank reconciliations ensure the following: n
Objective CEA
Done by
W. P. Ref.
No long outstanding item should remain unfollowed, No revenue nature item should be appearing All deposit made should be cleared within two days No long outstanding cheques of significant amount are unpresented; if so then check their payment voucher and ensure that no discrepancy is involved. CA
5.
Ensure that all balances etc. reported by bank in replies to bank confirmation request are included in records of the client. Ensure that no balances are subject any encumbrance, if so then disclosure is made. Convert FCY accounts into PKR at year-end rate. Ensure that all bank accounts are in company's name. Ensure that closing balances as per our working paper file are in match with general ledger. Determine that disclosures have been made in accordance with the requirements of Fourth Schedule to the Companies Ordinance, 1984 and the applicable IASs.
6. 7. 8. 9.
U V R N/A
10.
OCAL RVU
205
Execution Phase Sample Audit Programs Liabilities Accrued Expenses
II
S. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
Balance Sheet Liabilities

Financial Statement Caption Accrued Expenses Contingencies & Commitments Deferred Liabilities Direct Taxation Dividend Payable Equity Liabilities Against Assets Long Term Debt Long Term Deposit Payables Short Term Borrowings Surplus on Revaluation Reference No. Page No.
206
Audit Program
(a) Accrued Expenses
Accrued Expenses Amount in Rs.
Account balances:
S. No.
Audit Objectives
Assertions IR
To ensure that accrued expenses represent valid claims by suppliers against goods delivered or services rendered to the entity. To ensure that all goods and services received by the entity have been accounted for in the books of the company on a timely basis. To ensure that liability is recorded at the correct amount. To ensure that payables have been presented, classified and disclosed in the financial statements in accordance with the requirements of applicable financial reporting framework i.e. Companies Ordinance, 1984 and applicable International Financial Reporting Standards.
Existence, Rights & Obligations
Completeness Valuation
Presentation & Disclosure
207
S. No.
Audit Procedures
Objective
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Test of Controls Select purchase transactions over the period under audit and ensure the following controls have existed during the period: Purchase orders are approved at an appropriate level. Purchase orders are serially numbered. Only authorized purchases are made All purchase orders are entered into the records Credit to accrued expenses represent goods actually received All entries to Accrued expenses are authorized Accrued expenses are recorded in the appropriate amount Accrued expenses are recorded at the appropriate amount Accrued expenses have been booked at appropriate amount and represent valid claims by third party Accrued expenses are accurately recorded 208
Entries are made only on the basis of approved Goods Received Notes (GRN). Entry to accrued expense account is authorized at appropriate level and supported by appropriate calculations. Suppliers invoices are checked for calculation and casting by a person independent of the purchase department Price charged by the supplier is verified for appropriateness, for e.g. by agreeing the rates charged to approved price lists or quotations. An independent person compares the purchase orders, goods received notes and suppliers invoices for consistency.
Suppliers statements are obtained and reconciled to accounting records on a regular basis
S. No.
Audit Procedures Credit notes are checked for correctness of calculation by a person independent of the preparer. Credit Notes issued are properly calculated and recorded at appropriate amount Credit Notes are recorded in an appropriate period
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Credit notes have been entered in the same period to which the purchases relate. Analytical Procedures 1.
Compare accrued expenses to prior periods and budgets seeking explanations for unusual items and significant variances. Review monthly movement of accrued expenses in order to identify any inconsistency particularly towards the period end. Analyse the turnover of trade creditor ratio of creditors to total operating costs and compare to prior periods and budgets, seeking explanations for unusual items and significant variances. Review the ratio of individual expense accounts to sales or other appropriate base. Review the accrued expense, purchases or expense ledgers to identify whether there are any significant purchases or expenses towards the period end. Check that these have been accounted for in the correct period.
2.
3.
4. 5.
209
S. No.
Audit Procedures
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Test of Details 1. TEST THE PROPRIETY OF ACCRUED EXPENSE ACCOUNTING POLICIES AND PROCEDURES A. Review the information in prior-year working papers and/or inquire concerning the nature of each significant accrued expense account and the policies and procedures used to account for them. Inquire as to the reasons for significant changes in accrued expense balances since the prior year. Determine that the accounting policies and procedures for identifying when liabilities should be recorded are appropriate and applied consistently. In the course of performing the following procedures in this Program, consider whether audit evidence we examine supports our understanding of accrued expense accounting policies and procedures and their propriety.
B. C.
D.
2.
TEST ACCRUED EXPENSES BALANCES A. Perform Procedure 1, Steps B to D, in the Model Audit Program for Payables. For selected subsequent cash disbursements or unpaid invoices that indicate liabilities incurred but not recorded as accounts payable in the audit period, ascertain that they were recorded in an appropriate accrued expense account.
210
S. No.
Audit Procedures B. Inquire and/or review information in prior-year working papers concerning the nature of recorded accrued expenses. Inquire and consider other available evidence, if any, that unrecorded or underrecorded liabilities exist. Consider the following sources of evidence, among others, as applicable: prior-year balances of accrued expense accounts; prior and current-year balances of related expense accounts; minutes of meetings of the board of directors; discussions with internal legal counsel; responses to letters of inquiry to independent legal counsel; employee benefit plans (e.g., pension, medical, vacation, deferred compensation) and reports from actuaries, insurance companies, etc.; subsequent payroll records; significant contracts for services performed in the audit period. Make a selection of the significant accrued expenses noted while performing Steps A and B (including any that appear to exist but are unrecorded or underrecorded). 1. For selected accruals that are based primarily on known data (i.e., that are not accounting estimates), examine documents supporting the amounts accrued (e.g., service contracts or invoices, subsequent payroll records, property tax statements). For selected accruals that are accounting estimates (e.g., liabilities for certain employee benefits plans and legal contingencies): 2.1 Evaluate the reasonableness of the methods and assumptions management used to make the estimates. If management's methods and assumptions were reasonable, test the data and assumptions underlying the estimates, and re-compute the estimates.
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C.
2.
2.2
211
S. No.
Audit Procedures 2.3 If management's methods and assumptions were not reasonable, develop an independent range of reasonable estimates and determine whether management's estimates fall within that range. (Note: The factors that might be considered will vary according to the nature of the liabilities.)
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3.
For selected accruals with significant balances in the prior year that no longer exist or that have significantly lower balances in the current year: 3.1 Assess whether the circumstances requiring the accruals in the prior year no longer exist or whether they warrant reductions in the amounts accrued. If the accounts consist of only one or very few transactions (e.g., a prior-year accrual for a legal liability), trace the disposition of the liability (or partial disposition) to supporting documents (e.g., cancelled checks).
3.2
4. 3.
Evaluate results of the tests.
TEST PRESENTATION OF ACCRUED EXPENSES A. Determine that the following balances, if any, are properly classified: 1. 2. Debit balances in accrued expenses. Non-current accrued expenses.
212
S. No.
Audit Procedures B. Determine that the following, if any, are properly recorded, classified, and/or disclosed, as appropriate: 1. 2. 3. 4. 5. 6. Accrued expenses owed to related parties. Loss contingencies. Retirement plans. Post retirement health care and life insurance benefit plans. Property taxes estimated with a substantial measure of uncertainty. Lease obligations.
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W. P. Ref.
4.
TEST BALANCES DENOMINATED IN FOREIGN CURRENCIES A. Agree the closing exchange rate(s) used to published records and test the translation calculations.
5.
TEST PRESENTATION OF RELATED-PARTY BALANCES A. Inquire and consider available evidence, if any, to identify all related parties. Obtain a schedule of related-party balances and determine that all identified related parties with balances at year end are included in the schedule. Trace the amounts in the schedule to the trial balance. Determine that the economic substance of the relatedparty balances supports their recording. Evaluate the reasonableness of presentation and/or footnote disclosures of related-party balances. Consider requesting positive confirmation of material balances with related parties.
B. C. D.
213
S. No. 6.
Audit Procedures TEST ACCOUNTING ESTIMATES FOR BIAS A. Perform a retrospective review of significant accounting estimates reflected in the financial statements of the prior year to determine whether management judgments and assumptions relating to the estimates indicate a possible bias on the part of management. The significant accounting estimates selected for testing should include those that are based on highly sensitive assumptions or are otherwise significantly affected by judgments made by management. Consider the results of this retrospective review in evaluating the current-year estimates. If we identify a possible bias on the part of management in making prior-year accounting estimates, we should evaluate whether circumstances producing such a bias represent a risk of a material misstatement due to fraud. Consider whether differences between estimates best supported by the audit evidence and the estimates included in the financial statements, even if they are individually reasonable, indicate a possible bias on the part of the entity's management. If so, reconsider estimates taken as a whole.
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1.
2.
B.
214
S. No. 7.
Audit Procedures TEST UNUSUAL ENTRIES RECORDED TO THE GENERAL LEDGER A. Investigate journal entries from sources that are typically not associated with this account. 1. When selecting items to be tested, consider (a) our assessment of the risk of material misstatement due to fraud, (b) the effectiveness of controls over the preparation and posting of journal entries, (c) the entity's financial reporting process and the nature of the evidence that can be examined, (d) the nature and complexity of the accounts, and (e) the amount and number of such entries. Because fraudulent journal entries often are made at the end of a reporting period, our testing ordinarily should focus on the journal entries and other adjustments made at that time. In addition, because material misstatements in financial statements due to fraud can occur throughout the period and may involve extensive efforts to conceal entries at the end of the reporting period, we should consider whether there also is a need to extend the testing of journal entries to other periods within the period under audit.
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B.
Examine related accounting records and determine whether the selected debit/credit is valid, appropriate, and authorized. Determine whether the selected entry was properly recorded in the correct period and consider the possible implications of such journal entries on internal control.
215
S. No.
Audit Procedures C. Determine whether the entries exhibit characteristics of inappropriate or unauthorized journal entries such as (a) entries made to unrelated, unusual, or seldomused accounts or business segments, (b) entries recorded at the end of the period or as post-closing entries that have little or no explanation or description, (c) entries made either before or during the preparation of the financial statements that do not have account numbers, and (d) entries that contain round numbers or a consistent ending number. Evaluate the reasonableness of other adjustments (e.g., entries posted directly to financial statement drafts, consolidating adjustments, report combinations, and reclassifications) made in the preparation of the financial statements.
Done by
W. P. Ref.
D.
8.
EVALUATE BUSINESS RATIONALE FOR SIGNIFICANT UNUSUAL TRANSACTIONS A. If we become aware of significant transactions that are outside the normal course of business or that otherwise appear to be unusual given our understanding of the entity and its environment, perform the following procedures: 1. 2. Gain an understanding of the business rationale for such significant unusual transaction. Consider whether the transactions involve previously unidentified related parties or parties that do not have the substance or the financial strength to support the transaction without assistance from the entity we are auditing. Determine whether that rationale (or the lack thereof) suggests that the transactions may have been entered into to engage in fraudulent financial reporting.
3.
216
Execution Phase Sample Audit Programs Liabilities Contingencies & Commitments
Audit Program
(b) Contingencies & Commitments
Contingencies & Commitments Amount in Rs.
Account balances:
S. No.
Audit Objectives
Assertions IR
To ensure that contingencies and commitments have been disclosed in the financial statements in accordance with the requirements of applicable financial reporting framework i.e. Companies Ordinance, 1984 and applicable International Financial Reporting Standards.
217
S. No.
Audit Procedures
Done by
W. P. Ref.
Analytical Procedures 1. Review contingencies and commitments appearing in last years accounts and inquire about the status this year. Compare current year disclosures with last year and obtain explanations for any significant or unusual items.
2.
Test of Details 1. CONTINGENCIES AND COMMITMENTS 1. Inquire of and discuss with management the clients policies and procedures for identifying, evaluating, and accounting for contingencies, including those resulting from litigation and claims. The inquiry should consider addressing oral arrangements, such as an oral guarantee for the debt of others, as well as written arrangements. Obtain from management or legal adviser a description and evaluation of the litigation and claims that existed at the balance sheet date and during the period from the balance sheet date to the date the information is provided to the auditors. Examine documents, including correspondence and invoices from lawyers, in the clients possession concerning litigation, claims and unasserted claims. Obtain and evaluate letters from legal advisors. Inquire of and discuss with management the clients policies and procedures for identifying, evaluating, and accounting for commitments. Review the results of audit procedures performed in other accounts.
2.
3.
4. 5.
6.
218
S. No.
Audit Procedures 7. Read the minutes of corporate meetings (e.g., shareholders, board of directors, and relevant committees of the board) held during the period being examined and through to the date of the auditors report. Read significant contracts, loan agreements, leases, service guarantees, insurance policies (or note the lack of insurance), and other applicable to sales, purchases or lease contracts. Determine, through inquiry and review of sales and/or lease agreements, polices in effect with respect to returns, repurchases, and future allowances applicable to sales or leases. Determine, through inquiry and review of minutes, contracts/agreements, and bank confirmations, accounting and operating policies in effect with respect to interest rate and foreign currency futures/hedges. Examine bank confirmations for contingent liabilities, letters of credit, and compensating balance arrangements. Inquire as to material commitments to complete sales contracts at a loss. Inquire as to any commitments to repurchase assets previously sold; purchase quantities in excess of requirements or at prices in excess of prevailing market prices; construct or acquire property, plant, equipment, investments, investments, intangibles, or other non current assets. Review cost and progress estimation procedures for long term projects. Evaluate the possibility of subsequent events, to ensure that there is no unrecorded contingency Obtain the clients representation regarding contingencies & commitments as part of the financial statement representation letter.
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W. P. Ref.
8.
9.
10.
11.
12. 13.
14. 15. 16.
219
Execution Phase Sample Audit Programs Liabilities Deferred Liabilities
Audit Program
(c) Deferred Liabilities
Deferred Liabilities Amount in Rs.
Account balances:
S. No.
Audit Objectives
Assertions IR
All deferred liabilities on the balance sheet represent amounts owed by the entity to tax authorities, employees or other third parties. The deferred liabilities represent obligations of the entity at the balance sheet date. All deferred liabilities owed by the entity and all related expenses that have accrued at the balance sheet date have been recorded.
Existence
Rights & Obligations
Completeness
220
S. No.
Audit Objectives
Assertions IR
Deferred Liabilities have been included on the balance sheet at appropriate amounts. To ensure that deferred liabilities have been presented, classified and disclosed in the financial statements in accordance with the requirements of applicable financial reporting framework i.e. Companies Ordinance, 1984 and applicable International Financial Reporting Standards.
Valuation
221
S. No.
Audit Procedures
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W. P. Ref.
Analytical Procedures 1. Compare current year balances with prior year and ensure reasonableness of changes during the year.
2.
Enquire into and obtain explanations for any unusual changes during the year.
3.
Compare income tax expense to previous year and assess whether variance is consistent with change in profits after taking into account any changes in income tax rates.
Test of Details 1. TEST DEFERRED LIABILITIES A. Obtain a schedules of all Deferred liabilities showing beginning and ending balances , provision payments during the year, and perform the following: 1. To obtain assurance about the completeness of the schedule: 1.1 2. B. Make inquiries of knowledgeable management.
Test the summarization and trace the ending balances to the general ledger.
For deferred liability regarding gratutity perform the following procedures 1. 2. Obtain copy of companys rules and policies regarding staff gratuity. Verify the last salaries drawn by selected employees from payroll or salary sheet.
222
S. No.
Audit Procedures 3. 4. Verify the date of appointment from personal files. Check the calculation of number of years completed from date of appointment to date of the balance sheet. Check the calculation of charge of the gratutity for the year. Verify the payments of the gratuity to staff retired during the year from the companys rule and bank statements. Check other requirements as per IAS 19.
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5. 6.
7. C.
For deferred liability regarding pensions:1. 2. Obtain a copy of companys rules and policies regarding pension (whether funded or unfunded). For funded pension plans, check payment of contribution of client towards fund according to the funds rules. For unfunded pension plan, verify provisions for deferred liability in light of actuarial valuations. Check other requirements as per IAS-19 (revised).
3. 4.
223
S. No.
Audit Procedures D. For deferred liability regarding taxation:1. 2. Calculate taxable and deductible timing differences. Apply appropriate rate of taxation on total of reversible timing differences (as per old IAS 12. However, as per revised IAS 12, all timing differences whether reversing in the foreseeable future or not, are required to be incorporated into the accounts) Ensure that proper amount has been taken in profit and loss account by taking difference of opening and closing balance of deferred tax liability. E. Evaluate results of the tests.
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2.
TEST VALUATION AND PRESENTATION A. Determine that disclosures have been made in accordance with requirement of Companies Ordinance, 1984 and relevant accounting pronouncements.
224
Execution Phase Sample Audit Programs Liabilities Direct Taxation
Audit Program
(d) Direct Taxation
Direct Taxation
Amount in Rs. Account balances:
S. No.
Audit Objectives
Assertions IR
All liabilities for income taxes on the balance sheet represent amounts owed to income tax authorities. The income taxes payable on the balance sheet represent obligations of the entity at the balance sheet date. All liabilities for income taxes owed by the entity and all income tax expense that had accrued at the balance sheet date have been recorded.
Existence
Rights & Obligations
Completeness
Income taxes payable are included on the Valuation balance sheet at the appropriate amounts.
225
S. No.
Audit Objectives
Assertions IR
To ensure that liabilities for income tax and the related expense has been presented, classified and disclosed in the financial statements in accordance with the requirements of applicable financial reporting framework i.e. Companies Ordinance, 1984 and applicable International Financial Reporting Standards.
226
S. No.
Audit Procedures
Done by
W. P. Ref.
Analytical Procedures 1. 2. 3. Compare current year balances with prior year and ensure reasonableness of changes during the year. Enquire into and obtain explanations for any unusual changes during the year. Compare income tax expense to previous year and assess whether variance is consistent with change in profits after taking into account any changes in income tax rates.
Test of Details 1. DIRECT TAXATION A. Obtain (or prepare) a movement schedule of taxation liabilities, showing beginning balance, activity during the year, and ending balance by tax jurisdiction and tax years. Agree opening and closing balances to the general ledger. Test transactions for the year, and investigate unusual items. Review status of open years' returns, and examine related correspondence from tax authorities for indications that the actual liability may differ significantly from the amount provided. Where liabilities have been finalized, verify appropriate payment or refund. Determine that adjustments have been made for any difference between the final liability and the amount provided, and consider the effect of any such adjustments on subsequent tax years and taxes imposed by other jurisdictions. Obtain calculation of the tax liability identifying all items constituting the difference between net pretax income and taxable income, and compare calculation to that of the previous year. Review calculation to determine that correct tax rates have been used and that all significant tax matters have been addressed. Agree with tax returns, if prepared.
B.
C.
D.
227
S. No.
Audit Procedures E. F. If applicable, ensure that any tax losses have been correctly calculated and appropriately dealt with. If applicable, consider whether any provisions for deferred taxes have been appropriately dealt with. Test calculation of deferred taxes and whether timing differences have been appropriately considered. Evaluate results of the tests.
Done by
W. P. Ref.
G. 2.
TEST ACCOUNTING ESTIMATES FOR BIAS A. Perform a retrospective review of significant accounting estimates reflected in the financial statements of the prior year to determine whether management judgments and assumptions relating to the estimates indicate a possible bias on the part of management. 1. The significant accounting estimates selected for testing should include those that are based on highly sensitive assumptions or are otherwise significantly affected by judgments made by management. Consider the results of this retrospective review in evaluating the current-year estimates. If we identify a possible bias on the part of management in making prior-year accounting estimates, we should evaluate whether circumstances producing such a bias represent a risk of a material misstatement due to fraud.
2.
B.
Consider whether differences between estimates best supported by the audit evidence and the estimates included in the financial statements, even if they are individually reasonable, indicate a possible bias on the part of the entity's management. If so, reconsider estimates taken as a whole.
228
Execution Phase Sample Audit Programs Liabilities Dividend Payable
Audit Program
(e) Dividend Payable
Dividend Payable Amount in Rs.
Account balances:
S. No.
Audit Objectives To ensure that dividend payable represents established liability as at the year end payable to the shareholders of the company. To ensure that the companys liability in respect of dividends has been recorded in the books in full. To ensure that liability is recorded at the correct amount. To ensure that dividend payable has been presented, classified and disclosed in the financial statements in accordance with the requirements of applicable financial reporting framework i.e. Companies Ordinance, 1984 and applicable International Financial Reporting Standards.
Assertions IR
229
Execution Phase Sample Audit Programs Liabilities Dividend Payable
S. No.
Audit Procedures
Done by
W. P. Ref.
Analytical Procedures 1. 2. 3. Review the percentage of declaration as compared to previous year. Determine whether the declaration is consistent with the profits of the company Review movement during the year and ensure that any unpaid dividends carried forward have been properly classified as unclaimed dividends.
Test of Details 1. TEST DIVIDEND PAYABLE BALANCES 1. 2. 3. 4. Trace opening balance from general ledger. Obtain a list of members of the company as at the book closure date. Obtain copy of the board resolution to verify the rate of the dividend (interim and final ) announced. Check that Zakat has been deducted at source and deposited in the Central Zakat Fund under the provisions of the Zakat and Ushr Ordinance, 1980. Check that income tax has been deducted from dividend under the provisions of the income tax Ordinance 2001. Check payment of the dividend (i.e. dispatch of the dividend warrant) has been made within the time period as required by Sec 251 of the Companies Ordinance, 1984. Agree closing balance with general ledger. Evaluate results of the tests.
5. 6.
7. 8. 2.
TEST PRESENTATION OF DIVIDEND PAYABLE A. Determine that disclosures have been made in accordance with requirements of the Companies Ordinance, 1984 and relevant accounting pronouncements.
230
Execution Phase Sample Audit Programs Liabilities Equity
Audit Program
(f) Equity
Equity Amount in Rs.
Account balances:
S. No.
Audit Objectives
Assertions IR
All the equity accounts on the balance sheet are appropriately authorized and issued. To ensure that all changes to equity accounts including transfer to reserve and dividends have been accounted for in the books of the company on a timely basis. To ensure that all equity accounts are stated on the balance sheet at the appropriate amounts. To ensure that all equity accounts have been presented, classified and disclosed in the financial statements in accordance with the requirements of applicable financial reporting framework i.e. Companies Ordinance, 1984 and applicable International Financial Reporting Standards.
Existence, Rights & Obligations Completeness
Valuation
231
S. No.
Audit Procedures
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Analytical Procedures 1. 2. Compare current year balances with prior year and ensure reasonableness of changes during the year. Enquire into and obtain explanations for any unusual changes during the year.
Test of Details 1. TEST EQUITY BALANCES A. Obtain a schedule of all equity accounts showing number of shares authorized, issued, and outstanding at the beginning and end of the year and all transactions affecting equity (e.g., dividends, retained earnings) occurring during the year. 1. 2. 3. Test the summarization of the schedule. Trace totals to the general ledger. Check the number of shares and amount of issued, subscribed and paid up capital from a) b) 4. 5. Memorandum of association Form A
Agree changes in authorized or issued shares to minutes and documents filed with the SECP. Examine all changes in capital. 5.1 Trace to appropriate authorizations (e.g., board minutes, members register). 5.2 Agree number of shares and proceeds from issuance of new shares to cash receipts and supporting records. Compute the entries to par value of outstanding shares and paid in capital.
232
S. No.
Audit Procedures 5.3 Agree number of shares and value of redemptions to cash disbursements and supporting records. 5.4 For shares issued as bonus shares a) b) Check board resolution Check members register to ensure that changes have been made in number of shares of each member.
Done by
W. P. Ref.
B. C.
Test entries to paid-up capital other than from the issuance of securities. Test entries to retained earnings other than from net income, dividends, and treasury shares.
D. Examine documents supporting treasury shares transactions during the period. Confirm outstanding treasury shares. E. F. 2. Examine schedule of shares owned off record and beneficially by major officers. Evaluate results of the tests.
TEST DIVIDENDS AND RETAINED EARNINGS A. Determine that dividend payment and liability have been correctly recorded. 1. 2. 3. B. Review extracts of board minutes for dividends proposed and paid. Re-compute calculation of dividends and trace total dividends to earnings statement. Re-compute the liability for dividends.
Agree changes in retained earnings (e.g., income, dividends) to supporting documentation and trace ending balance to general ledger and equity accounts. Evaluate results of the tests.
C.
233
S. No. 3.
Audit Procedures TEST PRESENTATION OF EQUITY A. Determine that for each class of authorised shares, the title of issue, par or stated value per share, and the number of shares authorized, issued, and outstanding are properly recorded and disclosed. Determine that authorised shares, paid-in capital, reserves, and retained earnings are properly recorded, classified and/or disclosed, as appropriate. Determine that any shares options, warrants, rights, or conversion privileges existing at the balance-sheet date are disclosed properly. Determine that all transactions affecting shareholders' equity are properly recorded in conformity with applicable state laws.
Done by
W. P. Ref.
B.
C.
D.
4.
TEST SHARES OPTIONS A. Obtain a schedule of options granted, cancelled, and exercised during the audit period, and options outstanding, exercisable and available for future grant at the balance-sheet date. 1. 2. Test the summarization of the schedule. Review descriptions of the shares option plans and determine that all activity during the year is in compliance. Agree options granted to board minutes and to schedule of changes in outstanding shares. Determine that outstanding options are valid. Agree option price of qualified shares options granted to market source. Determine that compensation expense has been recorded on nonqualified shares options when appropriate. Agree options cancelled or expired to supporting documentation (e.g., employee termination notice). Evaluate results of the tests. 234
3. 4. 5. 6.
7.
8.
S. No. 5.
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B.
235
S. No.
Audit Procedures C. Determine whether the entries exhibit characteristics of inappropriate or unauthorized journal entries such as (a) entries made to unrelated, unusual, or seldom-used accounts or business segments, (b) entries recorded at the end of the period or as post-closing entries that have little or no explanation or description, (c) entries made either before or during the preparation of the financial statements that do not have account numbers, and (d) entries that contain round numbers or a consistent ending number. Evaluate the reasonableness of other adjustments (e.g., entries posted directly to financial statement drafts, consolidating adjustments, report combinations, and reclassifications) made in the preparation of the financial statements.
Done by
W. P. Ref.
D.
6.
EVALUATE BUSINESS RATIONALE FOR SIGNIFICANT UNUSUAL TRANSACTIONS A. If we become aware of significant transactions that are outside the normal course of business or that otherwise appear to be unusual given our understanding of the entity and its environment, perform the following procedures: 1. Gain an understanding of the business rationale for such significant unusual transaction. Consider whether the transactions involve previously unidentified related parties or parties that do not have the substance or the financial strength to support the transaction without assistance from the entity we are auditing. Determine whether that rationale (or the lack thereof) suggests that the transactions may have been entered into to engage in fraudulent financial reporting.
2.
3.
236
Execution Phase Sample Audit Programs Liabilities Liabilities Against Assets
Audit Program
(g) Liabilities Against Assets
Liabilities Against Assets Amount in Rs.
Account balances:
S. No.
Audit Objectives To ensure that liability represents valid claims by lessor against assets leased to the entity under finance lease arrangements. To ensure that the entire liability against finance lease arrangements has been accounted for in the books of the company on a timely basis. To ensure that liability is recorded at the correct amount. To ensure that the liability has been presented, classified and disclosed in the financial statements in accordance with the requirements of applicable financial reporting framework i.e. Companies Ordinance, 1984 and applicable International Financial Reporting Standards.
Assertions IR
237
S. No.
Audit Procedures
Done by
W. P. Ref.
Analytical Procedures 1. Compare balances to prior periods and budgets seeking explanations for unusual items and significant variances. Review movement during the year in long term deposits and ensure reasonableness of changes during the year.
2.
Test of Details 1. TEST LIABILITIES AGAINST ASSETS SUBJECT TO FINANCE LEASE. A. Obtain a schedule(s) of Finance and operating leases (including any that existed at the end of the prior year, as well as any new leases). For finance leases, the schedule should show beginning and ending balances and borrowings and repayments during the year. For operating leases, the schedule should show current-year rent expense. 1. To obtain assurance about the completeness of the schedule: 1.1 1.2 Make inquiries of knowledgeable management. Consider any evidence of additional leases obtained through examination of minutes of the board, significant contracts, confirmations of bank accounts, support for subsequent cash disbursements (when testing payables) or for property additions, and other documents.
2.
Test the summarization and trace the ending balances (for operating leases, the current-year amount of rent expense) to the general ledger.
B.
Read the lease agreements (or descriptions thereof in our permanent files) and determine that each is accounted for as a capital or an operating lease, as appropriate. Determine that the leased property is still in use. 238
S. No.
Audit Procedures C. Make a selection of finance leases. Prepare, or have the client prepare, confirmation requests, and perform the following: 1. Ascertain that the confirmations request all information likely to be relevant to our tests of the leases and related interest balances (e.g., applicable interest rates, due dates, the date to which interest has been paid, and the nature and original value of the property leased). Mail the request under our control to the lessor. Send second requests for non-replies. Compare replies to requests. Prepare, or have the client prepare, reconciliations of exceptions. Trace reconciling items to supporting documents.
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W. P. Ref.
2. 3. 4.
D.
For new lease obtained during the year: 1. 2. 3. Review the lease agreements to ascertain its nature as to finance or operating lease. Check proper approval of lease transaction. Ensure that only principal portion has been recorded as liability against assets subject to finance lease. Review the security documents. Evaluate results of the tests.
4. 5. 2.
TEST RENTAL EXPENSE A For rentals paid during the year check the following: 1. 2. The amount of lease rentals from lease amortization schedule. Proper bifurcation of lease rental into principal portion paid and finance charges paid.
239
S. No.
Audit Procedures 3. 4. B. Verify payment from bank statements. Check calculation financial charges amortization schedule.
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For selected parties, circularize confirmation requests. Match replies to confirmation with amount given in the schedule. Evaluate results of the tests.
C. 3.
TEST VALUATION AND PRESENTATION A. B. Check that lease liabilities are properly bifurcated into current and non-current portions. Determine that disclosures have been made in accordance with requirement of Companies Ordinance, 1984 and relevant accounting pronouncements.
240
Execution Phase Sample Audit Programs Liabilities Long Term Debt
Audit Program
(h) Long Term Debt
Long Term Debt Amount in Rs.
Account balances: Long term debt
S. No.
Audit Objectives
Assertions IR
All long term debts on the balance sheet represent valid claims by banks or other third parties. To ensure that all goods and services received by the entity have been accounted for in the books of the company on a timely basis. To ensure that liability is recorded at the correct amount. To ensure that long term debts have been presented, classified and disclosed in the financial statements in accordance with the requirements of applicable financial reporting framework i.e. Companies Ordinance, 1984 and applicable International Financial Reporting Standards.
Completeness
Valuation
241
S. No.
Audit Procedures
Done by
W. P. Ref.
Test of Details 1. CONFIRM DEBT A. Obtain a schedule of notes payable and long-term debt (including debt outstanding at the end of the prior year, as well as any new debt) showing beginning and ending balances and borrowings and repayments during the year, and perform the following: 1. To obtain assurance about the completeness of the schedule: 1.1 Make inquiries of knowledgeable management. 1.2 Consider any evidence of additional debt obtained through examination of minutes of the board, significant contracts, confirmations of bank accounts, support for subsequent cash disbursements (when testing payables), and other documents. 2. B. Test the summarization and trace the ending balances to the general ledger.
For each lender (or, in some circumstances, selected lenders) with which the client had debt outstanding at the prior year end or during the current year, prepare, or have the client prepare, a confirmation request for the amount(s) owed to the lender, and perform the following:
242
S. No.
Audit Procedures 1. Ascertain that the confirmation asks for all information likely to be relevant to our tests of debt and related interest balances (e.g., applicable interest rates, due dates, the date to which interest has been paid, collateral and security interests). Mail the requests under our control to a person within the lending institution who would be expected to be knowledgeable about the client's obligations, including any contingent liabilities, guarantees, letters of credit, security agreements, or similar matters with which the lender may be involved. Send second requests for non-replies. Compare replies to requests. Prepare, or have the client prepare, reconciliations of exceptions. Trace reconciling items to supporting documents.
Done by
W. P. Ref.
2.
3. 4.
2.
TEST ACCRUED INTEREST A. Obtain a schedule of accrued interest expense (which may be prepared in connection with the schedule of debt in Procedure 1 above). Test the summarization and trace the total or the individual amounts, as applicable, to the general ledger. B. Make a selection of debt instruments tested in Procedure 1 and, for each item selected, perform the following: 1. Based on the information in the confirmation concerning the date through which interest was paid and the applicable interest rate, re-compute the amount of accrued interest. If the information needed to re-compute the amount was not confirmed: 2.1 Examine the debt agreement evidencing the interest rate. 2.2 Obtain and examine cash disbursement records (usually the paid check) evidencing the most recent payment of interest.
2.
243
S. No.
Audit Procedures 2.3 Re-compute the amount of accrued interest. C. Evaluate results of the tests.
Done by
W. P. Ref.
3.
TEST INTEREST EXPENSE A. Calculate overall interest expense on loans for the year, and compare with recorded interest expense.
4.
TEST VALUATION AND PRESENTATION OF DEBT AND INTEREST ACCOUNTS A. Determine that the following items, if any, are properly recorded, classified, and/or disclosed, as appropriate: 1. 2. 3. 4. 5. 6. 7. 8. B. Debt owed to related parties. Long-term debt and current portion of long-term debt. Debt callable by the creditor (e.g., due to loan covenant violations). Short-term obligations expected to be refinanced. Capitalized interest (e.g., related to construction financing). Imputed interest (e.g., when there is no stated interest rate). Discounts or premiums and related amortization. Unconditional purchase obligations.
Obtain a schedule(s) of amounts due to be repaid in the next five years under the terms of long-term debt agreements (including, separately, amounts due under capitalized leases and/or unconditional purchase obligations, if any). Test the summarization of the schedule and re-compute (possibly on test basis) the amounts.
244
S. No.
Audit Procedures C. Read the provisions in loan and debt agreements (and update descriptions thereof contained in our permanent files, if applicable) and perform the following: 1. Test that the client is in compliance with loan covenants and other significant provisions of the agreements. If there are any provisions with which the client is not in compliance, determine whether the debt should be classified as current. If enforcement of the provisions has been waived by the lender, obtain confirmation of the waiver from the lender.
Done by
W. P. Ref.
2.
D. Determine that the accounting policies and methods of recording debt are appropriate and applied consistently. 5. ROLLFORWARD TEST FOR DEBT TESTED PRIOR TO YEAR END A. Inquire, and consider any other evidence that comes to our attention (e.g., in reading the minutes of the board), as to the existence of any new debt agreements, or modifications to existing agreements, in the intervening period from the interim testing date to the balance-sheet date. Test any new debt (and related accrued interest) as in Procedures 1 through 4 of this Program. 1. B. Evaluate results of the tests.
Inquire, and consider any other evidence that comes to our attention (e.g., in reading the minutes of the Board), as to the existence of any new debt agreements, or modifications to existing agreements, in the intervening period from the interim testing date to the balance-sheet date. Test any new debt (and related accrued interest) as in Procedures 1 through 4 of this Program. Test transactions during the intervening period between the interim testing date and year end:
C.
245
S. No.
Audit Procedures 1. Obtain reconciliations of the interim debt balances to the year-end balances: 1.1 Agree new borrowings to cash receipts journals or to entries in cash accounts. 1.2 Agree payments to cash disbursements journals or to entries in cash accounts. 1.3 Examine supporting documents to verify other significant entries. 2. Make a selection of entries in cash disbursement journals (or those entries recorded directly in cash accounts that represent debt payments): 2.1 Determine that the amounts of the payments are in accordance with the terms of the debt agreements (e.g., by re-computing the payments). 2.2 Examine related paid checks or bank advices (for wire transfers) for evidence of receipt and deposit by the authorized payee (i.e. the lender). 3. Evaluate results of the tests.
Done by
W. P. Ref.
6.
CLIENT SERVICE CONSIDERATIONS Consider whether we can make useful recommendations to the client with respect to any of the following: A. When debt is retired, the client ensures that a discharge is received on assets securing the debt.
7.
246
S. No. 8.
Audit Procedures TEST PRESENTATION OF RELATED-PARTY BALANCES A. Inquire and consider available evidence, if any, to identify all related parties. Obtain a schedule of relatedparty balances and determine that all identified related parties with balances at year end are included in the schedule. Trace the amounts in the schedule to the trial balance. B. C. Determine that the economic substance of the relatedparty balances supports their recording. Evaluate the reasonableness of presentation and/or footnote disclosures of related-party balances.
Done by
W. P. Ref.
D. Consider requesting positive confirmation of material balances with related parties. 9. TEST UNUSUAL ENTRIES RECORDED TO THE GENERAL LEDGER A. Investigate journal entries from sources that are typically not associated with this account. 1. When selecting items to be tested, consider (a) our assessment of the risk of material misstatement due to fraud, (b) the effectiveness of controls over the preparation and posting of journal entries, (c) the entity's financial reporting process and the nature of the evidence that can be examined, (d) the nature and complexity of the accounts, and (e) the amount and number of such entries. Because fraudulent journal entries often are made at the end of a reporting period, our testing ordinarily should focus on the journal entries and other adjustments made at that time. In addition, because material misstatements in financial statements due to fraud can occur throughout the period and may involve extensive efforts to conceal entries at the end of the reporting period, we should consider whether there also is a need to extend the testing of journal entries to other periods within the period under audit.
247
S. No.
Audit Procedures B. Examine related accounting records and determine whether the selected debit/credit is valid, appropriate, and authorized. Determine whether the selected entry was properly recorded in the correct period and consider the possible implications of such journal entries on internal control. Determine whether the entries exhibit characteristics of inappropriate or unauthorized journal entries such as (a) entries made to unrelated, unusual, or seldom-used accounts or business segments, (b) entries recorded at the end of the period or as post-closing entries that have little or no explanation or description, (c) entries made either before or during the preparation of the financial statements that do not have account numbers, and (d) entries that contain round numbers or a consistent ending number.
Done by
W. P. Ref.
C.
D. Evaluate the reasonableness of other adjustments (e.g., entries posted directly to financial statement drafts, consolidating adjustments, report combinations, and reclassifications) made in the preparation of the financial statements. 10. EVALUATE BUSINESS RATIONALE FOR SIGNIFICANT UNUSUAL TRANSACTIONS A. If we become aware of significant transactions that are outside the normal course of business or that otherwise appear to be unusual given our understanding of the entity and its environment, perform the following procedures: B. If we become aware of significant transactions that are outside the normal course of business or that otherwise appear to be unusual given our understanding of the entity and its environment, perform the following procedures: 1. Gain an understanding of the business rationale for such significant unusual transaction.
248
S. No.
Audit Procedures 2. Consider whether the transactions involve previously unidentified related parties or parties that do not have the substance or the financial strength to support the transaction without assistance from the entity we are auditing. Determine whether that rationale (or the lack thereof) suggests that the transactions may have been entered into to engage in fraudulent financial reporting.
Done by
W. P. Ref.
3.
249
Execution Phase Sample Audit Programs Liabilities Long Term Deposit
Audit Program
(i) Long Term Deposit
Long Term Deposit Amount in Rs.
Account balances:
S. No.
Audit Objectives
Assertions IR
To ensure that long term deposits represent valid claims by third parties. To ensure that all deposits received from customers or other third parties have been accounted for in the books of the company on a timely basis. To ensure that long term deposits are recorded at the correct amount. To ensure that long term deposits have been presented, classified and disclosed in the financial statements in accordance with the requirements of applicable financial reporting framework i.e. Companies Ordinance, 1984 and applicable International Financial Reporting Standards.
Completeness
Valuation
Presentation Disclosure
&
250
Execution Phase Sample Audit Programs Liabilities Long Term Deposit
S. No. Analytical Procedures 1. 2.
Audit Procedures
Done by
W. P. Ref.
Compare balances to prior periods and budgets seeking explanations for unusual items and significant variances. Review movement during the year in long term deposits and ensure reasonableness of changes during the year.
Test of Details 1. TEST LONG TERM DEPOSIT BALANCES A. Ascertain the nature of deposits by inquiry or by reviewing prior years working papers B. C. Examine the supporting documents of deposits e. g. contracts with customers etc. Circularize confirmations to selected parties. Match replies with the amounts shown in general ledger.
D. Check that the amounts of deposits to which Sec 226 of the Companies Ordinance, 1984 applies have been credited by the client in a separate bank account as required by that Section. 2. TEST PRESENTATION A. Determine that disclosures have been made in accordance with the requirements of the Companies Ordinance, 1984 and the relevant accounting pronouncements.
251
Execution Phase Sample Audit Programs Liabilities Payables
Audit Program
(j) Payables
Payables Amount in Rs.
Account balances:
S. No.
Audit Objectives
Assertions IR
To ensure that payables represent valid claims by suppliers against goods delivered or services rendered to the entity. To ensure that all goods and services received by the entity have been accounted for in the books of the company. To ensure that liability is included on the balance sheet at the correct amount. To ensure that the liability is recorded in the appropriate period and there are not cut off issues.
Completeness
252
S. No.
Audit Objectives
Assertions IR
To ensure that payables have been presented, classified and disclosed in the financial statements in accordance with the requirements of applicable financial reporting framework i.e. Companies Ordinance, 1984 and applicable International Financial Reporting Standards.
Presentation Disclosure
&
253
S. No. Test of Controls
Audit Procedures
Objective
Done by
W. P. Ref.
Select purchase transactions over the period under audit and ensure the following controls have existed during the period:
n
Purchase orders are approved at an appropriate level. Purchase orders are serially numbered. Entries are made only on the basis of approved Goods Received Note (GRN). Suppliers invoices are checked for calculation and casting by a person independent of the purchase department Price charged by the supplier is verified for appropriateness, for e.g. by agreeing the rates charged to approved price lists or quotations. An independent person compares the purchacse orders, goods received notes and suppliers invoices for consistency.
Only authorized purchases are made All purchase orders are entered into the records Credit to accounts payable represent goods actually received Accounts Payable are recorded at the appropriate amount Accounts Payable are recorded at the appropriate amount Accounts payable have been booked at appropriate amount and represent valid claims by third party Accounts Payable are accurately recorded
Suppliers statements are obtained and reconciled to accounting records on a regular basis
254
S. No.
n
Audit Procedures Entries to Accounts Payable are approved at an appropriate level Credit notes are checked for correctness of calculation by a person independent of the preparer.
Objective All entries to Accounts payable are authorized Credit Notes issued are properly calculated and recorded at appropriate amount Credit Notes are recorded in the appropriate period
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Credit notes have been entered in the same period to which the purchases relate.
255
S. No. Analytical Procedures 1.
Audit Procedures
Done by
W. P. Ref.
Compare trade creditors, purchases and payments to prior periods and budgets seeking explanations for unusual items and significant variances. Review monthly movement of trade creditors in comparison to purchases and payments particularly around the period end. Analyse the turnover of trade creditor ratio of creditors to total operating costs and compare to prior periods and budgets, seeking explanations for unusual items and significant variances. Analyze the ratio of purchases in the last month of the period to total purchases. Review the gross profit margin achieved particularly around the period end and compare to prior periods and budgets seeking explanations for any unusual variance. Review the ratio of individual expense accounts to sales or other appropriate base. Review the accounts payable, purchases or expense ledgers to identify whether there are any significant purchases or expenses towards the period end. Check that these have been accounted for in the correct period.
2.
3.
4. 5.
6. 7.
Test of Details 1. TEST PAYABLES A. Obtain the payables trial balance. Test the summarization and the reconciliation of the total to the general ledger. Trace significant reconciling items, if any, to supporting documents. B. Make a selection of cash disbursements from subsequent cash disbursement records during an appropriate period following the date of the payables trial balance (usually at least one trade payables cycle, or, if payables are tested at year end, to the end of field work), and:
256
S. No. 1.
Audit Procedures Trace selected disbursements to receiving documents, purchase invoices, and/or other supporting documents. Determine whether those selected disbursements that indicate a liability as of the trial balance date are recorded in the trial balance or the reconciliation to the general ledger.
Done by
W. P. Ref.
2.
C.
On or after the date of the test in Step B, make a selection of unpaid suppliers' invoices and unmatched receiving reports. Determine whether those that indicate a liability as of the trial balance date are recorded in the trial balance or the reconciliation to the general ledger.
D. Review the year-end accounts payable trial balance to determine whether significant debits are included in the account balance. For material debit balances that are included in the year end balance consider whether reclassification is appropriate. E. 2. Evaluate results of the tests.
TEST VALUATION AND PRESENTATION OF PAYABLES A. Determine that the following balances, if any, are properly classified: 1. 2. B. Debit balances in payables. Non-current or non-trade payables.
Determine that the following balances, if any, are properly valued, classified, and/or disclosed, as appropriate: 1. 2. 3. Old, disputed, or questionable payables. Payables to related parties. Purchase commitments.
257
S. No. 3.
Audit Procedures TEST EARLY CUT-OFF OF PURCHASES A. Make a selection of purchase invoices recorded in the ___-day period after year end. Trace the selected invoices to receiving records. Determine that the payables were recorded in the correct period. Evaluate results of the tests. B. Make a selection of initial records of receipts of goods or services that occurred in the ___-day period prior to year end. Trace receiving records to purchase invoices. Determine that the payables were recorded in the correct period. Evaluate results of the tests.
Done by
W. P. Ref.
4.
TEST LATE CUT-OFF OF DEBIT NOTES A. Inquire into purchase returns in the ___-day period after year end. Determine that the debit notes were recorded in the correct period. B. Make a selection of debit notes recorded in the ___-day period prior to year end. Trace the debit notes to shipping records and determine that they were recorded in the correct period. Identify miscellaneous debits to payables recorded in the ___-day period prior to year end. Trace the debits to supporting documents and determine that they were recorded in the correct period.
C.
D. Evaluate results of the tests. 5. ROLLFORWARD TEST FOR PAYABLES TESTED PRIOR TO YEAR END A. Inquire into any significant disputed balances since the date at which payables were tested under Procedure 1 (or 4, if performed). Investigate disputed balances as necessary.
258
S. No. B.
Audit Procedures Review the trial balance of payables as of year end. For individual supplier accounts that have decreased significantly since the interim testing date, either review subsequent cash disbursement records for indications of unrecorded liabilities to such suppliers or obtain statements or unpaid invoices received by the client from such suppliers. Determine that any liabilities to such suppliers that existed at year end were recorded at year end. Evaluate results of the tests. Perform analytical procedures to test the payables balance at year end: 1. Consider using the following data, as applicable, to develop an expectation of the payables balance at year end: prior period balances, monthly amounts of purchases, disbursements, and purchase returns in the intervening period from the interim testing date to the balance-sheet date compared to such monthly amounts in prior years and in the current year prior to the interim testing date. Determine the threshold needed to identify a significant difference between the expectation and the recorded year end payables balance. Compare the expectation to the recorded balance. If the difference is more than the threshold, obtain and corroborate explanations for the difference (e.g., by examining supporting documents). Evaluate results of the tests.
Done by
W. P. Ref.
C.
2.
3.
4.
D. Test transactions during the intervening period between the interim testing date and year end: 1. Obtain a reconciliation of the interim payables balance to the year-end balance: 1.1 Agree purchases totals to purchases journals. 1.2 Agree disbursements totals to cash disbursements journals.
259
S. No.
Audit Procedures 1.3 Examine supporting documents to verify other significant entries. 2. Make a selection of entries to purchases journals in the intervening period between the interim testing date and year end: 2.1 Trace the selected entries to supplier invoices and receiving records. 2.2 Verify additions and extensions on the invoices. 2.3 Determine that the purchases were recorded in the correct period. 3. Make a selection of entries in cash disbursements journals in the intervening period between the interim testing date and year end: 3.1 Trace the selected entries to supplier invoices and receiving records. 3.2 Determine that the disbursements were recorded in the correct period. 3.3 Agree totals in disbursements journals to credits in cash accounts. 4. Evaluate results of the tests.
Done by
W. P. Ref.
6.
TEST PAYABLES OWED TO SELECTED SUPPLIERS A. Make a selection of significant suppliers to which amounts may be payable as of the date of the payables trial balance. Such suppliers may be identified through inquiry and/or review of prior cash disbursements records. (Perform B, if practicable, or else C) B. Obtain statements or purchase invoices received by the client from selected suppliers.
260
S. No. C.
Audit Procedures If statements from selected suppliers are not available, prepare, or have the client prepare, confirmation requests for the amounts owed to the suppliers and perform the following: 1. 2. 3. 4. Mail the requests under our control. Send second requests for non-replies. Compare replies to requests. For non-replies, examine subsequent cash disbursements to the suppliers and/or unpaid supplier invoices, and receiving records. Determine that any items representing liabilities as of the trial balance date are recorded at that date.
Done by
W. P. Ref.
D. Obtain and prepare reconciliations of statements, invoices, or confirmations obtained in Steps B and C above to the amounts recorded in the payables trial balance. Trace reconciling items to shipping/receiving records, purchase invoices, debit notes, and other supporting documents, as applicable. E. 7. Evaluate results of the tests.
TEST PRESENTATION OF RELATED-PARTY PAYABLES A. Inquire and consider other available evidence, if any, to identify all related parties from which purchases were made during the year. Obtain a schedule of relatedparty payables and determine that all identified related parties to which payables are owed at year end are included in the schedule. Trace the amounts in the schedule to the payables trial balance. B. C. Determine that the economic substance of the relatedparty payables supports their recording. Evaluate the reasonableness of presentation and/or footnote disclosures of related-party payables.
261
S. No.
Audit Procedures D. Consider requesting positive confirmation of material balances with related parties.
Done by
W. P. Ref.
8.
TEST VALUATION OF FOREIGN CURRENCY PAYABLES A. Inquire and consider other available evidence, if any, to identify foreign suppliers from which purchases were transacted in foreign currencies. Identify payables to such suppliers. Identify applicable exchange rates and agree them to an independent source. Re-compute foreign currency payable amounts in local currency. B. Determine the impact of foreign currency hedging contracts, if any, on the recorded balance of foreign currency payables. Trace currency translation adjustments to the general ledger.
C. 9.
TEST ACCOUNTING ESTIMATES FOR BIAS A. Perform a retrospective review of significant accounting estimates reflected in the financial statements of the prior year to determine whether management judgments and assumptions relating to the estimates indicate a possible bias on the part of management. 1. The significant accounting estimates selected for testing should include those that are based on highly sensitive assumptions or are otherwise significantly affected by judgments made by management. Consider the results of this retrospective review in evaluating the current-year estimates. If we identify a possible bias on the part of management in making prior-year accounting estimates, we should evaluate whether circumstances producing such a bias represent a risk of a material misstatement due to fraud.
2.
262
S. No. B.
Audit Procedures Consider whether differences between estimates best supported by the audit evidence and the estimates included in the financial statements, even if they are individually reasonable, indicate a possible bias on the part of the entity's management. If so, reconsider estimates taken as a whole.
Done by
W. P. Ref.
10.
TEST UNUSUAL ENTRIES RECORDED TO THE GENERAL LEDGER A. Investigate journal entries from sources that are typically not associated with this account. 1. When selecting items to be tested, consider (a) our assessment of the risk of material misstatement due to fraud, (b) the effectiveness of controls over the preparation and posting of journal entries, (c) the entity's financial reporting process and the nature of the evidence that can be examined, (d) the nature and complexity of the accounts, and (e) the amount and number of such entries. Because fraudulent journal entries often are made at the end of a reporting period, our testing ordinarily should focus on the journal entries and other adjustments made at that time. In addition, because material misstatements in financial statements due to fraud can occur throughout the period and may involve extensive efforts to conceal entries at the end of the reporting period, we should consider whether there also is a need to extend the testing of journal entries to other periods within the period under audit.
B.
263
S. No. C.
Audit Procedures Determine whether the entries exhibit characteristics of inappropriate or unauthorized journal entries such as (a) entries made to unrelated, unusual, or seldom-used accounts or business segments, (b) entries recorded at the end of the period or as post-closing entries that have little or no explanation or description, (c) entries made either before or during the preparation of the financial statements that do not have account numbers, and (d) entries that contain round numbers or a consistent ending number.
Done by
W. P. Ref.
D. Evaluate the reasonableness of other adjustments (e.g., entries posted directly to financial statement drafts, consolidating adjustments, report combinations, and reclassifications) made in the preparation of the financial statements. 11. VALUATE BUSINESS RATIONALE FOR SIGNIFICANT UNUSUAL TRANSACTIONS A. If we become aware of significant transactions that are outside the normal course of business or that otherwise appear to be unusual given our understanding of the entity and its environment, perform the following procedures: 1. 2. Gain an understanding of the business rationale for such significant unusual transaction. Consider whether the transactions involve previously unidentified related parties or parties that do not have the substance or the financial strength to support the transaction without assistance from the entity we are auditing. Determine whether that rationale (or the lack thereof) suggests that the transactions may have been entered into to engage in fraudulent financial reporting.
3.
264
Execution Phase Sample Audit Programs Liabilities Short Term Borrowings
Audit Program
(k) Short Term Borrowings
Short Term Borrowings
Amount in Rs. Account balances: Short term borrowings
S. No.
Audit Objectives
Assertions IR
All short term borrowings on the balance sheet represent valid claims by banks or other third parties. To ensure that all short term borrowings have been accounted for in the books of the company on a timely basis. To ensure that liability is recorded at the correct amount.
Completeness
Valuation
265
S. No.
Audit Objectives
Assertions IR
To ensure that short term borrowings have been presented, classified and disclosed in the financial statements in accordance with the requirements of applicable financial reporting framework i.e. Companies Ordinance, 1984 and applicable International Financial Reporting Standards.
266
S. No. Analytical Procedures 1. 2.
Audit Procedures
Done by
W. P. Ref.
Compare current year balances with prior year and ensure reasonableness of changes during the year. Enquire into and obtain explanations for any unexpected changes.
Test of Details 1. CONFIRM DEBT A. Obtain a schedule of short term borrowing (including debt outstanding at the end of the prior year, as well as any new debt or renewal of debt) showing beginning and ending balances and borrowings and repayments during the year, and perform the following: 1. To obtain assurance about the completeness of the schedule: 1.1 1.2 Make inquiries of knowledgeable management. Consider any evidence of additional debt obtained through examination of minutes of the board, significant contracts, confirmations of bank accounts, support for subsequent cash disbursements (when testing payables), and other documents.
2. B.
Test the summarization and trace the ending balances to the general ledger.
For each lender (or, in some circumstances, selected lenders) with which the client had debt outstanding at the prior year end or during the current year, prepare, or have the client prepare, a confirmation request for the amount(s) owed to the lender, and perform the following:
267
S. No. 1.
Audit Procedures Ascertain that the confirmation asks for all information likely to be relevant to our tests of debt and related interest balances (e.g., applicable interest rates, due dates, the date to which interest has been paid, collateral and security interests). Mail the requests under our control to a person within the lending institution who would be expected to be knowledgeable about the client's obligations, including any contingent liabilities, guarantees, letters of credit, security agreements, or similar matters with which the lender may be involved. Send second requests for non-replies. Compare replies to requests. Prepare, or have the client prepare, reconciliations of exceptions. Trace reconciling items to supporting documents.
Done by
W. P. Ref.
2.
3. 4.
C. 2.
TEST ACCRUED INTEREST A. Obtain a schedule of accrued interest expense (which may be prepared in connection with the schedule of debt in Procedure 1 above). Test the summarization and trace the total or the individual amounts, as applicable, to the general ledger. B. Make a selection of debt instruments tested in Procedure 1 and, for each item selected, perform the following: 1. Based on the information in the confirmation concerning the date through which interest was paid and the applicable interest rate, re-compute the amount of accrued interest. If the information needed to re-compute the amount was not confirmed: 2.1 Examine the debt agreement evidencing the interest rate.
2.
268
S. No. 2.2
Audit Procedures Obtain and examine cash disbursement records (usually the paid check) evidencing the most recent payment of interest. Re-compute the amount of accrued interest.
Done by
W. P. Ref.
2.3 C. 3.
TEST INTEREST EXPENSE A. Calculate overall interest expense on loans for the year, and compare with recorded interest expense.
4.
TEST VALUATION AND PRESENTATION OF DEBT AND INTEREST ACCOUNTS A. Determine that the following items, if any, are properly recorded, classified, and/or disclosed, as appropriate: 1. 2. 3. 4. 5. 6. B. Debt owed to related parties. Debt callable by the creditor (e.g., due to loan covenant violations). Short-term obligations expected to be refinanced. Imputed interest (e.g., when there is no stated interest rate). Discounts or premiums and related amortization. Unconditional purchase obligations.
Read the provisions in loan and debt agreements (and update descriptions thereof contained in our permanent files, if applicable) and perform the following: 1. Test that the client is in compliance with loan covenants and other significant provisions of the agreements.
269
S. No. 2.
Audit Procedures If there are any provisions with which the client is not in compliance, determine whether the debt should be classified as current. If enforcement of the provisions has been waived by the lender, obtain confirmation of the waiver from the lender.
Done by
W. P. Ref.
C. 5.
Determine that the accounting policies and methods of recording debt are appropriate and applied consistently.
ROLLFORWARD TEST FOR DEBT TESTED PRIOR TO YEAR END A. Inquire, and consider any other evidence that comes to our attention (e.g., in reading the minutes of the board), as to the existence of any new debt agreements, or modifications to existing agreements, in the intervening period from the interim testing date to the balance-sheet date. Test any new debt (and related accrued interest) as in Procedures 1 through 4 of this Program. 1. B. Evaluate results of the tests.
Inquire, and consider any other evidence that comes to our attention (e.g., in reading the minutes of the Board), as to the existence of any new debt agreements, or modifications to existing agreements, in the intervening period from the interim testing date to the balance-sheet date. Test any new debt (and related accrued interest) as in Procedures 1 through 4 of this Program. 1. Agree borrowings to cash receipts journals or to entries in cash accounts. 1.1 1.2 2. Agree payments to cash disbursements journals or to entries in cash accounts. Examine supporting documents to verify other significant entries.
Make a selection of entries in cash disbursement journals (or those entries recorded directly in cash accounts that represent debt payments):
270
S. No. 2.1
Audit Procedures Determine that the amounts of the payments are in accordance with the terms of the debt agreements (e.g., by re-computing the payments). Examine related paid checks or bank advices (for wire transfers) for evidence of receipt and deposit by the authorized payee (i.e. the lender).
Done by
W. P. Ref.
2.2
3. 6.
CLIENT SERVICE CONSIDERATIONS Consider whether we can make useful recommendations to the client with respect to any of the following: A. When debt is retired, the client ensures that a discharge is received on assets securing the debt.
7.
8.
TEST PRESENTATION OF RELATED-PARTY BALANCES A. Inquire and consider available evidence, if any, to identify all related parties. Obtain a schedule of relatedparty balances and determine that all identified related parties with balances at year end are included in the schedule. Trace the amounts in the schedule to the trial balance. B. C. Determine that the economic substance of the relatedparty balances supports their recording. Evaluate the reasonableness of presentation and/or footnote disclosures of related-party balances.
D. Consider requesting positive confirmation of material balances with related parties.
271
S. No. 9.
Done by
W. P. Ref.
B.
Examine related accounting records and determine whether the selected debit/credit is valid, appropriate, and authorized. Determine whether the selected entry was properly recorded in the correct period and consider the possible implications of such journal entries on internal control. Determine whether the entries exhibit characteristics of inappropriate or unauthorized journal entries such as (a) entries made to unrelated, unusual, or seldom-used accounts or business segments, (b) entries recorded at the end of the period or as post-closing entries that have little or no explanation or description, (c) entries made either before or during the preparation of the financial statements that do not have account numbers, and (d) entries that contain round numbers or a consistent ending number.
C.
272
S. No.
Audit Procedures D. Evaluate the reasonableness of other adjustments (e.g., entries posted directly to financial statement drafts, consolidating adjustments, report combinations, and reclassifications) made in the preparation of the financial statements.
Done by
W. P. Ref.
10.
EVALUATE BUSINESS RATIONALE FOR SIGNIFICANT UNUSUAL TRANSACTIONS A. If we become aware of significant transactions that are outside the normal course of business or that otherwise appear to be unusual given our understanding of the entity and its environment, perform the following procedures: 1. 2. Gain an understanding of the business rationale for such significant unusual transaction. Consider whether the transactions involve previously unidentified related parties or parties that do not have the substance or the financial strength to support the transaction without assistance from the entity we are auditing. Determine whether that rationale (or the lack thereof) suggests that the transactions may have been entered into to engage in fraudulent financial reporting.
3.
273
Execution Phase Sample Audit Programs Liabilities Surplus on Revaluation
Audit Program
(l) Surplus on Revaluation
Surplus on Revaluation
S. No.
Audit Objectives
Assertions IR
Surplus on revaluation represents valid gains on revaluation of fixed assets. To ensure that all transfers to and from the account have been made in accordance with the requirements of applicable financial reporting framework, i.e. Companies Ordinance, 1984 and applicable International Financial Reporting Framework. To ensure that the surplus has been stated on the balance sheet at an appropriate amount.
Completeness
Valuation
274
S. No.
Audit Objectives
Assertions IR
To ensure that Surplus on Revaluation has been presented, classified and disclosed in the financial statements in accordance with the requirements of applicable financial reporting framework i.e. Companies Ordinance, 1984 and applicable International Financial Reporting Standards.
275
S. No.
Audit Procedures
Done by
W. P. Ref.
Test of Details 1. TEST SURPLUS BALANCE A. Obtain a schedule of Revaluation of fixed assets showing assets wise detail, cost of the assets, revalued amount, name of valuer. 1. 2. 3. Test the summarization of the schedule. Trace totals to the general ledger. Examine the valuers report to ensure the correctness of revalued amount of the fixed assets and ensure independence of the valuer and checked appropriateness of assumptions used by valuer. Check the increase in value of the assets has been transferred to separate account called surplus on revaluation of fixed assets in accordance with Section 235 of the Companies Ordinance, 1984. Check that the surplus on revaluation of the fixed assets has been applied: a) b) Only to the extent actually realized on disposal of revalued assets. On setting off any deficit arising from the revaluation of any other fixed assets of the company.
4.
5.
6.
Check incremental depreciation transferred from surplus to unappropriated profit / accumulated loss.
276
S. No.
Audit Procedures 7. Check compliance with the requirement of IFRS 12 Income Taxes (Revised) in respect of deferred Tax on surplus on revaluation of fixed assets.
Done by
W. P. Ref.
2.
TEST PRESENTATION OF SURPLUS ON REVALUATION OF FIXED ASSETS A. Determine that disclosures have been made in accordance with the requirements of the Companies Ordinance, 1984 and the relevant accounting pronouncements.
277
Execution Phase Audit Programs Profit & Loss
III
S. No. 1. 2. 3. 4. 5.
Profit & Loss

Financial Statement Caption Sales Cost of Sales Admin Expense Financial Charges Other Income Reference No. Page No.
278
Execution Phase Audit Programs Profit & Loss - Sales
Audit Program
(a) Sales
Sales Amount in Rs.
Account balances:
S. No.
Audit Procedures
Audit Assertion Addressed
Done by
W. P. Ref.
TEST OF CONTROLS 1 Make a selection of sales transactions from independent source records e.g. shipping records, delivery orders, purchase orders etc. Test the completeness of source records by ensuring their numerical sequences. Occurrence
Completeness
279
S. No.
Audit Procedures
Audit Assertion Addressed Completeness
Done by
W. P. Ref.
For each item selected above: (a) Trace it to sales invoice (b) Agree sales invoice prices to a price list / agreements. (c) Determine that the sales was recorded in the correct period. (d) Trace sales invoice amount to a sales journal (e) Trace sales journal total to the general ledger
Make a selection of recorded sales returns and each selected item: (a) Trace it to credit notes. (b) Trace credit notes to goods receiving documents and original sales invoices. (c) Determine that credit notes were recorded in the correct period.
Completeness
Check that sales data is input only once and is subject to validation. Access to sales system is restricted by user ID and password. Check that prices charged in accordance with the approved price list. Check that the quantity discount are in accordance with the approved limits.
7.
8.
280
S. No.
Audit Procedures
Done by
W. P. Ref.
ANALYTICAL PROCEDURES 1 Perform analytical procedures on sales by developing an expected amount of sales based on prior years figures or current period economic conditions and then comparing it with actual amount any significant differences should be enquired into and corroborated. TEST OF DETAILS 1. Make a selection of transactions from recorded sales and shipping records for prior and after period-end and ensure proper cut-off. Consider reasonableness of revenue by multiplying the number of units with the average selling price Determine that the accounting policies and methods of revenue recognition are appropriate and are applied consistently. Determine that disclosures have been made in accordance with the requirement of Companies Ordinance, 1984 and relevant accounting pronouncements. Conclude on the result of the work performed. Valuation Measurement Presentation / Disclosure Completeness Occurrence Occurrence Completeness
3.
4.
5.
281
Execution Phase Audit Programs Profit & Loss - Cost of Sales
Audit Program
(b) Cost of Sales
Cost of Sales Amount in Rs.
Account balances:
S. No.
Audit Procedures
Done by
W. P. Ref.
TEST OF CONTROLS 1. Select a sample of transactions from each of the cost of sales transactions and check the following:
n
Expenses are approved in accordance with the companys policy Expenses are supported by documentation. Tax is deducted at source in accordance with the Income Tax Ordinance, 2001.
282
S. No.
Audit Procedures Payments are made only through crossed cheques other than those allowed by Income Tax Ordinance. Expenses are posted in the correct account code.
Done by
W. P. Ref.
ANALYTICAL PROCEDURES 1. Perform analytical review of cost of sales and inquire and corroborate significant variations from prior period and budgeted amounts. Completeness Occurrence
2.
For other items in cost of sales: a) Review all heads analytically and document reasons for significant variations. Examine supporting documents for selected items to ensure their validity.
Occurrence
b)
TEST OF DETAILS 1. Perform tests of details as under: a) Reconcile recorded cost of sales to corresponding credits in inventory accounts. b) Make a selection of debits to inventory accounts (i.e. purchases) during the year. For each items selected: (i) Trace the item to a purchases journal total. Completeness
283
S. No.
Audit Procedures
Done by
W. P. Ref.
(ii)
Make a selection of individual purchases from the journal. Trace the selected purchases to a supplier invoice and receiving records. Determine that the purchases were recorded in the correct period. Completeness Occurrence Presentation/ Disclosure
(iii)
(iv)
c) Ensure proper cut-off of purchases. 2. Determine that disclosures have been in accordance with the requirements of Companies Ordinance, 1984 and relevant accounting pronouncements. Conclude on the results of work performed.
3.
284
Execution Phase Audit Programs Profit & Loss Admin Expense
Audit Program
(c) Admin Expense
PL3
Admin Expense Amount in Rs.
Account balances:
S. No.
Audit Procedures
Performed by
Reference
TEST OF CONTROLS 1. For salaries and other benefits perform the test of details stated in the salaries work programme Select a sample of transactions and check the following:
n
2.
Expenses are approved in accordance with the companys policy Expenses are supported by documentation.
285
S. No.
Audit Procedures Tax is deducted at source in accordance with the Income Tax Ordinance, 2001. Payments are made only through crossed cheques other than those allowed by Income Tax Ordinance. Expenses are posted in the correct account code.
Performed by
Reference
ANALYTICAL PROCEDURES 1. Perform analytical procedures to evaluate administration / selling / marketing expenses: a) Develop expectations of significant expenses. b) Compare the expected amounts with actual recorded amounts. c) Inquire and document reasons for major variations. TEST OF DETAILS 1. Select a sample of recorded expenses and examine proper supporting documents for relevant expenses e.g. rent agreements for rent expenses, personal files and payroll for salaries and other allowances etc. Scan general ledger of expenses and investigate large and unusual items and expenses were incurred for the purposes of the business. Occurrence Completeness Measurement Completeness
2.
Completeness
286
S. No.
Audit Procedures
Audit Assertion Addressed Presentation/ Disclosure
Performed by
Reference
3.
Determine that disclosures have been made in accordance with the requirements of Companies Ordinance, 1984 and relevant accounting pronouncements. Conclude on the result of the work performed.
4.
287
Execution Phase Audit Programs Profit & Loss Financial Charges
Audit Program
(d) Financial Charges
PL 5
Financial charges Amount in Rs.
Account balances:
S. No.
Audit Procedures
Done by
W. P. Ref.
TEST OF CONTROLS 1 Check that the company itself recalculates the financial charges levied by the bank. Check that such calculation is reviewed by an authroised personnel. Check that before obtaining financing rates of financing are obtained from different banks and financing is obtained on most economical and other terms.
2.
288
S. No.
Audit Procedures
Done by
W. P. Ref.
3.
Carry out companys search at registrars office to ensure that all financings and their related finance charges are appearing in the books of accounts for which charge has been registered.
ANALYTICAL PROCEDURES Compare current year with prior year and budgeted amounts to anyalyse the variation in the expenses. Inquire and document the reasons for variation TEST OF DETAILS 1 Select a sample of recorded financial charges and perform the following: a) Examine supporting documents to verify rates of financial charges. b) Re-calculate amount of financial charges on the basis of amounts, number of days and rates of financial charges. 2 Ensure that charge on WPPF, WWF and CRF are calculated as per the rules of WPPF. Check that the payments of prior year was made within the stipulated time. Determine that all loans, borrowings, leases etc. have been considered to ensure that there are no unrecorded or under recorded financial charges.
Occurrence Measurement Completeness
Valuation
Completeness
289
S. No.
Audit Procedures
Audit Assertion Addressed Presentation/ Disclosure
Done by
W. P. Ref.
Determine that disclosures are in accordance with the requirements of Companies Ordinance, 1984 and relevant accounting pronouncements and no netting of is performed of income and expenses. Conclude on the result of the performed.
290
Execution Phase Audit Programs Profit & Loss Other Income
Audit Program
(e) Other Income
PL 7
Other Income Amount in Rs.
Account balances:
S. No.
Audit Procedures
Done by
W. P. Ref.
TEST OF CONTROLS 1 Obtain a sample of investments made by the company and check that the:
n
Investments made are authorised and in accordance with the companys objects. Check that the income on the investments is checked and accrued on a timely basis
2.
For scrap sales check that the sales are made on the most economic terms.
291
S. No. 3.
Audit Procedures Check that procedures are in place to ensure that good material is not transferred to scrap yard.
Done by
W. P. Ref.
ANALYTICAL PROCEDURES Compare current year with prior year and budgeted amounts to anyalyse the variation in the expenses. Inquire and document the reasons for variation TEST OF DETAILS 1 Review the marketable securities and related accounts (e.g., interest and dividend income) in the general ledger for unusual items. Test accrued interest and interest earned during the period on receivables; determine whether interest should be imputed on longterm receivables arising during the period. Verify interest and dividend income on marketable securities, investments, and equity in earnings (losses) of investees by calculating interest earned or by referring to published records of dividends paid or to the financial statements of investees. Verify computations of gains and losses from sales of marketable securities and investments. Existence
Valuation and Measurement
Valuation & Measurement
Measurement
292
S. No. 5
Audit Procedures Select a sample of assets retired during the period and check:
n n
Audit Assertion Addressed Existence
Done by
W. P. Ref.
Authorisation; Computation of gain or loss on disposal of fixed assets Timely deletion from fixed assets records. Measurement
Select a sample of scrap sales, and check for:

n n n
Authorisation; Proper recording of gain; and Receipt of scrap proceeds. Presentation & Disclosure
Check that all material items have been presented and disclosed in accordance with the requirements of Companies Ordinance, 1984 and IASs. Conclude on the results of work performed.
293
Execution Phase Audit Programs Others
IV Others
S. No. 1. 2.
Caption WWF Laws and Regulations
Reference No.
Page No.
294
Execution Phase Audit Programs Others - WWF / WPPF
Audit Program
(a) WWF / WPPF
WWF / WPPF
S. No.
Audit Procedures TEST OF CONTROLS ANALYTICAL PROCEDURES
Performed by
Reference
1.
Compare current year with prior year and budgeted amounts to anyalyse the variation in the expenses. Inquire and document the reasons for variation TEST OF DETAILS
Measurement
1.
Obtain computation of WWF charge and check its appropriateness.
Measurement
295
Execution Phase Audit Programs Others - WWF / WPPF
S. No. 2.
Audit Procedures Obtain computation of WPPF and check its appropriateness. Check that all material items have been presented and disclosed in accordance with the requirements of Companies Ordinance, 1984 and IASs. Conclude on the results of work performed.
Audit Assertion Addressed Measurement
Performed by
Reference
3.
4.
296
Execution Phase Audit Programs Others Laws and Regulations
Audit Program
(b) Laws and Regulations
Laws and Regulations
Purpose The purpose of this Audit Programme is to facilitate adherence to International Standard on Auditing regarding laws and regulations. It is to be completed throughout the audit. Professional judgement and discretion are to be utilised in preparing the Audit Programme. The Audit Programme is to be tailored to the specific circumstances of the entity to include specific procedures to be performed, as determined by the engagement team. The purpose of this document is to obtain an understanding of the entitys legal and regulatory framework and obtain sufficient and appropriate audit evidence regarding non-compliance by the entity with laws and regulations that may materially affect the financial statements. It is recognised that some laws and regulations may have a fundamental effect on the operations of the entity. Non-compliance with certain laws and regulations may cause the entity to cease operations, or calls into question the entity's continuance as a going concern. The laws and regulations that affect the determination of material amounts and disclosures in the financial statements may relate to, for example:
n n n n n
the form and content of financial statements industry specific requirements accounting for transactions under government contracts the accrual or recognition of expenses for income taxes the accrual or recognition of expenses for pension costs.
The Audit Programme - Laws and Regulations includes the following sections: I II Summary of Business Understanding Audit Procedures
297
Summary of Business Understanding If applicable, summarise the business understanding and those instances of noncompliance identified at initial planning stage below to assist in focusing the procedures to be performed in this Audit Programme on the appropriate audit objectives. Obtain understanding of the laws and regulations applicable to the client by discussing the management about the procedures for ensuring compliance with applicable laws and regulations. List of applicable laws
n n n n n n n n n
Companies Ordinance, 1984 Income Tax Ordinance, 2001 International Accounting Standards The Workmen's Compensation Act, 1923 The Factories Act, 1934 The Payment of Wages Act, 1936 The Minimum Wages Ordinance, 1961 The Provincial Employees' Social Security Ordinance, 1965 The West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 The Industrial Relation Ordinance, 1969 The West Pakistan Shop Establishment Ordinance, 1969 The Employees' Old Age Benefit Act, 1976 Workers Profit Participation Fund, Workers' Welfare Fund, (Others laws relevant to specific business e.g. Insurance Ordinance etc.)
n n n n n n
298
Instances of non-compliance with laws and regulations
299
II
Audit Procedures S. No. 1. Nature and extent of audit procedures Obtain a general understanding of the legal and regulatory framework applicable to the entity and the industry and how the entity complies with that framework. Identify instances of non-compliance with laws and regulations where non-compliance may be considered when preparing financial statements.
n
Done by and date
W/P ref
2.
Enquire of management as to whether the entity is in compliance with such laws and regulations. Inspect correspondence with relevant licensing or regulatory authorities. Remain alert for instances of non-compliance while applying all audit procedures.
3.
Set out any other procedures relating to identifying instances of non-compliance. List planned procedures below:
3.1 3.2 3.3 4 When there is an awareness of information concerning a possible instance of non-compliance, perform the following procedures:
n
obtain an understanding of the nature of the act and the circumstances in which it has occurred set out any other procedures necessary to obtain sufficient other information to evaluate the possible effect on the financial statements.
List planned procedures below: 4.1
300
S. No. 4.2 4.3 5.
Nature and extent of audit procedures
Done by and date
W/P ref
When it is believed that there may be non-compliance, perform the following procedures:
n n n
document the findings discuss the findings with management consider the effects of non-compliance in relation to other aspects of the audit, particularly the reliability of management representations as soon as practicable, either communicate with the audit committee, the board of directors and senior management or obtain evidence that they are appropriately informed.
6.
Obtain a written representation from management that they have disclosed to us all known actual or possible non-compliance with laws and regulations whose effects may be considered when preparing financial statements. Other steps as decided by the engagement team.
7.
301
Execution Phase Leads
Leads
n n n n
Long Term Loans Fixed Assets Redeemable Capital Disposal of Fixed Assets
302
Execution Phase Leads Schedules
Leads Schedule
n
Stock in Trade
303
Execution Phase Format of Confirmations Bank Confirmation
Format of Confirmation
I Bank Confirmation
The Manager Bank's Name and Branch Address Date: _________ Dear Sir, Name of Client In accordance with your above named customers instructions given hereon, please send DIRECT to us at the above address, as auditors of your customer, the following information relating to their affairs at your branch as at the close of business on ( Year end date) and, in the case of items 2, 4 and 9, during the period since ( Year start date). Please state against each item any factors which may limit the completeness of your reply; if there is nothing to report, state NONE. It is understood that any replies given are in strict confidence, for the purposes of audit. BANK ACCOUNTS (1) Full titles of all accounts together with the account numbers and balances thereon, including NIL balances: (a) (b) (c) where your customers name is the sole name in the title; where your customers name is joint with that of other parties; where the account is in a trade name. NOTES (i) Where the amount is subject to any restriction (e.g. garnishee order or arrestment) or exchange control consideration (e.g. blocked account) information regarding nature and extent of restriction should be stated. Where the authority upon which you are providing this information does not cover any amounts held jointly with other parties, please refer to your customer in order to obtain the requisite authority of the other parties with a copy to us.
(ii)
304
(2) (3)
Full titles and dates of closure of all accounts closed during the period. The separate amount accrued but not charged or credited as at the above date, of (a) (b) Mark-up/interest and Provisional charges (including commitment fees)
(4) (5)
The amount of mark-up/interest charged during the period, if not specified separately in the customers statement of account. Particulars (i.e. type of document and accounts covered) of any written acknowledgement of set-off, either by specific letter of set-off, or incorporated in some other document or security.
FACILITIES (6) Details of leasing facilities, loans, overdrafts, cash credit facilities (including standby facilities), and associated gurantees/ indemnities, specifying agreed limits, unused facilities, markup/ interest terms, overdue rentals/ installments and in case of term loans, date for repayment or review. SECURITY (a) In respect of facilities, contingent liabilities and derivatives and commodity trading. Please give (i) (ii) details of any security formally charged in favor of the bank, including the date and type of charge, (e.g. pledge, hypothecation, etc.) particulars of any undertaking to assign to the bank any assets. If a security is limited to any borrowing, or if there is a prior pari passu or subordinate charge, please indicate. Whether the security supports facilities granted by the bank to the customer or to another party. For any arrangements for setoff of balances or compensating balances e.g. back to back loans, give particulars of any acknowledgement of set off (i.e. date, type of document and account covered)
(7)
(iii) (iv)
(b)
CUSTODIES: - Investments, bills of exchange, documents of title, or other assets held but not charged. Please give details.
305
CONTINGENT LIABILITIES (8) Nature, currency, amount and extent of facilities limits and details of period of availability of agreed facility of all contingent liabilities, viz: (a) (b) Total of bills discounted with resource to the customer or any subsidiary or related party of the customer; Details of any guarantees, comforts, letter of undertakings, bonds, endorsement or indemnities given to you by the customer in favour of third parties (separately specifying any such items in favour of any subsidiary or related party of the customer); Details of any guarantees, bonds or indemnities given by you, on your customers behalf, stating where there is recourse to your customer and/or to its holding, parent or any other company within the group; Total of acceptances; Total of outstanding liabilities under documentary credits; Others (please give details.)
(c)
(d) (e) (g) ASSETS (9)
Details of specifying the nature, amount, and maturity date of the assets covered under Islamic mode of finance (e.g. morabaha, musharika, modarba etc.) or any other mode of finance including leasing:(a) (b) (c) Assets repurchase agreement; Assets resale agreement; Options outstanding at the relevant date.
DERIVATIVES AND COMMODITY TRADING (10) Details of all outstanding contracts specifying the number, deal date, maturity or value date, price at which the deal was transacted and currency of the contract bought and sold for: (a) (b) Total of foreign exchange contracts; Bullions;
306
(c) (d)
Securities; Others
(11) Information in respect of any letter of comfort obtained by the bank from the parent or any other associated concern of the company. ADDITIONAL BANKING RELATIONSHIP (12) A list of other banks, or branches of your bank, where you are aware that a relationship has been established during the period. (13) OTHER INFORMATION.
Yours faithfully, AUTHORISED SIGNATORY (Clients Signature)
307
Execution Phase Format of Confirmations Debtor / Creditor Confirmations
II Debtors / Creditor Confirmation
Name of debtor/ creditor Address Date: Dear Sir(s) Our records show a debit / credit balance of Rs.____________ at the close of business on (year end date). To ensure an independent verification of this balance, we shall appreciate if you will kindly check this balance with your records and send your confirmation DIRECT to our auditors, Messrs. __________, Chartered Accountants, by completing the form below for which an addressed postage paid envelope is enclosed. Your prompt response to this request will be appreciated. Yours faithfully,
M/s ________________ Chartered Accountants Address Confirmation of balance
Name and address of the debtor/ creditor
I/We confirm that the debit/credit balance of Rs. _________________ as at ________________, in the name of ________________________________________ is/are not in agreement with my/our books. The details of difference are as follows: Yours faithfully,
308
Execution Phase Format of Confirmations Lease Confirmation
III Lease Confirmation
Name and address of Leasing company / bank Date_____________ Dear Sir(s) Our auditors Messrs. _____________., Chartered Accountants are performing their usual examination of our financial statements. Please furnish DIRECT to our auditors the following information relating to the lease arrangements with you as at (year end date). Lease No. Description of leased asset(s) Lease start Dare Lease Expiry Date Cost of leased assets Security deposit Rental amount & frequency Amount in arrears (including contingent payment due)
Please send your confirmation direct to our auditors, Messrs. ________________, Chartered Accountants, (address of the audit firm). A self addressed postage paid envelope is enclosed for your convenience. Your prompt response to this request will be appreciated. Yours faithfully,
309
Execution Phase Format of Confirmations Legal Confirmation
IV Legal Confirmation
Name and Address of the Lawyer ___________________ ___________________ ___________________ Date___________ Dear Sirs, Our auditors M/s ____________________, Chartered Accountants are performing their usual examination of our financial statements. Please furnish DIRECT to our auditors the information requested below involving matters as to which you have been engaged and to which you have devoted substantive attention on behalf of the Company in the form of legal consultation or representation. Please provide the information requested below, taking into consideration matters that existed at (balance sheet date) and for the period from that date to the effective date of your response if it is other than date of reply. Pending or Threatened Litigation 1. The nature of the litigation. 2. The progress of the case to date. 3. How management is responding or intends to respond the litigation; for example to contest the case vigorously or to seek out of court settlement, and 4. Evaluation of the likelihood of an unfavourable outcome and an estimate, if one can be made, of the amount or the range of potential loss. Your response should be sent to our auditors. An addressed envelope is enclosed for your convenience. Also, please identify any pending or threatened litigation with respect to which you have not yet devoted substantive attention. Yours faithfully,
(Authorized signatory of the company)

310
Execution Phase Format of Confirmations Loan Confirmation
V Loan Confirmation
Name and address of Leasing company / bank Date_____________ Dear Sir(s) Our auditors Messrs. _____________, Chartered Accountants are performing their usual examination of our financial statements. Please furnish DIRECT to our auditors the following information relating to the lease arrangements with you as at (year end date). 1 2 3 4 5 Details of all accounts whether in rupees or in any other currency as at _________________ stating full title, account numbers and balance therein including NIL balances. Details of loans and credit facilities, specifying agreed limits and in case of term loans, dated for repayment and renewals. Amounts of interest, commitment fees, service charges etc., charged during the period. Details of amounts accrued but not charged or credited at the above date: e.g. interest, commitment fees, service charged etc. Details of any security formally charged to you, including the date and type of charge (e.g. pledge, hypothcation etc.). If a security is limited to any borrowing or if there is a prior, equal or subordinate charge, please indicate. Details of customer's assets held as security (other than those mentioned in your response to 5 above) or for other purposes. Details of any guarantees, bonds or indemnities given to or by you, stating where there is a recourse to your customer and/or to its holding, parent or any other company within the group. Any other information that you consider appropriate for the purpose of the audit.
6 7
Please send your confirmation direct to our auditors, Messrs. ________________, Chartered Accountants, (address of the audit firm). A self addressed postage paid envelope is enclosed for your convenience. Your prompt response to this request will be appreciated. Yours faithfully,
311
Planning Phase Using the Work of Another Auditor
VI Tax Confirmation
Name and address of tax adviser ________________________ ________________________ Date: __________ Dear Sir Our auditors M/s. ______________ Chartered Accountants are performing their usual examination of our financial statements. Please furnish DIRECT to our auditors the information requested below involving tax matters for which you have been engaged. Please provide the information requested below, taking into consideration matters that existed at (balance sheet date) and for the period from that date to the effective date of your response. Please specify the effective date of your response if it is other than the date of reply. Your response should be sent to our auditors. An addressed postage paid envelope is enclosed for your convenience. 1 2 3 4 Current status of tax assessment completed. Details of appeals filed either by the company or by the department indicating details of significant issues and quantum of amount involved. An evaluation of the likelihood of an unfavourable outcome and an estimate, if one can be made, of the amount or range of potential liability. An other matter which you feel that the auditor should be aware of.
Yours faithfully,
312
Execution Phase Compliance of Various Laws Audit Program on Laws and Regulations
Inventory Count Attendance Programe

I
1.
Guidelines for observation of physical inventories

The attendance at the clients physical inventory is now regarded as s compulsory audit procedure. It is from the physical inventory that a client establishes that quantities in inventory which are valued to give the inventory amount in the balance sheet. It is clearly pointless for the auditor to verify the valuation of inventories if he has not satisfied himself as to the accuracy of the quantities held. The purpose of observing the physical inventory is to determine that the clients procedure result in an accurate count. It should be remembered that while the auditor will himself carry out test counts and extract certain cut-off information he is primarily there to observe that the clients procedure are satisfactory. Where the client has an efficient system for inventory records, the physical inventory may be carried out on a continuous basis as opposed to counting everything in one go at the year-end. In the case of a client using the continuous basis, the auditor will still be required to observe a part of this continuous inventory counting. The work of the auditor will normally cover three stages before, during and after the physical inventory. The following tasks should be carried out before the physical inventory begins: (a) (b) (c) Obtain a copy of the clients inventory instructions Review adequacy of instructions using the preprinted checklist and discuss any weaknesses in instruction with the client. Arrange for letters to be sent to third parties holding inventories on behalf of client, requesting confirmation of these inventories to be sent direct to the auditors with a copy to the client.
2.
3.
4. 5.
6.
The main task during the count to see that the clients employees are carrying out their instructions properly. The physical inventory preprinted checklist should be completed and supporting schedules will be prepared to cover the following: Notes of inventory movement during the count.
313
Details of last number prior to physical inventory in respect of:

n n n
Goods received Goods despatched Internal movement of goods
Details of numbering of inventory sheets used and destroyed and of control of their issue to and return by those carrying out the physical inventory. Schedules of items counted by the auditor showing their valuation (this valuation may have to be completed at final visit). Details of any old, obsolete, damaged or excess inventories noted during the attendance. Comments on adequacy of custody. 7. The working paper should be prepared in such a manner that the information can be easily followed up at the final audit visit. Test counts for example should have been traced to the stock sheets to confirm that they are a proper record of the results of the physical inventory. The auditor should be aware of the approximate value of the various inventory items as he may wish to cover high value items in his test count. The valuation of the items counted by the auditors should be recorded during the count or, if not possible, at the final audit visit. Where it is considered that physical inventory has been unsatisfactory in any major respect that matter should be reported immediately to the manager or partner concerned so that the necessity for a second physical inventory can be considered and discussed with the client. At the final audit the information obtained at the physical inventory will be followed up. The work to be carried out will include: (1) (2) (3) (4) An overall review of the working papers to assess the effectiveness of the physical count and whether the final audit programme work should be altered as a result. A check of the cut-off using the information obtained or the last goods received and despatched note numbers. A check of the auditors test count items to the final inventory sheets. A test that the final inventory sheets include only the inventories counted by reference to the details of numbering of inventory sheets obtained during the observation.
8.
9.
10.
314
(5) (6) (7)
A follow up of all outstanding queries including obsolete etc items noted at the attendance of the physical inventory. A test to ensure that inventory records have been adjusted to agree with the physical inventory. A discussion with management of any weakness which arose, and if appropriate include points in the internal control memorandum.
315
Client ___________________________ Date of count _____________________
II
(a)
Notes
Production Costs and Inventories

Observation of Physical Inventory Count Checklist
An inventory count has three stages:

n n n
Organisation Conduct Follow-up
Such counts are carried out by business either: 1. 2. To corroborate information contained in their books and records which is the product of a continuous accounting and control system, or To provide an inventory figure for inclusion in financial statement and to use in calculating profit where there is no system of continuous inventory accounting. Attendance at inventory counts by the auditor is a standard verification test which serves to confirm the physical existence of inventories, to corroborate the method of quantification and to ascertain their physical condition. The staff member is required to: (1) (2) Observe procedures and complete the following checklist. Carry out test counts as specified by the scope decisions sheet and record the results on the sheets attached to the checklist.
316
Checklist Question Organisation (1) Were written instruction prepared, issued in advance of the count and used. (2) Was there adequate physical preparation for the count including:
n n n n
Yes
No
Alternative procedure
Tidying up Stopping work or production Sorting gods out Identifying and marking goods
(3) Were stock sheets prepared before the count. (4) Was cut-off proper organized by:
n n
Closing receiving and despatch Recording the last numbers of documents controlling the flow of goods prior to the count Segregating goods in receiving and despatch areas.
Conduct (1) Was the count carried out by personnel:

n
Not usually involved in the custody of inventories. Able to identify the inventories being counted.
317
Question (2) Was a system of double check carried out by accounts or supervisory personnel. (3) Were inventories marked as counted to avoid omission or duplication in the count. (4) Were damaged or obsolete items specifically noted. (5) Were the contents of sealed packages checked by opening and weighed to see that contents conformed to labels. (6) Was there an adequate procedure to identify goods not belonging to the company. (7) Where amendments to inventory sheets were made were these initialled by a supervisor. Follow-up (1) Were all the inventory sheets accounted for. (2) Were rough inventory sheet retained. (3) Is there a proper procedure for authorised amendment of inventory record to agree to the results of the count. (4) To assist in testing cut-off, try to establish and note down the last goods received and issued prior to the physical inventory, and the last transfer between categories of inventory.
Yes
No
Alternative procedure
318
(b)
Conclusions
Give below your overall conclusions on the count referring specifically to: (1) The adequacy of procedures laid down. (2) Whether these procedures were complied with, and (3) Whether the results of the counts can be relied upon the properly reflect quantities on hand as of that date and to form the basis of the valuation of inventories.
319
Client ___________________________ Date of count _____________________
Production Costs and Inventories
RECORD OF TEST COUNTS
Selection items in both directions (full and false inclusion)
Reference (stock sheet number etc)
Description of item
Quantity counted
Condition (i.e. note any damage or obsolescence)
320
Planning Phase Guidelines for observation of physical inventories
Going Concern Assessment
Going Concern Assessment Client: Prepared by: Reviewed By: Audit Date Date: Date
1.
a)
Evaluating Managements Assessment. Does managements assessment of the entitys ability to continue as a going concern indicate any events or conditions that would indicate a risk exists that the going-concern assumption may be questionable during the twelve month period after the balance sheet? Yes No Examples of conditions and events can be traced from paragraphs 8 of ISA 570 Describe
1.
b)
Evaluating Managements Assessment (paragraph 17 of ISA 570) . Based on our inquiries of management and our review of their assessment, were any events or conditions noted that may occur shortly beyond the twelve month period after the balance sheet date that were so significant that they may cast doubt on the entitys ability to continue as a going concern? Yes No IF THE AUDIT TEAM ANSWERS NO TO QUESTIONS 1a and 1b ABOVE, STOP HERE AND DISCARD THE REMAINDER OF THE FORM. HOWEVER, IF THE AUDIT TEAM ANSWERS YES TO QUESTIONS 1a and 1 b ABOVE, THEY SHOULD COMPLETE THE ASSESSMENT IN STEPS 2 & 3 BELOW. Describe
2. Mitigating Conditions. Were any recent conditions or events noted (other than considering management's future plans) that have mitigated the risk events or conditions identified in step 1.? Yes Describe
321
3. Assessment. Without considering managements future plans, is there substantial doubt about the appropriateness of the going-concern assumption? Yes No Describe
322
Going Concern
Consideration of Management's Plans At this stage of the going concern assessment, there is a rebuttable presumption that the engagement team will conclude that a substantial doubt exists about the entitys ability to continue as a going concern resulting in modification of our report. This presumption can only be overcome with persuasive evidence in support of the adequacy and achievement of managements plans. The following procedures should be performed, as applicable: 1. Stated plans. Obtain and discuss with management its plans to deal with the identified risks. Indicate the individuals interviewed. (See Appendix A for background information.)
Done by: Interviewed:
Date: Date:
2. Supporting evidence overcoming substantial doubt. Indicate below the elements of management's plans that are particularly significant to overcoming the substantial doubt about the entitys ability to continue as a going concern. Examine and describe evidence that supports those elements (examples of such evidence are described in Appendix A).
n n
Third-party guarantee (Step 3 below) Debt restructuring or new borrowings (Firm policy contains a rebuttable presumption that only an irrevocable, legally binding commitment letter constitutes sufficient evidential matter to overcome a going concern consideration.) Liquidation of assets Reduction or delay of expenditures Increase in revenues Increase in equity Other (describe)
n n n n n
323
3. Third party guarantees and other financial restructuring agreements. If there are significant guarantees of financial support from a third party (such as the entitys parent company, another shareholder, an affiliate or a general partner of a limited partnership): a. Describe the nature of the guarantee from the list provided below (and, if the guarantee is limited, describe its amount and duration). In addition, discuss the nature and extent of the audit work performed in this area. See Appendix B for a listing of suggested steps.
n
Subordination agreement to allow deferral of payment of amounts owed to the parent company and affiliates. Agreement of third party to serve as guarantor of the entitys future borrowings from a lender. Line of credit or provision of funds directly to the entity. Other (describe): Are all of the following points true?
n
n n
There is a written agreement signed by the guarantor (not just a representation by management of the entity). It is reasonable to assume that the guarantee can be realized, if necessary. (Consider the enforceability of the guarantee, the liquidity of the guarantor, its past record of honoring similar commitments and its risk of losing credibility with the public if it fails to honor its commitment.)
n
Should the entity default, it is reasonable to expect, from a business viewpoint, that creditors would seek recovery from the guarantor. The entity will disclose the existence of the guarantee agreement.
Yes No N/A Little, if any, reliance should be placed on the guarantee. A guarantee is not part of management's plans.
Done By:
Date: 324
4. Prospective financial information. Normally, we expect management to have prospective financial information for at least one year from the balance sheet date (budgets, projections, cash flow forecasts, etc.) available to demonstrate the intended outcome of its plans. Although this information is not as persuasive as evidence provided by third parties, we usually consider it as necessary to support management's plans. a. b. c. Consider the reliability of the system for generating the prospective information. Read the information and the underlying assumptions to determine whether it is consistent with other plans or evidence. Compare similarly prepared budget information prepared in prior periods with the actual results achieved in those periods. Compare the prospective information for the current period with results achieved to date. Consider the adequacy of the support for significant underlying assumptions, based on knowledge of the entity, its business and its management. (We should be skeptical of assumptions that appear to be based on wishful thinking and do not reflect the conditions and course of action that entity management truly anticipates.) Give particular attention to assumptions that are:
n n n n
d.
Material to the prospective financial information. Especially sensitive or susceptible to change. Inconsistent with historical trends. Inconsistent with management's stated plans.
e.
If it appears that important factors are not reflected in the prospective information, discuss their effects with management. If necessary, request that the prospective information be revised (Note: The inability or refusal to make requested revisions ordinarily will prevent us from resolving our going-concern doubt.) In addition, if managements assessment of the entitys ability to continue as a going concern covers less than twelve months from the balance sheet date, the auditor should ask management to extend its assessment period to at least twelve months from the balance sheet date. Consider whether it would be appropriate to perform other procedures such as those performed in an examination of a forecast NOTE: No report should be issued because the work is solely for our use in assessing management's plans.
f.
325
Can the Firm place any reliance on the prospective information noted above, adjusted as necessary, given the history and specific facts and circumstances of this entity? Yes No Little, if any, reliance should be placed on the prospective information.
Performed By:
Date:
5. Overall assessment of management's plans. Does the evidence indicate that all of the following are true?
n n n
Management's plans are feasible. They are likely to be implemented. They are likely to allow the entity to operate for at least a year beyond the date of the financial statements. The going-concern question has been satisfactorily resolved.
WE HAVE CONCLUDED THAT THERE REMAINS SUBSTANTIAL DOUBT ABOUT THE ABILITY OF THE ENTITY TO CONTINUE AS A GOING CONCERN.
Yes No
6. Management's representation. Obtain written representation (in the general representation letter) regarding management's plans and conclusion about the appropriateness of the going concern assumption and the reasonableness of related disclosures in the financial statements. Done By: Date:
326
7. Consultation. The engagement team should consult with the partner in all of the following situations related to making an assessment of an entitys ability to continue as a going concern:
n
When the engagement team has identified risks and any related mitigating circumstances and is evaluating whether those circumstances mitigate the risks or whether there is a need to consider managements plans; When the engagement team has completed assessing managements plans and is assessing whether a report modification is necessary. A going-concern problem is expected to arise shortly after the twelve-month "cutoff" period beyond the date of the financial statements. Report modifications Engagement retention/resignation. The following should be considered:
n n n n
n n
The quality of the entitys accounting policies and procedures. Prospects for continuation of business for the next two to three years. Quality of management (e.g., ability to control risk) The Firm's vulnerability (litigation risk, risk of damaging reputation, and fee recoverability).
Performed By: Documented at: 8. Approved: Manager
Date:
Date:
Partner
Date:
327
Reporting and Finalization Phase Related Party Transactions Checklist
Related Party Transactions Checklist

Client: Period: Introduction Related party parties are considered to be related if one party has the ability to Control the other party or exercise significant influence over the other party in making financial and operating decisions. W/P Ref System Evaluation 1 Determine and evaluate the clients procedures, if any, for authorising identifying and properly accounting for related party transactions. Document our assessment as to whether or not significant RPTs would be identified by the procedures. Determine and evaluate the clients procedures, if any for prohibiting individual directors or other members of management from exercising significant influence over transactions in which that person is a related party. Initial
Related Parties 3a Obtain from management personnel (or prepare) a list of all related parties and compare with the previous years list and the shareholders records. Distribute the list of relate parties to all staff assigned to the engagement for their consideration while performing various audit tests, and attach copy to this checklist. If a coordinating office, distribute the list of RPTs to other offices / firms of auditors participating in the engagement. If secondary auditors, consider obtaining representation from parent company management as to the existence of related parties. Consider enquiring of predecessor auditors, or other firms involved in the audit, as to their knowledge of RPTs. Document any affiliations directors or senior management 328
3b
4a
4b
have with other entities.
329
W/P Ref Related Party Transactions 6 Inquire of appropriate management personnel whether there were any transactions with related parties (including significant transactions that occurred but were not given accounting recognition). Perform procedures to identify additional related parties and significant (over ____), unusual, or nonrecurring transactions or balances involving related parties. Such procedures could include: (a) identifying major customers, suppliers, borrowers, and lenders, and significant changes to these relationships. review of lawyer billings review of bank guarantees review of contract awards review of overdue receivables or payables review of investment transactions transactions at, or near, the year end (refer audit manual para 5.8.1) review of transactions with unusual terms of trade consider where RPTs may have occurred but not changed
Initial
(c) (d) (e) (f) (g) (h)
(i) (j)
Where RPTs have been identified prepare (or obtain) a schedule, or a summary where appropriate of thee and obtain an understanding of the business purpose of the transaction(s) . (a) (b) examine invoices, agreements etc. examine approval for the transaction both by management and local shareholders
330
W/P Ref (c) (d) obtain confirmation of any outstanding balances obtain information as to the financial standing of the related parties regarding out indicate whether disclosure is required or not agree with management
Initial
(e) (f) 9.
Where it is uncertain if the transaction is a RPT or not consider: (a) obtaining confirmation of significant information directly from third parties obtaining further information and references on supplies or customers that appearing
(b)
Signed Partner / Manager
Date: Date:
331
Culmination Audit Meeting Agenda And Minutes
Meeting Held on
Attended by: Name Designation Auditor / Client
Point 1 Minutes Resolution action Responsible
Point 2 Minutes Resolution action Responsible
Note: Add more points as desired.
332
Execution Phase Compliance of Various Laws Companies Ordinance Compliance Checklist
Companies Ordinance Compliance Checklist
WP Ref.: Prepared by: Date Reviewed by Date:
Client: Period: Answer YES or NO, where the answer requires any further details, please give that separately, (where not applicable mark N/A).
I.
Secretarial Formalities
A. Are the following statutory books maintained by the company, whereby applicable, under the Companies Ordinance, 1984 and are these kept at the registered office of the company. (a) (b) (c) Register of transfer of shares (Section 76) Register of mortgages (Section 135) Register of members and Index of members. Index required if more than fifty members (Section 147) Register of debentures and Index of debentures. Index required if more than fifty members (Section 149) Minute books for proceedings of general meetings and meetings of Directors / Committee of Directors A copy of the
Answer
(d)
(e)
minutes of meeting of the board of directors shall be furnished to every director within fourteen days of the date of meeting. (Section 173)
(f) Register of Directors, Officers including Chief Executive, Managing Agent, Secretary, Chief Accountant, Auditors and Legal Adviser containing with respect to each of them such particulars as maybe prescribed.(Section 205)
333
Answer (g) Register for shares and securities not held in the name of company (Section 209) Register containing particulars of contracts / arrangements or appointments i.e. contracts in which directors and officers interested, contracts for appointment of chief executive, whole time directors, secretary, etc. (Section 219) Register in respect of director, chief executive, chief accountant, secretary, managing agent or auditor of company and every other person holding not less than 10 percent beneficial interest in shares and debentures of company, etc. (Applicable to listed companies), (Section 220) Register of Pakistani members, debenture holders, directors, officers, etc. (Applicable to foreign companies and register to be kept at principal place or business), (Section 454)
(h)
(i)
(j)
B.
Have the following forms, etc., wherever applicable, been filed with the Registrar or other relevant authorities under the Companies Ordinance, 1984. (a) (b) Return of allotments (Section 73) Notice of increase in share capital beyond the registered capital (Section 92 & Section 94) Particulars of mortgages, charges etc. (Section 121/129 & Section 463 Particulars of mortgage or charge subject to which property has been acquired (Section 122 and Section 463) Registration of entire series of participation term certificates / term finance certificates / debentures (Section 123/124 & Section)
(c)
(d)
(e)
334
Answer (f) Particulars of an issue of participation term certificates / term finance certificates / debentures in a series when more than one in the series is made. (Proviso to Section 123 / 463) Particular of modification of mortgage, charge, etc. (Section 129 & Section 463) Memorandum of complete satisfaction of mortgage (Section 132 & Section 463) Notice of situation of registered office or of any change therein (Section 142) Declaration of compliance with conditions of Section 146 of the Ordinance before commencing business in case of a company issuing prospectus (Section 146) Declaration before commencing business in case of a company filing statement in lieu of prospectus (Section 146) Notice of modification of register of members (Section 154) Annual return of company having share capital (Section 156) Statutory report (Section 157) Special resolution (Section 172) Consent to act as Director / Chief Executive to be filed within 14 days (Section 184) Particulars of directors and officers including the chief executive, managing agent, secretary, chief accountant, auditors and legal adviser or of any change therein and such particulars as may be prescribed (Section 205) Resolution passed by members pursuant to Section 208 of the Ordinance (relating to investments in associated companies and undertakings) (Section 208)
(g)
(h)
(i)
(j)
(k)
(l) (m) (n) (o) (p)
(q)
(r)
335
Answer (s) Return containing particulars of beneficial ownership of listed securities (Section 222) Return of change of beneficial ownership of listed securities and making of gains (Section 222 & Section 224) Notice of address at which books of accounts are maintained (Section 230 & Section 464) Application for extension in period for payment of dividend (Section 251)
(t)
(u)
(v)
Following applicable only in case of foreign companies (w) Documents (Charter / Statute / Memorandum and Articles, etc.) delivered for registration by a foreign company (Section 451) Return showing address of registered office or principal office of a foreign company or any change therein (Section 451 & Section 452) Return showing particulars of directors, chief executive and secretary (if any) of a foreign company or of any alteration therein (Section 451 & Section 452) Return showing particulars of principal officer of a foreign company in Pakistan or of any change therein (Section 451 & section 452)
(x)
(y)
(z)
(aa) Return showing particulars of persons resident in Pakistan authorised to accept service on behalf of a foreign company or of any alteration therein (Section 451 & Section 452) (bb) Return showing address of the principal place of business in Pakistan of a foreign company or any change therein (Section 451 & Section 452)
336
Answer (cc) Return of alternation in charter, etc. of a foreign company (Section 452) (dd) Notice by a foreign company on ceasing to have any place of business in Pakistan (Section 458)
II. Disclosure and Other Requirements Under The Companies Ordinance, 1984
A. The financial statements of listed companies have to comply with the requirements of the Fourth Schedule to the Companies Ordinance, 1984, (Section 234). The financial statements of non-listed companies have to comply with the requirements of the Fifth Schedule to the Companies Ordinance, 1984 (Section 234). The following provisions of the Companies Ordinance, 1984 could have a bearing on the financial statements and should be considered during the audit to ensure that the provisions have been complied with, wherever applicable. (a) Prohibition of purchase or grant of financial assistance by a company for purchase of its own shares or the shares of its holding company except under the conditions provided under section 95A (Section 95) Restriction on directors remuneration for attending meetings and for extra services which may be determined in accordance with provisions of Articles i.e. by directors or company in general meeting (Section 191)
B.
C.
(b)
337
Answer (c) Loans to directors (Section not to apply to private company unless subsidiary of public company, banking company, loan or guarantee and security for loan by holding company for its subsidiary) (Section 195) (d) Certain matters specified in Section have to be approved by means of resolution passed at the meeting of the Board of Directors (Section 196) Terms of appointment of Chief executive to be determined in accordance with provision in Companys Articles i.e. either by directors or company in general meeting (Section 200) Investments in associated companies and undertakings. (Section not to apply to banking company, financial institution approved by Federal government and private company which is not a subsidiary of public company, accompany whose principal business is the acquisition of shares, stocks, debentures and other securities (Section 208) Investments of company to be held in its own name (Section 209) Disclosure of interest by director in contract / arrangement entered by or on behalf of the company (Section 214) Disclosure of interest by officers in contract / arrangement other than in Section 214 of Ordinance (Section 215) Securities and deposits, etc. to be kept in special account with scheduled bank etc. (Section 226) Provisions obtaining to employees provident funds and securities including requirement of keeping amounts in special accounts and payment of contributions within specified time (Section 227)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
338
Answer (l) (m) Proper books of accounts to be kept by company (Section 230) Financial statements of listed companies to comply with requirements of Fourth Schedule and the International Accounting Standards (IASs) as specified by SECP in the Gazette. (Section 234) Assets may be revalued, however incremental depreciation is to be charged to surplus on revaluation (Section 235) Directors report and its contents prescribed including separate requirements for public company or a private company which is a subsidiary of a public company. In case of holding company the directors are required to prepare and attach consolidated financial statements, group affairs and all the applicable sub sections of this section (Section 236) Balance sheet of holding company to include certain particulars as to its subsidiaries and to comply with all requirements of this section (Section 237) Restriction on declaration of dividends. Dividends to be paid only out of profits; dividends not to be paid except to registered shareholders or to their order or to their bankers and dividend to be paid within prescribed period (Section 248 & Section 251)
(n)
(o)
(p)
(q)
D.
Compliance with International Accounting Standards (Refer separate check list)
339
Execution Phase Compliance of Various Laws Income Tax Provision Checklist
Income Tax Provision Checklist
Name of Client: Income Year Ended: Type of Person: Industry Segment: Income Period Ended on: Total Income: Tax liability / Provision - Total Current Year Prior Year Prior Year Tax Year: Tax Status: Current Year Previous Year
For Tax Return Name Prepared by Reviewed by Approved by Initial
For Provision for Tax Name Audit In charge Audit Manger Tax Manager Tax Partner Initial
Note: This checklist does not apply to insurance companies and businesses involved in production of oil & natural gas and exploration & extraction of other mineral deposits.
340
CLIENT: PERIOD/YEAR : SUBJECT: TAXATION CONCLUSION STATEMENT
Objectives Within the overall objective of ensuring that the financial statements present a fair view of the client's financial position, the objectives regarding taxation are to ensure that: 1. 2. 3. adequate disclosure has been made in the financial statements in respect of company tax liabilities and have been dealt with properly. any amounts shown in the appropriation account and notes are properly computed and disclosed. adequate provision has been made for any withholding taxes on non-resident third party payments being borne by the company.
Work done The previous year's tax computation, annual returns, assessment orders, appeals statements and subsequent letters have been reviewed together with the estimates for the current period to achieve the above objective. The file contains a copy of the previous year's return and a memorandum signed by a tax manager/partner of work done in the tax review. Conclusion It is my opinion that subject to the matters listed on the list of outstanding items. 1. 2. Adequate provision has been for company tax and withholding taxes liabilities. Appropriate disclosures have been made of the overall taxation position on a basis consistent with the previous period.
Signed ................................................... Partner/Manager (Tax)...............................
Date ...................................... Date ......................................
341
Legal requirement 1 1.1 General Audited accounts for the period are available or working of provision for tax is based on latest updated draft of the accounts. Where a persons tax year is other than normal tax year i.e. ending on 30 June, it has Commissioners / CBRs approval for that purpose. Details of income and expenditure classified and apportioned under each of the following heads of income I. II. III. Income from Business Income from property Income under the head capital gains
Section
Yes
No
N/A
118
1.2
74 (5)
1.3
11
IV. Income from other sources 1.4 Details of income and expenditure have been further classified and apportioned between Pakistan source income and foreign source income In case of a company, income from business has been accounted for on accrual basis. Cash or hybrid basis is not allowed to companies except where prescribed by CBR. In case of long term contracts percentage of completion method has been used. Long term contract is a contract for manufacture, installation or construction etc. which is not completed within tax year and is for a period of more than six months. Liabilities which were charged against the profits in earlier years and remained outstanding at the end of the year under consideration have been offered for tax. . 67
1.5
32 (2)
1.6
36
1.7
34(5)
342
Legal requirement 1.8 Liabilities which were added to the income under section 34(5) of the Ordinance in any of the preceding years and were discharged during the year have been claimed as deduction. Provisions made for gratuity / pension etc. have been added to income and amounts of gratuity / pension paid during the year have been claimed as admissible deduction.. Provision for bad debts made during the year has been offered for tax. Bad debts written off against provisions disallowed during preceding years have been claimed as admissible deduction. Recoveries against provisions for bad debts not allowed during the preceding years have been claimed as a deduction. Any other provisions made during the year have been offered for tax. Payments made against any other provision taxed in earlier years have been claimed as admissible deduction. . Where the transactions between associates are not at arms length, these have been adjusted to arms length value. The impact of the provisions of the Ordinance in respect of re-characterization of income and deductions has been considered in the following cases: a) Tax avoidance schemes; b) Transactions not having substantial economic effect; or c) Transaction, where the form of the transaction does not reflect the substance.
Section 34 (6)
Yes
No
N/A
1.9
1.10 1.11
29 29
1.12
29
1.13 1.14
29
1.15
108
1.16
109
343
Legal requirement 1.17 Where a foreign controlled resident company (other than financial institution or a banking company) has a foreign debt-to-foreign equity ratio in excess of 3:1 at any time during a tax year, deduction in respect of profit on debts has not been claimed on the part of the debt which exceeds 3:1 ratio. All exemption from tax, reduction in the rate of tax, reduction in tax liability or exemption from any provision of this Ordinance claimed are either provided in the Income Tax Ordinance, 2001 or were introduced in the relevant law prior to 01 July 2002. Where the assessee is a resident person, both Pakistan source income and foreign source income have been offered for tax. Where expenditure relates to: a) b) the derivation of more than one head of income; or derivation of income comprising of taxable income and any class of income which falls under the presumptive tax regime (PTR); or derivation of income chargeable to tax under a head of income and to some other purpose (e.g. exempt income)
Section 106
Yes
No
N/A
1.18
54
1.19
11(5)
1.20
67
c)
the expenditure has been apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates or as per rules specified by the CBR. For this purpose details of income need to be further classified and apportioned between Pakistan source income and foreign source income.
344
Legal requirement 1.21 All transactions relating to property, rent, asset, service, benefit or perquisites are at fair market value i.e. the value in the open market at that time. Where a person has been allowed deduction in respect of an expenditure or loss and subsequently receives any amount in respect of such expenditure or loss, the amount so received has been offered for tax. Where any amount is received during the year from a source of income which has been ceased in the preceding years, such amount has been offered for tax during the year All currency conversions are at SBP rate prevailing on the date the amount is taken into account. Application of a business asset to the personal use has been treated as disposal of the asset. Application of a personal asset to business use has been treated as acquisition of the asset. Where an asset has been acquired by a person with a foreign currency loan, any exchange gain or loss and interest on the loan has been adjusted against the cost of the asset. Where acquisition of an asset is the derivation of an amount chargeable to tax or exempt from tax, the cost of the asset has been calculated to be the amount so charged or exempted plus any amount paid by such person. The cost of asset does not include the amount of any grant, subsidy, rebate, commission or any other assistance, other than a loan payable with or without profit.
Section 68
Yes
No
N/A
1.22
70
1.23
72
1.24
71
1.25 1.26 1.27
75 75 76
1.28
76
1.29
76
345
Legal requirement 1.30 Where an asset has been disposed off under a non-arms length transaction, the fair market value of the asset at the time of disposal has been treated as its sale price of the seller and cost for the purchaser. No gain or loss has been considered on the disposal of an asset by: a) transmission of an asset on death of a person; b) a gift of the asset; c) Compulsory acquisition of asset under the law, where the consideration received by the recipient is reinvested in an asset of a like kind within one year of the disposal; d) A company to its shareholders on its liquidation; e) An AOP on its dissolution where the assets are distributed to members in accordance with its interest in the capital of AOP. 1.32 In case of a resident company the tax payable, where for any reason whatsoever, tax payable is less than 0.5 % of the turnover, the tax liability has been increased to the level of 0.5% of the turnover in view of the provisions of minimum tax. Head Office expenditure admissible under law have been claimed. Zakat paid under the Zakat and Ushr Ordinance 1980, if any, has been claimed as admissible deduction. Tax credit in respect of donations made during the year to non-profit organisations specified under Section 2(36) of the Income Tax Ordinance, 2001 has been claimed.
Section 78
Yes
No
N/A
1.31
79
113
1.33 1.34
105(2) 60
1.35
61
346
Legal requirement 1.36 1.37 Tax credit in respect of investment in new listed shares has been claimed. Assessed business loss and unabsorbed depreciation has been brought forward from preceding years. Where there is a change of fifty percent or more in the underlying ownership of an entity, any loss incurred before the change has not been claimed as deduction after the change unless the entity: a) Continues to conduct the same business after the change until the loss has been fully setoff; and b) Does not engage in any other business or investment until the loss has been fully set off. 1.39 Foreign losses are set off and carried forward separately from Pakistan source losses and are not set off against Pakistan source income. In case of non-resident assessee, the provisions of Agreement for Avoidance of Double Taxation, if applicable, have been considered. Credit for advance tax paid under Section 147 and taxes deducted/paid at source has been claimed on tax year basis and not on financial year basis. Credit for any amounts refundable from preceding years has been taken. Credit for taxes paid outside Pakistan, if any, in respect of any income chargeable to tax in Pakistan has been claimed.
Section 62 57 (2) & (4) 98
Yes
No
N/A
1.38
104
1.40
107
1.41
147 to 156 & 233 170 103
1.42 1.43
347
Legal requirement 2 2.1 Income from Business Any profit on debt derived where the business of the assessee is to derive such income has been offered for tax as Income from Business and not under the head Income from Other Sources. Where a person carries on a speculation business: (a) that business has been treated as distinct and separate from any other business carried on by the person; section 67 (apportionment of expenses) has been applied as if the profits and gains arising from a speculation business were a separate head of income; any profits and gains arising from the speculation business for a tax year have been included in the persons income chargeable to tax under the head Income from Business for that year; and any loss of the person arising from the speculation business sustained for a tax has been carried forward separately from business loss.
Section
Yes
No
N/A
18 (2)
2.2
19
(b)
(c)
(d)
2.3
Admissible deductions against business income Whether or not the following expenses have been claimed.
2.3.1
All expenditure incurred for the purpose of deriving income from business chargeable to tax under the Ordinance have been claimed as an admissible expenditure. Expenditure incurred by an amalgamated company on legal and financial advisory services and other administrative cost relating to planning
20
2.3.2
20(3)
348
Legal requirement and implementation of amalgamation.
Section
Yes
No
N/A
349
Legal requirement 2.3.2 2.3.3 2.3.4 Depreciation (on the basis of number of months used). Initial allowance on eligible assets used for the first time in Pakistan. Has normal depreciation allowance been calculated on WDV arrived at after deducting the initial allowance as per section 23. Intangibles Pre-commencement expenditure Scientific research expenditure (research in Pakistan). Employee training and facilities Profit on debt, financial costs, lease payments and securitisation cost. Bad debts in respect of debts written off. Reserve for bad debts (3%) in respect of consumer loans Profit on non-performing debts of a bank or DFI. Transfer to participatory reserve as per section 120 of the Companies Ordinance, 1984. Inadmissible deductions against business income Whether the following expenses have NOT been claimed 2.4.1 Any cess, rate or tax paid or payable that is levied on the profits or gains of the business or assessed as a percentage or otherwise on the basis of such profits or gains.
Section 22 23 22(5)
Yes
No
N/A
2.3.5 2.3.6 2.3.7 2.3.8 2.3.9 2.3.10 2.3.11 2.3.12 2.3.13 2.4
24 25 26 27 28 29 29A 30 31 21
21(a)
350
Legal requirement 2.4.2 2.4.3 Any amount of tax deducted at source under the provisions of this Ordinance. Any salary, rent, brokerage or commission, profit on debt, payment to non-resident, payment for services or fee from which tax required to be deducted at source has not been deducted. Any entertainment expenditure in excess of prescribed limits. Any contribution made to a fund that is not a recognised provident fund, an approved superannuation fund, or an approved gratuity fund; Any contribution made to any provident or other fund established for the benefit of employees of the person, where the person has not made effective arrangements to secure that tax is deducted under section 149 from any payments made by the fund in respect of which the recipient is chargeable to tax under the head "Salary"; Any fine or penalty paid or payable for the violation of any law, rule or regulation; Any personal expenditure incurred. Any amount carried to a reserve fund or capitalised in any way; Any profit on debt, brokerage, commission, salary or other remuneration paid by an association of persons to a member of the association.
Section 21(b) 21(c)
Yes
No
N/A
2.4.4 2.4.5
21(d) 21(e)
2.4.6
21(f)
2.4.7 2.4.8 2.4.9 2.4.10
21(g) 21(h) 21(i) 21(k)
351
Legal requirement 2.4.11 Any expenditure paid or payable by an employer on the provision of perquisites and allowances to an employee where the sum of the value of the perquisites computed under section 13 and the amount of the allowances exceeds fifty per cent of the employees salary for a tax year (excluding the value of the perquisites or amount of the allowances). Any expenditure paid or payable under a single account head which, in aggregate, exceeds fifty thousand rupees paid other than by a crossed bank cheque or crossed bank draft except:
n
Section 21(k)
Yes
No
N/A
2.4.12
21(l)
expenditures not exceeding five thousand rupees, or on account of freight charges, travel fare, postage, utilities or payment of taxes, duties, fees, fines or any other statutory obligation 21(m)
2.4.13
Any salary paid or payable exceeding five thousand rupees per month paid other than by a crossed cheque or direct transfer of funds to the employees bank account. Except as provided in 2.1 above, any expenditure of a capital nature. Amounts charged to profit and loss accounts as finance charge. Income from Property Rent includes any forfeited deposit paid under a contract for the sale of land or a building. Whether such deposit has been included in Rent. Any rent received or receivable in respect of the lease of a building together with plant and machinery has been offered for tax under the head Income from Other Sources.
2.4.14 2.4.15 3 3.1
21(n)
15(2)
3.2
15(3)
352
Legal requirement 3.3 Where the property has owned by two or more persons and their respective shares are definite and ascertainable; a) the persons shall not be assessed as an association of persons in respect of property; and b) 3.4 share of each person in the income from property shall be included in his income.
Section 66
Yes
No
N/A
Non-adjustable amounts like pugree etc. received in relation to buildings have been treated as rent chargeable to tax under the head income from property in the tax year in which it was received and the following nine tax years in equal proportion. Where any irrecoverable rent is subsequently recovered, the amount recovered has been included in the income. Where any deduction has been claimed in respect of income from house property and the liability in respect of such deduction is not paid within three years of the deduction, it shall be added to the income. Any deduction claimed in respect of income from property has not been claimed against income from any other source. Whether or not following deductions / expenditure against property income have been claimed. In respect of repairs to the building an allowance equal to 1/5 of the rent chargeable to tax in respect of the building. The amount of any insurance premium paid to cover the risk of damage or destruction to the property.
16
3.5
17(2)
3.6
17(3)
3.7
17(5)
3.8
3.8.1
17(a)
3.8.2
17(b)
353
Legal requirement 3.8.3 The amount of any local rate, tax, charge or cess (being owners burden) in respect of property or income from property other than any tax payable under the Income Tax Ordinance, 2001. Any ground rent paid Where the property has been acquired, constructed, renovated or reconstructed with borrowed capital, the amount of any interest paid on such capital; Where the property is subject to mortgage or other capital charge, the amount of interest / profit paid on such mortgage or charge; Where the property has been acquired, constructed, renovated, extended, or reconstructed by the person with capital contributed by the House Building Finance Corporation or a scheduled bank under a scheme of investment in property on the basis of sharing the rent made by the Corporation or bank, the share in rent and share towards appreciation in the value of property (excluding the return of capital, if any) from the property paid or payable by the person to the said Corporation or the bank in the year under that scheme; Any expenditure (not exceeding six percent of the rent chargeable to tax in respect of the property for the year computed before any deduction allowed) incurred for the purpose of collecting the rent of the property; Any legal expense incurred to defend title of the property or any suit connected therewith in a court of law; Any unpaid rent which is considered irrecoverable
Section 17 (c)
Yes
No
N/A
3.8.4 3.8.5
17(d) 17(e) & (f)
3.8.6
17
3.8.7
17(f)
3.8.8
17(g)
3.8.9
17(h)
3.8.10
17(i)
354
Legal requirement 4 4.1 Income under the head Capital Gain Gain arising on the disposal of a capital asset by a person in a tax year, other than a gain that is exempt from tax, has been offered for tax under the head Capital Gains. Gain from sale of following assets of personal nature has been offered for tax under the head Capital Gains
n
Section
Yes
No
N/A
37(1)
4.2
37(5)
a painting, sculpture, drawing, or other work of art; jewelry; a rare manuscript; a postage stamp or first day cover; a coin or medallion an antique. 37(2)
n n n n n
4.3
The cost of acquisition of the capital asset and any expenditure incurred wholly and exclusively for acquiring such asset have been claimed as deduction against income under the head capital gains. Where the capital asset has been held for more than one year, only 75% of the capital gains has been offered for tax.
4.4
37(3)
355
Legal requirement 5 5.1 Income from other sources Income of every kind received by a person in a tax year, if it is not included in any other head, other than income exempt from tax, or has not been offered on PTR basis, has been offered for tax in that year under the head Income from Other Sources, including the following namely: (a) (b) (c) (d) (e) (f) dividend; profit on debt; ground rent; rent from the sub-lease of land or a building; income from the lease of any building together with plant or machinery; any annuity or pension; (fa) any amount received by the owner of a property in respect of provision of amenities, utilities and any other services in respect of that property. (g) (h) any prize bond, or winnings from a raffle, lottery or crossword puzzle; any other amount received as consideration for the provision, use or exploitation of property, including from the grant of a right to explore for, or exploit, natural resources; the fair market value of any benefit, whether convertible to money or not, received in connection with the provision, use or exploitation of property; and any amount received by a person as consideration for vacating the possession of a building or part thereof, reduced by any amount paid by the person to acquire possession of such building or part thereof.
Section
Yes
No
N/A
39
(i)
(j)
356
Legal requirement 5.2 Where a person receives an amount referred to in 5.1 (j) above, the amount has been offered for tax under the head Income from Other Sources in the tax year in which it was received and the following nine tax years in equal proportion. Any amount received as a loan, advance, deposit or gift by a person in a tax year from another person (not being a banking company or financial institution) otherwise than by a crossed cheque drawn on a bank or through a banking channel from a person holding a National Tax Number Card has been treated as income chargeable to tax under the head Income from Other Sources for the tax year in which it was received. This clause does not apply to an advance payment for the sale of goods or supply of services. Deduction has been claimed in respect of expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of deriving income chargeable to tax under the head income from other sources. Income falling under Presumptive Tax Regime Whether or not following income have been offered for tax under Presumptive Tax Regime. 6.1 6.2 6.3 6.4 6.5 Dividend Royalty Fee for technical services received by a nonresident Shipping and air transport income of a nonresident Income of the importer arising from the imports except in the case of an industrial undertaking importing goods as raw materials for its own use.
Section 39(2)
Yes
No
N/A
5.3
39(3)
5.4
40
5 6 6 7 148 (7)
357
Legal requirement 6.6 Income of a resident person arising from the sale of goods and on the execution of a contract, other than a contract for the supply of goods or the rendering of services. The tax deducted under section 153 shall be a final tax on the income of a non-resident person arising from (i) (ii) a turnkey contract; a contract or sub-contract for the design, construction or supply of plant and equipment under a power project;
Section 153(6)
Yes
No
N/A
6.7
153(7)
(iii) a contract or sub-contract under a construction, assembly or installation project in Pakistan, including a contract for the sale of supervisory activities in relation to such project; or (iv) any other contract for construction or services rendered, other than a contract to which section 152 (Royalty and fee for technical services) applies, 6.8 6.9 Realisation of foreign exchange proceeds on account of the export of goods by an exporter. Proceeds on account of a sale of goods to an exporter under an inland back-to-back letter of credit. Prize on a prize bond, or cash and non-cash (in kind) winnings from a raffle, lottery, or crossword puzzle Prize on winning a quiz or prize for promotion of sale offered by companies. Tax collected from any person being the owner of goods transport vehicle shall be the final tax on the income of such person from plying or hiring out of such vehicles. 154(1) 154(3)
6.10
156
6.11 6.12
156 234
358
Legal requirement 6.13 Where all the income derived by a person in a tax year is subject to final taxation under Presumptive Tax Regime, a return of income under section 114 for the year has not been filed instead a statement under section 115(4) has been filed. Where the presumptive tax regime applies (a) the income has not be charged to tax under any head of income in computing the taxable income of the person;
Section 115(4)
Yes
No
N/A
6.13
169(2)
(b) no deduction has been claimed for any expenditure incurred in deriving the income; (c) the amount of the income has not be reduced by (i) (ii) (d) any deductible allowance under Part IX of Chapter III, i.e. zakat the set off of any loss; the tax deducted has not been reduced by any tax credit allowed under this Ordinance; and no refund has been claimed in respect of tax collected or deducted unless the tax so collected or deducted is in excess of the amount for which the taxpayer is chargeable,
(e)
359
Execution Phase Workings of Cash Flow Statement
Labour Laws Compliance Checklist Index

1. 2. Gratuity Workers Profit Participation Fund
360
Gratuity
S. No. Scope of the Scheme 1. Does the status of the employer come under the definition of commercial or industrial establishment as defined in West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 (the Ordinance)? If the answer to 1 above is Yes, does it satisfy the following conditions: 2.1 The number of workmen employed is 20 or more in case of commercial establishment; or 2.2 The number of workmen employed is 50 or more in case of industrial establishment. 3. If the answer to 1 and 2 above are Yes does the employer pay gratuity to workman on his retirement, resignation or termination of service due to any reason other than misconduct? Is gratuity payable only to a person who is a workman as defined in the Ordinance? Is gratuity payable in addition to any other benefit which the worker may be entitled in accordance with the terms of his employment or any custom, usage settlement or award? [Note that, no gratuity is payable during the period an employer has established a provident fund in his establishment with equal contribution by the employer and workman, and both these contribution being payable to the workman even if he dismissed from service due to any reason including misconduct.] 6. Is the rate of gratuity 30 days wages for every completed year of service or for any period in excess of six months in the same establishment? YES NO N/A
2.
4. 5.
361
S. No. 7. If answer to 6 above is Yes is gratuity calculated in the following manner: 7.1 Wages admissible to workman in the last month of service in case of fixed rated workman and highest pay drawn during the last twelve months in case of piece rated workman. 7.2 Wages include basic wage plus cost of living allowance and any other allowance being part of wages under the relevant law. 8. 9. Does the employer maintain funded gratuity? If answer to the above is Yes, is it an approved gratuity fund as defined under section 2(3) of the Income Tax Ordinance, 2001 (ITO). If answers to 8 to 9 are Yes, has the employer established a fund under an irrevocable trust? Does the gratuity fund satisfy the following conditions: a) b) not less than ninety percent employees of the Company are employed in Pakistan; the beneficiaries belong to the class of persons qualified in terms of sub-clause (b) of clause 2 of Part III of the sixth schedule of the Income Tax Ordinance, 2001; the employer contributes to the fund; and all benefits granted by the fund are payable only in Pakistan.
YES
NO
N/A
10. 11.
c) d) 12.
Is the annual contribution by the employer in respect of any particular employee made on a reasonable definite basis as approved by the Commissioner of Income Tax? Has the employer furnished returns, statements, etc., as required by notice from Commissioner of Income Tax under rule 7 of part III of the Sixth Schedule of ITO?
13.
362
S. No. 14. Are all moneys contributed to the fund and interest / return on the accumulated balances of such contribution invested as per Rule 102 of the Income Tax Rules, 2002 (ITR) together with section 227 of the Companies Ordinance, 1984? Has the prior approval of the Commissioner of Income Tax been obtained to make a special contribution to the fund to meet the deficit? Has effective arrangement been made to deduct tax at source from any payments made from gratuity which is chargeable to tax? Have the rules of gratuity fund formulated by the trustees been complied with? Note that if there is a repugnance between any rule of an approved gratuity fund and any provision of part III of Sixth Schedule of the Income Tax Ordinance, 2001, the said rule shall, to the extent of repugnance, be of no effect and the Commissioner of Income Tax, at any time require that, such repugnance shall be removed from the rules of the fund. 18. Does the employer cause to carry out actuarial valuation to determine cost and liability on account of retirement benefit? Has the company made full provision in the financial statements in accordance with IAS-19. If answer to 19 is No (a) has it been disclosed in the notes to the accounts any shortfall or reason etc? (b) have been made reference in the auditors report? In case of outstanding balance of an eligible employee who is retired, has the company / fund shown the balance payable to him in current liability under outgoing members? In case of unfunded gratuity. Is the liability to existing employees shown as deferred liability in the financial statements of the company?
YES
NO
N/A
15.
16.
17.
19. 20.
21.
22.
363
II
Workers Profit Participation Fund

YES Applicability NO N/A
S. No.
1. 2.
Is the status of the client a Company and engaged in Industrial undertaking. If yes, does the company satisfy any one of the following three conditions: a) the number of workers employed by the Company at any time during a year is 50 or more; or b) the paid-up capital of the Company as on the last day of its accounting year is Rs. 2 million or more; or c) the cost of the fixed assets of Company as on the last day of the accounting year is Rs. 4.00 million or more.
3.
Establishment of the Fund Has the company to which the Act becomes applicable, established WPPF within nine months of the close of the year in respect of which the Act became so applicable.
4.
Does the Company pay 5% of its profits, as defined in the Act, for the year to the Fund within 9 months after close of the year. Investment of Fund Is the amount allocated or accruing to the fund: a) b) made available to the Company; or invested at the request of the Company by the Board.
5.
364
S. No. 6. If the amount is invested by the Board, has the investment been made in the following certificates / securities only: a) b) c) d) 7. I.C.P Mutual Fund Certificates NIT (Unit) Certificates Allowable Government Securities; and any other securities approved for the purpose by the Federal Government.
YES
NO
N/A
If the amount allocated, was made available to the Company, does Company pay interest thereon to the Fund starting from the first day of the next succeeding year to the date of payment to workers at higher of (i) 2.5% plus bank rate; and (ii) 75% of dividend declared on its ordinary shares. Has the computation and allocation of interest:
n n n n
8.
correctly done; properly allocated to workers; fully provided in the accounts; and where applicable properly segregated as between WPPF and WWF except in those cases where company has filed petition with High Court in respect thereof.
9.
Distribution of Benefits to Workers Have you ensured eligibility of the workers to the Fund benefits by considering that the list of workers prepared by the Secretary (Rule 4 (A)(b)) is complete and does not include workers: a) b) whose employment period is less than 6 months except in case of retired / deceased employees; or whose average monthly wages exceed Rs. 5,000/-.
365
S. No. 10. a) Have you ensured that no worker gets more than Rs.6,000/- as his annual share out of the Fund (All categories inclusive)? Ensure that units are properly allocated to employees as per their respective category Refer para 4 of annexed note on page 10.
YES
NO
N/A
b)
11.
Have you ensured that the average monthly wages do not include any overtime allowance or bonus or cost of living allowance or any other part of compensation not covered by the definition of wages as defined in the Act. Has the Fund transferred any left out amount out of the annual allocation to the WWF, within 15 days after the allocation. Disbursement of Benefits Has every worker been distributed the annual income of Fund including capital gains, if any, realized in prorata to his units of entitlements. After entitlements he holds as at the commencement of such year in line with example B in annexure II of mode procedure for the maintenance of accounts of the fund.
12.
13.
14.
In case a worker leaves his employment or his service is terminated, have you ensured that he has received 100% of the net asset value of the units standing in his name as on that date. Management of the Fund Have you obtained a list of Trustees.
15.
16.
Have you ensured that the appointment of Chairman to the Board is for one year and alternatively from workers and management.
366
S. No. 17. Have you obtained copies of:

n n n n
YES
NO
N/A
special Audit Report (by Federal Government); board minutes; if any regulations for governing the fund; audited accounts with auditors report thereon of the fund (if not done by FRSH); and contract for management of the fund with ICP, NIT or NBP, if any.
18. 19. 20.
Have you ensured that the secretary to the fund is the management trustee from the accounts department. Is office of the Board located at the factory premises? Miscellaneous Allocations to the fund by Companies is treated as allowable deduction to arrive at the taxable income of the Company.
21. 22. 23. 24.
All the income of the fund including capital gains are exempt from income tax. All the sums paid by the fund to workers are exempt from income tax in the hands of the workers. All expenses of the Board including the cost of maintaining accounts shall be borne by the Company. The Trustees shall not take any remuneration for their services except the reasonable cost of their travel for attending Board meeting. Ensure that the Trustees of Fund have opened the bank account of Fund. Ensure that no income tax was deducted at source on the income of the Fund. If it is deducted at source, inform the trustees through covering letter addressed to them for sending the initialled financial statements.
25. 26.
367
S. No. 27. Obtain the copy of the audited financial statements of the company to confirm the amount of the allocation of the fund. Obtain the copy of challan showing the left over amount deposited into bank. Obtain the schedule of details of interest accrued on total allocated Workers Profit Participation Fund and copy of the statement for its distribution amongst workers and the left over amount as per Annexure-IIIA required to be submitted to Section Officer of Ministry of Labour, Manpower and Overseas Pakistanis Federal Government of Pakistan. Examine on test basis name-wise payment vouchers / sheets as per Annexure-III and Annexure-IIIA required to be submitted to Section Officer of Ministry of Labour, Manpower and Overseas Pakistanis Federal Government of Pakistan. Note that any difference arising between the board and company relating to the administration of the scheme has been referred to the Federal Government because the decision of the Federal Government would be final on any matter referred to the Federal Government. Obtain the copy of the decision.
YES
NO
N/A
28. 29.
30.
31.
368
Execution Phase Compliance of Various Laws Labour Laws Compliance Checklist
Tax Position
n
Provision For Taxation - Year Wise Position
369
Execution Phase Proposed Adjusting and Reclassification Entries
Adjusting Entries
Client: Subject: Period / Year: Prepared by Reviewed by
No.
Date
Name
Account No.
Reference
Debit (Rupees)
Credit (Rupees)
370
REPORTING PHASE Financial Statements
DOCUMENT THE FOLLOWING FINANCIAL STATEMENTS:
FINAL DRAFT ACCOUNTS SIGNED BY THE SENIOR FINANCIAL OFFICER
INITIALLED / SIGNED ACCOUNTS (CROSS REFERENCED TO WORKING PAPERS)
PUBLISHED FINANCIAL STATEMENTS (CURRENT & PREVIOUS YEAR)
371
Working of Cash Flow Statement

File the working of current years cash flow statement with previous years comparative figures and properly refer each item with the final draft / initialed financial statements.
372
Final Analytical Review Procedures

The term "analytical procedures" refers to a collection of activities performed by auditors to gather evidence. Analytical procedures be performed in the audit planning stage to identify possible problem areas and in the substantive testing stage as a means of gathering substantive evidence in relation to one or more account balances or classes of transactions (i.e. as a substantive procedure, or substantive test); and in the opinion formulation stage (overall review stage), as a means of gathering evidence as to the consistency of the financial statements with the auditor's knowledge of the business of the entity. All analytical procedures involve a comparison of the value of the actual (ratio/trend/account balance / transaction etc.) with the value of the expected (ratio/trend/ account balance/ transaction etc.) with the objective of identifying any unusual or unexpected values. The procedure requires the investigation of the reason for any unexpected or unusual value. Analytical procedures include: reasonableness tests: In a reasonableness test, the expected value is determined by reference to data partly or wholly independent of the accounting information system, and for that reason, evidence obtained through the application of such a test may be more reliable than evidence gathered using other analytical procedures. e.g. the reasonableness of the total annual revenue of a freight company may be estimated by calculating the product of the total tonnes carried during the year and the average freight rate per tonne. scanning. An auditor may scan account balances, listings of transactions etc., with the object of detecting any unusual or unexpected balances or transactions. review. An auditor may review reconciliation, compilations and aggregations of transactions and/or account balances, again with the object of detecting any unusual or unexpected balances or transactions. ratio analysis. The computation and comparison of the actual value of a ratio with the expected value. The expected value may be based, for example, on:
n n n n
prior period values. values in other divisions of the entity. industry averages. forecast values.
Once again, the objective of this analytical procedure is to detect any unusual or unexpected value for the ratio. common size analysis is a type of cross-sectional analysis used for comparing the percentage components of balance sheets and income statements of one entity, or a division of an entity, with comparable data from one or more other entities/ divisions. This analysis may be used for either (i) the comparison of a (prospective) client's data with the industry average and/or an
373
industry competitor or (ii) for the comparison of income statements of different divisions of the same entity. When analytical procedures are used as a substantive procedure (or substantive test), and the application of the procedures does not identify any unusual or unexpected differences, then, by inference, the results provide evidence in support of management's assertions. Analytical procedures generally provide less reliable substantive evidence than the other category of substantive procedures/tests, (tests of detail). The substantive evidence gathered using analytical procedures is thus generally used to corroborate other substantive evidence gathered, rather than used as a sole source of evidence.
374
Reclassification Entries
Client: Subject: Period / Year: Prepared by Approved by
No.
Date
Name
Account No.
Reference
Debit (Rupees)
Credit (Rupees)
375
Execution Phase Manager / Partner Review Notes and Queries
Manager Review Notes & Queries

Name of client: Prepared by: Reviewed by: Observations / Notes Year ended Date Date
Disposal
376
Execution Phase Manager / Partner Review Notes and Queries
Partner Review Notes & Queries

Observations/Notes
Disposal
377
Execution Phase Audit Issues Control Documents
Audit Issues Control Document

Name of client: Subject Issue Period
Reported to:
n n n n
Concerned Personnel CFO CEO Board of Directors
Client approach to mitigate the issue Performed By

n n n
Audit approach W/P Ref

n n n
Performed by
378
Execution Phase Audit Issues Control Documents
Result of work done
CONCLUSION:
n n n n n
Resolved Adjustment ML CL Report
Point Identified By
Senior
Manager
Partner
379
Reporting and Finalization Phase Points for Next Year
Points for Next Year

Client: Period: Subject: Prepared By Approved By
Ref.
Business betterment/ financial improvement Ideas
Discussed with Audit Staff
Disposition process
380
Reporting and Finalization Phase Points for Next Year
381
Execution Phase Summary Review Memorandum
Summary Review Memorandum

Name of client: Prepared by: Reviewed by: Year ended Date Date
Following are the examples of items that may be reported in the Summary Review Memorandum for the review of the partner: Major Accounting or Auditing Issues
Change in Accounting policy with financial impact
Major acquisitions/disposal of Fixed Assets/Investments
382
Execution Phase Summary Review Memorandum
Provisions
Acquisition of Long Term Loan/Leases
Major Contingencies/litigations including Tax etc.
383
Reporting and Finalization Phase Audit Completion and Reporting
Audit Completion and Reporting

Ref. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Description Financial statements signed Final called over financial statements cross referred to lead schedule Final audit meeting agenda and minutes Taxation final conclusion statement Audit issue control document Audit completion checklist Manager review notes Partner review notes Management representation letter Covering letter to the Board Management letter to the board Financial statement disclosure checklist (IAS) Financial statement disclosure checklist (Local Laws) Adjusting Journal Entries Reclassifying journal entries Proposed Journal entries Cash flow working Points forwarded to next year Directors report and Chairmans review Company Law compliance Checklist ICAP ICAP W.P Reference
384
Reporting and Finalization Phase Audit Completion and Reporting
Ref. 21. 22. 23. 24. 25.
Description Checklist for the Code of Corporate Governance Labour law checklist Going concern checklist Related party checklist Audit compliance review
W.P Reference ICAP
ICAP
385
Reporting and Finalization Phase Audit Completion Checklist
Audit Completion Checklist Part I

Client: Period: Purpose
WP Ref.: Date
The purpose of this checklist is to document adherence to International Standard on Auditing. This document requires, at a minimum, review and sign-off by the partner. The working paper is divided into the following sections: I II III Engagement Partner Sign-off Computer Information System Specialist Sign-off Considerations and Procedures
The engagement partner signs and date the Audit Completion Checklist sections I throughout each phase of the audit workflow and prior to issuance of the report. Section III provides a list of policies and professional standards to be considered by the audit team throughout each phase of the audit workflow. Its primary purpose is to serve as a memory jogger for the audit team and is reviewed prior to engagement partner sign-off. Additional considerations may be added to the list based on specific circumstances of each engagement. In addition, some procedures in the list may not be applicable to every engagement (e.g., use of internal audit or service organisation auditors).
386
Engagement Partner Sign-off

Procedures Engagement Management I have:
n
Sign-off
Date
reviewed the suitability of accepting the audit engagement or continuing with the audit engagement and have performed formal re-evaluation procedures as appropriate obtained an engagement letter, as appropriate identified a US-SEC filing review partner, approved for foreign filing reviews, in instances where required. I have identified the entities, its affiliates, securities, and/or funds that should be considered restricted for independence purposes.
n n
I have determined materiality for planning purposes for use in planning our audit procedures and documented this determination. I have reviewed the following documents and am satisfied that our understanding of the business and strategic business risks and the basis on which we have formed our decisions have been adequately and appropriately documented in the:
n n n n
Strategy and Planning Document Control Overview and Risk Assessment Document Fraud Risk Assessment Document Documentation of analytical procedures
I am satisfied that:
n
working papers related to critical audit objectives have been reviewed by the engagement partner working papers that do not relate to critical audit objectives have been reviewed by someone other than the preparer
387
Procedures
n
Sign-off
Date
review points have been cleared and the review notes discarded the audit team has performed its work in compliance with International Standards on Auditing and the working papers demonstrate this compliance all adjusting entries have been reviewed final Trial Balance has been obtained from client containing all adjusting entries, reclassifications etc. the audit team has obtained sufficient appropriate audit evidence, including consideration of going concern, so as to form an audit opinion the engagement deliverables are consistent with the deliverables specified in the engagement letter or any variation to it, and are supported by the work performed during the engagement the financial statement presentations and disclosures are adequate and conform with the audit teams understanding of the business as well as the Companied Ordinance, 1984 and International Accounting Standards in my opinion, based on the audit procedures performed, the financial statements are free of material misstatement when an unqualified opinion is expressed
n n
I agree with the opinion reached such that the audit report may be released.
388
II
Computer Information System (CIS) Specialist Sign-off

Procedures IT related business risks have been considered, assessed and dealt with appropriately and nature, extent and timing of CIS Specialist involvement has been considered and documented in the Strategy and Planning Document. Sign-off Date
389
III
Considerations and Procedures

This section provides a list of policies and professional standards to be considered by the audit team throughout each phase of the audit workflow. Its primary purpose is to serve as a memory jogger for the audit team. It is to be reviewed throughout the audit prior to partner sign-off. Additional considerations may be added to the list based on specific circumstances of each engagement. The note column provides an opportunity to indicate consideration of each step as either applicable ( ) or not applicable (N). In addition, audit teams may choose to make additional references in the notes column as considered appropriate. Procedures Engagement management We have reviewed the suitability of accepting the audit and have accepted the appointment as auditor We have reviewed the suitability of continuing with the audit engagement and have performed formal re-evaluation procedures as appropriate We have followed the appropriate procedures to determine the independence of partners, managers and professional staff with respect to the entity on whose financial statements we express an opinion We have set the terms of the engagement and obtained an engagement letter We have considered materiality in the audit and determined and used materiality for planning purposes in planning our audit procedures Working papers We have appropriately managed the working papers including preparing them, utilising current and continuing use working papers, reviewing working papers, restricting access to working papers and retaining working papers including:
n
Notes
Points raised during the review of the working papers have been cleared and where appropriate the working papers have been revised. Review notes have not been retained. The engagement partner has reviewed audit working papers related to critical audit objectives and determined that all audit working papers meet requirements of International Auditing Standards. Someone other than the preparer has reviewed each working paper.
390
Procedures
n
Notes
Upon completion of the audit, we have determined that the working papers and other documents are in proper order and complete. Working papers and other documents are properly filed and carefully maintained so they can be readily located. Specifically working papers and other documents on electronic media, finalised working papers and other documents on disk drives maintained by the audit team, including support staff, have been moved to either the appropriate file server or to disks for storage with the working paper files. Additional electronic copies of entity-related information have not been retained, except as set forth in this paragraph. The professional staff assigned a re in possession of no audit-specific information, whether on their personal computers, on their support staff's computers or otherwise. We have and will only make working papers available to third parties (excluding joint auditors and principal auditors) after consultation with the engagement partner.
Workflow activities We have obtained and / or updated our understanding of the entitys environment, including:
n n
preparing a Strategy and Planning Document performing and documenting analytical procedures in planning the audit, including follow-up actions for variances where appropriate.
We have determined and documented materiality for planning purposes. We have obtained an understanding of the strategic business risks and significant classes of transactions, identified the potential financial statement effects and documented our analysis in Control Overview and Risk Assessment Document We have considered all issues raised during the planning phase, summarised those considered significant and appropriately identified planned audit procedures in Strategy and Planning Document.
391
Procedures Fraud and error In planning the audit, we have assessed the risk that fraud or error may cause the financial statements to contain material misstatements, and have enquired of management regarding their understanding of the risk of fraud in the entity, their knowledge of fraud or suspected fraud that the entity is investigating or whether they have discovered material errors. We have also enquired of management regarding the accounting and internal control systems put in place to address fraud risk and prevent and detect error. We have documented our understanding of managements fraud risk assessment, the accounting and internal control systems in place, and known fraud and material error in the Fraud Risk Assessment Document We have documented fraud risk factors that have been identified as being present in the Fraud Risk Document Communications to management and those charged with governance We have communicated with management to confirm our understanding of the entitys business and to discuss other issues as appropriate We have considered with whom in governance to communicate. We have also considered audit matters of governance interest arising from the audit of financial statements and communicated them with those charged with governance on a timely basis We have obtained an understanding of the financial statement risks and financial statement controls and made a preliminary assessment of the risk of significant misstatement as documented in the appropriate Audit Programmes We have performed appropriate audit procedures to obtain sufficient audit evidence to support, and planned appropriate audit procedures to respond to, our assessment of the risk of significant misstatement for each audit objective as documented in the Audit Programmes. We have also addressed the fraud risk factors, as documented in the Fraud Risk Assessment Document, in designing these audit procedures We have obtained an understanding of the accounting system sufficient to identify and understand the accounting and financial reporting process from the initiation of significant transactions and other events to their inclusion in the financial statements, including how journal entries are prepared, processed and approved
Notes
392
Procedures We have identified, documented and considered the significant issues and updated planned procedures and findings as appropriate Substantive Procedures, Evaluation and Reporting Workflow activities We have performed substantive audit procedures as planned and documented them in the Audit Programme including substantive analytical procedures, and / or tests of details as appropriate. We have identified and investigated audit differences and have:
n n n
Notes
prepared a Summary of Unadjusted Audit Differences considered materiality in evaluating the effect of audit differences considered the aggregate of unadjusted audit differences in evaluating the fair presentation of the financial statements.
We have discussed identified audit differences with management during the audit and considered their nature and cause. In instances where management refused to adjust the financial statements and the results of extended audit procedures did not enable us to conclude that the aggregate of unadjusted audit differences was not material, we considered the appropriate modification to our report in accordance with ISA 700 the Auditors Report on Financial Statements. We have also informed those charged with governance of unadjusted audit differences aggregated by us during the audit that were determined by management to be immaterial, both individually and in the aggregate, to the financial statements taken as a whole. We have evaluated our findings, including performing analytical procedures at the overall review stage of the audit We have reviewed the reconciliation of amounts audited in the working papers to the amounts reported in the financial statements and have documented in the working papers that we have performed this review. We have checked all adjusting entries that have been made We have obtained final Trial Balance from client and ensured that it is updated for all adjusting entries, reclassifications etc. We have obtained sufficient audit evidence to form our audit opinion and have reported our findings
393
Procedures We have obtained written management representations. At a minimum these representation include those specified by the ISAs. Fraud and error For circumstances encountered that may indicate that there is a material misstatement in the financial statements resulting from fraud or error, we have performed procedures to determine whether the financial statements are materially misstated. We have documented the circumstances identified together with the audit procedures performed in the Fraud Risk Assessment Document. For audit differences identified, we have considered whether such audit differences may be indicative of fraud and if there is such an indication, we have considered the implications in relation to other aspects of the audit, particularly the reliability of management representation. Communications to management and those charged with governance We have included in engagement deliverables caveats, disclaimers and restrictions relevant to the circumstances, and also restricted reliance on engagement deliverables to clients or any other party specifically identified in the engagement letter. We have communicated to management, if applicable, fraud or error, noncompliance with laws and regulations and material weaknesses that have come to our attention. If we suspect that members of senior management, including members of the board of directors, are involved in non-compliance, we have reported the matter to the next higher level of authority at the entity, if it exists, such as an audit committee or a supervisory board. If a material weakness in the design or operation of the accounting and internal control systems has come to our attention, we have made management aware of the weakness as soon as practical and at an appropriate level of responsibility. If a material weakness in internal control related to the prevention and detection of fraud and error has come to our attention, we have communicated it to management in writing. We are satisfied that those charged with governance have been informed of these weaknesses that have been brought to our attention by management, or that have been identified by us during the audit.
Notes
394
Procedures We have considered with whom in governance to communicate and appropriately communicated audit matters of governance interest arising from the audit of the financial statements We have also informed those charged with governance of uncorrected misstatements aggregated by us during the audit that were determined by management to be immaterial, both individually and in the aggregate, to the financial statements taken as a whole. Need of Specialists We have determined the need for a specialist (such as CIS Specialist and tax specialists etc.) and defined the role and responsibility of the specialist. We have obtained feedback from the specialists on issues arising from their work and appropriately considered the results of their work in the audit We have obtained feedback from the specialists on issues arising from their work and appropriately considered the results of their work in the audit. Other independent auditor When the work of another independent auditor has been used, we have:
n
Notes
considered our participation in the audit (as principal auditor or other auditor) determined how the work of the other auditor will affect the audit considered the professional competence and independence of the other auditor in the context of the specific assignment shared information with the other auditor
n n
When the work of another independent auditor has been used we have:
n
obtained sufficient appropriate audit evidence that the work of the other independent auditor is adequate for our purpose, in the context of the specific assignment considered significant findings from the other independent auditor and other matters affecting the financial information of the component and appropriately addressed the findings
395
Procedures We have considered the significant findings of the other independent auditor and other matters affecting the financial information of the component and determined whether the work of the other auditor can be used. We have obtained written representation from the other independent auditor regarding their compliance with the independence, accounting, auditing and reporting requirements. If it was concluded that the work of the other auditor cannot be used and we have not been able to perform sufficient additional audit procedures regarding the financial information of the component audited by the other auditors we have expressed a qualified opinion or disclaimer of opinion because there is a limitation in the scope of the audit. If our audit opinion on the financial statements as a whole is based solely on the audit report of another auditor regarding the audit of one or more components, we have stated in our report that fact clearly and have indicated the magnitude of the portion of financial statements audited by the other auditor. External expert We have considered the need for use of an external expert, assessed the professional competence and objectivity of the expert, documented our decision to rely on the work of the expert and obtained audit evidence regarding the scope of the experts work. We have obtained sufficient appropriate audit evidence that the work of the external expert was adequate for our purpose, in the context of the specific assignment. If the results of the experts work did not provide sufficient appropriate audit evidence or if the results were not consistent with other audit evidence, we have resolved the matter. We have made appropriate reference to the work of an expert based on whether the report is modified.
Notes
396
Procedures Internal audit We have obtained an understanding of the activities of internal audit and performed a preliminary assessment of the internal audit function sufficient to identify those activities that are relevant to planning our audit. Where relevant, we have documented our decision to rely on the work of the internal auditors, including a discussion of our assessment of the competence and objectivity of the internal audit department and the planned use of internal audit and considered use of the Internal Audit Function Evaluation working paper.. If the work of internal audit has been used, we have obtained sufficient appropriate audit evidence that their work is adequate for our purpose, in the context of the specific assignment and we have completed the Internal Audit Function Evaluation working paper. When we used the specific work of internal audit, we evaluated and tested that work to confirm its adequacy for our purposes and completed the Internal Audit Function Evaluation working paper. Specific topics Consideration has been given to other specific topics. Such topics include:
n n n n n n n n
Notes
long -term investments segment information comparative financial statements corresponding figures opening balances attendance at physical inventory counting environmental matters derivative financial instruments
397
Procedures Consideration has been given to other specific topics and procedures appropriate for the process analysis performed. Consideration has been given to other specific topics and procedures appropriate for substantive procedures, evaluation and reporting performed and appropriate conclusions reached. Other Information We have read the other information to identify material inconsistencies with the audited financial statements.
Notes
398
Audit Completion Checklist Part II

Client: Period covered by examination:
S. No.
DESCRIPTION
Check in Appropriate Column Yes No N/A
1.
Ensure that final Trial Balance has been prepared by the client after incorporating all Adjusting Journal Entries, Reclassifying Journal Entries (if any) by himself or advised by the auditors. Ensure that closing and opening entries have been passed into the books of account of the Company by the client. Ensure that all requirements of the firm's covering letter have been met and marked as "Received" on the covering letter by the Job Incharge. Ensure that the copy of covering letter is cross referenced with the documents received in respect of the requirements of covering letter. Ensure that we have obtained the representation letter on financial statements matters After receiving all requirements as stated in the covering letter, ensure that the required number of copies of financial statements have been signed and despatched to the client. Management letter has been sent to the client. (CCG compliance for all listed compnaies and prefereably for unlisted companies) Willingness letter" has been sent to the client preferably in response to client's letter. Fee bills have been prepared and sent to the client. Fee revision letter, if required this year, is sent. Ensure that the auditors report is dated before presenting for signature to the Partner. This date should not be earlier than the date financial statements were approved by the Board.
2.
3.
4.
5.
6.
7.
8. 9. 10.
399
S. No.
DESCRIPTION
Check in Appropriate Column Yes No N/A
The above steps are common for both public and private companies. In addition to the above the following steps are exclusive for public companies: 11. After receiving dummy financial statements from client, it should be carefully compared with the initialled accounts and other information (i.e., directors' report, ratio analysis etc.). Ensure that Notice of Annual General Meeting (AGM) has been received and noted for attendance. Ensure that all formalities of Code of Corporate Governance have been complied with and the checklist for Code of Corporate Governance compliance has been filled and reviewed by Engagement Manager and Engagement Partner.
12. 13.
Date
Engagement Manager
Date
Engagement Manager
400
Reporting and Finalization Phase Culmination Audit Meeting Agenda and Minutes
Subsequent Events Review Checklist

Client: Completed By: Year end: Reviewed By: Yes / No / N.A. (Any note on separate sheets) Events Discovered upto Signing of Audit Report 1. Adjustable Events: A. Have under given possible events (alongwith checking procedures) which may be adjusted been identified clearly, discussed with clients officials and adjusted in accounts? a. Subsequent determination of price of fixed assets purchase or sale before the year end. Property and investments: Evidence of permanent diminution in value.
n
Initial Date
b.
See valuation certificate.
c.
Stock and work-in-process: Subsequent sale proceeds for evidencing of net realizable value at balance sheet date. Long-term contracts: Estimated final result shows the accrued profit thereon was materially inaccurate. Adequacy of provision for bad debts: Evidence as to collectabilty and negotiation with debtors. Claims receivable: Negotiated at the balance sheet date. Discovery of frauds and errors: Indicating financial statement are in-correct. Dividend receivable/payable: Declared after balance sheet date.
d.
e.
f.
g.
h.
401
Yes / No / N.A. (Any note on separate sheets) 2. Non-adjustable events: (Only disclose if material) B. Have under noted possible events been discussed with clients officials and disclosed in accounts in compliance with IAS-10? a. b. c. Mergers and acquisitions of any business. New issue of shares or acquisition of loan capital. Acquisition or disposal of material assets or investments. Major changes in market price of investments. Losses of fixed assets or stocks as a result of catastrophe such as fire and flood. Opening/extending of trading activities. Closing of significant part of trading activities not expected to close at year-end. Major exchange rate movements. Effect of any new legislation or government regulation. Strike and other labour disputes. Significant reversal of sales and profit trend. Reason of any suspension or interruption of operations. Loss of major customers or contractors. Potential losses on forward contracts. Imposition of exchange controls. Acquisition, or withdrawal, of short-term borrowings facilities.
d. e.
f. g.
h. i. j. k. l. m. n. o. p.
402
Yes / No / N.A. (Any note on separate sheets) q. Financial arrangements made but disbursements where not made.
C.
Have evidences of such above events been documented and enclosed? Have representations been taken from management for such events? Review the minutes of meetings since the year-end of directors, shareholders and appropriate key committees. Obtain and read any post year-end management accounts and inquire the significant variances, if any. Consider whether the going concern assumption in relation to whole or a part of the enterprise is appropriate.
D.
E.
F.
G.
Note: Apart from above, also consider above events upto the signing of audit report but before its issuance and events discovered after financial statement are issued or when there is any change in financial statements after it is issued.
403
Reporting and Finalization Phase Representation Letter
Format of Representation Letter

[To be typed on client letterhead] [Date of approval of accounts by the Board]
(Firm's Name) Chartered Accountants (Firm's Address) Dear Sirs, Audit for the year ended ______________________ This representation letter is provided in connection with your audit of the balance sheet of [ name of Company] (the Company), as of [date], and the related profit and loss account, statements of cash flows and changes in equity for the year then ended for the purpose of expressing an opinion as to whether these financial statements give a true and fair view of the financial position of the company and of the results of its operations and its cash flows in accordance with the approved accounting standards as applicable in Pakistan and the requirements of the Companies Ordinance, 1984. We acknowledge our responsibility for the fair presentation of the financial statements in conformity with approved accounting standards and the requirements of the Companies Ordinance, 1984 and we approve the financial statements. Certain representations in this letter are described as being limited to matters that are material. We understand that items are considered material if they involve an omission or misstatement of accounting information that could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. We have made appropriate inquiries of directors and officers of the Company with the relevant knowledge and experience. Accordingly, we confirm, to the best of our knowledge and belief, the following representations: 1. The financial statements referred to above are presented fairly, in all material respects, in accordance with approved accounting standards as applicable in Pakistan and the requirements of the Companies Ordinance, 1984. The accounting policies, which are material or critical in determining the results for the year or state of affairs are set out in the accounts and are consistent with those adopted in the preparation of the accounts for the previous accounting period.
2.
404
3.
We have made available to you all books of account and supporting documentation and all minutes of meetings of shareholders and the Board of Directors, and summaries of actions of meetings held after period end for which minutes have not yet been prepared. We confirm that all transactions entered during the year have been approved at appropriate level according to materiality levels approved by the Board of Directors. There has been no known actual or possible non-compliance with laws and regulations that could have a material effect on the financial statements in the event of non-compliance. We confirm that: (a) We understand that the term fraud includes misstatements resulting from fraudulent financial reporting and misstatements resulting from misappropriation of assets. Misstatements resulting from fraudulent financial reporting involve intentional misstatements or omissions of amounts or disclosures in financial statements to deceive financial statement users. Misstatements resulting from misappropriation of assets involve the theft of an entitys assets, often accompanied by false or misleading records or documents in order to conceal the fact that the assets are missing. We acknowledge responsibility for the implementation and operation of accounting and internal control systems designed to prevent and detect fraud and error. We have disclosed to you the results of our assessment of the risks that the financial statements may be materially misstated as a result of fraud. We have disclosed to you all significant facts relating to any known frauds or suspected frauds that may have affected the Company [or There have been no instances of frauds or suspected frauds that may have affected the Company].
4. 5. 6.
(b) (c) (d)
7.
We believe the effects of uncorrected financial statement misstatements (summarized in the accompanying schedule) are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. [Summary of uncorrected financial statement misstatements should be attached.] We confirm the completeness of the information provided to you regarding the identification of related parties and regarding transactions with such parties that are material to the financial statements. The identity of, and balances and transactions with, related parties have been properly recorded and when appropriate, adequately disclosed in the financial statements. The records required by listing regulations in respect of related party transactions have been adequately maintained and the prices have been determined in accordance with the guidelines provided therein. We understand that, as defined in International Accounting Standard 24, Related Party Disclosures, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. Related party transactions are transfers of resources or obligations between related parties, regardless of whether a price is charged. 405
8.
9.
All sales transactions are final and there are no side agreements with customers or other terms that allow for the return of merchandise, except for conditions covered by the usual and customary warranties. Receivables reported in the financial statements represent valid claims against debtors for sales or other charges arising on or before the balance sheet date and appropriate provisions have been made for losses that may be sustained on un-collectible receivables. We have no plans or intentions that may materially alter the carrying value or classification of assets and liabilities reflected in the financial statements. We believe that the carrying amounts of all material assets will be recoverable. We have no plans to abandon lines of product or other plans or intentions on behalf of the Company that will result in any excess or obsolete inventory, and no inventory is stated at an amount in excess of net realizable value. We confirm that we have reviewed all financial assets and liabilities outstanding as of [balance sheet date] and have correctly classified them as either:
n n n n n
10.
11.
12.
13.
financial assets or liabilities held for trading; held-to maturity investments; loans and receivables originated by the Company; available for sale financial assets; or other financial liabilities in accordance with the requirements of IAS 39, Financial Instruments: Recognition and Measurement , and that they are appropriately recorded at their fair value, amortized cost or cost based on their classification.
14.
We have accounted for derivatives and hedging activities in accordance with International Financial Reporting Standards and complied with the applicable hedge accounting, designation, documentation and effectiveness assessment requirements of these standards. [Depending on the volume and complexity of derivative activities, representations about derivative financial instruments may also include representations about:
n
managements objectives with respect to derivative financial instruments, for example, whether derivatives are used for hedging or speculative purposes; the financial statement assertions concerning derivative financial instruments, for example:
n n
the records reflect all derivative transactions; all embedded derivative instruments have been identified;
406
the assumptions and methodologies used in the derivative valuation models are reasonable; whether all transactions have been conducted at arms length and at fair market value; the terms of derivative transactions; whether there are any side agreements associated with any derivative instruments; whether the entity has entered into any written options; and whether the entity complies with the documentation requirements of the financial reporting framework for derivatives that are conditions precedent to specified hedge accounting treatments.]
n n
n n
15.
Information regarding financial risks exposure and our financial risk management objectives and policies has been adequately disclosed in the financial statements, as required by IAS 32, Financial Instruments: Disclosure and Presentation. Presentation and disclosure of the fair value measurements of material assets, liabilities and components of equity are in accordance with International Financial Reporting Standards. The amounts disclosed represent our best estimate of fair value of assets and liabilities required to be disclosed by these standards. The measurement methods and significant assumptions used in determining fair value have been applied on a consistent basis, are reasonable and they appropriately reflect our intent and ability to carry out specific courses of action on behalf of the Company where relevant to the fair value measurements or disclosures. [In addition to the general representation, other situations may exist where more specific representations may be considered for inclusion. For example, the engagement team may wish to obtain representations specific to an asset or liability requiring fair value measurements depending on its nature, materiality and complexity. Depending on the nature, materiality and complexity of fair values, management representations about fair value measurements and disclosures contained in the financial statements also may include representations about:
n n
16.
specific assets or liabilities requiring fair value measurements; the basis used by management to overcome the presumption relating to the use of fair value set forth under the entitys financial reporting framework; the completeness and appropriateness of disclosures related to fair values under the entitys financial reporting framework; whether subsequent events require adjustment to the fair value measurements and disclosures included in the financial statements.] 407
17.
The Company has satisfactory title to all assets and there are no liens or encumbrances on the companys assets, except for those that are disclosed in Note(s) ___ to the financial statements. Fixed assets are depreciated at appropriate rates to reduce the assets to their estimated residual value at the end of their expected useful lives. Addition to fixed assets during the year represent actual capital expenditure and no expenditure of a capital nature was charged to the operations of the company during the year. Fixed assets sold during the year were properly accounted for in the books of the company. The following have been properly recorded and when appropriate, adequately disclosed in the financial statements:
n n n n
18.
losses arising from sale and purchase commitments; agreements and options to buy back assets previously sold; assets pledged as collateral; off-balance sheet activities, including transactions with special purpose entities, nonconsolidation and revenue recognition; significant common ownership or management control relationships; changes in accounting principles affecting consistency;
n n
19.
We have recorded or disclosed, as appropriate, all liabilities, both actual and contingent, and have disclosed in Note _____ to the financial statements all guarantees that we have given to third parties. The estimated financial effect of pending or threatened litigation and claims against the Company has been properly recorded or disclosed in the financial statements. Except as disclosed, we are not aware of any additional claims that have been or are expected to be received. Except as disclosed in the financial statements or footnotes to the financial statements, there are no:
n
20.
21.
other gain or loss contingencies or other liabilities that are required to be recognized or disclosed in the financial statements, including liabilities or contingencies arising from environmental matters resulting from illegal or possibly illegal acts, or possible violations of human rights legislation; material transactions that have not been properly recorded in the accounting records underlying the financial statements;
22.
The Company has complied with all aspects of contractual agreements that could have a material effect on the financial statements in the event of non-compliance.
408
23.
There are no formal or informal compensating balance arrangements with any of our cash and investment accounts. We have no line of credit arrangements other than those disclosed in Note ___ to the financial statements. There are no significant matters that have arisen that would require a restatement of the corresponding figures. [This representation would be relevant only when comparatives are provided as corresponding figures.]
25.
26.
We confirm that all the details /assessment orders etc. have been given to you. We also confirm that adequate provisions have been made including for assessment years where assessments have not yet been finalized. We have reviewed all estimates and basis used for recording transactions (including staff benefits), and confirm that the same are reasonable, relevant and consistently applied in assessing assets and liabilities There have been no events subsequent to the balance sheet date which require adjustment of or disclosure in the financial statements or Notes thereto, except as disclosed in the Note ____ to the financial statements. Should any of such events occur between the date of this letter and the date of AGM we shall let you know. [Additional representations to address specific circumstances of the client The engagement team would consider asking management to provide representations with respect to material matters including matters impacted by:
n n n
27.
28.
significant assumptions made by management; management intent; information that is only known to management. The purpose of obtaining representations from management with respect to these types of matters is to confirm that:
the engagement team has an understanding of managements intent and the relevant assumptions made with respect to these matters; and management has provided the engagement team with all relevant information in relation to these matters, i.e., that there are no undisclosed issues such as side agreements that may impact the engagement teams conclusions about the matters] Yours faithfully,
Chief Executive
Finance Director/Manager
409
Reporting and Finalization Phase Exceptions and Control Weaknesses
Exceptions and Control Weaknesses

Client: Year end: Prepared By: Reviewed By:
Exceptions / Control Weaknesses Noted
Manager / Partners Comments Or Disposals
Risk Addressed
410
Exceptions / Control Weaknesses Noted Recommendation
Manager / Partners Comments Or Disposals
411
Client: Subject: Period / Year: Notes for Management Letter Comments
Prepared by
Approved by
Description of Issue (include specific examples):
How was issue noted (reference to working papers, if applicable):
412
Suggestion for improvement:
Clients comments:
Comment included in letter:
Yes
No
413
If no state reasons:
414
Reporting and Finalization Phase Letter to the Board of Directors
Suggested Letter to the Board of Directors (BOD)

Board of Directors, ABC Company Limited, Karachi Dear Sir, We are pleased to inform you that we have completed the audit of your financial statements for the year ended 30 June 2000, and are enclosing the 5 copies of the financial statements for identification purposes only. The signed accounts would be issued after we have received the following: i) ii) Management representation letter Approval of the Board regarding the following:
n
Date:
All additions to assets (including investments) (over the limits in Companies Ordinance) All disposals of assets Bonuses Level of provisions Transfers Items of management estimates and judgement Deferral or Capitalisation of expenditure Revaluation of assets
n n n n n n n
*(Further significant observations relating to legal/tax advisor, large outstanding balances, confirmations outstanding and other significant matters that require attention of the Board of Directors, may also be included in this letter.) _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ (Name of the Auditor) sd/-
415
Reporting and Finalization Phase Format of Audit Report to the Members
Auditors Report To The Members - Form 35A

THE COMPANIES ORDINANCE, 1984 [See section 255(3) and rule 17A]
AUDITORS REPORT TO THE MEMBERS We have audited the annexed balance sheet of ____________________________________ as at _________________ and the related *1profit and loss account, cash flow statement and statement of changes in equity together with the notes forming part thereof, for the year then ended and we state that we have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit. It is the responsibility of the companys management to establish and maintain a system of internal control, and prepare and present the above said statements in conformity with the approved accounting standards and the requirements of the Companies Ordinance, 1984. Our responsibility is to express an opinion on these statements based on our audit. We conduct our audit in accordance with the auditing standards as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the above said statements are free of any material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the above said statements. An audit also include assessing the accounting policies and significant estimates made by management, as well as, evaluating the overall presentation of the above said statements. We believe that our audit provides a reasonable basis for our opinion and, after due verification, we report that (a) (b) In our opinion, proper books of accounts have been kept by the company as required by the Companies Ordinance, 1984; in our opinion (i) the balance sheet and profit and loss account together with the notes thereon have been drawn up in conformity with the Companies Ordinance, 1984, and are in agreement with the books of accounts and are further in accordance with accounting policies consistently applied *2 except for the changes as stated in note(s) with which we concur; the expenditure incurred during the year was for the purpose of the companys business; and
(ii)
(iii) the business conducted, investments made and the expenditure incurred during the year were in accordance with the objects of the company;
416
(c)
in our opinion and to the best of our information and according to the explanations given to us, the balance sheet, *1 profits and loss account, cash flow statement and statement of changes in equity together with the notes forming part thereof conform with approved accounting standards as applicable in Pakistan, and, give the information required by the Companies Ordinance, 1984, in the manner so required and respectively give a true and fair view of the state of the companys affairs as at ___________________ and of the *3 profit/loss, its cash flows and changes in equity for the year then ended; and in our opinion *4 Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980), was deducted by the company and deposited in the Central Zakat Fund established under section 7 of that Ordinance.
(d)
Date Place
Signature [Name(s) of Auditors]
NOTES Where applicable *1. *2. *3. *4. Substitute income and expenditure account in case of association not for profit. Where there is no change in the accounting policy(ies) the portion except for the changes as stated in note(s) with which we concur may be omitted. Substitute surplus or deficit in case of association not for profit. Where no Zakat is deductible, substitute no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980. Where any of the matter referred to in the Auditors Report is answered in the negative or with a qualification, the report shall state the reason for such answers alongwith the factual position to the best of the auditors information. In the case of a non-listed company reference to cash flow statement or source and application of funds and statement of changes in equity and opinion thereon may be omitted.
417
Auditors Report To The Members or Directors in Case of Branches of Foreign Banks - Form 35B
THE COMPANIES ORDINANCE, 1984 [See section 255(3) and rule 17B] AUDITORS REPORT TO THE MEMBERS OR DIRECTORS IN CASE OF BRANCHES OF FOREIGN BANKS We have audited the annexed balance sheet of ____________________ Bank as at the 31st December __________, and the related profit and loss account, cash flow statement and statement of changes in equity together with the notes forming part thereof (here in after referred to as the financial statements) for the year then ended, in which are incorporated the unaudited certified returns from the branches except for________ branches which have been audited by us and we state that we have obtained all the information and explanations which, to the best of our knowledge and belief were necessary for the purposes of our audit. It is the responsibility of the Banks Board of Directors/Management to establish and maintain a system of internal control, and prepare and present the financial statements in conformity with approved accounting standards and the requirements of the Banking Companies Ordinance, 1962 (LVII of 1962), and the Companies Ordinance, 1984 (XLVII of 1984). Our responsibility is to express an opinion on these statements based on our audit. We conducted our audit in accordance with the International Standards on Auditing as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of any material misstatement. An audit includes examining, on a test basis, evidence supporting amounts and disclosures in the financial statements. An audit also includes assessing accounting policies and significant estimates made by management, as well as, evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion and after due verification, which in case of loans and advances covered more than sixty per cent of the total loans and advances of the bank, we report that: (a) in our opinion, proper books of accounts have been kept by the _______________ Bank/branches as required by the Companies Ordinance, 1984 (XLVII of 1984), and the returns referred to above received from the branches have been found adequate for the purposes of our audit; in our opinion (i) the balance sheet and profit and loss account together with the notes thereon have been drawn up in conformity with the Banking Companies Ordinance, 1962 (LVII of 1962), and the Companies Ordinance, 1984 (XLVII of 1984), and are in agreement with the books of account and are further in accordance with accounting policies consistently applied *1 (except for the changes as stated in note(s) with which we concur);
(b)
418
(ii)
the expenditure incurred during the year was for the purpose of the Banks/branches business; and
(iii) the business conducted, investments made and the expenditure incurred during the year were in accordance with the objects of the Bank/branches and the transactions of the Bank/branches which have come to our notice have been within the powers of the Bank/branches; (c) in our opinion and to the best of our information and according to the explanations given to us the balance sheet, profit and loss account, cash flow statement and statement of changes in equity together with the notes forming part thereof conform with approved accounting standards as applicable in Pakistan, and give the information required by the Banking Companies Ordinance, 1962 (LVII of 1962), and the Companies Ordinance, 1984 (XLVII of 1984), in the manner so required and give a true and fair view of the state of the Banks/branches affairs as at the 31st December, and its true balance of the profit or loss, its cash flows and changes in equity for the year then ended; and in our opinion *2 Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980), was deducted by the Bank/branches and deposited in the Central Zakat Fund established under section 7 of that Ordinance.
(d)
Signature [Name(s) of Auditors] Date Place
Notes Where applicable *1. *2. *3. Where there is no change in the accounting policy or policies the portion except for changes as stated in note(s)--- with which we concur may be deleted. Where no Zakat is deductible, substitute no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980). Any other matter which the auditor considers should be brought to the notice of the Members or Directors in case of foreign banks, should also be stated in the report. Where any of the matters referred to in the Auditors Report is answered in the negative or with a qualification, the report shall state the reason for such answers alongwith the factual position to the best of auditors information.
419
Auditors Report To The Members of a Non-Life Insurance Company

We have audited the annexed financial statements comprising of: (i) (ii) balance sheet; profit and loss account;
(iii) statement of changes in equity; (iv) (v) (vi) cash flow statement; revenue account; statement of premium;
(vii) statement of claims; (viii) statement of expenses; (ix) (x) (xi) statement of investment income; statement of claims analysis; and statement of exposures
of ___________________ as at ___________________ together with the notes forming part thereof, for the year then ended. It is the responsibility of the Companys Board of Directors/Management to establish and maintain a system of internal control, and prepare and present the financial statements in conformity with the International Accounting Standards as applicable in Pakistan and the requirements of the Insurance Ordinance, 2000 (XXXIX of 2000) and the Companies Ordinance, 1984 (XLVII of 1984). Our responsibility is to express an opinion on these statements based on our audit. We conducted our audit in accordance with the International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting policies used and significant estimates made by management, as well as, evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion.
420
In our opinion ----(a) (b) proper books of accounts have been kept by the Company as required by the Insurance Ordinance, 2000; the financial statements together with the notes thereon have been drawn up in conformity with the Insurance Ordinance, 2000 and the Companies Ordinance,1984, and accurately reflect the books and records of the Company; The financial statements together with the notes thereon present fairly, in all material respects, the state of the Companys affairs as at _________________ in accordance with International Accounting Standards as applicable in Pakistan, and the information required to be disclosed by the Insurance Ordinance, 2000 and the Companies Ordinance, 1984; and Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980), was deducted by the company and deposited in the Central Zakat Fund established under Section 7 of that Ordinance.
(c)
(d)
Date ___________________ Signature Place ___________________ [Name(s) of Auditors] Notes 1. 2. Where no Zakat is deductible, substitute no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980. Where any of the matter referred to in the Auditors Report is answered in the negative or with a qualification, the report shall state the reason for such answers along with the factual position to the best of the auditors information.
421
Auditors Report To The Members of a Life Insurance Company

We have audited the annexed financial statements comprising of: (i) (ii) balance sheet; profit and loss account;
(iii) statement of changes in equity; (iv) (v) (vi) cash flow statement; revenue account; statement of premium;
(vii) statement of claims; (viii) statement of expenses; and (ix) statement of investment income
of ___________________ as at ___________________ together with the notes forming part thereof, for the year then ended. It is the responsibility of the Companys Board of Directors/Management to establish and maintain a system of internal control, and prepare and present the financial statements in conformity with the International Accounting Standards as applicable in Pakistan and the requirements of the Insurance Ordinance, 2000 (XXXIX of 2000) and the Companies Ordinance, 1984 (XLVII of 1984). Our responsibility is to express an opinion on these statements based on our audit. We conducted our audit in accordance with the International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting policies used and significant estimates made by management, as well as, evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion ----(a) proper books of accounts have been kept by the Company as required by the Insurance Ordinance, 2000;
422
(b)
the financial statements together with the notes thereon have been drawn up in conformity with the Insurance Ordinance, 2000 and the Companies Ordinance,1984, and accurately reflect the books and records of the Company; The financial statements together with the notes thereon present fairly, in all material respects, the state of the Companys affairs as at _________________ in accordance with International Accounting Standards as applicable in Pakistan, and the information required to be disclosed by the Insurance Ordinance, 2000 and the Companies Ordinance, 1984; The apportionment of assets, liabilities, revenue and expenses between two or more funds has been performed in accordance with the advice of the appointed actuary; Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980), was deducted by the company and deposited in the Central Zakat Fund established under Section 7 of that Ordinance.
(c)
(d) (e)
Date ___________________ Signature Place ___________________ [Name(s) of Auditors] Notes 1. 2. Where no Zakat is deductible, substitute no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980. Where any of the matter referred to in the Auditors Report is answered in the negative or with a qualification, the report shall state the reason for such answers along with the factual position to the best of the auditors information.
423
Auditors Report To The Certificate Holders - Form No. XI

[See rule 9 (3) of Modaraba Companies and Modaraba Rules, 1981]
AUDITORS REPORT TO THE CERTIFICATE HOLDERS We have audited the annexed balance sheet of ___________________ modaraba as at ___________________ and the related profit and loss account, cash flow statement and statement of changes in equity together with the notes forming part thereof (hereinafter referred to as the financial statements), for the year then ended and we state that we have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit. These financial statements are the modaraba companys (name of the modaraba company to be indicated) responsibility who is also responsible to establish and maintain a system of internal control, and prepare and present the above said statements in conformity with the approved accounting standards as applicable in Pakistan and the requirements of the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980), and the Modaraba Companies and Modaraba Rules, 1981. Our responsibility is to express an opinion on these statements based on our audit. We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of any material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting policies and significant estimates made by the modaraba company, as well as, evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion and, after due verification, we report that (a) in our opinion, proper books of accounts have been kept by the modaraba company in respect of modaraba as required by the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980), and the Modaraba Companies and Modaraba Rules, 1981; in our opinion: (i) the balance sheet and profit and loss account together with the notes thereon have been drawn up in conformity with the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980) and the Modaraba Companies and Modaraba Rules, 1981, and are in agreement with the books of accounts and are further in agreement with accounting policies consistently applied *1 except for the changes as stated in note(s) . with which we concur;
(b)
424
(ii)
the expenditure incurred during the year was for the purpose of the modarabas business; and
(iii) the business conducted, investments made and the expenditure incurred during the year were in accordance with the objects, terms and conditions of the modaraba; (c) in our opinion and to the best of our information and according to the explanations given to us, the balance sheet, profit and loss account, cash flow statement and statement of changes in equity together with the notes forming part thereof conform with approved accounting standards as applicable in Pakistan, and, give the information required by the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980), and the Modaraba Companies and Modaraba Rules, 1981, in the manner so required and respectively give a true and fair view of the state of the modaraba companys affairs as at . and of the profit or loss, its cash flows and changes in equity for the year then ended; and in our opinion, *2 Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980), was deducted by the modaraba company and deposited in the Central Zakat Fund established under section 7 of that Ordinance.
(d)
Signature (Name(s) of Auditors) Date ___________________ Place ___________________
Notes Where applicable *1. *2. Where there is no change in the accounting policy (ies) the portion except for the changes as stated in note(s) . with which we concur m ay be omitted. Where no Zakat is deductible, substitute no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980. Where any of the matter referred to in the auditors report is answered in the negative or with a qualification, the report shall state the reason for such answers along with the factual position to the best of the auditors information.
425
Auditors Report To The 1Trustees / Board of Governors / Management Committee

(ACCRUAL BASIS OF ACCOUNTING) [ICAP-ATR 17 (Revised-2004)] We have audited the annexed balance sheet of the ___________________ as at ___________________ and the related income and expenditure account and cash flow statement together with the notes forming part thereof (here-in-after referred to as the financial statements for the year then ended). It is the responsibility of the trustees / board of governors / management committee to establish and maintain a system of internal control, and prepare and present the financial statements in conformity with the approved accounting standards as applicable in Pakistan. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements . An audit also includes assessing the accounting policies used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion the financial statements present fairly in all material respects the financial position of the ___________________ as at ___________________ and of its surplus/deficit and cash flow for the year then ended in accordance with the approved accounting standards as applicable in Pakistan.
Date ___________________ Place ___________________
Note:
1.
Select wherever is appropriate.
426
Auditors Report To The 1Trustees / Board of Governors / Management Committee

(OTHER THAN ACCRUAL BASIS OF ACCOUNTING) [ICAP-ATR 17 (Revised-2004)]
We have audited the annexed receipt and disbursement account / receipt and expenditure account of the ___________________as at ___________________together with the notes forming part thereof (here-in-after referred to as the statement(s) for the year then ended). It is the responsibility of the trustees / board of governors / management committee to establish and maintain a system of internal control, and prepare and present the statement(s) in conformity with the cash receipt and disbursement / cash receipt and expenditure incurred basis as described in Note. X to the accounts. Our responsibility is to express an opinion on these statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the statements . An audit also includes assessing the accounting policies used and significant estimates made by management, as well as evaluating the overall presentation of the statements. We believe that our audit provides a reasonable basis for our opinion. As described in Note X, the statement(s) have been prepared on the (cash receipts and disbursements basis / cash receipt and expenditure basis, etc.) of accounting, which is a comprehensive basis of accounting other than generally accepted accounting principles. In our opinion the statement(s) present(s) fairly, in all material respect(s), the cash receipt and disbursement or cash receipt and expenditure, etc. of the ___________________for the year ended ___________________on the basis of accounting described in Note X to the statement.
Date ___________________ Place ___________________ Note: 1. Select wherever is appropriate.
427
Auditors Report on Consolidated Financial Statements Form 35C

[See rule 17C] THE COMPANIES ORDINANCE, 1984
AUDITORS REPORT ON CONSOLIDATED FINANCIAL STATEMENTS We have audited the annexed consolidated financial statements comprising consolidated Balance Sheet of ___________________and its subsidiary companies as at ______________ and the related consolidated Profit and Loss Account, consolidated Cash Flow Statement and consolidated Statement of Changes in Equity together with the notes forming part thereof, for the year then ended. We have also expressed separate opinions on the financial statements of ___________ and its subsidiary companies except for ________ and _______ which were audited by other firm(s) of auditors whose report(s) has/have been furnished to us and our opinion, in so far as it relates to the amounts included for such company(ies), is based solely on the report(s) of such other auditors. These financial statements are the responsibility of the Holding Companys management. Our responsibility is to express an opinion on these financial statements based on our audit. Our audit was conducted in accordance with the International Standards on Auditing and accordingly included such tests of accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the consolidated financial statements present fairly the financial position of __________ and its subsidiary companies as at __________ and the results of their operations for the year then ended. Signature (Name(s) of Auditors) Date Place Note: ____________ ____________ Where any of the matter referred to in the Auditors Report is answered in the negative or with a qualification, the report shall state the reason for such answers alongwith the factual position to the best of the auditors information.
428
Permanent Audit File Permanent Audit Working Papers File
PERMANENT AUDIT WORKING PAPERS FILE
Client
INDEX
Section No. 1. 2. 3. 4. Description Formation Information and Regulation Minutes of the Board of Directors, Containing Decisions of permanent nature & minutes of AGM / EGM etc. Loans & Other Long Term Agreements Miscellaneous
Updation Date
Updated By
Reviewed By
Remarks
429
File ref. 5.1
Description Formation Information and Regulation
Date
5.1.1
Certificate of Incorporation
5.1.2
Certificate of Commencement of Business
5.1.3
Memorandum and Articles of Association
430
File ref. 5.1.5
Description Prospectus
Date
Other
5.2
Minutes
5.2.1
Extracts of Important Minutes of Board of Directors Containing decisions of Permanent nature.
431
File ref. 5.2.2
Description Extracts of Important Minutes of Shareholders Meetings (e.g. AGM)
Date
5.2.3
Other
5.3
Loans & Other Long Term Agreements.
5.3.1
Loans and Other Agreements of Permanent nature (e.g. long term loans & lease agreements)
432
File ref. 5.3.2
Description Other
Date
5.4
Miscellaneous
433
Permanent Audit File Permanent File Update Form
Client: Period: Subject: Permanent File Update Form
I have reviewed the permanent audit file and updated the following as necessary: Yes / No General information about the client
Minutes, rules and regulations
Accounting policies and procedural information
Material relevant to the formation of the company
Taxation information
Other information likely to be of audit use for the next 2 years (please specify)
Permanent file should include the following:
Copy of memorandum and articles of association, or excerpts thereon.
434
Information about the clients ownership, organisation and personnel practices, monitoring procedures and internal audit activities.
Information about the clients business and industry.
List of related parties including owners, affiliates, directors and management.
Copies of significant current agreements (e.g. loans, leases and other contracts) with notes or highlights of sections relevant to the financial statements.
Extracts of minutes of meetings of directors, shareholders or committees which relate to matters of continuing significance (eg authorisations for continuing or future actions).
Relevant copies or extracts from special reports or correspondence with regulatory agencies.
Management letters (previous years).
Documentation of each significant accounting application.
10
Data relating to employee benefit plans (eg bonus, pension or share option plans).
435
11
Data relating to tax matters of continuing significance.
12
Chart of Accounts.
17
Engagement Letter.
18
Restrictions under loan agreements.
Carry Forward Statement The following documents have been carried forward to next years audit file. These documents remain up to date and relevant to the audit.
Signed ______________________ Date ________________________
Manager______________________ Date _________________________
436

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Audit Practice Manual (Revised)

Audit Practice Manual Revised

Audit Practice Manual Revised

Suggested Engagement Letter Audit Strategy and Planning Document

Control Overview and Risk Assessment Document

Fraud Risk Assessment Document

Audit Practice Manual Revised

II Discussions with Management

III Fraud Risk Factors and Response

IV Procedures when Circumstances Indicate a Possible Misstatement

V Evaluation and Disposition of Misstatements

Computer Information Systems Questionnaire

General Purpose CIS Checklist

Audit Practice Manual Revised

V CIS Control Reliance

Analytical Review Ratio Analysis

10. Review of Financial Performance of the Client

11. Internal Audit Function Evaluation

Section IIIObtaining direct assistance Conclusion

12. Using the Work of Another Auditor

Section II - Main areas of judgment

Audit Practice Manual Revised

126 126 127 127

132 135 136 137 138

Audit Practice Manual Revised

IV Planning The Sample

V Sampling methodology VI Sampling techniques

VII Using Sampling in Auditing

23. Sample Audit Programs

Audit Practice Manual Revised

II Balance Sheet Liabilities

III Profit & Loss

24. Leads 25. Leads Schedule 26. Format of Confirmation

302 303 304

Audit Practice Manual Revised

27. Inventory Count Attendance Programe

321 328 333

33. Tax Position 34. Adjusting Entries

Audit Practice Manual Revised

399 401 404 410 415 416

Audit Practice Manual Revised

Acceptance and Retention of Client New Client Evaluation

PRE ENGAGEMENT PHASE Prospective Client Acceptance Memorandum

Audit Practice Manual Revised

Acceptance and Retention of Client New Client Evaluation

Background information on the business (consider following questions)

Audit Practice Manual Revised

Acceptance and Retention of Client New Client Evaluation

Auditors association with the prospective client (consider following questions)

Audit Practice Manual Revised

Acceptance and Retention of Client New Client Evaluation

Audit Practice Manual Revised

Acceptance and Retention of Client New Client Evaluation

Signed Engagement partner Date

Audit Practice Manual Revised

Acceptance and Tetention of Client Existing Client Evaluation

Existing Client Continuation/ Retention Memorandum

Part A Client relating matters

Yes/No Yes/No Yes/No

Part B Professional risk related matters

Yes/No Yes/No Yes/No Yes/No

Audit Practice Manual Revised

Acceptance and Tetention of Client Existing Client Evaluation

________________________________ _ (Signature) (Date)