THE INSTITUTE OF

CHARTERED ACCOUNTANTS
OF PAKISTAN

AUDIT PRACTICES MANUAL

FEBRUARY 2001

QUALITY CONTROL REVIEW COMMITTEE

 FOREWORD

Comprehensiveness in performance and self-regulation are the hallmark of a chartered

accountant. It is because of these distinguishing characteristics that the public has looked
up to the profession for validating and assuring that the information in the published
financial statements is a true and fair view of the state of the affairs of the entity.

The compliance with various standards, corporate regulations, and technical releases of
the Institute automatically assures the excellence in performance. The Institute, to assist
the review partners, managers, and field staff in these efforts, has evolved an Auditing
Practices Manual. Given the multi-variety of the corporate entities, any manual cannot be
prescriptive; this manual also is only descriptive. The working papers etc. are also only
sample forms and are not standards of the Institute as such. There might be a situation
where the members may need to supplement, amend, or add to this manual according to
the actual needs of the particular entity under audit by them.

The Institute attaches great importance to this process of self-regulation. Necessary

administrative mechanism has been put in place in the Institute to assure that the manual
is followed and members performance is therefore not less than the best.

In conclusion I would express my sincere appreciation for concerted efforts and long
hours put in for the preparation of this comprehensive Auditing Practices Manual by
members of the sub-committee, including Mr. Asad Ali Shah (Chairman), Mr. Ather Ali.
Mr. Hussain Lalani, Mr. Saad Kaliya, Mr. Shafiq Ahmed, Mr. Sharjeel Butt, Mr. Mazhar
H. Hameedi, Mr. Nadeem Yousuf Adil and last but not the least to Mr. Ahmed D. Patel,
Chairman Quality Control Review Committee, for his personal interest in completion of
this manual.

Pir Mohammad A. Kaliya, FCA

President
17 January 2001
 PREFACE

The Institute of Chartered Accountants of Pakistan as member of the International

Federation of Accountants (IFAC) has a professional obligation to implement the
standards issued by the Federation of the International Accounting Standards Committee
(IASC).

The Preface to the International Standards on Auditing (ISAs) issued by the IFAC states
that the objective of audit of financial statements is to enable the auditor to express an
opinion whether the financial statements are prepared, in all material respects, in
accordance with an identified reporting framework (which would mean accounting
standards applicable in Pakistan).

In order to arrive at a correct audit opinion in an efficient and effective manner, the audit
is to be conducted in accordance with the ISAs and related assurance services and
pronouncements issued by the Council of the Institute.

The manual does not envisage all possible corporate entities or circumstances, for
instance special purpose entities such as banks, airlines, insurance companies,
telecommunications and other utilities etc. may need substantial modifications, even
redesigning, to fully conform to the requisite requirements of ISAs etc.

The Quality Control Review Committee of the Institute hopes that the manual shall be of
great functional utility to its practicing members.

The committee expects the practicing members would follow the Manual in letter and
spirit.

The manual shall be updated to incorporate the latest requirements of the ISAs etc.

WORKING PAPERS

The working papers are not definitive but are only sample working papers that need to be
supplemented or amended or modified by the members in accordance with the
requirements of the entity under audit.

ORGANIZATION OF THE MANUAL

Two volumes of the Manual are organized as follows:

Volume 1

Chapter 1: Describes briefly the salient features of the audit process, including the
three phases of planning, execution and completion.

Chapter 2: Gives the contents of the Audit Planning File. Also included therein is
guidance on evaluation of accounting and internal control systems, the
internal control questionnaires including a guide on the evaluation of
general controls relating to Computerized Information Systems. Further,
model audit programs for a manufacturing entity, duly correlated with
possible audit assertions have also been included.

Volume 2

Chapter 3: Gives the contents of the Audit Execution File. This largely comprises of
the standard working paper schedules that are used to collect audit evidence
on the financial statement components, including lead schedules on such
components, referencing methodology and the possible wordings of the
conclusions.

Chapter 4: Gives the contents of the Completion and Reporting File. Also included
therein is a suggested completion checklist, the disclosure checklist based on
the requirements of the international accounting standards and the
requirements of the Companies Ordinance 1984 developed by the Institute,
the suggested formats of Management Representation letter, Letter to the
Board of Directors, Management Letter etc.

Chapter 5: Gives the contents of the Permanent Audit File.

Chapter 6: Covers Summary of Some ISAs.

 CONTENTS

Chapter 1
Audit Process
1.1 Audit Process Chart 1-1
1.2 Overview of the Audit Process 1-2
Planning Phase 1-2
Execution Phase 1-3
Completion Phase 1-4

Chapter 2
Audit Planning File
2.1 Terms of Reference / Engagement 2-1
2.1.1 Suggested Engagement Letter 2-2
2.2 Overall Audit Plan
2.2.1 Client Profile 2-4
2.2.2 Understanding the Clients Business 2-5
Knowledge of Client Business 2-6
Significant Accounting Policies 2-8
Key Management Personnel 2-9
2.2.3 Factors that may Affect Clients Business 2-10
2.2.4 Critical Audit Areas/Significant Financial Statement Components 2-11
2.2.5 Risk Assessments, Accounting and Internal Control System 2-12
Documentation & Evaluation of Accounting and Internal Control
System 2-37
Internal Control Questionnaire 2-39
2.2.6 Audit Materiality 2-70
2.2.7 Review of Financial Performance of the Client 2-72
Suggested Format of Financial Performance Review 2-73

iii
2.3 Detailed Planning
2.3.1 Computer Information System (CIS) Checklist 2-75
2.3.2 Audit Programs 2-83
Sample Audit Programs 2-86
2.3.3 Analytical Review Procedures 2-145
Analytical Review of Balance Sheet and Profit & Loss Account 2-147
Ratio Analysis 2-155
2.4 Audit Administration & Other Matters
2.4.1 Staff Planning & Time Allocation 2-159
2.4.2 Daily Time Control/Staff Attendance Sheet 2-161
2.4.3 Job Costing/Recovery (based on minimum hourly charges
proposed by ICAP ATR 14) 2-162
2.4.4 Instructions from Client / Key Dates 2-163
2.4.5 List of Schedules Required from Client 2-164
2.4.6 Formats of Confirmation (Bank, Legal / Tax Advisor,
Debtor/Creditor etc) 2-168

2.4.7 List of Authorized Signatories 2-178

2.4.8 Notes of Meeting with Client 2-179
2.4.9 Notes of Review of Correspondence File
(if Separately Maintained) 2-185
2.4.10 Points Forward From Previous Year
(Refer Points Carried Forward to Next Year) 2-186
2.5 Audit Planning Checklist 2-187

Chapter 3
Audit Execution File
3.1 General Instructions for Documentation of Audit Execution File 3-1
3.2 Exceptions and Control Weaknesses 3-2
3.3 Audit Working Paper Guidelines 3-3
3.4 Significant Components of Balance Sheet and P & L Account
Lead Schedules with Conclusions 3-5

iv
 Chapter 4
Audit Completion & Reporting File
4.1 Financial Statements 4-1
4.2 Workings of Cash Flow Statement 4-2
4.3 Audit Completion Checklist 4-3
4.4 Accounts Completion Checklist 4-5
4.5 Partners Review Notes & Queries 4-8
4.6 Summary Review Memorandum 4-9
4.7 Analytical Review of Balance Sheet and Profit & Loss Account 4-10
Ratio Analysis 4-18
4.8 Managers Review Notes & Queries 4-22
4.9 Management Representation Letter 4-23
Suggested Management Representation Letter 4-24
4.10 Sample Letter to the Board of Directors 4-27
4.11 Management Letter / Internal Control Memorandum 4-28
Suggested Format of Management Letter 4-29
4.12 Points Carried Forward to Next Year 4-30
4.13 Financial Statements Disclosure Checklist 4-31
4.14 Subsequent Events Review Checklist 4-32
4.15 Going Concern Review Checklist 4-34

Chapter 5
Permanent Audit File
5.1 Formation Information and Regulation 5-2
5.2 Minutes of Board Of Directors Meetings Containing Decisions of
Permanent Nature & Minutes of Annual General / Extraordinary Meetings 5-3
5.3 Loans & Other Long Term Agreements 5-4
5.4 Miscellaneous 5-5

v
 Chapter 6
Summary of Some International Standards
on Auditing (ISAs)

6.1 Summary of Some ISAs 6-1

vi
 Audit Process

Audit Phase Documentation

Planning phase Audit Planning File

Execution phase Audit Execution File

Completion phase Completion & Reporting File

Issue Report containing an audit opinion

1-1
1.2 OVER VIEW OF THE AUDIT PROCESS
1. The Framework on the International Auditing Standards (ISAs) issued by the International
Federation of Accountants states that the objective of an audit of financial statements is to
enable the auditor to express an opinion whether the financial statements are prepared, in
all material respects, in accordance with an identified reporting framework (which would
mean applicable accounting standards in Pakistan). In order to arrive at a correct audit
opinion in an efficient and effective manner, the audit is to be conducted in accordance
with the ISAs.

2. The audit is designed to provide reasonable assurance that the financial statements taken as
whole are free from material misstatement. Reasonable assurance is a concept relating to
accumulation of sufficient and appropriate audit evidence on the basis of which the auditor
can conclude that there are no material misstatements in the financial statements.

3. The Audit Process, as described below, has been designed, based on the framework of
auditing suggested by the ISAs, with a view to assist an auditor to form an audit opinion in
the most efficient manner.

4. The audit process constitutes three phases of Planning, Execution and Review and
Completion. Each of these phases are briefly discussed below. These phases are also
described in tabular form at the end of this Chapter to provide a quick comprehension of
the process to the reader.

5. PLANNING PHASE
5.1 The ISA 300 requires that the audit should so plan his work so that the audit is performed
in an effective manner.
5.2 Efficient planning helps in ensuring that appropriate attention is devoted to the important
areas of the audit, potential problems are identified and the work is completed
expeditiously.

5.3 The extent of planning will vary according to the nature and size of the entity being
audited, the complexity of the audit and the auditors experience and knowledge of the
entitys business.

5.4 The planning phase comprises of the following activities:

Developing an Overall Audit Plan

Detailed Audit Planning Leading to Development of Audit Program

Documentation in the Form of an Audit Planning File

Audit Administration & Other Matters.

1-2
5.5 OVERALL AUDIT PLAN

5.6 The overall Audit Plan is a summarized strategy for the audit engagement, which primarily
consists of strategic decisions of expected scope and conduct of the audit based on a
preliminary understanding of the entitys business, its management structure and
philosophy, accounting and internal control systems, audit risk and materiality and the
audit administration. The steps involved are described in the Flow Chart 2 below

5.7 DETAILED AUDIT PLANNING

5.8 Based on the audit approach developed in the Overall Audit Plan, the auditor should carry
out detailed audit planning leading to the development of the audit programs of each
component of the financial statements containing nature, timing and extent of audit
procedures to be applied to them.

5.9 These audit programs need to be reviewed at least by a qualified manager or partner to
ascertain whether the execution of selected audit procedures included therein shall lead to
obtaining sufficient and appropriate audit evidence for forming an audit opinion on the
financial statements.

5.10 An important aspect of detailed planning is the study and evaluation of the internal control
procedures to ascertain the extent to which the internal control systems can be relied upon
for the purposes of the audit. Where the accounting and internal control systems are
considered reasonably reliable (that means when the control risk is assessed as less than
high) and a decision is made to place reliance on such systems and internal control
questionnaires, flow charts or a combination thereof.

5.11 The internal control checklist prepared by the Institute of Chartered Accountants of
Pakistan; is included in Chapter 2, which can be used for documenting the important
features of the internal control. This checklist is not definitive and may need to be
supplemented, amended or modified according to the need of the audit requirements of the
entity.

5.12 The overall audit plan, audit programs, time budgets, planning checklist and other
documentation encompassing the planning phase of the audit is to be filed as part of the
Audit Planning File as shown in Chapter 2 of the Manual.

6 AUDIT ADMINISTRATIVE & OTHER MATTERS

6.1 Information regarding audit administration (Chart-4) such as staff, planning, staff time
allocation, formats of confirmations, job/costing recovery etc., is included in Chapter 2.

7 EXECUTION PHASE

7.1 The auditor, before commencing audit, should review whether based on his knowledge of
the accounting systems and internal control procedures on the basis of which plans and
audit programs were made were valid or they need to be modified.

1-3
7.2 The detailed steps involved in the execution phase are given in the Flow Chart 5 below.
The evidence accumulated in this is filed in the execution File.

8 COMPLETION PHASE

8.1 The final phase of the audit comprises of the review working papers and the financial
statements and evaluation of the conclusions that have been reached. The review should be
carried out by a qualified audit manager/partner. However, in the case of sole-
proprietorship concern, it must be ensured that the proprietor carries out a thorough review
of all the working papers.

8.2 Care is to be exercised to ensure that disclosure and completion checklist are prepared and
completed and issues such as subsequent events review, related party transactions and
going concern aspect etc. are considered before audit opinions of the financial statements is
issued.

8.3 Details of the steps involved in the completion phase are given in Flow Chart 6 and matters
to be considered and the documentation to be completed are clarified in Review and
Completion File in Chapter 4.

1-4
2.1 TERMS OF REFERENCE / ENGAGEMENT

Auditors agree with the client, in writing, about the scope, terms and conditions of the audit
engagement. This written communication is referred to as an engagement letter (specimen letter
attached). The purpose of such a letter is to minimize any possible misunderstanding concerning
the scope and terms of the audit engagement.

The letter is sent to all new audit clients and where there has been a change in the terms of the
engagement or the auditor considers that management may not understand the existing terms of
the engagement, the letter is also be sent to continuing clients.

2-1
2.1.1 Suggested Engagement Letter

Clients Name And Address Date

Dear Sir

You have requested that we audit the balance sheet of as of , and the related
statements of income and cash flows for the year then ending. 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.

We will conduct our audit in accordance with 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 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.

We remind you 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. As part of our audit process, we will
request from management written confirmation concerning representations made to us in
connection with the audit.

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 are requested in connection with our
audit. 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.

2-2
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.

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.

Yours truly

FIRMS NAME

2-3
2.2 OVERALL AUDIT PLAN

2.2.1 CLIENT PROFILE

Name of client _____________________________________________________

Nature of Client Business ____________________________________________

_________________________________________________________________

Major Locations: ___________________________________________________

_________________________________________________________________

Other Information
o Banks
o Legal Advisor
o Tax Advisor etc.

2-4
2.2.2 UNDERSTANDING THE CLIENTS BUSINESS

Preliminary knowledge of client's business

A preliminary knowledge of the client's business is required in the client

acceptance/retention stage in order to determine whether to accept or reject a new entity
as a client or to retain or relinquish an existing client.

This knowledge is obtained through the performance of activities such as observation,

inspection, inquiry and analytical procedures such as ratio analysis and common size
analysis.

Detailed knowledge of client's business

A detailed knowledge of the client's business is required in all audit processes except
client acceptance/retention stage. Most of this knowledge should be acquired in the audit
planning stage and is required in order to determine the audit approach.

The knowledge may be acquired through the auditor performing such activities as
inspection, inquiry and analytical procedures such as ratio analysis, and Computer
Assisted Audit Techniques (CAAT), such as test data, programmed code analysis and
specialized audit software.

2-5
 Knowledge of Client Business

Core Business Activities

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

Major Products / Services

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

Substitute of Clients Products / Services

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

2-6
Major Customers
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

Major Suppliers
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

Major Competitors
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

Related Parties (if any)

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

2-7
 Significant Accounting Policies

List down significant accounting policies (or change in accounting policy, if any) adopted
by the Company relating to:

1. Staff retirement benefits

________________________________________________________________________

2. Fixed assets

________________________________________________________________________

3. Revenue recognition

________________________________________________________________________

4. Taxation

________________________________________________________________________

5. Foreign currency transaction

________________________________________________________________________

2-8
 Key Management Personnel

List down key management personnel of organization, i.e.

Directors
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________

Other Management Staff

________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________

2-9
2.2.3 FACTORS THAT MAY AFFECT CLIENTS BUSINESS

Economic Factors:
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

Industry Conditions:

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

Social /Environmental Factors:

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

Technological Factors:
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

2-10
2.2.4 CRITICAL AUDIT AREAS / SIGNIFICANT FINANCIAL
STATEMENT COMPONENTS

List down the critical audit areas and its impact on the financial statements relating to the
audit in consideration. It also includes consideration of previous years brought forward
issues.

Major areas include:

New borrowings with extra-ordinary terms and conditions

________________________________________________________________
________________________________________________________________

Discontinuation of major suppliers

________________________________________________________________
________________________________________________________________

Acquisition of a significant asset

________________________________________________________________
________________________________________________________________

Discontinuation of a major customer

________________________________________________________________
________________________________________________________________

Loss of a significant market share

________________________________________________________________
________________________________________________________________

Major claims and litigation against the client, etc.

________________________________________________________________
________________________________________________________________

2-11
2.2.5 RISK ASSESSMENTS, ACCOUNTING AND INTERNAL
CONTROL SYSTEM

1. The International Standard on Auditing AS-6 on the captioned subject provides guidance
on obtaining an understanding of the accounting system and internal control systems and
on the audit risk and its components. The standard states that:

The auditor should obtain an understanding of the accounting and internal control
systems sufficient to plan the audit and develop an effective audit approach. The
auditor should use his professional judgment to assess audit risk and to design audit
procedures to ensure it is reduced to an acceptably low level.

2. The following paragraphs contain guidance on matters relating to risk assessment and
internal control to help members in understanding these concepts based on the guidance
contained in AS-6 and other related guidance to enable them in developing an efficient
and effective audit approach and in complying with the requirements of AS-6.
3. Definitions

3.1 Audit Risk means the risk that an auditor gives an inappropriate audit opinion when
the financial statements are materially misstated. Audit risk has three components:
inherent risk, control risk and detection risk.
3.2 Inherent risk is the susceptibility of an account balance or class of transactions to
misstatements that could be material, individually or when aggregated with
misstatements in other account balances or classes, assuming there are no related internal
controls.
3.3 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.
3.4 Detection risk is the risk that an auditors substantive procedures will not detect a
misstatement that exists in an account balance or class of transactions that could be
material, individually or when aggregated with other balances and classes.
3.5 Accounting system means the series of tasks and records of an entity by which
transactions are processed as a means of maintaining financial records. Such systems
identify, assemble, analyze, calculate, classify, record, summarize and report transactions
and events.
3.6 Internal Control System means all the policies and procedures (internal controls)
adopted by the management of an entity to assist in achieving managements 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 timely preparation of reliable financial information. The internal control system
extends beyond those matters which relate directly to the functions of the accounting
system and comprises of two components: a) the control environment and the control
procedures.

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3.7 Control environment means the overall attitude, awareness and actions of directors
and management regarding the internal control system and its importance in the entity.
The control environment has an effect on the effectiveness of the specific control
procedures. A strong control environment, for example, one with the tight budgetary
control and an effective internal audit function, can significantly complement specific
control procedures. However, a strong control environment does not, by itself, ensure the
effectiveness of the internal control system. Factors reflected in the control environment
include:

The function of the board of directors and its committees.

Managements philosophy and operating style.
The entitys organizational structure and methods of assigning authority and
responsibility.
Managements control system including the internal audit function, personnel policies
and procedures and segregation of duties.

3.8 Control Procedures means those policies and procedures in addition to the control
environment which management has established to achieve the entitys specific
objectives. Specific Control objectives include:

Reporting, reviewing and approving reconciliation.

Checking the arithmetical accuracy of records.
Controlling applications and environment of computer information systems, for
example, by establishing controls over:
Changes to computer programs.
Access to data files.
Maintaining and reviewing control accounts and trial balances.
Approving and controlling of documents.
Comparing internal data with external sources of information.
Comparing the results of cash, security and inventory counts with accounting records.
Limiting direct physical access to assets and records.
Comparing and analyzing the financial results with budgeted amounts.

4. In the audit of financial statements, we are only concerned with those policies and
procedures within the accounting and internal control systems that are relevant to the
financial statement assertions. The understanding of relevant aspects of the accounting
and internal control systems, together with inherent and control risk assessments will help
the auditor to:

a. Identify the type of potential material misstatements that could occur in the
financial statements;
b. Consider factors that affect the risk of material misstatements; and
c. Design appropriate audit procedures to minimize risk to an acceptable level.

5. Therefore, while developing the audit approach, we should consider the preliminary
assessment of control risk (in conjunction with the assessment of inherent risk) to
determine the appropriate detection risk to accept for the financial statement assertions.
Based on such assessment, we should decide on the timing, nature and extent of the
substantive procedures for the financial statement assertions.

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6. Inherent Risk

6.1 For developing the overall audit plan, we should assess inherent risk at the financial
statement level. For developing audit programs, we should relate such assessment to
material account balances and class of transactions at the assertion level, or assume that
the inherent risk is high.

6.2 The assessment of inherent risk requires the use of professional judgment considering the
following factors:

6.2.1 At the financial statement level

The integrity of management.

Management experience and knowledge and changes in management during the
period, for example, the inexperience of management may affect the accuracy and
reliability of the financial statements prepared by such management.
Unusual pressures on management, for example, circumstances that might predispose
management to misstate the financial statements, such as the industry experiencing
large number of business failures or an entity that lacks sufficient capital to continue
operations.
The nature of entitys business, for example, the potential for technological
obsolescence of its products and services, the complexity of its capital structure, the
significance of related parties and the number of locations and geographical spread of
its production facilities.
Factors affecting the industry in which the entity operates, for example, economic and
competitive conditions as identified by the financial trends and ratios, and changes in
technology, consumer demand and accounting practices common to industry.

6.2.2 At the Account Balance and Class of Transactions Level

Financial Statement accounts likely to be susceptible to misstatement, for example,

accounts which required adjustments in the prior period or which involve a high
degree of estimation.
The complexity of underlying transactions and other events, which might require
using work of an expert.
The degree of judgment involved
Susceptibility of assets to loss or misappropriation, for example, assets which are
highly desirable and movable such as cash.
The completion of unusual and complex transactions, particularly at or near the
period end.
Transactions not subject to ordinary processing.

7. Following are the objectives of internal control which relate to the accounting system:

7.1 Transactions are executed in accordance with the managements general and specific
authorizations.

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7.2 All transactions and other events are promptly recorded in the correct amount, in the
appropriate accounts and in the proper accounting period so as to permit preparation of
reliable financial statements in accordance with acceptable accounting policies.

7.3 Access to assets and records is permitted only in accordance with managements
authorization.

7.4 Recorded assets are compared with the existing assets at reasonable intervals and
appropriate action is taken regarding any differences.

8. Understanding the accounting and internal control systems

8.1 We are required by AS-6 to obtain an appropriate understanding of the accounting and
internal controls system to enable us to design our substantive audit procedures aimed at
minimizing the detection risk to an acceptable level.

8.2 The process of understanding involves obtaining knowledge of the design of the
accounting and internal control systems, and their operation. We usually perform a
Walk-through test that is, tracing a few transactions through the accounting system, for
understanding the accounting and internal control systems.

8.3 Previous periods audit experience, review of the previous years files containing
documentation of the accounting and internal control systems also enhances our
understanding of such systems.

8.4 The procedures, which may be used for obtaining such understanding include:

Inquiries of appropriate management, supervisory and other personnel at various

organizational levels within an entity, together with reference to documentation,
such as procedures manuals, job descriptions and flow charts;
Inspection of records and reports produced by the accounting and internal control
systems; and
Observation of the entitys activities and operations, including observation of the
organization of computer operations, management personnel and the nature of
transaction processing.

9. We are required to obtain a level of understanding of the accounting system that is

sufficient to identification and understanding of:

a. Major classes of transactions in the entitys operations;

b. How such transactions are initiated;
c. Significant accounting records, supporting documents and accounts in the
financial statements; and
d. The accounting and financial reporting process, from the initiation of
significant transactions and events to their inclusion in the financial statements.

10. In respect of control environment, we are required to obtain an understanding sufficient

to assess directors and managements attitudes, awareness and actions regarding internal
controls and their importance to the entity. This understanding will enable us to

2-15
 determine the appropriateness of relying on controls for a portion of our overall audit
assurance.

11. Control Risk

11.1 After obtaining an understanding of the accounting and internal control systems, the
auditor is required to make a preliminary assessment of control risk, at the assertion level,
for each material account balance or class of transactions.

11.2 The control risk for some or all assertions is assessed at a high level when:

The entitys accounting and internal control systems are not effective; or
Evaluating the effectiveness of the entitys accounting and internal control system
would not be efficient.

11.3 The preliminary assessment of control risk for a financial statement assertion should be
high unless the auditor:

Is able to identify internal controls relevant to the assertion which are likely to
prevent or detect and correct a material statement; and
Plans to perform tests of control to support the assessment.

11.4 We should document:

our understanding of the accounting and internal control system; and

when the control risk is assessed as less than high, the basis for the conclusions.

11.5 Different techniques may be used to document information relating to accounting and
internal control systems, such as narrative descriptions, questionnaires, checklists and
flow charts.

11.6 The Institute has developed an Internal Control Questionnaire (Annexed), given in this
Manual which may also be used for the purpose of such documentation.

12. Testing of Controls

12.1 We are required to obtain evidence through tests of control to support any assessment of
control risk which is less than high. The lower the assessment of control risk, higher will
be the reliance on such controls, the more support will be required to ensure that such
accounting and internal controls are suitably designed and operating effectively.

12.2 Objective of tests of controls is to obtain evidence about the effectiveness of:

The design of the accounting and internal control systems, that is, whether they are
suitably designed to prevent or detect and correct material misstatements; and
Operation of the internal controls through out the period under audit.

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12.3 Tests of controls may include:

Inspection of documents supporting transactions and other events to gain audit

evidence that internal controls have operated properly, for example, verifying that a
transaction has been authorized.
Inquiries about, and observation of, internal controls which leave no audit trail, for
example, determining who actually performs each function and not merely who is
supposed to perform it.
Re-performance of internal controls, for example, reconciliation of bank accounts to
ensure that they were correctly performed by the entity.

12.4 Based on the results of the tests of controls, we should evaluate whether the internal
controls are designed and operating as contemplated in the preliminary assessment of
control risk. If the results of test of controls highlight deviations, the preliminary
assessment of control risk may need to be revised. In such cases, there will be a need to
modify the timing, nature and extent of planned substantive procedures.

12.5 Before the conclusion of the audit, based on the results of substantive procedures and
other audit evidence obtained, we should consider whether the assessment of control risk
is confirmed.

13 Relationship between the assessment of Inherent and Control Risks

13.1 Management often reacts to inherent risks situations be designing accounting and internal
control systems to prevent or detect and correct misstatements and therefore, in many
cases, inherent risk and control risk are highly interrelated. In such situations, if the
auditor attempts to assess the inherent and control risks separately, there is a possibility
of inappropriate risk assessment. As a result, audit risk may be more appropriately
determined in such situations by making a combined assessment.

14. Detection Risk

14.1 The level of detection risk relates to the substantive procedures. Our assessment of
control risk, together with the inherent risk assessment, will influence the nature, timing
and extent of substantive procedures to be performed to reduce the detection risk, and
therefore audit risk, to an acceptably low level. However, some detection risk would
always be present, even of an auditor were to examine 100% of the account balance or
class of transactions because, for example, most audit evidence is persuasive rather than
conclusive.

14.2 We should consider the assessed levels of inherent and control risks in determining the
timing, nature and extent of substantive procedures required reducing audit risk to an
acceptably low level. In this regard, we should consider:

The nature of substantive procedures, for example, using tests directed toward
independent parties outside the entity rather than the tests directed toward parties or
documentation within the entity, or using tests of details for particular audit objective
in addition to the analytical procedures;

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 The timing of substantive procedures, for example, performing them at period end
rather than at an earlier date; and
The extent of substantive procedures, for example, using a larger sample size.

14.3 There is inverse relationship between detection risk and the combined level of inherent
and control risks. For example, when inherent and control risks are high, acceptable
detection risk needs to be low to reduce the audit risk to an acceptably low level. On the
other hand, when inherent and control risks are low, we can accept higher detection risk
and still reduce audit risk to an acceptably low level. This inverse relationship is
illustrated below. The shaded areas in the table relate to the detection risk.

Our Assessment of Control Risk

High Medium Low
Our assessment of High Lowest Lower Medium
Inherent Risk Medium Lower Medium Higher
Low Medium Higher Highest

14.4 The assessed levels of inherent and control risks cannot be sufficiently low to eliminate
the need for us to perform any substantive procedures. Regardless of the assessed levels
of inherent and control risks, there would invariably be a need to perform some
substantive procedures for material account balances and class of transactions.

14.5 The higher the assessment of inherent and control risk, the more audit evidence would be
required to be obtained from the performance of substantive procedures. When both
inherent and control risks are assessed as high, we need to consider whether substantive
procedures can provide sufficient appropriate audit evidence to reduce detection risk, and
therefore audit risk, to an acceptably low level. When it is determined that detection risk
regarding a financial statement assertion for a material account balance or class of
transactions cannot be reduced to acceptably low level, we should express a qualified
opinion or a disclaimer of opinion.

15. Audit Risk in the Small Business

15.1 We need to obtain the same level of assurance in order to express an unqualified opinion
on the financial statements of both small and large entities. However, many internal
controls which would be relevant to large entities are not practical in the small
businesses. For example, in small business, accounting procedures may be performed by
few persons who may have both operating and custodial responsibilities, and therefore
segregation of duties may be missing or severely limited. Inadequate segregation of
duties may, in some cases, offset by a strong management control system in which
owner/manager supervisory controls exist because of direct personal knowledge of the
entity and involvement in transactions. In circumstances where segregation of duties is
limited and audit evidence of supervisory controls is lacking, the audit evidence
necessary to support the auditors opinion on the financial statements may have to be
obtained entirely through performance of substantive procedures.

15.2 The following paragraphs provide more guidance for a better understanding of the two
components of internal control system described above, i.e., control environment and
control procedures.

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16. Control Environment

16.1 The control environment is the control consciousness of an organization; it is the

atmosphere in which people conduct their activities and carry out their control
responsibilities. An effective control environment is an environment where competent
people understand their responsibilities, the limits to their authority, and are
knowledgeable, mindful, and committed to doing what is right and doing it the right way;
they are committed to following an organization's policies and procedures and its ethical
and behavioral standards. The control environment encompasses technical competence
and ethical commitment; it is an intangible factor that is essential to effective internal
control.

16.2 The board of directors and management enhance an organization's control environment
when they establish and effectively communicate written policies and procedures, a code
of ethics, and standards of conduct. Moreover, the board and management enhance the
control environment when they behave in an ethical manner creating a positive "tone at
the top"--and when they require that same standard of conduct from everyone in the
organization.

16.3 Responsibility

16.3.1 Management is responsible for "setting the tone" for their organization. Management
should foster a control environment that encourages:

The highest levels of integrity and personal and professional standards,

A leadership philosophy and operating style which promote internal control
throughout the organization, and,
An assignment of authority and responsibility.

16.4 Control Environment Tips

16.4.1 Effective human resource policies and procedures enhance an organization's control
environment. These policies and procedures should address hiring, orientation, training,
evaluations, counseling, promotions, compensation, and disciplinary actions. In the event
that an employee does not comply with an organization's policies and procedures or
behavioral standards, an organization must take appropriate disciplinary action to
maintain an effective control environment. The control environment is greatly
influenced by the extent to which individuals recognize that they will be held
accountable.

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16.4.2 Listed below are some tips to enhance an entitys control environment. This list is not
all-inclusive, nor will every item apply to every department; it can, however, serve as a
starting point.

Make sure that the following policies and procedures are available (hard copy or Internet
access):

o Administrative Procedures
o Employee Handbook
o Purchasing Manual
o Personnel Memorandum

Make sure that the entity has well-written departmental policies and procedures manual
which addresses its significant activities and unique issues. Employee responsibilities,
limits to authority, performance standards, control procedures, and reporting relationships
should be clear.

Make sure that employees are well acquainted with the organization's policies and
procedures that pertain to their job responsibilities.

Discuss ethical issues with employees. If employees need additional guidance, issue
departmental standards of conduct.

Ask employees to disclose potential conflicts of interest (e.g., ownership interest in

companies doing business or proposing to do business with the department).

Make sure that job descriptions exist and correctly translate desired competence levels
into requisite knowledge, skills, and experience; make sure that hiring practices result in
hiring qualified individuals.

Make sure that the entity has an adequate training program for employees.

Make sure that employee performance evaluations are performed periodically. Good
performances should be valued highly and recognized in a positive manner.

Make sure that appropriate disciplinary action is taken when an employee does not
comply with policies and procedures or behavioral standards.

17. Control Procedures

17.1 Control procedures means the policies and procedures in addition to the control
environment, which the management has established to achieve the entitys specific
control objectives.

17.2 Control procedures are actions supported by policies and procedures that, when carried
out properly in a timely manner, manage or reduce risks. The effectiveness of control
procedures improved considerably, when there is strong control environment, a formal
system of identification, assessment and management of major risks, an appropriate
system of information and communication (vertical and horizontal) and an effective

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 system of monitoring by management. The concepts of risk assessment, information and
communication and monitoring are also described in the later part of this chapter.

17.3 Responsibility

17.3.1 The responsibility for establishing adequate controls to meet the requirements of the
business and the objectives of the internal control outlined above is that of the board of
directors and management. Their responsibility includes identifying the financial and
compliance risks for their operations, and designing, implementing and monitoring their
internal control system.

17.4 Preventive & Detective Controls.

17.4.1 Controls can be either preventive or detective. The intent of these controls is different.
Preventive controls attempt to deter or prevent undesirable events from occurring. They
are proactive controls that help to prevent a loss. Examples of preventive controls are
separation of duties, proper authorization, adequate documentation, and physical control
over assets.

17.4.2 Detective controls, on the other hand, attempt to detect undesirable acts. They provide
evidence that a loss has occurred but do not prevent a loss from occurring. Examples of
detective controls are reviews, analyses, variance analyses, reconciliation, physical
inventories, and audits.

17.4.3 Both types of controls are essential to an effective internal control system. From a
quality standpoint, preventive controls are essential because they are proactive and
emphasize quality. However, detective controls play a critical role providing evidence
that the preventive controls are functioning and preventing losses.

17.4.4 Control activities include approvals, authorizations, verifications, reconciliation, reviews

of performance, security of assets, segregation of duties, and controls over information
systems and are further explained as follows:

17.5 Approvals, Authorizations, and Verifications (Preventive).

17.5.1 Management authorizes employees to perform certain activities and to execute certain
transactions within limited parameters. In addition, management specifies those activities
or transactions that need supervisory approval before they are performed or executed by
employees. A supervisors approval (manual or electronic) implies that he or she has
verified and validated that the activity or transaction conforms to established policies and
procedures.

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17.6 Reconciliation (Detective).

17.6.1 An employee relates different sets of data to one another, identifies and investigates
differences, and takes corrective action, when necessary.

17.7 Reviews of Performance (Detective).

17.7.1 Management compares information about current performance to budgets, forecasts,

prior periods, competitors, or other benchmarks to measure the extent to which goals and
objectives are being achieved and to identify unexpected results or unusual conditions
that require follow-up.

17.8 Security of Assets (Preventive and Detective).

17.8.1 Access to equipment, inventories, securities, cash and other assets is restricted; assets are
periodically counted and compared to amounts shown on control records.

17.9 Segregation of Duties (Preventive).

17.9.1 Duties are segregated among different people to reduce the risk of error or inappropriate
action. Normally, responsibilities for authorizing transactions, recording transactions
(accounting), and handling the related asset (custody) are divided.

17.10 Controls over Information Systems (Preventive and Detective).

17.10.1 Controls over information systems are grouped into two broad categories-general
controls and application controls. General controls commonly include controls over data
center operations, system software acquisition and maintenance, access security, and
application system development and maintenance. Application controls such as
computer matching and edit checks are programmed steps within application software;
they are designed to help ensure the completeness and accuracy of transaction
processing, authorization, and validity. General controls are needed to support the
functioning of application controls; both are needed to ensure complete and accurate
information processing.

17.10.2 Control procedures must be implemented thoughtfully, conscientiously, and

consistently; a procedure will not be useful if performed mechanically without a sharp
continuing focus on conditions to which the policy is directed. Further, it is essential
that unusual conditions identified as a result of performing control procedures are
investigated and appropriate corrective action be taken.

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17.11 Control Procedures -Approvals (Preventive)

Written policies and procedures

Limits to authority
Supporting documentation
Question unusual items
No rubber stamps
No blank signed forms

17.11.1 An important control procedure is authorization/approval. Authorization is the

delegation of authority; it may be general or specific. Giving a department
permission to expend funds from an approved budget is an example of general
authorization. Specific authorization relates to individual transactions; it requires
the signature or electronic approval of a transaction by a person with approval
authority. Approval of a transaction means that the approver has reviewed the
supporting documentation and is satisfied that the transaction is appropriate,
accurate and complies with applicable laws, regulations, policies, and procedures.
Approvers should review supporting documentation, question unusual items,
and make sure that necessary information is present to justify the
transaction-before they sign it. Signing blank forms should not be done.

17.11.2 Approval authority may be linked to specific rupee levels. Transactions that
exceed the specified amounts would require approval at a higher level. Under no
circumstance should an approver tell someone that they could sign the approver's
name on behalf of the approver. Similarly, under no circumstance should an
approver with electronic approval authority share his password with another
person. To ensure proper segregation of duties, the person initiating a transaction
should not be the person who approves the transaction. A department's approval
levels should be specified in a departmental policies and procedures manual.

17.12 Control Procedures -Reconciliations (Detective)

Reconciliation is a comparison of different sets of data to one another,

identifying and investigating differences, AND taking corrective action, when
necessary.
For example, vouching charges in the statement of accounts to file copies of
approved vouchers.

17.12.1 Broadly defined, a reconciliation is a comparison of different sets of data to one

another, identifying and investigating differences, and taking corrective action,
when necessary, to resolve differences. Reconciling monthly financial reports
from the Accounting Department (e.g., Statement of Accounts, Ledger Sheets,
etc.) to file copies of supporting documentation or departmental accounting
records is an example of reconciling one set of data to another. This control
procedure helps to ensure the accuracy and completeness of transactions that have
been charged to a department's accounts. To ensure proper segregation of duties,
the person who approves transactions or handles cash receipts should not be the
person who performs the reconciliation. Another example of reconciliation is

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 comparing vacation and sick leave balances per departmental records to vacation
and sick leave balances per the payroll system.

17.12.2 A critical element of the reconciliation process is to resolve differences. It

does not do any good to note differences and do nothing about it. Differences
should be identified, investigated, and explained--corrective action must be taken.
If any expenditure is incorrectly charged to an account, then appropriate action for
posting a correcting journal entry is required; the reconciler should ascertain that
the correcting journal entry is posted. Reconciliation should be documented and
approved by management.

17.13 Control Procedures -Reviews (Detective)

Budget to actual comparison

Current to prior period comparison
Performance indicators
Follow-up on unexpected results or unusual items

17.13.1 Reviewing reports, statements, reconciliation, and other information by

management is an important control procedure; management should review such
information for consistency and reasonableness. Reviews of performance provide
a basis for detecting problems. Management should compare information about
current performance to budgets, forecasts, prior periods, competitors, or other
benchmarks to measure the extent to which goals and objectives are being
achieved and to identify unexpected results or unusual conditions which require
follow-up. Management's review of reports, statements, reconciliation, and other
information should be documented as well as the resolution of items noted for
follow-up.

17.14 Control Procedures-Asset Security (Preventive And Detective)

Security of physical and intellectual assets

Physical safeguards
Perpetual records are maintained
Periodic counts/physical inventories
Compare counts to perpetual records
Investigate/correct differences

17.14.1 Liquid assets, assets with alternative uses, dangerous assets, vital documents,
critical systems, and confidential information must be safeguarded against
unauthorized acquisition, use, or disposition. Typically, access controls are the
best way to safeguard these assets. Examples of access controls are as follows:
locked door, key pad systems, card key system, badge system, locked filing
cabinet, guard, terminal lock, computer password, menu protection, automatic
call-back for remote access, smart card, and data encryption.

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 17.14.2 The organizations which have large value capital assets or significant inventories
should establish perpetual inventory control over these items by recording
purchases and issuances, Periodically, the items should be physically counted by a
person who is independent of the purchase authorization and asset custody
functions and the counts should be compared to balances per the perpetual
records. Missing items should be investigated, resolved, and analyzed for
possible control deficiencies; perpetual records should be adjusted to physical
counts if missing items are not located.

17.15 Control Procedures-Segregation Of Duties (Preventive and Detective)

No one person should...

> Initiate transaction
> Approve transaction
> Record transaction
> Reconcile balances
> Handle assets
> Review reports

At least two sets of eyes

17.15.1 Segregation of duties is critical to effective internal control; it reduces the risk of
both erroneous and inappropriate actions. In general, the approval function, the
accounting/reconciling function, and the asset custody function should be
separated among employees. When these functions cannot be separated, a
detailed supervisory review of related activities is required as a compensating
control procedure. Segregation of duties is a deterrent to fraud because it requires
collusion with another person to perpetrate a fraudulent act.

17.15.2 Specific examples of segregation of duties are as follows:

The person who requisitions the purchase of goods or services should not be
the person who approves the purchase.
The person who approves the purchase of goods or services should not be the
person who reconciles the monthly financial reports.
The person who approves the purchase of goods or services should not be able
to obtain custody of checks.
The person who maintains and reconciles the accounting records should not
be able to obtain custody of checks.
The person who opens the mail and prepares a listing of checks received
should not be the person who makes the deposit.
The person who opens the mail and prepares a listing of checks received
should not be the person who maintains the accounts receivable records.

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17.16 Control Procedures-Separation of Duties Examples

17.16.1 The box below identifies some of the potential key (and high risk) transaction
types with guidelines for separating duties.

TRANSACTION WHO WHO WHO WHO CONTROLS

TYPE INITIATES AUTHORIZES RECORDS RECONCILES (CUSTODY)

Purchase of Goods Issues Requisition Approves P.O./ Accounting Records Budget Report Receives Goods
Invoice
Person A Person B Person D Person C Person A or C
Purchase of Issues Requisition Approves Payment Accounting Records Budget Report Disburses Check
Services (1) & Verifies Receipt
of Services
Person A Person B Person D Person C Person A or C
Cash Receipts (2) Opens Mall, Lists Makes Deposit Accounting Records & Bank Account/ N/A
Checks, Restrictively Department Records Budget Report
Endorses & Deposits to
Checklist
Person A Person B Person D Person A or C
Payroll Employees Time Approves Time Accounting Records Budget Report Distributes Payroll
Report Report & Payroll Review Checks
Data Changes
Person A Person D Person B Person C
Inventory (3) Issues Requisition Approves P.O./ Accounting Records & Departmental Receives &
Invoice Department Records Records to Disburses Goods
(Issues & Receipts) Budget Reports
& Physical Counts
Person A Person B Person C Person B or C Person A

(1) If the same person authorizes and reconciles, additional monitoring is necessary.
(2) No receipts should be received directly by Person B
(3) Physical counts should not be under the control of persons responsible for custody or recording.

17.17 Control Procedures -Information Systems

17.17.1 General Controls: these controls apply to entire information systems and to all
the applications that reside on the systems. These include:

Access Security, Data & Program Security, Physical Security

Software Development & Program Change Controls
Data Center Operations
Disaster Recovery

17.17.2 General controls consist of practices designed to maintain the integrity and
availability of information processing functions, networks, and associated
application systems. These controls apply to business application processing in
computer centers by ensuring complete and accurate processing. These controls
ensure that correct data files are processed, processing diagnostics and errors are
noted and resolved, applications and functions are processed according to
established schedules, file backups are taken at appropriate intervals, recovery
procedures for processing failures are established, software development and
change control procedures are consistently applied, and actions of computer

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 operators and system administrators are reviewed. Additionally, these controls
ensure that physical security and environmental measures are taken to reduce the
risk of sabotage, vandalism and destruction of networks and computer processing
centers.

17.17.3 Finally, these controls ensure the adoption of disaster planning to guide the
successful recovery and continuity of networks and computer processing in the
event of a disaster.

17.18 Control Procedures-Application Controls (Preventive And Detective)

17.18.1 Applications are the computer programs and processes, including manual
processes, that enable us to conduct essential activities; buying products, paying
people, accounting for research costs, and forecasting and monitoring budgets.

17.18.2 Application controls apply to computer application systems and include input
controls (e.g., edit checks), processing controls (e.g., record counts), and output
controls (e.g., error listings), they are specific to individual applications.
Application Controls Include:

Programmed Procedures Within Application Software

o Input Controls (Data Entry)
Authorization
Validation
Error Notification and Correction
o Processing Controls
o Output Controls

17.18.3 They consist of the mechanisms in place over each separate computer system that
ensures that authorized data is completely and accurately processed. They are
designed to prevent, detect, and correct errors and irregularities as transactions
flow through the business system. They ensure that the transactions and programs
are secured, the systems can resume processing after some business interruption,
all transactions are corrected and accounted for when errors occur, and the system
processes data in an efficient manner.

17.18.4 Electronic Data Interchange, Voice Response, and Expert Systems are types of
applications that may require certain controls in addition to general application
controls.

17.18.5 When an organization decides to purchase or to develop an application, its

personnel must ensure the application includes adequate application controls: (1)
input controls, (2) processing controls, and (3) output controls.

17.18.6 Input controls ensure the complete and accurate recording of authorized
transactions by only authorized users; identify rejected, suspended, and duplicate
items; and ensure resubmission of rejected and suspended items. Examples of
input controls are error listings, field checks, limit checks, self-checking digits,

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 sequence checks, validity checks, key verification, matching, and completeness
checks.

17.18.7 Processing controls ensure the complete and accurate processing of authorized
transactions. Examples of processing controls are run-to-run control totals,
posting checks, end-of-file procedures, concurrency controls, control files, and
audit trails.

17.18.8 Output controls ensure that a complete and accurate audit trail of the results of
processing is reported to appropriate individuals for review. Examples of output
controls are listings of master file changes, error listings, distribution registers,
and reviews of output.

17.18.9 If an organization has applications that are critical to its success, then its
personnel must ensure that application controls reduce input, processing, and
output risks to reasonable levels.

17.18.10 Application Controls: End User Computing

17.18.10.1 Twenty years ago, an information system professional was needed to operate a
computer. Today many user departments personnel can obtain and use
information on the computer themselves. Some of the common applications used
by them are word processing, desktop publishing, spreadsheets, database
management systems, graphics programs, electronic mail, project management,
scheduling software, and mainframe-based query systems that are used to
generate reports. In addition to computer applications, the user departments use
other information systems applications such as voice mail and video
conferencing.

17.18.10.2 Advancing technology enables user departments to purchase or develop

information systems and applications, shifting certain general control
responsibilities from the centralized information systems department to end-user
departments. This often happens in the move from the mainframe to a client-
server environment.

17.18.10.3 The end-user department becomes responsible for segregation of duties within the
department's information systems environment, backup and recovery procedures,
program development and documentation controls, hardware controls, and access
controls. If a department has end-user information systems that are critical to its
success, then department personnel must ensure that application & general
controls reduce information systems risks to reasonable levels.

18. Internal Control- integrated framework

18.1 Over the years the awareness and focus on internal control has been increasing for
achieving managements objectives of efficiency, effectiveness and economy. The
Committee of Sponsoring Organizations of the National Commission on
Fraudulent Financial Reporting (known as Treadway Commission) of USA
(comprising of five major sponsoring institutions of USA) undertook a study to
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 establish an integrated framework on internal controls. This study, which was
released in September 1992 generally known as COSO study, provides a
comprehensive framework, which organizations can use for review and enhancing
their internal control systems. This framework can also be used by external
auditors for the purpose of their study and evaluation of internal control systems
of their client organizations. 'Internal Control - Integrated Framework' defines
internal control as a method for achieving reasonable assurance that objectives in
areas related to the effectiveness and efficiency of operations, reliability of
financial reports, and compliance with laws and regulations are met. The report
also identifies the five interrelated components of internal controls: the control
environment, risk assessment, control activities, information and communication,
and monitoring.

18.2 The components of control environment and control activities (control

procedures) are largely covered in the guidance contained in the AS-6, which has
been described above. The remaining three components, which have now been
included as an integral part of the internal control system, of risk assessment,
information and communication and monitoring are discussed below.

19. Risk Assessment

19.1 Determine Goals and Objectives

19.1.1 The central theme of internal control is (1) to identify risks to the achievement of
an organization's objectives and (2) to do what is necessary to manage those risks.
Thus, setting goals and objectives is a precondition to internal controls. If an
organization does not have goals and objectives, there is no need for internal
control.

19.1.2 At the organization level, goals and objectives are usually presented in a strategic
plan that includes a mission statement and broadly defined strategic initiatives.
At the department level, goals and objectives must support the organization's
strategic plan. Goals and objectives are classified in the following categories:

Operations objectives. These objectives pertain to the achievement of the

basic mission(s) of a department and the effectiveness and efficiency of its
operations, including performance standards and safeguarding resources
against loss.
Financial reporting objectives. These objectives pertain to the preparation of
reliable financial reports, including the prevention of fraudulent public
financial reporting.
Compliance objectives. These objectives pertain to adherence to applicable
laws and regulations.

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19.1.3 The following table illustrates these concepts:

Goals and Objectives Business

Objective
Classification

Payroll

Processing-Compensation/ Withholding
Compensation rates and payroll deductions should be Operations
accurately and promptly entered into the payroll system. (O).

Each accounting period, prepare journal entries for payroll,

payroll deductions, and related adjustments. Financial (F)

Processing-Authorizations
Personnel management should properly and accurately
maintain all compensation documentation. Compliance
(C)

An employee master file that is accurate and complete should

be maintained. O, F, C

19.1.4 A clear set of goals and objectives is fundamental to the success of an

organization as well as the departments and functions within it. Specifically, a
department or work unit should have (1) a mission statement, (2) written goals
and objectives for the department as a whole, and (3) written goals and objectives
for each significant activity in the department (see diagram below). Furthermore,
goals and objectives should be expressed in terms that allow meaningful
performance measurements.

Department Department Activities to Activity Level

Mission Goals and Achieve Goals Goals and
Objectives and Objectives Objectives

19.1.5 There are certain activities which are significant to all departments: budgeting,
purchasing goods and services, hiring employees, evaluating employees,
accounting for vacation/sick leave, and safeguarding property and equipment.
Thus, all departments are expected to have appropriate goals and objectives,
policies and procedures, and internal controls for these activities.

19.2 Identify Risks After Defining Goals

19.2.1 Risk assessment is the identification and analysis of risks associated with the
achievement of operations, financial reporting, and compliance goals and
objectives. This, in turn, forms a basis for determining how those risks should be
managed.

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19.2.2 Responsibility: To properly manage their operations, managers need to
determine the level of operations, financial and compliance risk they are willing
to assume. Risk assessment is one of management's responsibilities and enables
management to act proactively in reducing unwanted surprises. Failure to
consciously manage these risks can result in a lack of confidence that operation,
financial and compliance goals will be achieved.

19.2.3 Risk Identification. A risk is anything that could jeopardize the achievement of
an objective. For each of the department's objectives, risks should be identified.
Management could ask the following questions to help to identify risks:

What could go wrong?

How could we fail?
What must go right for us to succeed?
Where are we vulnerable?
What assets do we need to protect?
Do we have liquid assets or assets with alternative uses?
How could someone steal from the department?
How could someone disrupt our operations?
How do we know whether we are achieving our objectives?
On what information do we most rely?
On what do we spend the most money?
How do we bill and collect our revenue?
What decisions require the most judgment?
What activities are most complex?
What activities are regulated?
What is our greatest legal exposure?

19.2.4 It is important that risk identification be comprehensive-at overall organization

level, department level and at the activity or process level-for operations, financial
reporting, and compliance objectives-considering both external and internal risk
factors. Usually, several risks can be identified for each objective.

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19.2.5 The following table illustrates the concepts discussed above. Note that the
identified risks relate to the goals and objectives previously determined.

Goals and Objectives Business Risks

Objective
Classification

Payroll
Provide service and support to the
entitys employees.

Processing-Compensation/ Operations (O). Transactions may not be

Withholding processed or processed
Compensation rates and payroll incorrectly.
deductions should be accurately
and promptly entered into the
payroll system.

Each accounting period, prepare Financial (F) Financial statements may be

journal entries for payroll, payroll misstated due to entry omissions,
deductions, and related incorrect coding, duplicate
adjustments. journal entries, or improper cut-
offs.

Processing-Authorizations Compliance (C) Employment/tax laws and

Personnel management should regulations may be violated
properly and accurately maintain resulting in fines, penalties, or
all compensation documentation litigation.
including filing of periodic
returns to the income tax
departments.

An employee master file that is O, F, C Incorrect data in the master file

accurate and complete should be could result in incorrect wage
maintained. payments.

Payroll withholdings may be

incorrect.

Awards, incentives,
recognitions, etc., may not be
accurately reflected on the
master file.

2-32
19.2.6 Below are some types of transactions that may pose higher risks:

High Risk Large cash payments (not routed through bank)

Transaction Major acquisitions
Types Unusually large transactions
Accounting transactions that require subjective assessment
Software Licensing Issues
Intellectual Property
Estimation of provisions against inventory or other assets

19.2.7 These are transaction types that deserve a conscious risk review. In evaluating the
potential impact of risk, both quantitative and qualitative costs need to be
addressed.

Qualitative and Quantitative costs include the cost of property, equipment, inventory,
Quantitative cash loss, damage and repair costs, cost of defending a lawsuit, etc.
Costs Qualitative costs can have wide ranging implications to the entity.
These costs may include:
Loss of reputation due to supply of defective products
Loss of customers and markets
Violation of laws
Default on a project
Bad publicity
Decrease in turn over and business

19.3 Risk Analysis.

19.3.1 After risks have been identified, a risk analysis should be performed to prioritize
those risks:

Assess the likelihood (or frequency) of the risk occurring.

Estimate the potential impact if the risk were to occur; consider both
quantitative and qualitative costs.
Determine how the risk should be managed; decide what actions are
necessary.

19.3.2 Prioritizing helps focus managements attention on managing significant risks

(i.e., risks with reasonable likelihood of occurrence and large potential impacts).

2-33
19.4 Risk Assessment Tips

19.4.1 Listed below are tips to guide a department through its risk assessment:

Make sure the entity and all its major functions have a mission statement and
written goals and objectives.
Assess risks at the each financial statement component level.
Assess risks at the activity (or process) level.
Make sure that all risks identified at the component level are addressed in the
Business Controls Worksheet.

20. Balancing Risks and Controls

20.1 To achieve goals, management needs to effectively balance risks and controls. By
performing this balancing act "reasonable assurance can be attained. As it
relates to financial and compliance goals, being out of balance causes the
following problems:

Excessive Risks Excessive Controls

Loss of Assets Increased Bureaucracy

Poor Business Decisions Reduced Productivity
Noncompliance with laws Increased Complexity
Increased Regulations Increased Cycle Time
Public Scandals Increase of No-Value Activities

20.2 In order to achieve a balance between risk and controls, internal controls should
be proactive, value-added, and cost-effective.

21. Information & Communication

21.1 Information and communication are essential to effecting control;

information about an organization's plans, control environment, risks,
control procedures, and performance must be communicated up, down, and
across an organization. Reliable and relevant information from both internal
and external sources must be identified, captured, processed, and communicated
to the people who need it--in a form and timeframe that is useful. Information
systems produce reports, containing operational, financial, and compliance-related
information that makes it possible to run and control an organization.

21.2 Information and communication systems can be formal or informal. Formal

information and communication systems--which range from sophisticated
computer technology to simple staff meetings-should provide input and feedback
data relative to operations, financial reporting, and compliance objectives; such
systems are vital to an organization's success. Just the same, informal
conversations with customers, suppliers, regulators, and employees often provide
some of the most critical information needed to identify risks and opportunities.

2-34
21.3 When assessing internal control over a significant activity (or process), the key
questions to ask about information and communication are as follows:

Does the organization get the information it needs from internal and external
sources-in a form and timeframe that is useful?
Does the organization get information that alerts it to internal or external risks
(e.g., legislative, regulatory, and developments)?
Does the organization get information that measures its performance-
information that tells management whether it is achieving its operations,
financial reporting, and compliance objectives?
Does the organization identify, capture, process, and communicate the
information that others need (e.g., information used by our customers or other
departments)-in a form and timeframe that is useful?
Does our organization provide information to others that alerts them to
internal or external risks?
Does our organization communicate effectively--internally and externally?

21.4 Information and communication are simple concepts. Nevertheless,

communicating with people and getting information to people in a form and
timeframe that is useful to them is a constant challenge.

2-35
22. Monitoring

22.1 Monitoring is the assessment of internal control performance over time; it is

accomplished by ongoing monitoring activities and by separate evaluations of
internal control such as self-assessments, peer reviews, and internal audits.
The purpose of monitoring is to determine whether internal control is adequately
designed, properly executed, and effective. Internal control is adequately
designed and properly executed if all five internal control components (Control
Environment, Risk Assessment, Control Activities, Information and
Communication, and Monitoring) are present and functioning as designed.
Internal control is effective if the Board of Directors and management have
reasonable assurance that:

They understand the extent to which operations objectives are being achieved.
Published financial statements are being prepared reliably.
Applicable laws and regulations are being complied.

22.2 While internal control is a process, its effectiveness is an assessment of the

condition of the process at one or more points in time.

22.3 Just as control procedures help to ensure that actions to manage risks are carried
out, monitoring helps to ensure that control procedures and other planned actions
to effect internal control are carried out properly and in a timely manner and that
the end result is effective internal control. Ongoing monitoring activities include
various management and supervisory activities that evaluate and improve the
design, execution, and effectiveness of internal control. Separate evaluations, on
the other hand, such as self-assessments and internal audits, are periodic
evaluations of internal control components resulting in a formal report on internal
control. Department employees perform self-assessments; internal auditors who
provide an independent appraisal of internal control perform internal audits.

22.4 Management's role in the internal control system is critical to its effectiveness.
Managers, like auditors, don't have to look at every single piece of information to
determine that the controls are functioning and should focus their monitoring
activities in high-risk areas. The use of spot checks of transactions or basic
sampling techniques can provide a reasonable level of confidence that the controls
are functioning.

2-36
 DOCUMENTATION & EVALUATION OF ACCOUNTING
AND INTERNAL CONTROL SYSTEMS

INTERNAL CONTROL

Procedures and processes designed by management to provide reasonable assurance that

organizational objectives are met.
Improve effectiveness management decision making & efficiency of business
process
Increase reliability of accounting information Achieve appropriate compliance
with rules and regulations

ELEMENTS OF INTERNAL CONTROL SYSTEM

Control Environment
Risk Assessment
Control Activities
o Performance Review
o Information Processing Controls
o Physical Controls
o Segregation Of Duties
Information And Communication
Monitoring Activities

CONTROL RISK ASESSMENT

AUDIT RISK = INHERENT RISK x CONTROL RISK x DETECTION RISK

Control risk must be assessed to determine appropriate degree of reliance on
controls and what level of detection risk will be necessary to achieve desired audit
risk
If control risk is to be assessed at less than 100% then some level of testing must
be necessary

2-37
 OBTAINING AN UNDERSTANDING OF ACCOUNTING & INTERNAL CONTROL
SYSTEMS
Interviews
Review Of Company Documents
Observations
Transactions Walk- Through

DOCUMENTING THE ACCOUNTING & INTERNAL CONTROL SYSTEMS

Written Narrative
Flowcharts
Control Questionnaire
Decision Table
Combination Of Previous

LINKAGE TO AUDIT TESTING

Controls Identify Strengths Test of Controls Reliance = Reduce Substantive Test

Controls Weaknesses Offsetting Controls Or Substantive Tests

REPORTING ON INTERNAL CONTROL

Reportable Conditions:

1. Efficiency or Effectiveness Management Letter

2. Affecting the financial reporting or compliance with laws but risk covered through
substantive procedures Management Letter

3. Affecting financial reporting or compliance with laws & risk cannot be covered
through substantive tests Qualification in Auditors Report

2-38
 INTERNAL CONTROL QUESTIONNAIRE

CONTENTS
PAGE NO.
I. CONTROL ENVIRONMENT
A. Management Philosophy and Operating Style 2-40

B. Organization Structure 2-40

C. Personnel Policies and Procedures 2-40

D. Management Control Methods 2-41

E. Internal Audit Function 2-41

II. ACCOUNTING SYSTEM

A. General Accounting 2-43

B. Preparation of Financial Statements 2-44

III. REVENUE CYCLE

A. Revenue and Receivables 2-45

B. Cash Receipts 2-49

IV. EXPENDITURES CYCLE

A. Purchases and Accounts Payable 2-51

B. Payroll 2-54
C. Cash Disbursements 2-56

V. PRODUCTION (CONVERSION) CYCLE

A. Production Costs and Inventories 2-59

B. Property and Equipment 2-65

VI. FINANCING (TREASURY) CYCLE

A. Investments 2-67
B. Equity Capital 2-68

2-39
I. CONTROL ENVIRONMENT
YES NO N/A

A. Management Philosophy and Operating Style

Questions-Policies and Procedures

1. Does management have clear objectives in terms of

budgets, profit and other financial and operating goals?

2. Are such policies:

a. clearly written?
b. actively communicated throughout the entity?
c. actively monitored?

B. Organization structure

Objective

Definitions of responsibilities and authority assigned to

specific individuals permit identification of whether
persons are acting within the scope of their authority.

Questions-Policies and Procedures

1. Is the organisation of the entity clearly defined in terms of

lines of authority and responsibility?

2. Does the entity have a current organisation chart and

related materials such as job descriptions.

3. Is there adequate computer system documentation?

C. Personnel Policies and Procedures

Questions-Policies and Procedures

1. Does the entity:

a. Adequately plan for staff needs?

b. Employ sound hiring practices, including

background investigations, where appropriate?

2-40
 YES NO N/A

2. Are employees adequately trained to meet their job

responsibilities?
3. Does the entity systematically evaluate the performance of
employees?
4. Is good performance appropriately rewarded?

D. Management Control Methods

Questions-Policies and Procedures

1. Are there regular meetings of the board of directors (or

comparable bodies) to set policies and objective, review
the entitys performance and take appropriate action, and
are minutes of such meetings prepared and signed on a
timely basis?

2. Has the entity established planning and reporting systems

that set forth managements plans and the results of actual
performance?

3. Do the planning and reporting system in place:

a. Adequately identify variances from planned

performance?
b. Adequately communicate variances to the
appropriate management level?

4. Does the appropriate level of management:

a. Adequately investigate variances?

b. Take appropriate and timely corrective action?

5. Does the entity have established policies for developing

and modifying accounting systems and control
procedures?

E. Internal Audit Function

Question-Policies and Procedures

1. Does the entity have an internal audit function?

2. If an internal audit function is present:

a. Are the internal auditors independent of the

activities they audit?

2-41
 YES NO N/A

b. Is the internal audit function adequately staffed in

terms of the number of employees, and their
training and experience?

c. Don the internal auditors document the internal

control structure and perform tests of control

d. Do they perform substantive tests of the details of

transactions and account balances?

e. Do they render written reports on their findings

and conclusions?

f. Are their reports submitted to the board of

directors or to a committee thereof?

g. Are copies of reports made available to external

auditors?

Are copies of reports made available to external auditors?

3. Does management take adequate and timely actions to

correct conditions reported by the internal audit function.

4. Does the internal audit function follow up on corrective

actions taken by management?

2-42
II. ACCOUNTING SYSTEM
YES NO N/A

A. General Accounting

Objectives

a. Accounting policies and procedures, including

selection among alternative accounting principles
are determined in accordance with managements
authorization.

b. Access to the accounting and financial records is

limited to minimise opportunities for errors and
irregularities and to provide reasonable protection
from physical hazards.

c. Accounting entries are initiated and approved in

accordance with managements authorisation.

d. All accounting entries are appropriately

accumulated, classified and summarised in the
accounts.

Question-Policies and Procedures

1. Does the entity have adequate written statements and

explanations of its accounting policies and procedures?

2. Are the entitys accounting policies and procedures

adequately communicated to appropriate personnel?

3. Are there adequate facilities for custody of the general

ledger and related records?

4. Are all journal entries reviewed and approved by

designated individuals at appropriate levels in the
organisation?

5. Are all journal entries adequately explained and

supported?

6. Do all journal entries include indication of approval in

accordance with managements general or specific
authorisation?

7. Do all journal entries include adequate identification of

the accounts in which they are to be recorded?
2-43
 YES NO N/A

8. Are adequate accounts and records maintained so that

adjustments and write-offs made to account balances do
not impair accountability for actual amounts?

9. Is approval of responsible official required to open new

accounts?

10. Are accounting records updated regularly and on timely

basis?

11. Are correction of entries prohibited except through

procedures for journal entries.

B. Preparation of Financial Statements

Objectives

a. The general ledger and related records permit

preparation of financial statements in conformity
with approved accounting standards.

b. Individuals at appropriate levels in the organisation

consider sufficient, reliable information in making
the estimates and judgments required for
preparation of financial statements including
related disclosures and other externally reported
financial information.

c. Financial statements including related disclosures

are prepared and released in accordance with
managements authorisation.

Questions -Policies and Procedures

1. Are there adequate instructions and procedures for

statement preparation?

2. Are financial statements subjected to overall review,

including comparisons with the prior period and budgeted
amounts, by appropriate levels of management before the
statements are approved for issuance?

2-44
III. REVENUE CYCLE
YES NO N/A

A. Revenue and Receivables

Sales Orders

Objectives

a. The types of goods and services to be provided,

the manner in which they will be provided and the
customers to which they will be provided are in
accordance with managements authorisation.

b. The prices and other terms of sale of goods and

services are established in accordance with
managements authorisation.

Questions -Control Policies and Procedures

1. Do policies and procedures for acceptance and approval of

sales orders appear clearly defined and adequately
communicated for:

a. Standard goods and services?

b. Unusual delivery arrangements?
c. Export sales?
d. Sales to related parties?

2. Is responsibility clearly assigned for approval sales orders

before shipment or performance?

3. Are sales orders approved in accordance with

managements general or specific authorisation before
shipment or other performance concerning:
a. Customer?
b. Description and quantities?
c. Price?
d. Other terms of sales?
e. Credit (account balances limits)?

4. Are all approved sales orders recorded on appropriate

forms which include indication of proper approval and are
subject to:
a. Pre-numbering?
b. Accounting for all forms used?
c. Recording in detail?
(For example, listing in a register or log, or copies
of all sales orders issued in file.)
2-45
 YES NO N/A

d. Timely communication to persons who perform the

shipping or service function?
5. Are there appropriate procedures for approval of No
charge services and services performed under a
warranty?

6. Are unfilled sales commitments periodically reviewed?

Credit

Objective

Credit terms and limits are established in accordance with

managements authorisation.

Questions -Control Policies and Procedures

1. Do policies on granting of credit appear clearly defined

and adequately communicated?

2. Is there periodic review of credit limits?

3. Do persons who perform the credit function receive timely

information about past due accounts?

Shipments

Objectives

a. Goods delivered and services provided are based

on orders which have been approved in accordance
with managements authorisation.

b. Deliveries of goods and rendering of services

result in preparation of accurate and timely
billings.

Question-Control Policies and procedures

1. Are goods shipped or services rendered based on

documented sales or work orders which include indication
of approval in accordance with managements
authorisation?

2. Are shipping documents prepared for all shipments?

2-46
 YES NO N/A

3. Are shipping documents subjected to:

a. Pre-numbering?

b. Accounting for all shipping documents issued?

c. Timely communication to persons who physically

perform the shipping function?

d. Timely communication to persons who perform

the billing function?

e. Timely communication to persons who perform

the inventory control function?

4. Is access to finished goods and merchandise restricted so

that withdrawals of inventory are based only on properly
approved sales orders

5. Are quantities of goods shipped independently verified?

6. Are shipping and performance documents reviewed and

compared with billings on a timely basis to determine that
all goods shipped or services rendered are billed and
accounted for?

Billings and Records

Objectives

a. Sales and such related transactions as commissions

and sales taxes are based on deliveries of goods or
rendering of services and recorded at the correct
amounts and in the appropriate period and are
properly classified in the accounts.

b. Sales related deductions and adjustments are made

in accordance with managements authorisation.

Questions-Control Policies and Procedures

1. Are sales invoices prepared for all shipments of goods or

services rendered (including purchases which are shipped
directly to customer)?

2-47
 YES NO N/A

2. Are billing and invoice preparation functions performed

by persons who are independent of the selling (soliciting
and receiving orders from customers), credit, and cash
functions?

3. Are all sales invoices:

a. Pre-numbered?
b. Accounted for to determine all invoices are
recorded?
c. Matched with properly approved sales orders?
d. Matched with shipping documents?
e. Traced to authorised current source information on
prices and terms (for example, price list, schedules,
catalogues, or computer stored master files?
f. Recorded promptly?

4. Are sales invoices listed in detail?

5. Are all credit memos:

a. Pre-numbered and all numbers accounted for?

b. Matched when applicable with receiving reports
for returns?
c. Approved by a responsible employee other than
the person initiating preparation of the credit
memo?
d. Recorded promptly?

6. Are monthly statements and specific billings sent for

trade receivables:

a. Reviewed by a responsible employee who is

independent of the accounts
functions?
b. Mailed by a responsible
independent of the accounts
functions?
receivable and cash
employee who is
receivable and cash

7. Is an aging schedule or schedule of past due accounts

prepared monthly by someone independent of the billing
and cash receipts functions?

8. Is the accounts receivable subsidiary ledger reconciled

monthly to the general ledger control account?

2-48
 YES NO N/A

9. Does the credit manager review monthly ageing schedules

or listings of past due customer accounts and investigate
delinquent accounts and unusual items on a timely basis?

10. Is there documentation of review and analysis of accounts

receivable balances to determine valuation allowances (for
doubtful accounts) and any specific balances to be written-
off?

11. Are valuation allowances and write-offs approved by a

responsible employee?

B. Cash Receipts
Processing Collections

Objectives

a. Access to cash receipts and cash receipts records,

accounts receivable records, and billing and
shipping records is controlled to prevent or detect,
on a timely basis, the taking of unrecorded cash
receipts or the abstraction of recorded cash
receipts.

b. Details transaction and account balance records are

reconciled, at reasonable intervals, with applicable
control accounts and bank statements for timely
detection and correction of errors.

Question-Control Policies and Procedures

1. Is the mail opened by a person(s) whose duties do not

involve any shipping, billing, accounts receivable detail,
general ledger, invoice processing, payroll and cash
disbursement functions?

2. Are receipts of currency controlled by cash registers

and/or pre-numbered cash receipt forms?

3. Are each days receipts (by mail and over the counter)
except for post-dated items deposited intact daily?

4. Are post-dated items segregated on daily detail listings of

remittances to aid in control of total items received?

5. Are all employees who handle receipts adequately

bonded?
2-49
 YES NO N/A

6. Are banks instructed not to cash cheques and other

instruments drawn to the order of the company?
7. Does company policy prohibit the asking of any
accommodation cheques for example, personal and
payroll cheques) out of collections?
8. Are entries to the cash receipts journal compared with
a. Duplicated deposit slips authenticated by the bank?
b. Deposits per the bank statements?
9. Are the comparisons described in item 13 above made by
a person(s) whose duties do not include cash receipts and
accounts receivable functions?

Recording Collections

Objectives

All cash receipts recorded are at the correct amount in the period
in which received and are properly classified and summarised.

Question-Control Policies and Procedures

1. Is information captured from remittances (by mail and

over the counter) adequate for accurate posting of credits
to individual accounts receivable subsidiary records or to
classifications concerning such other sources as
investment income, rents sales of property or scrape and
proceeds of financing?
2. Are details of daily collections balanced with the total
credits to be distributed to appropriate general ledger
accounts and to the total collections for the day before
posting to the subsidiary records?
3. Do postings of the general ledger control accounts and
subsidiary records include the date on which the
remittance was received?
4. Are posting to the general ledger control accounts made
by a person(s) independent of:

a. Physical handling of collection?

b. Posting accounts receivable subsidiary detail?

2-50
IV. EXPENDITURE CYCLE
YES NO N/A

A. Purchases and Accounts Payable

Purchases

Objectives

The types of goods, other asset and services to he obtained, the

manner in which they are obtained, the vendors from which they
are obtained, the quantities to be obtained and the prices and other
terms are initiated and executed in accordance with management's
general or specific authorization.

Adjustments to vendor accounts and account distributions are

made in accordance with management's general or specific
authorization.

Questions-Control Policies and Procedures

1. Are all purchases based on requisitions which have been

approved in accordance with management's authorization ?
2. Are written purchases orders (or other equivalent document)
used for all commitments and do those orders include the
vendor description, quantity, price, term and delivery
requirements for the goods or services ordered?
3. Are all purchase orders, before issuance, approved by
specific individuals or classes of individuals designated by
management?
4. Are all purchase orders pre-numbered?
5. Is the purchases function independent of receiving, shipping,
invoice processing and cash functions?
6. Are all purchase orders routinely accounted for?
7. Is custody of unissued purchases order form adequate to
prevent their misuse?
8. Are open purchase orders periodically reviewed and
investigated?
Receiving
Objectives
a. All goods, other assets and services received are
accurately accounted for on a timely basis
b. Only authorized goods, other assets and services are
accepted and/or paid for.

2-51
 YES NO N/A

Questions -Control Policies and Procedures

1. Are all goods received inspected for condition and

independently counted, weighed or measured to provide for
comparison with the applicable purchase order?
2. Is there evidence that all services received are evaluated for
quality and completeness?
3. Are receiving reports prepared promptly for all goods
received?
4. Are receiving reports subjected to the following
a. Pre-numbering?
b. Listing in detail?
c. Accounting for all receiving reports used?
d. Distribution of copies for timely matching with
purchase orders and vendor's invoices and if
applicable, timely maintenance of perpetual inventory
records?
5. Are receiving functions performed by designated
employees who are independent of the purchasing,
shipping, invoice processing and cash functions?
Invoice Processing

Objectives
a. Only authorized goods, other assets and services received
are paid for.
b. Amounts payable for goods and services received are
accurately recorded at the- correct amount in the
appropriate period and are classified in the accounts
to:
(1) Permit preparation of reports and statements in
conformity with generally accepted accounting
principles or other criteria.
(2) Maintain accountability for costs incurred.
C. Access to purchasing, receiving and accounts payable
records is suitably controlled to prevent or detect within a
timely period duplicate or improper payments.
Questions-Control policies and Procedures
1 Are vendors invoices processed by designated employees
who are independent of the purchasing and receiving
functions?
2. Are duplicate invoices conspicuously stamped or
destroyed as a precaution against duplicate payment?

2-52
 YES NO N/A
3. Are vendors invoices prior to payment compared in detail
to:
a. Receiving reports?
b. Evidence of direct shipment to customers? (For
example, copy of vendor's shipping document or
acknowledgment of receipt by the customer).
c. Debit memoranda'?
d. Evaluation reports on services rendered?
4. Are advances to suppliers made in accordance with
management's authorization?
5. Are vendors invoices, prior to payment, reviewed for
correctness of:
a. Clerical accuracy?
b. Adjustment of advances?
c. Freight charges?
d. Account distribution?
6. Are processed invoices and supporting documents
approved by designated employees before payment?
7. Are approved debit memos used to notify vendors of
goods returned and other adjustments of their accounts?
8. Are accumulation of processed invoice and follow-up of
unmatched purchase orders and receiving reports adequate
to result in a proper cut off for financial reporting
purposes?
9. Are vendors statements reviewed for overdue items and
reconciled with accounts payable detail
10. Are there adequate controls to ensure recognition of
liabilities for goods/services received but not invoiced?
11. Are employee expense accounts:
a. Prepared in accordance with criteria set by
management?
b. Submitted promptly?
c. Adequately supported?
d. Approved before payment?

12. Are approved debit memos used to notify vendors of

goods returned and other adjustments of their accounts?
13. Is accounts payable detail periodically reconciled with the
control accounts at reasonable intervals?

2-53
 YES NO N/A
B. Payroll

Authorization of Wages, Salaries, and Deductions Objectives

Objectives
a. Employees are hired and retained only at rates, benefits and
perquisites determined in accordance with management's
general or specific authorization.
b. Payroll deductions are based on evidence of appropriate
authorization.
c. Payroll include only those employees who worked during
the period.

Questions-Control policies and procedures

1. Are all new hires, rates of pay and changes thereto,

changes in position, and separations based on written
authorizations in accordance with management's criteria?
2. Are appropriate written authorization obtained from
employees for all payroll deductions?
3. Are personnel files maintained for individual employees
which include appropriate written authorizations for rates
of pay, payroll deductions?
4. Are proper leave records maintained for vacations, illness
and holidays?
Preparation and Recording

Objectives
a. Compensation is made only to company employees at
authorized rates and for services rendered in accordance
with management's authorization.
b. Gross pay, deductions and net pay are correctly computed
based on authorized rates and services rendered and
properly authorized deductions.
c. Payroll costs and related liabilities are correctly
accumulated, classified, and summarized in the accounts in
the appropriate period.
Questions-Control Policies and Procedures

1. Do employees who perform the payroll processing

function receive timely notification of.
a. Wage and salary rates resulting from new hires,
rate changes, changes in position, and separations?
b. Changes in authorized deductions?

2-54
 YES NO N/A
2. Is gross pay determined using authorized rates and:

a. Time or attendance records for employees paid by

the hour or by salary?
b. Piecework records for employees whose wages are
based on production?
c. Adequate detail records of sales for commission
salesmen?
3. Are accruals for gratuity provided on the based of
contractual agreements with the employees?
4. Are total production hours used for determination of gross
pay reconciled with production statistics used for cost
accounting purposes?
5. Are piece rate records reconciled with production
records?
6. Are salesmens commission records reconciled with
recorded sales?
7. Are such data as hours worked, piecework and
commission sales used to determine gross pay compared
at reasonable intervals with applicable production and
sales records by responsible persons.

Disbursement ( Payroll)

Objective

Not pay is disbursed to the appropriate employees when due.

Questions-Control Policies and Procedures

1. Are payrolls approved in writing by responsible employees
before issuance of payroll cheques or distribution of cash
for net pay?
2. Is net pay distributed, by persons who are independent of
payroll preparation, time-keeping, and cheque preparation
functions?
3. For payrolls paid by cheque:
a. Are cheques drawn on a separate imprest account?
b. Are deposits equal to the amount of net Pay?

4. For payrolls paid in cash.

a. Are adequate security precautions taken?

b. Does the cash requisition equal the amount of net
pay to he distributed as cash?
c. Is distribution made by persons independent of
payroll preparation functions?
d. Are receipts obtained from employees and revenue stamps
affixed?
2-55
 YES NO N/A
5. Is responsibility for custody and follow-up of unclaimed
wages assigned to a responsible person independent of
personnel, payroll processing, and cash disbursements
functions?
6. Are procedures adequate to result in timely and accurate
preparation and filing of payroll tax returns and payment
of related accumulated accrued taxes?
Segregation of Functions and Physical Safeguards

Objectives

a. Functions are assigned so that no single individual is in a

position to both perpetrate and conceal errors or
irregularities in the normal course of his duties.
b. Access to personnel and payroll records is limited to
minimize opportunities for errors, and irregularities

Questions-Control Policies and Procedures

1 Is there adequate separation of duties among employees

who perform the following functions:
a. Written authorization of new hires, any rates and
changes thereto, benefits, changes in position, and
separations?
b. Maintenance of personnel records?
c. Preparation of payrolls?
d. Approval of payrolls?

C. Cash Disbursements

Assignment of Functions

Objective

Functions are assigned so that no single. individual is in a

position to both perpetrate and conceal errors or irregularities in
the normal course of his duties.

Questions-Control Policies and Procedures

1. Is the cash disbursements function performed by persons

who are independent of the following functions:
a. Purchasing?
b. Receiving?
c. Invoice processing?
d. Shipping?

2-56
 YES NO N/A
Processing Disbursements

Objectives

a. Disbursements are made only for expenditures

incurred in accordance with management's authorization.
b. Adjustments to cash. accounts are made only in
accordance with management's authorization.
c. Disbursements are recorded at correct amounts in the
appropriate period and are properly classified in the
accounts.
d. Access to cash and cash disbursement records is restricted
to minimize opportunities for irregular or erroneous
disbursements.

Questions-Control Policies and Procedures

1. Are all bank accounts authorized by the board of directors?

2. Are all cheque signers authorized by the board of directors?
3. Are bank promptly notified of any changes in authorized
cheque signers?
4. Are all disbursement and bank transfers based on vouchers
and cheque requests which have been approved by
responsible employees designated by management?
5. Are all disbursements except from petty cash made by
cheque?
6. Are properly approved supporting documents presented
with cheques and reviewed by the cheque signer(s) before
signing the cheques?
7. Are supporting documents for cheques properly canceled
and cheque number entered to avoid duplicate payment?
8. Are cash funds on an imprest basis and
a. Kept in a safe place?
b. Reasonable in amount?
c. Periodically counted by someone other the
custodian?
9. Are all disbursements from cash funds:
a. Supported by vouchers which are prepared in ink?
b. Approved in accordance with management's
authorization?
c. Canceled to prevent reuse?
d. Subject to a predetermined maximum limit for any
individual disbursement?

2-57
 YES NO N/A

10. Are reimbursements of cash funds:

a. Subject to the same review and approval as

processed invoices?
b. Remitted by cheques drawn payable to the order of
the custodian of the cash fund?

11. Are all voided cheques retained and mutilated?

12. Are all cheques promptly recorded when issued and listed
in detail?

Bank Reconciliations

Objective

Comparison of detail records, control accounts, and bank

statements are made at reasonable intervals for detection and
appropriate disposition of errors or irregularities.

Questions-Control Policies and Procedures

1. Are the bank accounts reconciled monthly by an

employee(s) who is independent of invoice processing,
cash disbursements, cash receipt, petty cash and general
ledger functions?

2. Are old outstanding cheques investigated?

2-58
V. PRODUCTION (CONVERSION) CYCLE
YES NO N/A

A. Production Costs and Inventories

Authorization of Production Activities and Planned

Inventory Levels

Objective

All production activity and accounting therefor is determined in

accordance with management's general or specific authorization.

Questions-Control Policies and Procedures

1. Are planned inventory levels or service capabilities to be

maintained determined in accordance with management's
authorization?
2. Are all adjustments to inventory and cost of sales made in
accordance with management's authorization?
3. Are all dispositions of obsolete or excess inventory or
scrap made in accordance with management's
authorization?

Recording Resources Used in Production and Completed

Results

Objective

Resources obtained and used in the production process and

completed results are accurately recorded on a timely basis.

Question-Control Policies and Procedures

1. (a) Are receiving reports prepared which include
adequate information for posting detailed
inventory records and allow for summarization
into a source for posting inventory control
accounts?
(b) Is goods receiving department independent of
storage and purchasing department?

2. Are all releases from storage of raw materials, supplies,

and purchased parts inventory based on approved
requisition documents?
3. Is authority to approve inventory requisitions assigned to
responsible employees.

2-59
 YES NO N/A

4. Is labor effort (lime, cost or both) reported promptly and

recorded in sufficient detail to be identified with
applicable classification such as job orders or allocation to
units in process.
5. Are transfers of completed units from production to
custody of finished goods inventory based on approved
completion reports which authorize such transfer?
6. Are there adequate procedures for reporting defective unit
and scrap resulting from the production process?
7. Are perpetual inventory records maintained of both
quantities and amounts.
8. Are the perpetual records of inventory detail:
a. Controlled by general ledger accounts?
b. Based on documentation of inventory movement and
adjustments which has been approved in accordance
with management's authorization?
c. Adjusted to periodic physical inventories taken
annually or on a cycle basis at least once a year?
d. Reconciled with the inventory control accounts at
reasonable intervals?

9. Are there adequate procedures for identifying and

reporting excess, slow-moving, and obsolete inventories?

Recording Transfers to Customers and Other Inventory

Dispositions

Objective

Transfer of finished production to customers and other disposition

such as sales of scrap are accurately recorded on a timely basis.

Questions-Control Policies and Procedures

1. Are releases of finished goods inventory to customers

based on shipping documents which have been approved
in accordance with management's authorization?
2. Are releases of excess, obsolete, defective or scrap
inventory for disposition based on documented
instructions which have been approved in accordance with
management's authorization?
3. Is authority to approve instructions for the release of
inventory assigned to responsible employees.

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 YES NO N/A

4. Do shipping documents and release documents for such

other dispositions as sales of scrap-:

a. Include adequate information for recording reductions in

the detailed inventory records, charges to cost of sales,
and cross-reference or connection with source documents
used to recognize revenue and the related receivable?
b. Provide a means (such as pre-numbering or
hatching) of accounting for all shipping documents
and other release documents issued?
Accumulation and Classification of Production and Inventory
Costs and Costs of Sales

Objective

Inventory, production costs, and costs of sales are accumulated

and classified in the accounts to-:

(1) Permit preparation of statements in conformity with

recognize accounting principles.
(2) Maintain accountability for costs incurred.
Questions-Control Policies and Procedures

1. If a cost accounting system is used, is it reconciled at

reasonable intervals with the general ledger?
3. Are requisitions for materials, supplies, finished goods
and physical transfers of inventory subjected to the
following:

a. Review to determine that requisitions are

completed and approved in accordance with
management's authorization?
b. Accounting for all requisitions used?
c. Summarization of requisitions at reasonable
intervals for consistent and timely maintenance of
control accounts?
3. Are burden rates and amounts of overhead applied to
production compared at reasonable intervals with actual
overhead costs incurred and updated in accordance with
management's authorization?
4. Is access to the detailed inventory records and control
accounts limited to persons responsible for their
maintenance, and internal audit?
5. Are the inventory detail records and control accounts
adjusted to physical counts at least annually?

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 YES NO N/A

6. Are the detailed inventory records and control accounts

adjusted for reports of excess, slow-moving, and obsolete
inventories in accordance with management's general or
specific authorization?
7. For standard cost systems:

a. Are standard rates and volume compared at

reasonable intervals with actual costs and activity
and revised accordingly for changes in underlying
conditions?

(For example, comparison of raw material costs with

vendors' invoices, standard labor rates with actual rates,
standard material usage and machine hours with product
engineering changes, standard labor hours with time
studies, etc.)
b. Are significant variances investigated and the
resulting explanation brought to management's
attention on timely basis?
Inventory Safeguarding

Objectives

a. Inventory is protected from unauthorized use or removal.

b. Access to inventory, property, cost and production records

is limited to designated individuals in accordance with
management authority so that unauthorized dispositions
may be prevented or detected within a timely period.
Questions-Control Policies and Procedures

1. Do physical safeguards of inventory appear reasonably

adequate in relation to the materiality of the inventory and
its susceptibility to theft?
2. Does inventory appear reasonably protected from physical
deterioration?

Physical Counts of Inventory

Objective

Recorded balance of inventory are substantiated and evaluated at

reasonable intervals by comparison with and evaluation of actual
quantities on hand.

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 YES NO N/A

Questions-Control Policies and Procedures

1. Is inventory subjected to physical count at least annually?

2. If the complete physical count is made at other than the
fiscal year end are the control over physical movement of
inventory, accuracy of recording cutoffs and segregation
of duties satisfactory for such timing?
3. If counts are made on a cycle basis rather than a complete
counts, are all of the following conditions present for
classes of inventory subjected to cycle counts?

a. Complete and accurate perpetual records which are

maintained on a timely basis?
b. Adequate control over physical movement of
inventories (receipts, internal transfers, and
shipments) and accurate recording of cutoffs to
provide timely and accurate source data for
maintaining the perpetual records and clear
identification of classes of items to be counted?
c. Sufficient segregation of duties so that errors of
omission or commission are prevented or detected
promptly?
4. Do detailed written inventory procedures and instructions
exist which have been approved in accordance with
management's authorization before issuance and use?
5. Do the inventory procedures adequately address the
following matters:

a. Location and orderly physical arrangement of

inventories?
b. Identification and description of the inventories by
persons familiar with it?
c. Segregation and proper identification of goods that
are not property of the client, such as customers'
goods and goods held on consignment?
d. Method of determining quantities such as weight,
count or measure.
e. Recording of items on count sheets or tickets
including complete descriptions, identifying codes
as well as quantities counted?
f. Special considerations for work in process such as
identifying stage of completion?
g. Identification of stock counted to determine whether
all items are counted and to preclude duplicate
counting?

2-63
 YES NO N/A

h. Cutoff of receipts. Internal transfers, and shipments?

i. Control of physical inventory records, such as pre-
numbering of all count sheets, count tickets, and
accounting for all numbered records issued and
used?
j. Identification of slow-moving, obsolete, and
damaged items?
k. Substantiation of inventories held by others?
l. Pricing, extension and summarization of the
physical counts?
m. Investigation and disposition of differences between
physical counts and detailed inventory records?

6. Are inventory instructions adequately communicated to and

understood by persons who perform the physical count?
7. Is inventory movement adequately controlled during the
count so that items are not missed or double counted.
8. Are controls over purchases and receiving activity
sufficient to result in recording of liabilities for any item
include in inventory which have not been paid for?
9. Are controls over sales and shipping activity sufficient to
result in exclusion from the physical inventory of any
items which have been sold and billed but not yet
shipped?
10. Are inventory counts subject to adequate verification such
as recounts by persons other than those who made the
initial counts or spot checks by others, such as internal
auditors?
11. Are difference between physical counts and detailed
inventory records investigated in accordance with
management's authorization before the records are
adjusted?

12. Is there documentation of review and analysis of the

physical inventory to:
a. Conform with the lower of cost or market
principle,
b. Identify items which are excessive, slow-moving,
defective or obsolete?
c. Determine the need for adjustments or valuation
allowances?

13. Are adjustments of the inventory detail records and

control accounts given prior approval in accordance with
management's authorization?

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 YES NO N/A
B. Property and Equipment
Initiation and Execution of Property and Equipment
Transactions
Objective
Additions and related accumulation of depreciation or
amortization, retirements, and dispositions of property and
equipment (owned and leased) are made in accordance with
management's authorization.

Questions-Control Policies and Procedures

1. Is advance approval in accordance with management's

criteria required for all property and equipment
transactions?
2. Are requests for additions, transfers, major maintenance
and repair, retirement and disposition of property and
equipment.
a. Initiated by designated individuals in accordance
with management's authorization?
b. Formally documented, including an adequate
description of the proposal, its reasons, and the
estimated amount of the transactions?
3. Are authorizations to execute property and equipment or
transactions adequately documented?
4. Are procedures adequate for determining that component
and services for property and equipment are received?
5. Are procedures adequate for determining that all
dispositions of property and equipment have been
executed and proceeds, if any, received in accordance with
managements authorization?
Recording Property and Equipment and related Depreciation
and Amortization
Objective
Transactions involving property and equipment and related
depreciation and /or amortization are accurately recorded,
accumulated, and classified in detail and in control accounts to:
(1) Permit preparation of statements in conformity with
recognized accounting principles or
(2) Maintain accountability for assets.

Questions-Control Policies and Procedures

1. Are detailed records maintained for each classes of

property and equipment (owned and leased)?

2-65
 YES NO N/A

2. Are general ledger control accounts maintained for the

appropriate classes of owned and leased property and
equipment and related depreciation and amortization?
3. Are the detailed property and equipment records
reconciled at reasonable intervals with the control
accounts and differences, if any, investigated and
resolved in accordance with managements authorization ?
4. Are depreciable and amortizable lives reviewed at
reasonable Intervals for adequacy in relation to use or
obsolescence based on actual experience?
Safeguarding Property and Equipment

Objective

Property and equipment is reasonably safeguarded from loss.

Questions-Control Policies and Procedures

1. Is property and equipment insured in accordance with
management's authorization based on appraisals made at
reasonable intervals?
2. Are items of property and equipment subject to reasonably
adequate physical protection techniques?
3. Are items of property and equipment (owned and leased)
physically inspected at reasonable intervals and compared
with the detailed property records?
4. Are documents of title and property rights compared with
the detailed property records at reasonable intervals by
persons whose duties do not include the
following:
a. Custody of such documents?

b. Maintenance of the detailed property and

equipment records?

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VI. FINANCING (TREASURY) CYCLE
YES NO N/A
A. Investments

Authorization of Investment Transactions

Objective

The nature and terms of investment transactions are made in

accordance with managements authorization.

Questions-Control Policies and Procedures

1. Are investment transactions initiated and approved in

accordance with management authorization?

2. Are brokers advices and other evidence of execution of

transactions promptly compared with documented
authorizations and differences brought to the timely
attention of management?

Recording and Classifying Investment Transactions

Objective

Investment transactions, including accrual and collection of

related income, are recorded at the correct amounts in the
accounting periods in which they were executed or earned. and
properly classified in the accounts.

Questions-Control Policies acid Procedures

1. Are adequate general ledger control accounts maintained
for various investment classifications and in the related
income?
2. Are adequate detailed investment records maintained
currently including control of related income?
3. Are procedures adequate to determine that investment
income is properly accrued and promptly collected?
4. Are investments and related collateral reviewed and
appraised or valued at market at reasonable intervals for
comparison with cost valuations and-:
a. Reporting of the findings to management?
b. Determination of need for any valuation
allowances?

2-67
 YES NO N/A
5. Are detailed investment records reconciled with the
general ledger control accounts, including related
income?

Physical Safeguards and Custodial Accountability

Objective

Documents evidencing ownership of investments and related

collateral, and other investment records are subjected to
reasonably adequate physical safeguards and effective custodial
accountability procedures.

Questions-Control Policies and Procedures

1. Are investment securities and related collateral subject to

reasonably adequate, physical safeguards?
2. Are investment securities, except for bearer securities,
registered in the name of the company or nominees
designated in accordance with management's
authorization?
3. Is authority to withdraw investment securities from
custody limited to written authorization and joint
signatures of responsible officials.

B. Equity Capital

Questions-Control Policies and Procedures

Recording and Classifying Equity Capital Transactions

Objective

Transactions and obligations concerning equity capital are

promptly and accurately recorded and classified in detailed
recorded and control accounts.

Questions-Control Policies and Procedures

1. Does the general ledger include appropriate control

accounts for equity capital?
2. Are detailed share certificate records reconciled at
reasonable intervals with the control records and the
general ledger?

2-68
 YES NO N/A
Physical Safeguards and Custodial Procedures

Objectives
a. Access to records, agreements, and such negotiable
documents as share certificates concerning equity capital
is permitted only in accordance with management's
authorization
b. Records, agreements, and negotiable documents are
subjected to reasonably adequate physical safeguards and
custodial procedures.

Questions-Control Policies and Procedures

1. Are unissued share certificates subject to reasonable

physical safeguards?

2. Are unissued share certificates examined and all

certificate numbers accounted for at reasonable intervals
by, a responsible official?

2-69
2.2.6 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
MATERIALITY LEVEL
AGGREGATION
Financial A misstatement of a financial statement
statement level 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.
Account balance A misstatement of an account balance
level 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.
Class of A misstatement of a transaction
transaction level 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.
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.

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.

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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 5-10%

Net (or after-tax) income 5-10%
Gross revenue 0.5-1%
Equity 5-10%
Total assets 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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2.2.7 REVIEW OF FINANCIAL PERFORMANCE OF THE CLIENT

Summarize results of financial performance review and discuss its impact on audit (see attachment).

______________________________________________________________________________
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______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
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______________________________________________________________________________
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______________________________________________________________________________
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2-72
 Suggested Format of Financial Performance Review

A. SUMMARY FINANCIAL DATA PERIOD X1 X2 X3 X4

ENDING (Indicate)
SALES
COST OF SALES
GROSS PROFIT
OPERATING EXPENSE
OPERATING INCOME
OTHER INCOME (Expense)
PRE-TAX INCOME
PROVISION FOR INCOME TAX
NET INCOME

B. PROFITABILITY OF OPERATIONS
GROSS MARGIN PERCENTAGE
OPERATING INCOME PERCENTAGE
EFFECTIVE TAX RATE
NET INCOME PERCENTAGE
EPS

C. FINANCIAL LEVERAGE
DEBT TO EQUITY RATIO

2-73
D. ASSET TURNOVER
RATIO REVENUE TO TOTAL ASSETS
RECEIVABLES TURNOVER RATIO
INVENTORY TURNOVER RATIO

E. LIQUIDITY
WORKING CAPITAL
OPERATING CASH FLOW
CURRENT RATIO
QUICK RATIO
INTEREST AND DIVIDEND COVERAGE

2-74
2.3 DETAILED PLANNING

2.3.1 COMPUTER INFORMATION SYSTEM (CIS) CHECKLIST

Introduction

A CIS environment exist when a computer of any type or size is involved in the processing by the
entity of financial information of significance to the audit, whether that computer is operated by
the entity or by a third party.

The auditor should consider how a CIS environment affects the audit.
The overall objective and scope of the audit does not change in a CIS environment. However, the
use of computer changes the processing, storage and communication of financial information and
may affect the accounting and internal system employed by the entity. Accordingly a CIS
environment may affect:
The procedures followed by the auditor in obtaining a sufficient understanding of the
accounting and internal control system.
The consideration of inherent risk and control risk through which the auditor arrives at
the risk assessment.
The auditors design and performance of tests of control and substantive procedures
appropriate to meet the audit objective.

This checklist prepared using the guidance provided in the Auditing Standards. It is designed as a
source of reference to assist audit teams in:
understanding the design and operations of the CIS environment and
planning and executing an audit approach that is responsive to the audit risk present in
CIS.

In the preparation of this checklist, no assumptions have been made regarding the degree of
sophistication or complexity of client systems. Therefore, in evaluating the overall CIS
environment of diversified client portfolio, this checklist may be tailored to the requirements of
their particular CIS environment. For this purpose guidance may also be sought from the
following statements on auditing
CIS Environments Stand Alone Micro computers (refer IAPS - 1)
CIS Environments On Line Computer Systems (refer IAPS - 2)
CIS Environments Database Systems (refer IAPS - 3)

This checklist must also be considered in the context of the professional and technical
requirements of the individual assignment in which an auditor is reporting. To satisfy such
requirements, it may be necessary to refer to additional technical guidance and need for an expert
may arise. This checklist is not intended to be used in an all-inclusive context.

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CLIENT: ________________________________________________
YEAR ENDED: ___________________________________________

INFORMATION TECHNOLOGY GENERAL CONTROLS REVIEW

CIS DEPARTMENT - RISKS AND CONTROLS

Are the CIS department risks reduced to a potentially acceptable level for audit purposes?

Yes / RISK
No. ADDRESSED
HIGH MEDIUM LOW

1. CIS RISK - 1 General controls

1.1 Organisational and management controls
1.2 Physical controls
1.3 Data access controls
1.4 EDP safeguards
1.5 System software controls
1.6 Application systems development and maintenance
controls
1.7 Computer operations controls
2. CIS RISK - 2 Application controls
2.1 Controls over input
2.2 Controls over processing and computer data files
2.3 Controls over output
2.4 Programme change controls
2.5 Control over maintain of the program
3. CIS RISK 3
3.1 Other controls
3.2 Contingency Planning

CONCLUSION:
We have reviewed the computer information system of the company and conclude that the risk
involved is low/medium/high. Overall system is functioning satisfactorily, with the exception of
matters noted on summary of weaknesses identified.

Controls evaluated by: Date:

Reviewed by: Date:
Approved by: Date:

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 Yes / RISK
No. ADDRESSED
HIGH MEDIUM LOW

CIS RISK - 1. General Controls

Organisational and management Controls
1.1.1 Does the organisation of the CIS function provide for an
adequate segregation of duties among the following
functions to prevent the performance of incompatible
functions:
- initiating and authorising source documents
- entering into the system
- changing programs and data files
- using or distributing output
- modifying the operating system
1.1.2 Is there appropriate segregation of duties within IT
department:
- IT management
-system analysis and programming
-technical support (system programming)
-database administration
- computer operations
-data control
-file librarian
-data security
1.1.3 -Does appropriate procedures exist relating to:
- rotation of sensitive duties/shifts
- holiday/vacation arrangements
- termination of employment (e.g. immediate
discharge, deletion of passwords etc.)
1.1.4 Are system design standards and programming standards
documented and enforced.
1.2 Physical controls
1.2.1 Are there adequate physical controls over the peripherals?
1.2.2 Are the backup data placed in a secured (fire proof )
place ?

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 Yes / RISK
No. ADDRESSED
HIGH MEDIUM LOW

1.3 Data access controls

1.3.1 Is some access protection software in use?
1.3.2 Are there password controls which
- identify authorised users
- restrict each user to limit range of activities
- limit attempts to password
- give time when unauthorised access was
attempted so that person attempting such
access may be identified
- limit simultaneous logins
1.3.3 Are there controls in place to ensure
- Password of adequate length
- regular change of password
- prohibition of use of similar passwords as used
before
- passwords are stored in encrypted format
- change of passwords for vendor supplied user
profiles;
1.3.4 Are there special arrangements to cover physical access by
outside contractors, maintenance engineers and cleaners
1.3.5 Are there procedures to ensure that:
- number of invalid sign-on attempts are limited;
- written authorisation for addition and deletion of
user profiles;
- user profiles are not shared;
- privileged users and authorities are controlled;
- user functions are assigned such that segregation
of duties is enforced
- deactivate/disconnect inactive terminals;
- remote and incoming network access is
controlled.
1.3.6 Are there procedures to minimise the risk that unauthorised jobs
are run:
- Supervisors are employed on all shifts;
- job schedule (operations checklist) is prepared;
- operating instructions prepared for operators
(e.g. operator response to console messages,
response to job aborts);
- unscheduled job run requests are authorised
before execution;
- if scheduling software is used, ensure that
controls for the following exist:
- access to scheduling functions restricted;
- audit trail for changes to schedules is
reviewed;

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 Yes / RISK
No. ADDRESSED
HIGH MEDIUM LOW

1.4 EDP safe guards

1.4.1 Are there adequate measures to take regular backup of
the data ?
1.4.2 Are there any recovery procedures for use of data in case
of loss or destruction of data ?
1.4.3 Is there any provision for off site processing in the
event of disaster?
1.4.4 Are there controls which ensure the use of the correct
tape disk files?
1.4.5 Ensure offline copies of computer files (such as tapes)
are externally labelled:
1.4.6 If offline files are used in job processing, controls exist to
ensure that the correct files are used.
1.5 System software controls
1.5.1 Are there adequate controls over authorisation, approval,
testing, implementation and documentation of new
systems software and systems software modifications ?
1.5.2 Is there any restriction on access to systems software and
documentation ?
1.6 Application system development and Maintenance
control
1.6.1 Are there adequate controls over testing conversion
implementation and documentation of new or revised
systems to application system ?
1.6.2 Are there controls over changes to application systems?
1.6.3 Whether controls over acquisition of application system
from 3rd parties exist ?
1.7 Computer Operation Controls
1.7.1 Whether the systems are used for authorised purpose
only ?
1.7.2 Is access to computer operations restricted to authorised
personnel only ?

1.7.3 Are authorised programs used only ?

1.7.4 Are processing errors detected and corrected on a timely
basis ?

2-79
 Yes / RISK
No. ADDRESSED
HIGH MEDIUM LOW

2. Application Controls
2.1 Controls over input

2.1.1 Is there any authorisation structure over transactions

being entered into the system ?
2.1.2 Are there controls over incorrect or incomplete
transactions entered ?
2.1.3 Are there programs in use pertaining to data input
activities which
- restrict data being entered twice
- do not accept a data when an invalid account
code is entered

2.2 Controls over processing and computer data files

2.2.1 Are there any controls to ensure that transactions,
including system generated transactions, are properly
processed by the computer ?
2.2.2 Are there procedures in practice so that the transactions
are not lost, added, duplicated or improperly changed ?
2.2.3 Are there procedures for identification & correction
processing errors on timely basis.
2.3 Controls over output
2.3.1 Are there procedures in use to ensure that the results of
processing are accurate ?
2.3.2 Is there any restriction on access to output other than the
authorised personnel ?
2.3.3 Is output providend on a timely basis.
2.4 Programme change controls
2.4.1 Are there procedures in use that provide for adequate
control over the implementation of application
programme changes ?
2.4.2 Are the changes to application programmes documented
and includes
- formal authorisation
- verification by user and CIS departments
- checking the results of such changes
2.4.3 Are there adequate controls to prevent user making
unauthorised programme changes ?
2.4.4 Are there procedure in use which restrict the user from
making direct changes to data files ?
2.4.5 Are there controls over access to special privilege utility
programmes ?
2-80
 Yes / RISK
No. ADDRESSED
HIGH MEDIUM LOW

2.4.6 Are separate test/production program/data libraries in

use;
2.4.7 Is access by programmers to production program
libraries is prevented (using program library software and
access control software);
2.4.8 Is there adequate program and system testing (including
interaction between programs);
2.4.9 Have newly made programs adequately being tested by
users (e.g. parallel runs or pilot tests):
2.4.10 Are there adequate implementation procedures?
Ensure:
program changes are reviewed and approved by
supervisory programmers;
controls are implemented over the transfer of programs
from test to production libraries:
- source codes are recompiled by computer
operators and not by programmers or analysts;
library management software is used to:
- record and report changes made
- increment program version numbers
- encrypt sensitive programs; and
2.4.11 Are there controls are implemented to ensure the object
copy is complied from the correct source and both are
implemented as production version.
2.5 Is there adequate control over maintenance of the
programs?
Ensure:
emergency fixes applied directly to production
programs:
- reported for review by supervisory programmers
- reported to user management for subsequent
approval.

2-81
 Yes / RISK
No. ADDRESSED
HIGH MEDIUM LOW

3. CIS RISK
3.1 Other Control
3.1.1 Is edit list extracted and approved before processing the
transactions?
3.1.2 Is there control over duplicate number of JV & receipt &
payment voucher ?
3.1.3 Does the computer generate the voucher numbers?
3.1.4 In case the computer generates number, make sure they
cannot be changed, otherwise ensure report of missing
numbers.
3.1.5 Are there proper controls in practice regarding use of
third party software such as:
- review application software prior to purchasing,
including functions capacity and controls
- adequate testing of the software and the
modification to it prior to use
- ongoing assessment of the software to meet
user requirements
3.1.6 Are there any provision for offsite processing in the
event of disaster.
3.1.7 Whether account codes not in use are deleted from the
programmes after proper approval ?
3.2 CONTINGENCY PLANNING
3.2.1 Are there procedures to ensure continued operation
should a prolonged system failure occur
Ensure:
- backup hardware arranged and tested;
- written emergency and business recovery
procedures are available and tested;
- backup of important data and program files
maintained and for a sufficient period of time;
- copies of files kept in remote storage;
- emergency power supplies available (e.g. UPS)
- regular preventive maintenance; and
- adequate insurance coverage.

2-82
2.3.2 AUDIT PROGRAMS

An audit program describes what and how much evidence is required to be gathered and
evaluated, and how, when and by whom it is to be gathered and evaluated. In other words, it
describes the nature, timing and extent of planned audit procedures.

An audit program is required in respect of evidence gathered and evaluated in each of the control
testing, substantive testing and opinion formulation stages. It is prepared, or revised, as part of
the detailed planning activities of those three audit stages. For example, refer to:

1. The auditor should obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the audit opinion.

2. Sufficiency and appropriateness are interrelated and apply to audit evidence obtained
from both tests of control and substantive procedures. Sufficiency is the measure of the
quantity of audit evidence; appropriateness is the measure of the quality of audit evidence
and its relevance to a particular assertion and its reliability. Ordinarily, the auditor finds it
necessary to rely on audit evidence that is persuasive rather than conclusive and will
often seek audit evidence from different sources or of a different nature to support the
same assertion.

3. Financial statement assertions are assertions by management, explicit or otherwise, that

are embodied in the financial statements. They can be categorized as follows:

a) Existence: an asset or a liability exists at a given date;

b) Rights and obligation: an asset or a liability pertains to the entity at a given date;

c) Occurrence: a transaction or event took place which pertains to the entity during
the period;

d) Completeness: there are no unrecorded assets, liabilities, transactions or events,

or undisclosed items;

e) Valuation: an asset or liability is recorded at an appropriate carrying value;

f) Measurement: a transaction or event is recorded at the proper amount and revenue

or expense is allocated to the proper period; and

g) Presentation and disclosure: an item is disclosed, classified, and described in

accordance with the applicable financial reporting framework.

4. Tests of control means tests performed to obtain audit evidence about the suitability of
design and effective operation of the accounting and internal control systems.

2-83
5. The aspects of the accounting and internal control systems about which the auditor would
obtain audit evidence are:

Design: the accounting and internal control systems are suitably designed to
prevent and/or detect and correct material misstatements; and
a) Operation: the systems exist and have operated effectively throughout the
Relevant period.
6. Substantive procedures means tests preformed to obtain audit evidence to detect
material misstatements in the financial statements, and are of two types:

a) Tests of details of transactions and balances: and

b) Analytical procedures.

7. Procedures for Obtaining Audit Evidence

The auditor obtains audit evidence by one or more of the following procedures:
inspection, observation, inquiry and confirmation, computation and analytical procedures.
The timing of such procedures will be dependent, in part, upon the periods of time during
which the audit evidence sought is available.

Inspection

Inspection consists of examining records, documents, or tangible assets. Inspection of

records and documents provides audit evidence of varying degrees of reliability
depending on their nature and source and the effectiveness of internal controls over their
processing. Three major categories of documentary audit evidence, which provide
different degrees of reliability to the auditor, are:

(a) documentary audit evidence created and held by third parties;

(b) documentary audit evidence created by third parties and held by the entity; and
(c) documentary audit evidence created and held by the entity.

inspection of tangible assets provides reliable audit evidence with respect to their
existence but not necessarily as to their ownership or value.

Observation

Observation consists of looking at a process or procedure being performed by others, for

example, the observation by the auditor of the counting of inventories by the entity's
personnel or the performance of control procedures that leave no audit trail.

Inquiry and Confirmation

Inquiry consists of seeking information of knowledgeable persons inside or outside the

entity. Inquiries may range from formal written inquiries addressed to third parties to
informal oral inquiries addressed to persons inside the entity. Responses to inquiries may
provide the auditor with information not previously possessed or with corroborative audit
evidence.

2-84
 Confirmation consists of the response to an inquiry to corroborate information contained
in the accounting records. For example, the auditor ordinarily seeks direct confirmation
of receivables by communication with debtors.

Computation

Computation consists of checking the arithmetical accuracy of source

documents and accounting records or of performing independent calculations.

Analytical Procedures

Analytical procedures consist of the analysis of significant ratios and trends including the
resulting investigation of fluctuations and relationships that are inconsistent with other
relevant information or deviate from predicted amounts.

8. Cut-Off test

A cut-off test is a type of evidence gathering activity, in particular, the cut-off test gathers
evidence that transactions are recorded in the period to which they refer.

A cut off test, depending on its direction, provides evidence as to whether:

- economic events occurring in the financial period being audited are recorded in
the related account balance in the subsequent accounting period (a misstatement
relating to completeness).

- economic events occurring in the period following the period being audited are
recorded in the related account balance in the period being audited (a
misstatement relating to validity).

A simple example in relation to accounts receivable and related sales transactions is as

follows. On balance sheet date (or other appropriate cut-off date) the auditor obtains
details (including details of the sequential identification number) of the last delivery
advice to be issued in the accounting period by physically examining the source
documents at the close of business.

If the auditor needs evidence as to the completeness of accounts receivable and related
sales transactions, then subsequent to balance sheet date the auditor will trace the details
on the last delivery advice issued for the year to the relevant sales invoice and then to the
accounts receivable records to ensure that the sale has been included in the accounting
records before year end. In addition, the auditor selects a sample of sales invoices posted
to accounts receivable in the first few days of the month following balance sheet date. All
of the invoices selected should refer to delivery advices having a reference number after
the number noted on balance date.

If the auditor needs evidence as to the validity of accounts receivable the auditor selects a
sample of invoices that have been included in accounts receivable in the last few days of
the financial year. All of the invoices selected should refer to delivery advices having a
reference number before (or including) the number noted on balance sheet date.

2-85
 Sample Audit Programs
(The enclosed list contains possible suggested audit procedures for different financial statement
components (mostly for the manufacturing concern). Only some of these procedures will usually
be selected to minimize the detection risk to an acceptably low level).

Index
Balance Sheet Equities & Liabilities

S.No. Title of Account Reference Page

No. No.
1. Share Capital AA/AP 2-88

2. Reserves BB/AP 2-89

3. Surplus on Revaluation of Fixed Assets CC/AP 2-90

4. Long term loan/ Redeemable Capital/Current Maturity DD/EE/MM/AP 2-91

5. Liabilities against Assets subject to finance lease FF/AP 2-93

6. Deferred Liabilities GG/AP 2-94

7. Long term Deposit HH/AP 2-96

8. Short term Borrowings JJ/AP 2-97

9. Creditors, Accrued & other liabilities NN/AP 2-99

10. Provision for taxation PP/AP 2-102

11. Dividend payable RR/AP 2-103

12. Contingencies & commitments SS/AP 2-104

Balance Sheet Assets

S.No. Title of Account Reference Page

No. No.
1. Tangible fixed assets A- AP 2-107

2. Assets subject to finance lease B- AP 2-109

3. Capital Work in Progress C- AP 2-110

4. Intangible Assets E- AP 2-111

5. Unallocated pre-production expenditure H- AP 2-113

2-86
 6. Long Term Investments/ Investments income K- AP 2-114

7. Long term loan & advances L- AP 2-117

8. Deferred Cost M-AP 2-119

9. Stock in trade N/R- AP 2-120

10. Trade debts S- AP 2-122

11. Advances, Deposits, Prepayments & Other receivable V- AP 2-124

12. Short Term Investment/Marketable Securities W- AP 2-125

13. Cash & Bank Balances X- AP 2-128

Profit & Loss Account Test of Control

S.No. Title of Account Reference Page

No. No.
1. Sales/ Receivable TC 1 2-129

2. Purchases/Inventory/Accounts payable TC 2 2-132

Profit & Loss Account Substantive

S.No. Title of Account Reference Page

No. No.
1. Sales PL 1- AP 2-137

2. Cost of sales PL 2 - AP 2-139

3. General/admin/selling & distribution expenses PL 3&4 AP 2-140

4. Financial Charges PL 5 AP 2-141

5. Other Charges PL 6 AP 2-142

6. Other Income PL 7 AP 2-143

2-87
Client Name
File No. Reference: AA/AP
Audit Program Share Capital Prepared By: Date:
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Check the number of shares and amount of Existence

authorized share capital from memorandum Ownership
of association. If there is any alteration from Completeness
last year, then obtain a copy of board
resolution and altered copy of memorandum
of association. If there is no alteration, then
check the same from our prior years
working papers.

2 Check the number of shares and amount of Existence

issued, subscribed and paid-up share capital Ownership
from:- Completeness
(a) Memorandum of association
(b) Form A

3 For shares issued for cash, check the entries Existence

in bank statement Completeness

4 For shares issued for consideration other Existence

than cash, check the amount of Ownership
consideration with supporting documents. Completeness

5 For shares issued as bonus shares :- Existence

(a) Check board resolution. Ownership
(b) Check members register to ensure that Completeness
changes have been made in number of
shares of each member.

6 Agree the amount of share capital with the Completeness

general ledger.

7 Check that members register has been Completeness

properly maintained as required by the
Companies Ordinance, 1984.

8 Determine that disclosures have been made Presentation/

in accordance with the requirements of Disclosure
Companies Ordinance, 1984 and relevant
accounting pronouncements.

2-88
Client Name
File No. Reference: BB/AP
Audit Program Reserves Prepared By: Date:
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Assertion Performed Reference

Addressed by

1 Trace opening balances from last Completeness

years audited financial statements
and general ledger.

2 Obtain board resolutions for Existence

transfers made during the year. Ownership
Completeness

3 Check that any statutory Ownership

requirements for creating any
specific reserve have been fulfilled.

4 Check that profits have been Ownership

distributed only out of revenue
reserves i.e. not out of capital
reserves.

5 Agree closing balances with general Completeness

ledger.

6 Determine that disclosures have Presentation/

been made in accordance with the Disclosure
requirements of Companies
Ordinance, 1984 and relevant
accounting pronouncements.

2-89
Client Name
File No. Reference: CC/AP
Audit Program Surplus on Prepared By: Date:
revaluation of
fixed assets
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Examine the valuers report to ensure the Ownership

correctness of revalued amount of fixed assets Valuation
and ensure independence of the valuer. Completeness

2 Check that increase in value of assets has been Completeness

transferred to separate account called "surplus on
revaluation of fixed assets ", in accordance with
Section 235 of the Companies Ordinance, 1984

3 Check that the surplus on revaluation of fixed Ownership

assets has been applied:

a) Only to the extent actually realised on

disposal of revalued assets.
b) On setting-off any deficit arising from the
revaluation of any other fixed assets of the
company.

4 Check that assets have been depreciated with Valuation

reference to the revalued amounts.

5 Determine that disclosures have been made in Presentation/

accordance with the requirements of Companies Disclosure
Ordinance, 1984 and relevant accounting
pronouncements.

2-90
Client Name
File No. Reference: DD-EE-MM/AP
Audit Program Long term loans/ Prepared By: Date:
current maturity.
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Obtain a schedule of long-term Completeness

loans payable and match the
balances with general ledger.

2 For selected loans, circularize Obligation

confirmation requests. Match Valuation
replies with the amounts shown in Existence
the schedule.

3 For loans taken during the year:- Completeness

(a) Verify terms and conditions of Obligation
loans from agreement. Valuation
(b) Check approval of appropriate Existence
level of management.
(c) Verify receipt of funds from
bank statement.

4 For loans repaid during the year:- Completeness

(a) Verify amounts of selected Obligation
repayments from repayment Valuation
schedules and agreements. Existence
(b) Verify payment from entry in
bank statement

5 Check calculations of interest Valuation

expense to:
(a) Verify rate of interest from
agreement.
(b) Ensure that number of days for
which the principal amount
remained outstanding.

6 Compute that portion of loans, Presentation

which pertains to the period of
twelve months after the balance
sheet date. This amount should be
shown separately as current portion
of long-term loans.

2-91
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed

7 Determine, if there is a need to Completeness

provide for penalties or additional Obligation
interest in accordance with terms
and conditions of loan agreement in
case of non-payment or delay in
payment of loans.

8 Determine that disclosures have Presentation/

been made in accordance with the Disclosure
requirements of Companies
Ordinance, 1984 and relevant
accounting pronouncements.

2-92
Client Name
File No. Reference: FF/AP
Audit Program Liabilities against Prepared By: Date:
assets subject to
finance lease.
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Obtain a schedule of obligations under Completeness

finance lease and agree the balances with
general ledger.

2 For new leases obtained during the year:- Obligation

(a) Review the lease agreements to Completeness
ascertain its nature as to finance or Existence
operating lease.
(b) Check proper approval of lease
transaction.
(c) Ensure that only principal portion
has been recorded as liability against
assets subject to finance lease.
(d) Review the security documents

3 For rentals paid during the year:- Obligation

(a) Check the amount of lease rental Completeness
from lease amortization schedule. Existence
(b) Check proper bifurcation of lease Valuation
rental into principal portion paid and
financial charges paid.
(c) Verify payment from bank
statements

4 For selected parties, circularize Obligation

confirmation requests. Match replies to Valuation
confirmation with the amounts given in Existence
the schedule.

5 Check that lease liabilities are properly Presentation

bifurcated into current and non-current
portions.

6 Check calculation of financial charges Valuation

from amortization schedule.

7 Determine that disclosures have been Presentation/

made in accordance with the requirement Disclosure
of Companies Ordinance, 1984 and
relevant accounting pronouncements.

2-93
Client Name
File No. Reference: GG/AP
Audit Program Deferred liabilities Prepared By: Date:
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Obtain a schedule showing all deferred Completeness

liabilities and agree with general ledger.

2 For deferred liability regarding gratuity:- Existence

(a) Obtain a copy of companys rules Completeness
and policies regarding staff gratuity. Valuation
(b) Verify the last salaries drawn by Obligation
selected employees from payroll or
salary sheets.
(c) Verify the dates of appointments
from personal files.
(d) Calculate the number of years
completed from date of appointment
to date of balance sheet.
(e) Check calculation of charge of
gratuity for the year.
(f) Verify payments of gratuity to staff
retired during the year from
companys rules and bank
statements.
(g) Check other requirements as per
IAS 19 (revised).

3 For deferred liability regarding Existence

pensions:- Completeness
(a) Obtain a copy of companys rules Valuation
and policies regarding pension Obligation
(whether funded or unfunded).
(b) For funded pension plans, check
payment of contribution of client
towards fund according to the funds
rules.
(c) For unfunded pension plan, verify
provisions for deferred liability in
light of actuarial valuations.

2-94
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed

d) Check other requirements as per

IAS 19 (revised).
4 For deferred liability regarding taxation:- Valuation
(a) Calculate taxable and deductible
timing differences.
(b) 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)
(c) Ensure that proper amount has been
taken in profit and loss account by
taking difference of opening and
closing balance of deferred tax
liability.

5 Determine that disclosures have been Presentation/

made in accordance with the Disclosure
requirements of Companies Ordinance,
1984 and relevant accounting
pronouncements.

2-95
Client Name
File No. Reference: HH/AP
Audit Program Long term Prepared By: Date:
deposits
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Ascertain the nature of deposits by Completeness

inquiry or by reviewing prior years
working papers.

2 Examine the supporting documents Obligation

of deposits e. g. contracts with Existence
customers etc. Valuation

3 Circularize confirmations to selected Obligation

parties. Match replies with the Existence
amounts shown in general ledger. Valuation

4 Check that the amounts of deposits Completeness

have been credited by the client in a
separate bank account as required by
Sec 226 of the Companies
Ordinance, 1984.

5 Determine that disclosures have Presentation/

been made in accordance with the Disclosure
requirements of Companies
Ordinance, 1984 and relevant
accounting pronouncements.

2-96
Client Name
File No. Reference: JJ/AP
Audit Program Short Term Prepared By: Date:
Borrowings
Accounting Reviewed By: Date:
Period

S. Audit Procedures Audit Performed Reference

No. Assertion by
Addressed
1 Compare the account balances
with those of prior periods and Rights &
investigated any unexpected Obligation
changes (or the absence of
expected changes).

2 Inspect original or authenticated Existence

copies of loan agreements, or other Rights
related documents to determine the Obligation
terms, restrictions, and other
pertinent provision of the
borrowings.

3 Identify liens, securities interests, Rights &

and assets pledged as loan Obligation
collateral by confirmation with
creditors and or the appropriate
public filing offices or by
inspection of public records.

4 Review calculations and other

evidence relating to compliance
with the terms, restrictions, or
other provisions compliance with
the terms, restrictions, or other
provisions of loan agreements.

5 Review refinancing agreements Valuation

subsequent to the balance sheet
date to determine their effects on
balance sheet classifications or on
disclosure.

2-97
6 Review minutes, agreements and Presentation &
bank and other confirmations Disclosure
replies for evidence of the
existence of short-term lines of
credit or similar obligations.

7 Test interest paid and accrued Existence

during the period. Valuation

2-98
Client Name
File No. Reference: NN/AP
Audit Program Creditors, Prepared By: Date:
accrued and
other liabilities
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

CREDITORS

1 Obtain a list of creditors showing Completeness

amounts outstanding against each
at year-end and match with last
years working papers.

2 Make a selection from creditors Existence

and circularize confirmation Obligation
requests. Valuation

3 Match replies to confirmation Valuation

requests with the amounts given in
the schedule.

4 For non-replies, check subsequent Existence

cash disbursements to ensure the Completeness
existence of liability at year-end. Valuation

5 Agree the balances with the Completeness

general ledger.

ACCRUED AND OTHER

LIABILITIES

1 Inquire about the nature of each Completeness

significant accrued expense
account.

2 Inquire about the reasons for Completeness

significant changes in accrued
expenses since prior year.

2-99
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed

3 For selected subsequent cash Completeness

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.

4 Inquire and consider existence of Completeness

other unrecorded or under Existence
recorded liabilities from:- Obligation
(a) Minutes of meetings of board
of directors.
(b) Discussion with internal legal
department (if any).
(c) Responses to letter of inquiry
to independent lawyers.
(d) Employee benefit plans.
(e) Prior year balances of accrued
expenses.

5 Make a selection of significant Existence

accrued expenses and examine Obligation
documents supporting the amounts Valuation
(e. g. invoices, service contracts,
subsequent payroll records, rent
agreements, etc.).

6 For selected accounts that are Valuation

accounting estimates (e. g.
liabilities for certain employee
benefit plans or legal
contingencies) check the amount
of estimate from supporting
documents and ensure the
accuracy of the amount.

2-100
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed

7 Check that liabilities outstanding Completeness

for more than three years, do not Rights &
qualify as a trading liabilities Obligation
under Income Tax Ordinance,
1979

8 Determine that disclosures have Presentation/

been made in accordance with the Disclosure
requirements of Companies
Ordinance, 1984 and relevant
accounting pronouncements.

2-101
Client Name
File No. Reference: PP/AP
Audit Program Taxation / Prepared By: Date:
provision for
taxation
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Obtain a schedule showing year-wise Completeness

tax position of the client.

2 Obtain a schedule showing Valuation

calculation of taxable income and tax Measurement
expense.

3 Check the accuracy of computation Valuation

of taxable income.

4 Check computation of tax expense by Valuation

applying appropriate tax rates.

5 Test check advance payments of tax Rights/

and tax deducted at source from Obligations
payment challans and other
supporting documents.

6 Obtain summary of tax assessments Valuation

and appellate orders in respect of Existence
prior year's taxes. Re-examine their Completeness
current status to ensure that there is
shortfall in the provision for taxation.

7 Circularize confirmation to tax Completeness

adviser to ascertain whether there are Existence
certain tax contingencies, which Obligation
needs to disclosed or provided in the
accounts.

8 Determine that disclosures have been Presentation/

in accordance with the requirements Disclosure
of Companies Ordinance, 1984 and
relevant accounting pronouncements.

2-102
Client Name
File No. Reference: RR/AP
Audit Program Dividend payable Prepared By: Date:
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Trace the opening balance from general ledger. Completeness

2 Obtain a list of members of the company as at Completeness

the book closure date.

3 Obtain copy of board resolution to verify the Existence/

rate of dividend (interim and final) announced. Valuation

4 Check calculation of dividend for selected Valuation

members.

5 Check that Zakat has been deducted at source Completeness

and deposited in the Central Zakat Fund under /Measurement
the provisions of Zakat and Ushr Ordinance,
1980.

6 Check that income tax has been deducted from Completeness

dividend under the provisions of income tax /Measurement
Ordinance, 1979.

7 Check payment of dividend (i.e. dispatch of Completeness

dividend warrants) has been made within the
time period as required by Sec 251 of the
Companies Ordinance, 1984.

8 Agree closing balance with general ledger. Completeness

9 Determine that disclosures have been made in Presentation/

accordance with the requirements of Companies Disclosure
Ordinance, 1984 and relevant accounting
pronouncements.

2-103
Client Name
File No. Reference: SS/AP
Audit Program Contingencies Prepared By: Date:
and
Commitments
Accounting Reviewed By: Date:
Period

S.No. Audit Procedures Audit Performed Reference

Assertion by
Addressed
Inquire of and discuss with Existence
management the clients policies and
procedures for identifying,
evaluating, and accounting for
contingencies, including those
resulting from litigation, claims, and
unasserted claims. The inquiry should
consider addressing oral
arrangements, such as an oral
guarantee of the debt of others, as
well as written arrangements.

Obtain from management or legal

adviser a description and evaluation Existence
of the litigation, claims and
unasserted 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 Measurement
concerning litigation, claims and
unasserted claims.

Obtain and evaluate letters from legal

Advisor.
Completion

2- 104
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
Inquire of and discuss with Rights &
management the clients policies and Obligation
procedures for identifying,
evaluating, and accounting for
commitments.

Review the results of audit Occurrence

procedures performed in other
accounts.

Read the minutes of corporate Existence

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 Existence

agreements, leases, service
guarantees, insurance policies (or
note the lack of insurance), and
other applicable to sales or leases.

Determine, through inquiry and

review of sales and/or lease Existence
agreements, polices in effect with
respect to returns, repurchases, and
future allowances applicable to sales
or leases.

Determine, through inquiry and Existence

review of minutes,
contracts/agreements, and bank
confirmations, accounting and
operating policies in effect with
respect to interest rate and foreign
currency futures/hedges.

2- 105
Examine returned standard bank Existence
confirmations forms and any other
returned confirmations of bank
credit arrangements for contingent
liabilities, letters of credit, and
compensating balance arrangements.

Inquire as to material commitments

to complete sales contracts at a loss Completions
or that cannot be fulfilled;
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 Valuation

procedures for long term projects.

Evaluate the possibility of

subsequent events, to ensure that Occurrence
there is no unrecorded contingency

Obtain the clients representation

regarding contingencies &
commitments as part of the financial Measurement
statement representation letter.

2- 106
Client Name
File No. Reference: A/AP
Audit Program Tangible fixed Prepared By: Date:
assets
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Obtain schedule of property, plant and Completeness

equipment showing beginning and
ending balances, acquisitions and
disposals during the year, as well as,
accumulated depreciation at the
beginning and end of the period, with
charge for the year. Check casting and
cross casting of the schedule.

2 Trace opening balances from fixed Completeness

assets register, general ledger and last
years working papers.

3 Make a selection of fixed assets held by Rights &

client at year end and physically inspect Obligation
them to ensure that:
(a) Asset is owned and held by client.
(b) Remaining useful life appears to be
correct
4 Trace the carrying value of selected Valuation
assets with supporting documents i.e.
(a) For purchases in current year, capital
expenditure approvals and vendors
invoices.
(b) Ensure that additions to fixed assets
do not include any amount of a
nature of revenue expenditure.

5 For selected assets disposed of during Existence

the current period: Ownership
(a) Examine documents authorizing Valuation
disposal.
(b) Examine documents supporting
amounts for which assets were sold
e.g. cash receipts
(c) Calculate gain or loss on disposal of
fixed assts

2-107
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed

6 To check depreciation expense: Valuation &

(a) Determine the reasonableness of Cut off
accounting policy and depreciation
method, rates and their consistency
with prior years.
(b) Check calculation of depreciation of
selected assets.

7 Trace closing balances with general Completeness

ledger

8 Determine that disclosures have been Presentation/

made in accordance with the Disclosure
requirements of Companies Ordinance,
1984 and relevant accounting
pronouncements.
9 Inspect evidence of ownership e.g. Rights &
Vehicle registration certificate Obligation

2-108
Client Name
File No. Reference: B/AP
Audit Program Audit Program for Prepared By: Date:
assets subject to
finance lease
(Steps in addition to
those of owned assets)
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 For additions during the year, check Ownership

from lease agreements that the lease is a Valuation
finance lease in substance. Completeness

2 To check depreciation on leased assets Valuation

ensures that appropriate depreciation
rates have been used.

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 (IAS-17).

2-109
Client Name
File No. Reference: C/AP
Audit Program Capital work in Prepared By: Date:
progress
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Obtain a schedule showing opening Existence

balances, additions to and transfers from
fixed assets during the year, and closing
balances.

2 Trace opening balances from general Completeness

ledger.

3 For selected additions during the year :- Ownership

(a) Check supporting documents like Existence
vendors invoices, contractor bills and Valuation
other evidences.
(b) Check proper authorization and
approval.

4 For selected transfers to fixed assets Measurement

during the year, check contractor Existence
certificates of completion of project and
proper approval thereof and examine the
stage of completion.

5 For items stuck-up for considerable Valuation

period of time, inquire about its status
from the management. Compute
provisions if required and ask for
management representations.

6 Agree closing balances with general Completeness

ledger.

7 Determine that disclosures have been Presentation/

made in accordance with the Disclosure
requirements of Companies Ordinance,
1984 and relevant accounting
pronouncements.

2-110
Client Name
File No. Reference: E/AP
Audit Program Intangible assets Prepared By: Date:
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Ascertain the nature of each significant Completeness

intangible asset by inquiry or reviewing
information contained in prior-years
working papers.

2 Inquire as to the reasons for significant Existence

changes in intangible assets balances since
the prior year.

3 Obtain a schedule of intangibles like Existence

goodwill, patents, copyrights and other assets
showing beginning and ending balances,
additions to and deletions from, during the
current period, as well as accumulated
amortization of costs at the beginning and
end of the period.

4 Match the balances with general ledger. Completeness

5 For selected intangibles additions during the Valuation

year :- Existence
(a) Trace the recorded value to supporting Ownership
documents e.g. independent valuation for
purchases in current year.
(b) Obtain authorization or board minutes.
6 For selected intangibles disposed off during Ownership
the year :-
(a) Examine supporting documents (e.g. cash
receipts).
(b) Calculate gain or loss on sale of assets

7 Determine that clients accounting policies Valuation

for amortization are appropriate and applied
consistently.

2-111
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
8 Calculate on a test basis, amortization charge Valuation
for the year and ensure proper amount has Measurement
been charged to Profit & Loss account.

9 Determine whether expectations of future Valuation

benefits are reasonable in relation to
amortization period.

10 Determine that disclosures have been made in Presentation/

accordance with the requirements of Disclosure
Companies Ordinance, 1984 and relevant
accounting pronouncements.

2-112
Client Name
File No. Reference: H/AP
Audit Program Un-allocated pre - Prepared By: Date:
production
expenditure
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Trace opening balances from general Completeness

ledger.

2 Review items of un-allocated pre- Existence

production expenditure incurred
during the year analytically and
document reasons for major
variations.

3 Examine supporting documents for Completeness

selected items to ensure their validity. Existence
Valuation

4 Check that at the time of Valuation

commencement of commercial
production, all those expenditures
have been treated in accordance with
the requirements of Technical
Release - 20 (TR-20).

5 Agree closing balances with general Completeness

ledger.

6 Determine that disclosures have been Presentation/

in accordance with the requirements Disclosure
of Companies Ordinance, 1984 and
relevant accounting pronouncements.

2-113
Client Name
File No. Reference: K/AP
Audit Program Long Term Prepared By: Date:
Investments
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed
1 Obtain a schedule of investments Existence
showing the description and number of
shares, beginning and ending, sales
and purchases during the current
period.

2 Trace the opening balances from the Completeness

general ledger

3 Trace the carrying value of selected Ownership

investments to supporting documents Valuation
e.g. Existence
(a) Broker's notes for investments
purchased in the current year, to
confirm date of purchase
description and number of shares.
(b) Carrying costs in our prior years
working papers.

4 For selected investments disposed of Existence

during the current period: Ownership
(a) Examine supporting documents of Valuation
investments sold e.g. brokers
notes and cash receipts records.
(b) Confirm the date of disposal,
description and number of shares.
(c) Calculate the gain or loss on sale
of investment and trace the
amount transferred to the profit
and loss account.

2-114
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
5. Test the casting and cross - casting of Valuation
the schedule.

6. Trace ending balances of investments Completeness

to the general ledger.

7. For investments held by client at Existence

period end, perform the following:
(a) Physically inspect selected
securities held by the client.
(b) For selected securities not held
by the client, circularize
confirmation requests to the
custodian. Compare replies to
recorded investments.

8. For selected investments, compute Valuation

market value as under:
(a) For quoted investments, trace
market value from independent
published quotations.
(b) For unquoted investments,
calculate breakup value of shares
from respective company's
financial statements.

9. For each portfolio of investments, Valuation

compare cost with market value and Completeness
ensure provisions for diminution in
values of investment according to the
accounting policies of client and as per
revised TR-23.
Discuss with the client procedures
used to determine whether a decline in
market value of investments is other
than temporary.

10. Determine that disclosures have been Presentation/

made in accordance with the Disclosure
requirements of Companies
Ordinance, 1984 and relevant
accounting pronouncements.

2-115
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
Investment Income

1. Obtain a schedule showing opening Existence

and closing balances of accrued Completeness
income and income earned and
received during the year

2. Trace opening balance of accrued Completeness

income from general ledger/ trial
balance.

3. Make a selection of accruals and Measurement

examine documents supporting the
amounts of investment income (e.g.
rates from published quotations,
dividend warrants).

4. Examine subsequent receipts of Measurement

income accrued at period-end. Occurrence

5. Trace ending balances of accrued Completeness

income from general ledger.

2-116
Client Name
File No. Reference: L/AP
Audit Program Long term loans Prepared By: Date:
and advances.
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Obtain a schedule of loans and advances Existence

2 Trace opening balances from general Completeness

ledger

3 For disbursements made during the Existence

year:-
(a) Check approval of appropriate level
of management.
(b) Check that all formalities necessary
before disbursement of loans have
been fulfilled by the party.
(c) Check disbursements of funds with
disbursement register and bank
statement.

4 For repayments made during the year:- Valuation

(a) check amount of repayment from Existence
repayment schedule or agreement. Ownership
(b) Check receipt of funds with receipt
records and bank statement.

4 Circularize confirmations to selected Rights &

parties. Match replies with the amounts Obligation
outstanding against each party. Completeness
Existence

5 Check calculation of interest income on Measurement

test basis:- Valuation
(a) Verify rate of interest from
agreement.
(b) Check the number of days for
which interest is to be charged.

2-117
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed

6 Obtain age-analysis of long-term loans Valuation

and advances and perform the
following:-
(a) Verify that loans have been
classified in correct categories.
(b) Consider the value of securities
available against each loan for the
purpose of calculation of provision
for doubtful loans and advances.

7 Agree closing balances with the general Completeness

ledger and trial balance.

8 Select a sample of loans entered, Rights &

renewed or otherwise restructured and Obligation
analyze whether management has
considered potential risk related to these
loans
9 Test check loan agreement and legal Rights &
documents to verify the terms and Obligation
conditions of the advances
10 Determine that disclosures have been Presentation/
made in accordance with the Disclosure
requirements of Companies Ordinance,
1984 and relevant accounting
pronouncements.

2-118
Client Name
File No. Reference: M/AP
Audit Program Deferred cost Prepared By: Date:
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Ascertain the nature of each item of Existence

deferred costs by inquiry or reviewing
information contained in prior years
working papers.

2 Obtain schedule of deferred cost Occurrence

showing beginning and ending Existence
balances and movements during the
year, as well as accumulated
amortization at the beginning and at
the end of the period.

3 Check casting and calculation of Valuation

schedule and agree balances with Completeness
general ledger.

4 Ensure that costs that should have Completeness

been expensed in current or past Measurement
periods are not being carried forward.

5 Determine that clients accounting Measurement

policies and procedures for
amortization are appropriate and
applied consistently.

6 Determine that no such events have Existence

occurred that might lead to a reduction
in the period over which the costs are
being written off.

7 Re-compute charge of amortization Completeness

for the year and agree the amount with
profit and loss account and general
ledger.

8 Determine that disclosures have been Presentation/

made in accordance with the Disclosure
requirements of Companies
Ordinance, 1984 and relevant
accounting pronouncements.

2-119
Client Name
File No. Reference: N-R/AP
Audit Program Store spares & Prepared By: Date:
loose tools and
stock in trade
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Observe physical count of inventories Existence/

at year-end and obtain schedules Completeness
showing quantities of inventories.

2 Check that inventories not owned by Occurrence

client e.g. stock on consignment from
suppliers are identified and excluded
from physical count.

3 For items owned by client but not Existence

physically held, obtain independent Ownership
confirmations from custodians.

4 Obtain final inventory compilation Completeness

schedule and perform the following:
(a) Test casting and calculation of
schedule.
(b) Trace balances to the general
ledger.
(c) Trace quantities from physical
stock take working papers.
(d) Trace prices used to build up the
average cost to purchase invoices.

5 To test check cut-off of inventory, Completeness

select transactions from purchases, Occurrence
purchase returns and sales (stock
outs) of some days before and after
the year end and ensure proper
recording of transactions in correct
period.

6 Determine that the basis of valuation Valuation

of e.g. FIFO or average cost is
appropriate and followed
consistently.

2-120
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed

7 Compare cost of closing stock with Valuation

its NRV, and compute provision for
obsolete or slow moving stocks, if
any.

8 Determine that disclosures have been Presentation/

made in accordance with the Disclosure
requirements of Companies
Ordinance, 1984 and relevant
accounting pronouncements.

2-121
Client Name
File No. Reference: S/AP
Audit Program Trade debts Prepared By: Date:
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Obtain the schedule of receivables/trial balance Completeness

(age analysis) and perform the following:
(a) Test the casting of schedule
(b) Trace the totals to the general ledger and
trace opening balances from prior years
working papers

2 Make a selection of customers balances and Ownership

perform the following:- Existence
(a) Circularize confirmations of selected Valuation
parties.
(b) Compare replies to requests. Trace
reconciling items, if any, to the supporting
documents.
(c) In case of non-replies check subsequent
clearance.
(d) Inquire into significant disputed balances.

3 Obtain a schedule of allowance for doubtful Valuation

debts showing beginning and ending balances Completeness
write-offs, recoveries and bad debts expense.
Trace ending balances to general ledger.

Ensure the recoverability of the debtors

considered good.

4 Trace ending balances from general ledger. Completeness

5 Determine that methods used by management to Valuation

estimate doubtful debts are appropriate and
applied consistently.

6 Calculate provision for doubtful debts based on Valuation

age-analysis of debtors.

7 Review documents, supporting correspondence Valuation

and authorization for selected write-offs during
the year.

2-122
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
8 Select transactions from sales invoices and Completeness
customer returns notes pertaining to some days Occurrence
prior to and after year-end and ensure that they
have been recorded in the correct period.

9 Determine that disclosures have been made in Presentation/

accordance with the requirements of Companies Disclosure
Ordinance, 1984 and relevant accounting
pronouncements.

2-123
Client Name
File No. Reference: V/AP
Audit Program Trade deposits, short- Prepared By: Date:
term prepayments,
loans, advances and
other receivables.
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Obtain a detailed scheduled showing separately Existence

trade deposits, prepayments, loans & advances and Rights &
other receivable Obligation

2 Inquire about the nature of trade deposits. Completeness

Corroborate movements in trade deposits with
supporting documents.

3 Review short-term prepayments analytically. Existence

Inquire as to the reason for significant changes in
prepaid expense balances since the prior year.

4 For short-term loans and advances to staff, review Completeness

companys policies for disbursement and recoveries Ownership
thereof, and ensure the same with supporting
documents. Verify on a test basis deductions from
advances to staff from their respective payroll
register.

5 Document the nature of other receivables, check the Valuation

movement with supporting documents and compute
the amount of provision for doubtful receivables, if
required.

6 Determine that accounting policies for recording Measurement

the above items are appropriate and applied
consistently.

7 Determine that disclosures have been made in Presentation/

accordance with the requirements of Companies Disclosure
Ordinance, 1984 and relevant accounting
pronouncements.

2-124
Client Name
File No. Reference: W/AP
Audit Program Short Term Prepared By: Date:
Investments
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

Compare the account balances with Rights &

those of prior periods and Obligation
investigate any unexpected changes
(or the absence of expected
changes).

Compare current years to market Valuation

value of the security.

Perform an overall test of the Valuation

reasonableness of interest income
by multiplying the average interest
rates by the average amounts
invested.

Verify the existence and ownership Existence/

of recorded securities through Rights &
confirmation or examination of Obligation
evidence of ownership (e.g., stock Valuation
certificates).

Inspect market quotations or other Valuation

evidence of the current value of
marketable securities.

Determine that marketable securities

are carried at the appropriate Measurement
amounts.

Review minutes, agreements and Existence

confirmation replies for
evidence of the existence of
marketable securities, and of

2-125
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
Liens, pledges or other security
interests in marketable
securities.

Discuss with the client procedures Valuation

used to determine whether a decline
in market value of a marketable
equity security is other than
temporary.

Determine if any decline in market

value of a marketable security Valuation &
below cost is other than temporary Measurement
be performing some or all of the
following procedures:

- Reviewing the issuers most

recent audited financial
statement.

- Considering the time and the

extent to which the market
value has been less that cost.

- Considering any specific

events that may influence the
operations of the issuer.

- Determining if decline in
market value relates to
cyclical patterns of the
issuers industry or is

- Review any client

reconciliations of statements
(e.g., from banks and
brokers) with the clients
records.

- When marketable

2-126
 Audit Procedures
S. No. Audit Performed Reference
Assertion by
Addressed

Securities are carried at market

value, verify the unrealized gains
and losses recorded.

2-127
Client Name
File No. Reference: X/AP
Audit Program Cash and bank Prepared By: Date:
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Prepare standard bank confirmation requests for all Existence

bank accounts and circularize them. Completeness
Valuation
Ownership

2 Agree balances and contingent liabilities reported Existence

in replies to bank confirmation request with records Rights&
of the client. Obligation

3 Examine the clients bank reconciliations (or Completeness

prepare the reconciliation). When appropriate, (e.g. Valuation
to determine whether receipts or disbursement are
recorded on a timely basis, or to verify the
appropriateness of reconciling items) obtain cut-off
bank statements.

4 Arrange physical count or obtain certificate of cash Existence

in hand of significant imprest account and un- Valuation
deposited cash receipts.

5 Determine that disclosures have been made in Presentation/

accordance with the requirements of Companies Disclosure
Ordinance 1984 and relevant accounting
pronouncements.

2-128
Client Name
File No. Reference: TC-1
Audit Program Sales/Receivables Prepared By: Date:
Accounting Reviewed By: Date:
Period

S. No. Control Objective Tests of Controls Performed Reference

by

1. Orders are approved by Make a selection of sales

management as to prices of sales invoices and examine evidence
that the prices assigned match
the approved price list

2. (a) Order entry data is transferred Make a selection of orders to

completely and accurately to the
shipping and invoicing activities.
(b) All orders received from
customers are input and
processed.
ensure that they are
sequentially numbered. Obtain
source document for each
selection alongwith the
document before and after
each selection, to verify the
integrity of sequence. Inquire
about any missing or duplicate
customer orders.

3. Only valid orders are input and Examine documentary

processed evidence that management
reviews relevant sales, debtors
and inventory reports related to
order entry, shipping and
invoicing and monitors and
significant unusual
relationships.

4. Invoices are generated using Ensure that invoices were

authorized terms and prices. priced using approved price
lists and that exceptions were
approved by the management.

5. Invoices are accurately Make a selection of invoices

calculated and recorded.
and ensure that recalculation of
invoices and discounts was
performed by the client in
accordance with the
established policies and
procedures.

2-129
6. Credit notes and adjustments to
accounts receivable are
accurately calculated and
recorded.
7. All goods shipped are invoiced
8. Credit notes for all goods
returned are issued in accordance
with the approved policy.
Agree summary information
from the clients actual reports
(e. g. details of all credits to
accounts receivable for one
month) to the general ledger
and trace information (e.g.
customer name, credit amount
and reason thereof) from
underlying records (e.g. credit
memos) into the clients
reports to ensure that relevant
information is properly
reported. Review documents
evidencing that the
management monitored the
nature, volume and amount of
recorded credit notes, write-
offs and other readjustments to
accounts receivable.
Ensure that the goods shipped
at, before, or after the end of
an accounting period are
scrutinized and reconciled to
ensure complete and consistent
recording in the appropriate
accounting period including
raising and recording of the
related invoices.
Understand and document the
policies related to issuance of
credit notes (e.g. evidence of
return of goods, original
invoices, time periods, within
which credit must be requested
and approval thereof). Make a
selection of credit notes and
ensure that policies have been
implemented.
2-130
9. All invoices and credit notes
issued are recorded.
10. Invoices are recorded in the
appropriate period.
Make a selection of
sequentially numbered
invoices and credit notes and
obtain source document for
each selection alongwith the
document before and after
each selection. Trace selected
items to clients reports and
determine their proper
inclusion or exclusion. Inquire
about any missing or duplicate
invoices and credit notes.
Make a selection of shipments
between the dates of one week
before the end of accounting
period and one week after the
end of accounting period and
ensure that goods shipped at,
before or after the end of
accounting period are
securitized and reconciled to
ensure complete and consistent
recording in the appropriate
accounting period including
issuing and recording of
related invoices.
2-131
Client Name
File No. Reference: TC-2
Audit Program Purchases/Inventory / Prepared By: Date:
Accounts Payable
Accounting Reviewed By: Date:
Period

S. No. Control Objective Tests of Controls Performed Reference

by

1. Raw materials are received and Ensure that:

accepted only if they have valid
purchase orders.
a) Goods received are matched
with purchase orders or
invoices.
b) Long outstanding goods
receipt notes, purchases
orders or invoices are
investigated timely and
accrued as appropriate.
c) Documents are cancelled,
once matched or on
payment of invoice to
prevent reuse.
d) When goods received are
matched to purchase orders,
receipt with no purchase
order or that exceed the
purchase order quantity are
rejected.

2. Raw materials received are Make a selection of physical

recorded accurately.
inventory count reports
performed by client and ensure
that:
a) physical inventory is
counted periodically by
persons independent of day-
to-day custody or recording
of inventory.
b) Inventory counts are
reconciled to inventory
records and inventory
records are reconciled to the
general ledger.

2-132
3. All raw materials received are
recorded
4. Receipts of raw materials are
recorded timely and in the
appropriate period.
5. Determine raw materials are
returned timely to suppliers.
a) Obtain goods receipt
vouchers and ensure that
they are sequentially pre-
numbered. For selected
vouchers, obtain source
documents alongwith the
document before and after
each selection to verify the
integrity of sequence around
each selection. Trace
selected items to client
reports and determine their
proper inclusion or
exclusion.
b) Invoices not matched to
goods receipt notes should
be investigated. Ensure that
payments of such invoices
have been specifically
approved by the
management.
Examine a selection of
documented listing of goods
received, supplier invoices and
credit notes at, before or after
the end of the accounting
period. Ascertain that the client
has scrutinized and reconciled
all such transactions to ensure
complete and consistent
recording in the appropriate
accounting period.
Observe that the rejected raw
materials are adequately
segregated from other raw
materials at various times
throughout the period of
intended reliance. Examine
documentary evidence
supporting that such rejected
raw materials were monitored
and returned to the supplier
within a reasonable period of
time.
2-133
6. All transfers of raw materials to
production are recorded
accurately and in the appropriate
period.
7. Finished goods returned by
customers are recorded
completely and accurately in the
appropriate period.
8. Finished goods received from
production are recorded
completely and accurately in the
appropriate period.
9. Goods received from production
or returned by customers are
only accepted in accordance with
the organizations policies.
Make a selection of transfers of
raw materials to production.
Examine documents evidencing
that received inventories were
properly counted and inventory
product numbers, quantities and
receipt dates were compared to
receipt or transfer
documentation that was used to
support the recording of the
inventory receipt in the
accounting records.
Ensure that gods receipt
vouchers were sequentially pre-
numbered. Ensure that finished
goods returns have been
specifically mentioned in the
goods receipt vouchers.
Agree summary information
from the clients actual reports
(e. g. total received amount of
inventories) to the general
ledger. Trace a selection of
information from the underlying
records (e. g. inventory
subsidiary ledgers) into the
clients reports to ensure that
relevant information is properly
reported.
Examine documentary evidence
indicating that the client
performed quality control
inspections in accordance with
their policies and procedures.
Ascertain that the goods
inspected were either returned
to inventory, reworked or
scrapped in accordance with the
recommendations of the quality
control inspection.
2-134
10. All shipments are recorded.
11. Shipments are recorded
accurately.
12. Shipments are recorded timely
and in the appropriated period.
13. Inventory is relieved only when
goods are shipped with approved
customers orders.
Ensure that:
a) All delivery notes are
sequentially numbered and
the sequence of delivery
notes processed is
accounted for.
b) Orders are sequentially
numbered. The sequence of
orders processed is
accounted for, including
following up on order
status (e. g. shipped,
invoiced).
Agree summary information
from the clients actual reports
(e. g. monthly sales) to the
general ledger. Trace
information (e. g. customer
name, invoice number, date and
amount) from a selection of
invoices into the clients reports
to ensure that relevant
information is properly
reported.
Examine a selection of
documented listing of goods
shipped at before or after the
end of the accounting period.
Ascertain that the client has
scrutinized and reconciled all
such transactions to ensure
complete and consistent
recording in the appropriate
accounting period, including
raising and recording of the
related invoices.
a) Examine documents
evidencing that before
goods are shipped, the
details of the approved
order are compared to
actual goods prepared for
shipment by an individual
independent of the order
picking process.
2-135

14. Cost of shipped inventory are
recorded accurately
b) Examine documents
evidencing that all
incoming and outgoing
vehicles are monitored by
security personnel to
ensure that all goods
leaving the premises are
accompanied by duly
completed documentation
(e. g. delivery note or
goods returned note).
Examine documentary evidence
indicating that management
reviewed relevant sales,
accounts receivable, cost of
sales and inventory reports
related to order entry, shipping
and invoicing and monitored
significant unusual
relationships.
2-136
Client Name
File No. Reference: PL 1/AP
Audit Program Sales Prepared By: Date:
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed
1 Perform analytical procedures on sales by Occurrence
developing an expected amount of sales Completeness
based on prior years figures or current year
economic conditions and then comparing it
with actual amount any significant
differences should be enquired into and
corroborated.

2 Make a selection of sales transactions from Occurrence

independent source records e.g. shipping
records, delivery orders etc.

3 Test the completeness of source records by Completeness

ensuring their numerical sequences.

4 For each item selected above : Completeness

(a) Trace it to a sales invoice
(b) Agree sales invoice prices to a price list
(c) Determine that the sale was recorded in
the correct period.
(d) Trace sales invoice amount to a sales
journal
(e) Trace sales journal total to the general
ledger

5 Make a selection of recorded sales returns Completeness

and each selected item:-
(a) Trace it to credit notes
(b) Trace credit notes to receiving
documents and original sales invoices.
(c) Determine that credit notes were
recorded in the correct period.

6. Make a selection of transactions from Completeness

recorded sales and shipping records some Occurrence
days prior and after period-end and ensure
proper cut-off.

2-137
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed

7. Determine that the accounting policies and Valuation

methods of revenue recognition are Measurement
appropriate and are applied consistently.

8. Determine that disclosures have been made Presentation/

in accordance with the requirement of Disclosure
Companies Ordinance, 1984 and relevant
accounting pronouncements.

2-138
Client Name
File No. Reference: PL 2/AP
Audit Program Cost of sales Prepared By: Date:
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Perform analytical review of cost of sales Completeness

and inquire and corroborate significant Occurrence
variations.

2 Perform tests of details as under: Completeness

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.
(ii) Make a selection of individual
purchases from the journal.
(iii) Trace the selected purchases to a
supplier invoice and receiving
records.
(iv) Determine that the purchases
were recorded in the correct
period.
c) Ensure proper cut-off of purchases. Completeness
Occurrence

3 For other items in cost of sales: Occurrence

a) Review all heads analytically and

document reasons for significant
variations.
b) Examine supporting documents for
selected items to ensure their validity.

4 Determine that disclosures have been in Presentation/

accordance with the requirements of Disclosure
Companies Ordinance, 1984 and relevant
accounting pronouncements.

2-139
Client Name
File No. Reference: PL 3 & 4 /AP
Audit Program General and Prepared By: Date:
admin expenses /
selling and
distribution
expenses.
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Perform Reference

Assertion ed by
Addressed

1 Perform analytical procedures to evaluate Completeness

operating expense:
a) Develop expectations of significant operating
expense.
b) Compare the expected amounts with actual
recorded amounts.
c) Inquire and document reasons for major
variations.

2 Make a selection of recorded expenses and Occurrence

examine proper supporting documents for relevant Completeness
expenses e.g. rent agreements for rent expenses, Measurement
personal files and payroll for salaries and other
allowances etc.

3 Determine that disclosures have been in Presentation/

accordance with the requirements of Companies Disclosure
Ordinance, 1984 and relevant accounting
pronouncements.

2-140
Client Name
File No. Reference: PL 5/AP
Audit Program Financial charges Prepared By: Date:
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed

1 Make a selection of recorded financial Occurrence

charges and perform the following :- Measurement
a) Examine supporting documents to Completeness
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 Determine that all loans, borrowings, Completeness

leases etc. have been considered to ensure
that there are no unrecorded or under
recorded financial charges.

3 Determine that disclosures have been in Presentation/

accordance with the requirements of Disclosure
Companies Ordinance, 1984 and relevant
accounting pronouncements.

2-141
Client Name
File No. Reference: PL 6/AP
Audit Program Other Charges Prepared By: Date:
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed
Obtain details of each expense in Existence
other charges (e.g., WWF & WPPF)

For determining the amount of WWF Valuation

ensure that charge of WWF has been
calculated on the basis of taxable
income.

Ensure that charge has been properly Valuation

calculated (i.e.WPPF@5% )

Ensure that each major item Presentation &

separately recorded & properly Disclosure
disclosed in the financial statements.

Compare balances with prior period Completions

for unusual fluctuations.

2-142
Client Name
File No. Reference: PL 7/AP
Audit Program Other Income Prepared By: Date:
Accounting Reviewed By: Date:
Period

S. No. Audit Procedures Audit Performed Reference

Assertion by
Addressed
Obtain detailed analyses of selected Existence
revenue accounts and trace the details
to the source data.

Review the marketable securities and Existence

related accounts (e.g., interest and
dividend income) in the general
ledger for unusual items.

Test accrued interest and interest Valuation

earned during the period on
receivables; determine whether
interest should be imputed on long-
term receivables arising during the
period.

Verify interest and dividend income Valuation &

on marketable securities, Measurement
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 Valuation

losses from sales of marketable
securities and investments.

Inspect authorizations and other data Existence

supporting retirements, sales, and
other disposals of property, plant, and
equipment and test the computations
of the resulting gains and losses.

2-143
Identify and examine items that may Presentation &
require separate disclosure in the Disclosure
financial statements, including the
notes thereto (e.g., extraordinary
items, discontinued operations,
segment information, gains or losses
on foreign currency transactions).

2-144
2.3.3 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:

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.

2-145
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 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.

2-146
Client File No.

Analytical Review-Balance Sheet-Liabilities

Name Initial Date
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Authorized capital

Issued, Subscribed & Paid-up Capital

General Reserves

Capital Reserves

Unappropriated Profit & Loss

Surplus on Revaluation of Fixed Assets

Redeemable Capital

Long Term Loans

Liabilities Against Assets Subject to

Finance Lease

Deferred Liabilities

Long Terms Deposits

Current Liabilities

Short Term Loans

Current Portion of Long Term Loans

Creditors, Accrued & Other Liabilities

Provision for Taxation

Proposed Dividend

Total Liabilities

2-147
Client File No.
Name Initial Date
Analytical Review-Balance Sheet
Assets Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Operating Fixed Assets

Capital-work-in-progress

Intangible Assets

Long Term Investments

Long Term Loan & Advances

Long Term Deposits , Prepayments &

Deferred Cost

Current Assets

Stores, Spares & Loose Tools

Stock-in-trade

Trade Debts

Short Term Deposits, Prepayments & Other

Receivable

Short Term Investment

Cash & Bank Balances

Total Assets

2-148
Client File No.
Name Initial Date
Analytical Review - Sales
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Export

Local

Add : Export Rebate

Less :

- Commission

- Brokerage and Discount

- Excise Duty

- Sales Tax

2-149
Client File No.
Name Initial Date
Analytical Review - Cost of Goods Sold
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Raw material consumed

Salaries, wages and benefits

Stores and spares consumed

Packing material consumed

Fuel and power

Rent, rates and taxes

Insurance

Repairs and maintenance

Depreciation

Other manufacturing overheads :

Vehicle Running & Maintenance

Telephone and postage
Utilities
Printing and stationery
Travelling and conveyance
Legal and professional
Others

Work in process :
Opening stock
Closing stock

Finished Goods:
Opening stock
Closing stock

Cost of Goods Sold

2-150
Client File No.
Name Initial Date
Analytical Review - Administrative

Expenses Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Directors' remmuneration

Staff salaries and benefits

Rent, rates and taxes

Insurance

Repairs and maintenance

Travelling and conveyance

Legal and professional

Vehicle running and maintenance

Utilities

Printing and stationery

Postage, telephone and telex

Fees, subscription and periodicals

Entertainment

Auditors' remmuneration

Advertisement

Charity and donation

Depreciation

Other

2-151
Client File No.

Analytical Review - Selling Expenses

Name Initial Date
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Salaries and Benefits

Freight and Octroi

Clearing and Forwarding

Travelling

Advertisement and Sample

Others :

Export Development Surcharge

Market Survey

Bank Charges

Insurance

2-152
Client File No.

Analytical Review - Financial Charges

Name Initial Date
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Markup / interest on :

- Redeemable Capital

- Debenture

- Long Term Loans

- Lease Finance

- Short Term Borrowings

- Loan from Directors &

Associated Undertaking

- Workers' Profit Participation Fund

Excise Duty on Borrowings

Bank Charges and Commission

Exchange (Gain) / Loss

Exchange Risk Fee on Foreign Currency

Loan

2-153
Client File No.
Name Initial Date
Analytical Review - Other Income
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Income from Investments - net of Zakat

Income from Redeemable Capital

Income from Modaraba or

Modaraba Certificates

Profit on Sale of Investment

Profit on sale of fixed assets

Rental Income

Scrap sales

Others

Unusual income

Prior year income

2-154
ANALYTICAL REVIEW RATIO ANALYSIS

FORMULA

Y1 Y2 Y3 Y4
A. PERFORMANCE ANALYSIS

1. Installed Capacity
2. Capacity utilized
3. Production in units i.e. Kgs. metres etc.
4. Production after convers ion, if any.
5. Gross Sale in % - Local Local Gross Sales
Gross Total Sales

- Export Export Gross Sales

Gross Total Sales

6. Gross Profit % to Net Sales Gross Profit

Net Sales

7. Raw material consumption cost to cost of Consumption Cost

goods manufactured. Cost of goods manufactured

8. Average raw material purchase price per unit. Total Purchase Price of Raw material
total units purchased

9. Average conversion cost per unit of Conversion Cost

production unit produced

10. Conversion cost without depreciation per unit Conversion Cost without depreciation
units produced

11. Labour cost per unit of production Labour Cost

units produced

12. Store and spares consumption per unit of Store & Spares consumption in
production. rupees
units produced

13. Electricity consumption per unit of production Electricity consumption in rupees

units produced

14. Packing material cost per unit of production Packing material cost
units produced

2-155
 FORMULA
Y1 Y2 Y3 Y4

15. Administrative expenses / unit of production Administration Expenses

units produced

16. Selling expenses per unit sold. Selling Expenses

units sold

17. Financial charges in rupees

18. Net Profit / (Loss) per unit sold Net Profit / (Loss)
unit sold

19. Net profit (Loss) percent of sales Net Profit / (Loss)

Sales X one hundred

20. Production in %

- Finished goods in production

- Visible waste Finished goods produced in units
- Invisible waste raw material consumed in units
100

21. Average selling rate per unit

- Local Local Sales

Total Units Sold

- Export Export Sales

Total Units Sold

In case of Textile

B. PROFITABILITY RATIOS

1. Return on assets (ROA) Net Profit after tax

Average total assets

2. Return on Capital Employed (ROCE) Net Profit after tax

Average total capital employed

3. Earning per share (EPS) Net profit available to equity holder

Number of ordinary shares
outstanding

Reasons for Fluctuations:

_________________________________________________________________________________

_________________________________________________________________________________

_________________________________________________________________________________

2-156
 FORMULA

Y1 Y2 Y3 Y4
4. Earning yield Earning per Share
Market value per share

5. Price Earning Ratio Market price as a Share

Earning per Share

6. Operating Expenses ratio Operating Expenses

(administrative Expenses ratio) Net Sales

7. Administrative Expenses ratio Administrative Expenses

Net Sales

8. Selling Expenses ratio Selling Expenses

Net Sales

9. Financial Expenses ratio Financial Expenses

Net Sale

C. ACTIVITY RATIOS
1. Inventory Turnover

i Raw Material Turnover Cost of raw material used

Avg. raw material inventory

ii. Work in process turnover Cost of good manufactured

Avg. Work in process inventory

iii. Finished goods turnover Cost of good sold

Avg. finished goods inventory

2. Debtor turnover Credit Sales

Debtors

3. Average debt collection period Months (days) in a year

Debtor turnover

4. A ssets turnover Cost of good sold

Average total assets

5. Fixed assets turnover Cost of goods sold

Average fixed assets

6. Current assets turnover Cost of good sold

Average current assets
7. Working Capital turnover Cost of good sold
Net working capital

2-157
 FORMULA

Y1 Y2 Y3 Y4
D. LIQUIDITY RATIOS

1. Current Ratio Current assets

Current liabilities

2. Acid - Test quick ratio Quick assets

Current liabilities

3. Creditors Net credit purchase

Average creditors

E. LEVERAGE / CAPITAL STRUCTURE

RATIOS

1. Debt - Equity ratio Total debt

Share holders equity

2. Equity Turnover Sales

Net worth

3. Owners stake in the fixed assets Fixed assets

Net worth

Reasons for Fluctuations:

_________________________________________________________________________________

_________________________________________________________________________________

_________________________________________________________________________________

2-158
2.4 AUDIT ADMINISTRATION & OTHER MATTERS

2.4.1 STAFF PLANNING AND TIME ALLOCATION

CLIENT :
PERIOD OF ACCOUNT : Staff :
DETAILED TIME BUDGET
Prepared by Reviewed by Approved by
Budget

BUDGET (hours) ACTUAL (hours)

Partner Manager Sup. Sr. S.Sr. Jr. Total Partner Manager Sup. Sr. S.Sr. Jr. Total
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

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
2-159

BUDGET (hours) ACTUAL (hours)

Partner Manager Sup. Sr. S.Sr. Jr. Total Partner Manager Sup. Sr. S.Sr. Jr. Total
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

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

COST
FEE
OVER (UNDER) RECOVERY
2-160
2.4.2 DAILY TIME CONTROL / STAFF ATTENDANCE SHEET

NAME: INITIAL: GRADE: GROUP:

NAME OF CLIENT NATURE OF JOB Period DAYS NORMAL OVER TIME TOTAL HOURS
DD MM YY 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 HOURS

Tue Wed Thu Fri Sat Sun Mon Tue Wed Thu Fri Sat Sun Mon Tue Wed Thu Fri Sat Sun Mon Tue Wed Thu Fri Sat Sun Mon Tue

-
TOTAL
OVERTIME HOURS

2-161
2.4.3 MINIMUM HOURLY CHARGE OUT RATES FOR AUDIT WORK
BY PRACTICING MEMBERS
ATR 14 (Revised)

The Council in its meeting held on 29 January 2000 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 traveling, hotel expenses, out of pocket expenses
and other disbursements:

Partner Rs. 3,000

Qualified Assistants
Senior (5 years and above) Rs. 1,800
Junior (0-5 years) Rs. 1,200
Supervisor Rs. 450
Senior Rs. 300
Semi-Senior Rs. 240
Junior Rs. 150

The actual fees charged in individual cases will be a matter of agreement between the member and the
client.

This ATR supersedes ATR 14 (revised) issued pursuant to the Council's decision of I6 July 1997.

(136th Meeting of the Council - 29 January 2000)

2-162
2.4.4 INSTRUCTIONS FROM CLIENT/ KEY DATES

SCHEDULED REMARKS
DATE

1. FINANCIAL YEAR END TIME TABLE

1.1 Annual General Meeting (AGM)
1.2 Meeting of Board of Directors (BOD)
1.3 Initialed audited accounts
1.4 Representation letter
1.5 Final draft accounts
1.6 First draft account with trial balance
1.7 Consolidated financial statements, if
applicable
1.8 Schedules and documents relating to financial
statements
1.9 Physical count and verification of.
- inventories
- investments
- cash
1.10 Circulation of confirmation letters to:
- banks
- legal advisors
- debtors/creditors
- others
1.11 Availability of the following for Auditors
Review
- Tax files
- Legal files
- AGM minutes
- BOD minutes
- Statutory records and corporate files
- Material agreements and documents
1.12 Preliminary meeting with auditors
1.13 Meeting with the following, where applicable:
- Other auditors
- Tax consultants
- Previous auditors
- Experts
- External or in house legal advisor

2-163
2.4.5 LIST OF SCHEDULE REQUIRED FROM CLIENT
(Date)

The Chief Accountant

Dear Sir

AUDIT FOR THE YEAR ENDING

In order to commence the annual audit for the year ended______, we shall be grateful if you could provide the
following as earlie st:

Trial balance

Draft financial statements

- Balance sheet
- Profit & Loss account
- Statement of Changes in Equities
- Accounting policy and other detailed notes to the accounts

(If financial statements are available on soft copy, please provide the same)

Property, plant and equipment (PPE)

- Detailed movements schedule i.e. additions, deletions & transfers
- Profit/Loss on disposal, showing for each item
description
date of purchase
date of disposal
cost
accumulated depreciation
net book value
proceeds on disposal
profit/loss

- Capital commitments, showing for main items

description
amount approved or budgeted
amount ordered
cost, if any, already debited to PPE

Please have available for our inspection the title deeds in respect of any freehold property.

Investment, showing for each item

- name or nature
- nominal value
- book value
- market value
- income booked for the year

The latest financial statements of investee companies (if any) should be made available for our review.

2-164
 Inventories
- detailed listing for each category of inventory, showing
reference
description
quantity
unit (ie. kilogram, metre, etc.)
unit price
valuation

- goods in transit, listed by banks handling the transactions

description of goods
letter of credit number
date L/C opened
cost to date
invoiced cost
freight (if not cif)
custom duty
other
deposit paid
date of receipt of goods.

Receivables and prepayments

- Aged listing of trade debtors, showing amounts received since the balance sheet date. The
analysis should show balances aged as follows - current month/2-3 months/4-12 months/over
one year.
- Specific provision for doubtful items
- Bills receivable showing
Donor
Date of maturity
Amount
Collecting bank
- Bills discounted showing
Donor
Date of maturity
Amount of bill
Bank with which discounted
- Staff loans and current accounts
Name of employee
Nature of debt
Amount
Repayment arrangements
- Sundry receivables, indicating nature of debt
- Prepayments
Nature (rent, insurance, tax, etc.)
Period of prepayment (identify separately amounts prepaid for more than one year.
Basis of calculation
Amount prepaid.

Affiliates balances

Please arrange for all affiliates, including the parent company/head office to confirm their balances with
the company at the balance sheet date direct to ourselves.

2-165
 Bank balances/overdrafts

- Please complete the attached letter in respect of each bank with which the company has had
dealings during the year, and return it to us, once signed, for us to forward to the banks
concerned.

- Bank reconciliations for all current accounts, showing

Cheques drawn but not yet cleared by bank
Cheque number
Date drawn
Payee
Amount
Date presented (after balance sheet date)
Deposits not yet credited by bank
Date deposited
Drawer of cheque etc.
Amount

Date cleared (after balance sheet date)

Cash

Please obtain confirmations of balances held by holders of all cash floats and petty cash funds at
different locations (if any).

Payables and accruals

- Trade creditors
- Bills payable showing
Payee
Date of maturity
Amount - foreign currency (for foreign bills)
- local currency
- Sundry payables, showing nature of the debt
- Accruals
Nature (eg. salaries, leave pay, utilities, communications etc.)
Period of accrual
Basis of calculation
Amount accrued

Employees terminal benefits

Show for each employee
Date of employment
Basic salary
Basis of calculation
Amount.

Loans payable. For all medium and long term loans outstanding, show
Source of loan
Purpose of loan
Original amount
Period of loan
Balance outstanding
Interest rate
Repayment arrangements
Security given

2-166
 Contingent liabilities
- Please list all claims against the company and any current litigation. Please send the attached
letter to your legal advisors.

- List of all letters of guarantee given by banks on behalf of the company, noting the purpose
and amount of each.
Profit & Loss account details of classification of each income and expense item including the tax
status summary supported by the last assessment order, tax return, summary of taxes paid and details of
appeals if any.

Statement of Changes in Equities

Movement schedule of paid-up capital (if any)
Form A
Other details of statutory forms submitted to the registrar of companies

Minutes

The minutes of all board and general meetings held during the year should be made available for our
inspection.

If you have any queries regarding the information requested above or any other questions in connection with
our forthcoming audit, please do not hesitate to contact us as soon as possible.

Yours faithfully

-sd/ -

Chartered Accountants

Note: The above list is guidance purposes only, the same can be tailored with the requirements/nature of the
client industry

2-167
2.4.6 FORMATS OF CONFIRMATIONS

1. Bank confirmation letter

2. Lawyers Confirmation

3. Tax Consultants Confirmation

4. Debtor/Creditor Balance Confirmation

5. Loan/Lease Confirmation

2-168
 BANK LETTER

BANKS NAME AND ADDRESS DATE

Dear Sir,

CLIENTS NAME

REQUEST FOR BANK REPORT FOR AUDIT

PURPOSES FOR THE YEAR ENDED

In accordance with your above-named customer's authorization given below, please provide to us, as
auditors of your customer, information relating to its affairs as at the close of business on
on the white copy of the attached form which should be returned to us direct. The
yellow copy of the form is for your records. With respect to items 3,5 and 11 on the form the information
requested should cover the period from to .

Please state under each item in the space provided any factors which may limit the completion of your
reply; if there is nothing to report, state "NONE". Where the space provided is insufficient please use
additional sheets appropriately referenced and stamped and signed by the bank. If you find it necessary to
provide the information in a different format, please return the white copy of the attached form with your
reply.

It is understood that any replies given are in strict confidence, for the purposes of audit.

Yours truly
For and on behalf of
Firm name
DISCLOSURE AUTHORISED
For and on behalf of

Signed in accordance with terms

and conditions for the conduct of
customer's bank account.
Encls

2-169
 Page 1 of 4

To: FIRM NAME AND From: BANKS NAME

ADDRESS

Dear Sirs

NAME OF CUSTOMER: CLIENTS NAME

We refer to your letter dated and now return the form appropriately completed showing balances and other
information as at and in the case of items 3,5 and 11, during the period since . Where we have nothing
to report, appropriate notation is given under the relevant item(s).

Yours truly

Date: Bank's stamp & signature

INFORMATION REQUESTED

(1) BANK ACCOUNT BALANCES

Please give full titles of ALL accounts whether in rupees or in any other currency together with the account numbers
and balances therein, including NIL balances:

(a) where your customer's name is the sole name in the title;
(b) where your customer's name is joined with that of other parties;
(c) where the account is in a trade name.

FULL TITLE OF ACCOUNT TYPE OF ACCOUNT ACCOUNT NUMBER CURRENCY DR/ BALANCE

CR IN FIGURES IN WORDS

For overdraft facilities, please give the following information:

ACCOUNT AGREED OVERDRAFT LIMIT TYPE OF CHARGE DESCRIPTION OF SECURITY DATE ON WHICH CHARGE

NUMBER AND DATE OF EXPIRY CHARGED TO THE BANK WAS CREATED

NOTES: (i) Where the account is subject to any restriction (e.g. a garnishee order or arrestment),
or exchange control considerations (e.g. "Blocked account") this information
should be stated:

(ii) Where the authority upon which you are providing this information does not cover any accounts
held jointly with other parties, please refer to your customer in order to obtain the requisite
authority of the other parties. If this authority is not forthcoming please indicate

Bank's stamp &

signature.

2-170
 Page 2 of 4

NAME OF CUSTOMER : CLIENTS NAME AS AT

(2) In respect of running and term finances under mark up arrangement please give the following
particulars:

RELATED PROMPT DATE ON WHICH REPAYMENT PERIOD

ACCOUNT DATE OF SALE PURCHASE PAYMENT RATE OF PURCHASE PRICE AND NUMBER OF

NUMBER AGREEMENT PRICE PRICE REBATE MARK -UP IS PAYABLE INSTALLMENTS.

GROSS NET

(3) Full titles and dates of closure of all accounts closed during the period:

FULL TITLE OF ACCOUNT TYPE OF ACCOUNT ACCOUNT NUMBER DATE OF CLOSURE

(4) Details of amounts accrued but not charged or credited at the above date; e.g. bank charges,
commitment fees, interest etc:

DESCRIPTION PERIOD AMOUNT

IN FIGURES IN WORDS

(5) The amount of interest charged during the period if not specified separately in the bank
statements:

DESCRIPTION PERIOD AMOUNT

IN FIGURES IN WORDS

(6) Particulars ( i.e. date, type of document and accounts covered ) of any written
acknowledgment of set-off, either by specific letter of set-off, or incorporated in some other
document or security.

Bank's stamp & signature

2-171
 Page 3 of 4

NAME OF CUSTOMER: CLIENTS NAME AS AT

(7) Details of loans, cash credit and other facilities ( other than overdrafts mentioned in item 1
above), specifying agreed limits and in case of term loans, date for repayment or renewal:

DESCRIPTION BALANCE AT AGREED DATE FOR DESCRIPTION OF DATE ON

ABOVE DATE LIMITS REPAYMENT/ SECURITY CHARGED TYPE OF WHICH
RENEWAL TO THE BANK CHARGE CHARGE WAS
CREATED

(8) CUSTOMER'S ASSETS HELD AS SECURITY

Please give:

(i) details of any security (other than those mentioned under item 1 and 6 above)
formally charged to the bank, including the date and type of charge (e.g. pledge,
hypothecation etc.):

TYPE OF CHARGE DESCRIPTION OF SECURITY DATE ON WHICH

CHARGED TO THE BANK CHARGE WAS
CREATED

(ii) particulars of any undertaking to assign to the bank any assets:

If a security is limited to any borrowings or if there is a prior, equal or subordinate

charge, please indicate:

(9) CUSTOMER'S OTHER ASSETS HELD

Please give full details of investments, bills of exchange, documents of title, deed boxes and
any other assets of the customer held but not charged:

Bank's stamp & signature

2-172
 Page 4 of 4

NAME OF CUSTOMER: CLIENTS NAME AS AT

(10) CONTINGENT LIABILITIES

All contingent liabilities, viz:

(a) aggregate amounts of bills discounted for your customer, with recourse:

(b) details of any guarantees, bonds or indemnities given to you by the customer in
favour of third parties

(c) details of any guarantees, bonds or indemnities given by you, on your customer's
behalf, stating where there is a recourse to your customer and/or to its holding,
parent or any other company within the group

(d) aggregate amounts of acceptances

(e) aggregate amounts of forward exchange contracts

(f) aggregate amounts of outstanding liabilities under documentary credits

(g) others - please give details

(11) OTHER INFORMATION

A list of other banks, or branches of your bank, where you are aware that a customer/banker
relationship has been established during the period:

Bank's stamp & signature

2-173
 SAMPLE OF LAWYERS CONFIRMATION

CLIENTS NAME AND ADDRESS DATE

Dear Sirs

CLIENTS NAME

We will shortly be expressing our opinion as to the fairness with which the financial statements
present the financial position of the company on ________ and the results of its operations for
the year then ended. In this connection, we shall be grateful if you would please inform us
directly of any litigation, existing or anticipated, as at the above mentioned date or arising
subsequent thereto, involving the company and your opinion as to the losses that are likely to
arise therefrom.

Yours truly
FIRMS NAME

Authorised by

2-174
 SAMPLE OF TAX CONSULTANTS CONFIRMATION

Dear Sirs

We are shortly going to express an opinion on the companys accounts for the year ended _______________
and shall be grateful if you will please directly advise us the position of the companys open ended tax
assessments giving a detailed breakdown of the amounts payable or refundable and likely impact of disputed
disallowances of such assessments.

Yours truly
For and on behalf of
Disclosure authorised by

2-175
 SAMPLE OF DEBTORS/CREDITORS CONFIRMATION

Name __________________ Our Ref: _____________

Address _________________ Date ________________
_________________

Dear Sir (s)

Balance as at ____________due to / from you is Rs.______________ on account of

________________________________________________________________________

Please compare the above balance with your records as of the date indicated above and
mention the details of exceptions (if any) or endorse the correctness of the balance, in the
space provided below, then please sign this letter and return it DIRECTLY to our auditors:

Address of the Auditors

_________________________
_________________________
_________________________

Yours faithfully

(________________)

THE BALANCE SHOWN ABOVE IS CORRECT / INCORRECT (Please delete as

appropriate)

COMPANY: ________________________

ACCOUNT BALANCE: ________________________

(If incorrect)

SIGNATURE: ________________________

DATE ________________________

2-176
 SAMPLE OF FORMAT OF LOAN/LEASE CONFIRMATION

Dear Sirs

REQUEST FOR INFORMATION FOR AUDIT PURPOSES

FOR THE YEAR ENDED ____________________

In accordance with your above-named customers authorisation given below, please provide to us directly as auditors of
your customer, the information relating to its affairs as at the close of business on _________________and for the period
from _____________________ to ___________________.

1. 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.

2. Details of loans and credit facilities, specifying agreed limits and in case of term loans, dated for repayment or
renewals.

3. Amounts of interest, commitment fees, service charges etc., charged during the period.

4. Details of amounts accrued but not charged or cre dited at the above date: e.g., interest, commitment fees, service
charged etc.

5. Details of any security formally charged to you, including the date and type of charge (e.g. pledge, hypothecation
etc.). If a security is limited to any borrowing or if there is a prior, equal or subordinate charge, please indicate.

6. Details of customers assets held as security (other then those mentioned in your response to 5 above) or for other
purposes.

7. 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.

8. Any other information that you consider appropriate for the purposes of the audit.

Please state in respect of each item any factors, wh ich may limit the completion of your reply. If there is nothing to
report state, NONE.

It is understood that any replies given are in strict confidence for the purpose of audit.

Yours truly

For and on behalf of

DISCLOSUR E AUTHORISED
For and on behalf of

2-177
2.4.7 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.

2-178
2.4.8 NOTES OF MEETING WITH CLIENT

CLIENT NAME

DATE

VENUE

TIME

FIRM Name Designation

REPRESENTATIVES

CLIENT Name Designation

REPRESENTATIVES

CONCLUDING
REMARKS

Sign off
Prepared by Reviewed by

Date Date

2-179
AGENDA FOR MEETING

Latest audited accounts

Coordinating persons Name Designation

Information about Other

Auditors/ Co-auditors(if any)
Availability of Accounting
manuals and any changes
Areas Requiring special
attention

Physical Existence Verification

Approx. Va lue Date Location(s) Coordinator(s)
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

2-180
Involvement of internal audit

a. No. of staff
b. Name of department head
c. Reporting authority
d. Type of reports issued
e. Frequency of reports

Confirmation circularization dates

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

2-181
Changes in market strategies

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

2-182
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

Names of key financiers and

changes thereto.

Significant changes in system

of internal controls since last
year

Significant changes in
accounting policies

2-183
Effect of new accounting
pronouncements

Clients international reporting

requirements and changes
thereto

Miscellaneous

2-184
Client:_____________________________ Prepared by:____________ Date:______________
Accounting Period:___________________ Reviewed by:___________ Date:______________

2.4.9 NOTES OF REVIEW OF CORESPONDENCE FILE

Letter Addressed
Dated 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.

2-185
4.12 POINTS FORWARD TO NEXT YEAR

Name of client: ____________________ Year ended _______________

Prepared by: ____________________ Date _______________
Reviewed by ____________________ Date _______________

Schedule
S.No. Description of issue Service Improvement Plan
Reference

Note: This schedule would be carried forward to the next year Audit Planning File as Points
Brought Forward From Previous Year.

2-186
CLIENT:

PERIOD OF ACCOUNT:

SUBJECT: AUDIT PLANNING CHECKLIST

This checklist should be completed and initialed prior to the partners approval of the audit plan.

YES/NO/N.A INITIALS WORKING

AND PAPER
DATE REFERENCE
Terms of Engagement

1. Has the partner or management discussed with client

officials their requirement for this years examination?

2. If the client is a member of a group, have group audit

instructions been received and have group requirements
been given full consideration in developing the plan?

3. Have the implications of changes in accounting and

auditing conventions, laws and regulations been
considered?

4. Have areas in which client staff, including internal

auditors, can make our work more efficient and effective
been considered?

5. Has an appropriate letter to the client been drafted

confirming our current understanding of the clients
requirements, our timetable, and the assistance which
client staff will give us?

6. Has a paragraph regarding Quality Control Review of

our working papers files by the Institute of Chartered
Accountants of Pakistan been included in engagement
letter?

7. Is an appropriate up-to-date engagement letter on file?

Updating the information base

1. Has sufficient work been performed to update the

information based on the clients:

(1) Nature of business?

(2) Business environment?
(3) Accounting systems and control procedures?
(4) Financial affairs?
(5) Accounting principles and practices?

2-187
2. In preparing the plan, has due consideration been given
to changes in:

(1) Key personnel or organisation structure?

(2) Operating locations, subsidiaries, or divisions?
(3) Operating premises and plant?
(4) Products or services provided?
(5) Customers and suppliers?
(6) Financing arrangements?
(7) Work force and labour relations?
(8) The clients business environment?

3. Does the Planning File reflect our current understanding

of the clients business?
4. If the client use computers for accounting purposes have
we considered:
(1) The implications for our work?
(2) The most effective use of computer audit specialists?
(3) The use of CAAT?

Overall Audit Plan

1. Has client profile been documented/updated?

2. Has an understanding of clients business been

obtained and documented?

3. Have all critical audit areas and factors that may

affect clients business been evaluated and
documented?

4. Have risk assessment procedures been applied and

understanding of accounting & internal control
systems been documented? Has Internal Control
Questionnaire (ICQs) been filled out?

Has accounting and internal control system been

evaluated and documented in the following manner:
- System flowcharts/narrative
- Risk assessment
- Observations/transactions-walk through
- Conclusion/ reliance on internal controls
- Control weaknesses/Management Letter

2-188
5. Has materiality level been determined and used in
the sampling procedures to verify the significant
transactions?

6. Has financial performance review been carried out

and documented with comments?

Detailed Audit Plan

7. Has understanding of Computer Information

System (CIS) been obtained and CIS checklist been
filled out?

8. Have audit programs been prepared for all

significant financial statement components to
document the detailed audit procedures, after
considering the results of test of controls?

9. Have analytical review procedures been applied at

planning stage and comments on the variations
since previous period been documented?

10. Audit Administration & Other Matters

Has the following matters relating to audit
administration been documented?
- Staff planning/time allocation/time sheets
- Job costing/recovery
- Instruction from client
- List of schedules
- List of authorized signatories
- Notes of meeting with client
- Notes of review of correspondence file
- Points brought forward from previous year

Has the following matters relating to audit

administration been documented?
- Staff planning/time allocation/time sheets
- Job costing/recovery
- Instruction from client
- List of schedules
- List of authorized signatories
- Notes of meeting with client
- Notes of review of correspondence file
- Points brought forward from previous year

2-189
Planning File, Overall audit plan, Detailed audit Plan
and planning checklist reviewed and approved by

Partner _______________________ Date __________

Manager ______________________ Date __________

2-190
3.1 GENERAL INSTRUCTIONS FOR DOCUMENTATION OF AUDIT
EXECUTION FILE

1. Planning file must be completed, reviewed and signed by at least a senior audit staff
before commencement of field work.

2. The job incharge should ensure that following has been done / completed before
presenting the file for review:

2.1 Total of the lead schedules for each head agrees with the accounts.

2.2 Lead schedules must be supported by the audit evidence gathered during the
course of the audit

2.2 Lead schedules adequately cross-referenced to supporting schedules.

2.3 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.

2.4 Lead schedules and sub-schedules are initialled and dated by auditor who has
prepared the schedule and carried out the work.

2.5 List of final outstanding points and exceptions with their disposals should be
stated in un-ambiguous terms and cross-referenced to working paper files.

2.6 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

2.7 All audit program steps should be cross-referenced with the schedules containing
work done.

2.8 A copy of the relevant audit program is to be filed with each significant financial
statement component

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.

3-1
3.2 EXCEPTIONS AND CONTROL WEAKNESSES

CLIENT: _________________________________________________________

YEAR ENDED: ___________________________________________________

PREPARED BY: __________________ REVIEWED BY: ________________

EXCEPTIONS/CONTROL MANAGER/PARTNERS COMMENTS

WEAKNESSES NOTED OR DISPOSALS

_________________________________________ ___________________________________________
_________________________________________ ___________________________________________
_________________________________________ ___________________________________________
_________________________________________ ___________________________________________

RISK ADDRESSED

__________________________________ ____________________________________
__________________________________ ____________________________________
__________________________________ ____________________________________
__________________________________ ____________________________________

RECOMMENDATION

__________________________________ ____________________________________
__________________________________ ____________________________________
__________________________________ ____________________________________
__________________________________ ____________________________________

3-2
3.3 AUDIT WORKING PAPERS GUIDELINES

1. Introduction.

The objective of an audit of financial statement is to enable the auditor to express an opinion
whether the financial statements are prepared, in all material respects, in accordance with an
identified financial reporting framework. In order to express the opinion, the auditor follows
certain procedures, performs tests, and obtains information and reaches conclusion after
examining the financial statements.

The auditor should document matters that are important in providing evidence to support the
audit opinion. This documentation of working papers may be in the form of data stored on paper,
film, electronic media or other media,

2. Purpose.

Audit working papers:

a) Assist in the planning and performance of the audit;

b) Aid in the conduct, supervision and review of the audit work; and
c) Record the audit evidence resulting from the audit wok performed to support the
auditors opinion.
3. Need.

The need of audit working papers is to show that the audit engagement is adequately planned,
executed, the work of the assistants has been properly supervised and that the working papers
support the contents of the opinion.

4. Standardization.

The quantity, type, content and form of working papers will vary with the policy of the firm and
circumstances, depending on the type of audit. A standard form or group of forms cannot be
devised to cover all situations. The auditor must have the capability to devise new or modify
forms to meet situations as they arise. Factors affecting our judgment about the working papers
prepared and their content include:

The nature of the engagement;

The nature of the report we are to issue;
The nature of the financial information on which we are to report;
The nature and condition of the clients records;
The degree of reliance on the clients controls;
The extent of supervision and review of the work required in the circumstances can be
significantly impacted by the extent of direct executive participation in the audit work and
teaming, and
The specific audit methodology and technology used in the course of the audit.

3-3
5. General consideration.
Working papers are designed and organized to meet the circumstances and our needs for each
individual audit. The use of standardized working papers (for example, checklists, specimen
letters, and standard organization of working papers) improve the efficiency with which such
working papers are prepared and reviewed. They facilitate the delegation of work while
providing a means to control its quality.

To improve audit efficiency, we may utilize schedules, analyses and other documentation
prepared by the client. In such circumstances, we need to be satisfied that those materials have
been properly prepared.

6. Types of working papers files.

During the course of an audit, the auditor accumulates audit evidences in the form of audit
working papers and keeps the records to support his opinion on the financial statements,
therefore it is apparent that the audit working papers will vary in form and composition. There
are basically two types of audit working papers files:
Permanent audit files.
In the case of recurring audits, some working paper files may be classified as ''permanent''
audit files which are updated with new information of continuing importance.
Current audit files.
As distinct from the above, current audit files contains information relating primarily to the
audit of a single period. Current working papers files may be divided into the following
categories:
a) Audit Planning File.
b) Audit Execution File.
c) Completion and Reporting file.
7. Working papers preparation.

Financial statements should be supported by schedules, which should be prepared to facilitate

analytical review, adjustments leading to final figures and cross reference to the underlying
working papers. Audit working papers should state the clients name, descriptive title of the
working paper, the period covered, name of the auditor preparing the paper and date of
preparation.
8. Indexing.
Working papers should be arranged in such a way that any item in the financial statements or
report may be traced back to the trial balance and supporting schedules and any other analysis or
documents.
9. Confidentiality, Safe Custody, Retention and Ownership of Working Papers.
The auditor should adopt appropriate procedures for maintaining the confidentiality and safe
custody of the working papers and for retaining them for a period of time sufficient to meet the
needs of the practice and in accordance with legal and professional requirements of record
retention.

3-4
3.4 SIGNIFICANT COMPONENTS OF BALANCE SHEET
AND P & L ACCOUNT

MAIN INDEX

Name of Client ___________________________________

Year end________________________________________
Page No.
CAPITAL AND LIABILITIES

AA SHARE CAPITAL 3-8

BB RESERVES AND ACCUMULATED PROFIT 3-10

CC SURPLUS ON REVALUATION OF FIXED ASSETS 3-12

DD REDEEMABLE CAPITAL 3-14

EE DEBENTURES AND LONG - TERM LOANS 3-16

FF LIABILITIES AGAINST ASSETS SUBJECT 3-18

TO FINANCE LEASE

GG DEFERRED LIABILITIES 3-20

HH LONG - TERM DEPOSITS 3-22

JJ SHORT - TERM LOANS AND FINANCIAL 3-24

ARRANGEMENTS

MM CURRENT PORTION OF LONG TERM 3-26

LIABILITIES

NN CREDITORS, ACCRUED AND OTHER 3-28

LIABILITIES

PP TAXATION 3-30

RR DIVIDENDS 3-33

SS CONTINGENCIES AND COMMITMENTS 3-35

3-5
 MAIN INDEX

Name of Client ___________________________________

Year end________________________________________

ASSETS
Page No.

A OPERATING ASSETS 3-37

B ASSETS SUBJECT TO FINANCE LEASE 3-38

C CAPITAL WORK - IN - PROGRESS 3-41

D STORES AND SPARES HELD FOR CAPITAL 3-43

EXPENDITURE

E INTANGIBLE ASSETS 3-45

H UNALLOCATED PRE - PRODUCTION 3-47

EXPENDITURE

K LONG - TERM INVESTMENTS 3-49

L LONG - TERM LOANS AND ADVANCES 3-51

M LONG - TERM DEPOSITS, PREPAYMENTS AND 3-53

DEFERRED COSTS

N STORES, SPARES AND LOOSE TOOLS 3-55

R STOCK - IN - TRADE 3-57

S TRADE DEBTS 3-59

V TRADE DEPOSITS, SHORT TERM 3-61

PREPAYMENTS, LOANS, ADVANCES
AND OTHER RECEIVABLES

W MARKETABLE SECURITIES / SHORT - TERM 3-63

INVESTMENTS

X CASH AND BANK BALANCES 3-65

3-6
 MAIN INDEX

PROFIT AND LOSS ACCOUNT

Page No.

PL 1 SALES 3-67

PL 2 COST OF SALES 3-69

PL 3 GENERAL AND ADMINISTRATIVE EXPENSES 3-72

PL 4 SELLING AND DISTRIBUTION EXPENSES 3-74

PL 5 FINANCIAL CHARGES 3-76

PL 6 OTHER CHARGES 3-78

PL 7 OTHER INCOME 3-80

PL 8 APPROPRIATIONS 3-82

3-7
 Index
File No. Reference AA
Client: Prepared by Date
Lead Schedule: Share Capital Reviewed by Date
Accounting
Period

Whether placed Initial

Reference in of
File Reviewer

SHARE CAPITAL AA

Audit program AA/AP

Lead schedule AA/LS
Supporting Schedules AA1-19
Form "A", supporting schedules and other forms AA/20
as applicable
List of shareholders alongwith workings. AA-21
Minutes representation letter. AA-22
Summary, extracts or copies of minutes AA-23

3-8
 File No. Reference AA/LS
Client: Prepared by Date
Lead Schedule: Share Capital Reviewed by Date
Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees
Total
- AUTHORISED CAPITAL Option on unissued shares
Number of shares - Available To:_______
Shares' face value (per share) - Period From:________
Total Authorised Capital - Amount of option
Types of shares B/S B/S - Class of shares
- Issue price

- ISSUED, SUBSCRIBED AND PAID UP CAPITAL Statistics Amount %

Number of shares - Further issue ________ ____
Amount (Total) Verified ________ ____
Types of shares B/S B/S Any restrictions on payment at
Value of each share dividend should be disclosed.
MOVEMENT DURING THE YEAR Redeemable prefeence shares:
Numbers - Earliest date of redeemption
Beginning of the year (a) - Earliest date of conversion:
Issued during the year - Terms of redeemption / conversion:
Cash (b) - Rate of dividend
Kind (c) Preference shares
Bonus/Right (d) - Rate of dividend
(b) + (c) + (d)= (e) Calls unpaid
At the end of the year a+e - By directors including chief executive
- By management agents
- By executives
B/S B/S - By others

CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-9

 Index
File No. Reference BB
Client: Prepared by Date
Lead Schedule: Reserves and Reviewed by Date
accumulated profit Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

RESERVES AND ACCUMULATED BB

PROFIT

Audit program BB/AP

Lead schedule ( capital and revenues ) BB/LS
Supporting Schedules
- Revenue reserves BB-1
- Capital reserves BB-2
- Accumulated Profit/(Loss) BB-3

Board Minutes BB4

Advance against future issue of capital * BB5

Movement schedule for disclosure purposes. BB10

* To be placed after net worth

3-10
 Reference BB/LS
Client: Date
Lead Schedule: Reserves and Date
accumulated profit

Current Period Previous Period Transfer Other

Reference during the year during the adjustment
Rupees Rupees year

Capital Reserves BB-1

- Capital redemption reserve
- share premium account
- profit prior to incorporation
- other (to be specified)
- ----- reserve not regarded free for distribution

Revenue Reserves BB-2

- General reserve
- dividend equalisation reserve
- other reserve (to be specified)
- unappropriated profit

- Accumulated Profit/(Loss) BB-3

Surplus on revaluation of fixed assets (section 235)

Total

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matter to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-11

 Index
File No. Reference CC
Client: Prepared by Date
Lead Schedule: Surplus on revaluation of Reviewed by Date
Fixed assets Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

SURPLUS ON REVALUATION OF CC
FIXED ASSETS

Audit program CC/AP

Lead schedule CC/LS
Basic information and summary of revaluation
report * CC-21
Procedure for release of reserve. Tests including
reconciliation with disposal of assets schedule CC-22

* Description as per respective fourth / fifth

schedule

3-12
 File No. Reference CC/LS
Client: Prepared by Date
Lead Schedule: Surplus on revaluation of Reviewed by Date
Fixed assets Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees

- Surplus on Revaluation of Fixed Assets

Opening Balance

Surplus on revaluation during the year

Utilization on disposal of Final Assets < >< >

* Increamental Value / Reduction in Value

Revalued or reduced carriying value

* Data of Revaluation

- Name & Revaluation

- Ban's of Revaluation

- Nature of indiecs used

* After revaluation of Assets, these items should be

shown in each subsequent balance sheet

B/S B/S

CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-13

 Index
File No. Reference DD
Client: Prepared by Date
Lead Schedule: Redeemable Capital Reviewed by Date
Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

REDEEMABLE CAPITAL DD

Audit program DD/AP

Lead schedule DD/LS
Supporting Schedules DD1-19
Confirmations summary, reconciliation and documents DD-20
Related information in respect of redeemable capital DD-21
Board minutes DD-22
Extracts/Copies of agreements DD-23

3-14
 File No. REFERENCE DD/LS
Client Name Initial Date
Prepared by
Lead Schedule : REDEEMABLE CAPITAL Checked by Job Incharge
Year End : Reviewed by Manager / Partner
Account Ref. P. T. C. Musharika T. F. C. Long term Current Period Previous Period
No. arrangement running finance
under markup Rupees Rupees
arrangement
Participatory / Non - Participatory

Secured / Unsecured

Opening balance

Obtained/adjustment during the period

Redeemed during the year < > < > < > < > < > < > < > < > < > < >

Current Portion Shown under current

Liabilities

Instalment due

Redemption within one year

< > < > < > < > < > < > < > < > < > < >

Principal amount

Marked up price

Markup

Rebate on timely payment

Instalment Payment Rest

Instalment amount

Number of Instalments

Installment commenced from

Interest / Markup rate per annum

Sub Note :
(Securities arrangement for sharing
profit and loss, provision/ creation of
reserve, features of conversion,
events of default in payments)

CONCLUSION
1. The audit has been completed in accordance with Audit Program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and notes of unusual matters to enable us to from and opinion on financial statements.
4. In my opinion _________________ of Rs. ______________________ are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________________

____________________________ Date : __________________
3-15
 Index
File No. Reference EE
Client: Prepared by Date
Lead Schedule: Long Reviewed by Date
Term loans Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

LONG - TERM LOANS EE

Audit program EE/AP

Lead schedule EE/LS
Supporting Schedules EE1-19
Confirmation summary, reconciliation and documents EE-20
Related information EE-21
Board minutes EE-22
Extracts/Copies of agreements EE-23
Copies of ledger accounts EE-24
(if related parties)

3-16
 File No. Reference EE/LS
Client Name Date
Prepared by
Lead Schedule : LONG TERM LOANS Checked by Job Incharge
Year End : Reviewed by Manager / Partner
Account Ref. Banking From From directors Others Current Period Previous Period
No. Companies subsidiaries (including
and other controlled firm Chief Executives) Rupees Rupees
financial managed
institution modarabas and
other associated
undertakings
Secured / Unsecured

Opening balance

Obtained / adjusted during the period

Repaid / adjustment / transferred

during the period < > < > < > < > < > < > < > < > < < >

Current portion shown under current

liabilities

Instalment due

Payable within one year

< > < > < > < > < > < > < > < > < < >

Number of equal instalments

Amount of Instalments

Instalment payment rest

Date of commencement of first

instalment

Interest % per annum/Mark-up

paisas per Rs. 1,000/- per day

Foreign Currency

Sub Note :
(Securities, priority in payment,
Conversion features, recognition
of exchange differences and other
material terms)

CONCLUSION
1. The audit has been completed in accordance with Audit Program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and notes of unusual matters to enable us to from and opinion on financial statements.
4. In my opinion _________________ of Rs. ______________________ are fairly stated and on a consistent basis with the previous period.
Job Supervisor : ____________________________
________________________ Date : __________________ 3-17
 Index
File No. Reference FF
Client: Prepared by Date
Lead Schedule: Liabilities against assets Reviewed by Date
subject to finance lease. Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

LIABILITIES AGAINST ASSETS SUBJECT FF

TO FINANCE LEASE

Audit program FF/AP

Lead schedule FF/LS
Working schedules FF-1
Confirmations summary, reconciliation and documents FF-20
Copies of Lease Agreements/extracts summary FF-21

3-18
 File No. REFERENCE G
Client Name Initial Date
Prepared by
Lead Schedule :: LIABILITIES AGAINST ASSETS SUBJECT TO FINANCE LEASE Checked by Job Incharge
Year End : Reviewed by Manager / Partner
Account Ref. Current Period Previous Period
No.
Rupees Rupees

Opening Balance

Assets acquired during the period

Paid during the period < > < > < > < > < > < > < > < > < > < >

Current portion shown under current

liabilities

Instalment due

Payable within one year

< > < > < > < > < > < > < > < > < > < >

Principal amount
Deposit amount
Instalment amount
Instalment payment rest
Number of Instalment
Applicable rate of finance %

Sub note :
Purchase option, executory cost born
by lessor/ lessee, residual value of
assets, financing restriction

Contingencies and other material term

The future minimum lease payment

to which the company is committed at
is as under :

Year Ending

Financial charges allocated to future

period

CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-19

 Index
File No. Reference GG
Client: Prepared by Date
Lead Schedule: Deferred Liabilities Reviewed by Date
Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

DEFERRED LIABILITIES GG

Audit program GG/AP

Lead schedule GG/LS
Supporting schedules ( gratuity / deferred taxation ) GG-1-19
Actuary's reports. GG-20
Copies of lease agreements / other agreements GG-21
Board of Directors' approval GG-22

3-20
 File No. Reference GG/LS
Client: Prepared by Date
Lead Schedule: Deferred liabilities Reviewed by Date
Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees

Deferred Taxation
- On account of :- GG-1
Accelerated Depreciation
Gratuity/Retirement Funds
Others

- Others GG2-19

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-21

 Index
File No. Reference HH
Client: Prepared by Date
Lead Schedule: Long-term deposits Reviewed by Date
Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

LONG - TERM DEPOSITS HH

Audit program HH/AP

Lead schedule HH/LS
Supporting Schedules HH-1-19
Confirmations summary, reconciliation and documents HH-20
Compliance to S.226 of Companies Ordinance, 1984 HH-21
(Note)

3-22
 File No. Reference HH/LS
Client: Prepared by Date
Lead Schedule: Long-term Deposits Reviewed by Date
Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees

- Customers HH-1

- Employees HH-2

- Others(Due to related party, if any) HH3-19

* Following items should be shown seperatily

- Nature
- Repayment Period
- Rate of interest
- Other Material Term

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-23

 Index
File No. Reference JJ
Client: Prepared by Date
Lead Schedule: Short-term loans and Reviewed by Date
Financial arrangements Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

SHORT - TERM LOANS AND JJ

FINANCIAL ARRANGEMENTS

Audit program JJ/AP

Lead schedule JJ/LS
Supporting Schedules and bank reconciliations JJ1-19
Confirmations summary, reconciliation and
documents JJ-20
Copies of agreements JJ-21
Copies of ledger accounts JJ-22
(if related parties)
Resolution/Power of attorney from
Board of Directors JJ-23

3-24
 File No. Reference JJ/LS
Client: Prepared by Date
Lead Schedule: Short-term loans and Reviewed by Date
Financial arrangements Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees
Secured/Un Secured
- Banking Companies and Financial Institutions JJ-1

- Subsidiary Companies JJ-2

- Controlled Firms JJ-3

- Managed Modarabas JJ-4

- Other Associated Undertakings JJ-5

- Directors' including Chief Executive JJ-6

- Others JJ7-19

* Sub-note

- Rate of interest

- Nature of security

- Un-availed credit facility

- Other material terms

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-25

 Index
File No. Reference MM
Client: Prepared by Date
Lead Schedule: Current portion of Long Reviewed by Date
Term liabilities Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

Audit program MM/UP

Lead Schedule Current Portion of Long Term

Liabilities MM/LS

Working in respect of Current Maturity MM-1

3-26
 File No. Reference MM/LS
Client: Prepared by Date
Lead Schedule: Current portion of Long Reviewed by Date
Term liabilities Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees

- REDEEMABLE CAPITAL DD-

- LONG TERM LOANS EE-

- LIABILITIES AGAINST ASSETS SUBJECT

TO FINANCE LEASE FF-

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-27

 Index
File No. Reference NN
Client: Prepared by Date
Lead Schedule: Creditors,Accrued and Reviewed by Date
Other liabilities Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

CREDITORS, ACCRUED AND OTHER NN

LIABILITIES

Audit program NN/AP

Lead schedule NN/LS
Supporting Schedules NN1-19
Confirmation of creditors and other liabilities NN-20
This area could include the following types of
documentation-detailed trial balance of accounts
payable and/or reconciliation of details to
general ledger control account at confirmation
date (if other than year-end)
Also summarize confirmation responses
Detailed trial balance of creditors and/or
reconciliation of details to general ledger
control account at year end NN-21
- Reconciliation of confirmation replies NN-22
- Alternate procedures NN-23

Subsequent position and aging of creditors NN-24

Subsequent payments review NN-25
Copies of ledger accounts of related parties NN-26

3-28
 File No. Reference NN/LS
Client: Prepared by Date
Lead Schedule: Creditors,Accrued and Reviewed by Date
Other liabilities Accounting
Period

Current Period Previous Period Increase/ Reason for Remarks For the purpose of disclosure
Reference Decrease variation in the accounts, amounts due to associated
Rupees Rupees % undertakings at the period end be
enter below
- CREDITORS NN-1 Rs ---------- (19... Rs...)
- ACCRUED LIABILITIES NN-2
- BILLS PAYABLE NN-3
- ADVANCE PAYMENTS, UNEXPIRED
DISCOUNTS AND DEFERRED INCOME NN-4
- MARK UP ACCRUED ON SECURED LOANS NN-5 Statistics amount%
- MARK UP ON EACH CLASS OF REDEEMABLE
CAPITAL - vouched
- MARK UP ACCRUED ON UNSECURED LOANS NN-6 - confirmed
- PROFIT, RETURN OR MARKUP ACCRUED NN-7 - subsequently
- WORKERS' PROFIT PARTICIPATION FUND NN-8 cleared
- WORKERS' WELFARE FUND NN-9
- PAYABLE TO DEBTOR
- OTHER LIABILITIES NN-10
- OTHER DEPOSITS NN-11
- TRADE CREDITORS NN-12
- ADVANCES FROM CUSTOMERS NN-13
- CUSTOM EXCISE DUTY PAYABLE NN-14
- CONTRACTORS EARNEST/PETENTION MONEY NN-15
- SALES TAX PAYABLE NN-16
- MARK UP ON RUNNING FINANCES NN-17
- MARK UP ON TERM FINANCES NN-18
- DISTRIBUTORS SECURITY DEPOSITS PAYABLE NN-19
ON TERMINATION OF DEALERSHIP NN-20
- OTHERS NN-20-25

B/S B/S
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-29

 Index
File No. Reference PP
Client: Prepared by Date
Lead Schedule: Taxation Reviewed by Date
Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

TAXATION PP

Audit program PP/AP

Lead schedule PP/LS
Tax position-Year wise PP-1
Tax computation (computation of income) PP-2
Schedule of tax depreciation PP-3
Statement of excess perquisites PP-4
Statement of liabilities over 3 years U/s 25(i) PP-5
Reconciliation of accounting records of tax
payment with the tax record (IT - 30 year wise) PP-6
Schedule of advance payment of taxes PP-7
Summary of tax assessments PP-8
Summary of Appellate orders PP-9
Confirmation from tax advisor* PP-10

Test documents is respect of :-

- Withholding tax PP-11
- unexplained credits PP-12
- unpaid loans/credits PP-13

* Obtain if tax work not handled by the auditing

firm

3-30
 File No. Reference PP / LS
Client: Prepared by Date
Lead Schedule: Taxation Reviewed by Date
Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees

PROVISIONS - CUMULATIVE PP-1

Opening balance

Made during the year - Current

- Prior year

Total

PAYMENTS - CUMULATIVE

Opening balance

Made during the year - Current

- Prior year
- Advance

Total

Balance
Represented by:
Tax liability
Tax refundable
Advance payment of tax

B/S B/S
CONCLUSION

1. The audit has been completed in accordance with Audit program.

2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-31

This page is intentionally left blank

3-32
 Index
File No. Reference RR
Client: Prepared by Date
Lead Schedule: Dividends Reviewed by Date
Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

DIVIDENDS RR

Audit program RR-AP

Lead schedule RR/LS
Supporting Schedules RR1-19
Bank account confirmations RR-20
Reconciliation of Zakat/tax deduction at source RR-21
Compliance to Sec. 248-251 of Companies
Ordinance 1984 RR-22
Board minutes RR-23

3-33
 File No. Reference RR/LS
Client: Prepared by Date
Lead Schedule: Dividends Reviewed by Date
Accounting
Period from

Current Period Previous Period

Reference
Rupees Rupees

- Unclaimed Dividend RR-1

- Unpaid Dividend RR-2

- Proposed Dividend RR-3

Year-wise summary alongwith bank reconciliation RR-20

statements and bank confirmations.

CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matter to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-34

 Index
File No. Reference SS
Client: Prepared by Date
Lead Schedule: Contingencies and Reviewed by Date
Commitments Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

CONTINGENCIES AND COMMITMENTS SS

(Including subsequent review)

Audit program SS-AP

Lead schedule SS-LS
Contingencies SS1
Subsequent review/legal matters/contingent
liabilities SS-2
Legal letters and supporting documentation SS-3
Bank confirmation contents summary SS-4

Capital commitments SS-II

Operating lease-agreements summary SS-12
Summary of unexecuted contracts in respect of
capital work in progress SS-13
Summary of BOD Meetings - report of
commitments made SS-14
Bonded Stock commitments SS-15

Review of subsequent material date of the

financial statements to the date of the
auditors' report SS-21
Review of subsequent cash receipts SS-22
Review of subsequent cash disbursements SS-23

3-35
 File No. Reference SS/LS
Client: Prepared by Date
Lead Schedule: Contingencies and Reviewed by Date
Commitments Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees

- Contingencies SS-1
- Nature of contingencies SS-2
SS-3
SS-4
SS-5
SS-6
SS-7

- Commitments (Revenue/Capital) SS-11

SS-12
SS-13

- Subsequent Events SS-21

SS-22
SS-23

Note Note
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-36

 Index
File No. Reference A
Client: Prepared by Date
Lead Schedule: Operating Assets Reviewed by Date
Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

OPERATING ASSETS A

Audit program A-AP

Lead schedule A/LS
Supporting Schedules A1-A19
Related information A-21
Additions - vouching schedules A-22
Disposals of assets vouching and linkage with A-23
tax and profit and loss
Depreciation A-24
Insurance - Coverage schedule A-25

Board minutes for major additions/delations A-26

3-37
 Index
File No. Reference B
Client: Prepared by Date
Lead Schedule: Assets subject to finance Reviewed by Date
Lease Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

ASSETS SUBJECT TO FINANCE LEASE B

Audit program B-AP

Lead schedule B/LS
Supporting Schedules/Lessor wise/ Assets B1-B19
categorywise schedules
Additions check B-21
Deletions check B-22

3-38
 File No. Reference A-B/LS
Client Name Initial Date
Prepared by
Lead Schedule : FIXED ASSETS Reviewed by Manager / Partner
Year End :
Account Ref. Depreciation
No. Cost at Addition/ Disposal/ Capitalization Cost at Accumulated Adjustment Depreciation Accumulated Written down Rate
the Begening Transfer during Transfer during of unallocated the end of the Depreciation Disposal / for the year Depreciation at value %
of the Year the period the period capital expenditure Year at the Transfer the end of
Begening the year
of year

Land - freehold

Land - leasehold

Building on freehold land

Building on leasehold land

Plant and Machinery

Electric Installation & Equipment

Office Equipment

Furniture and Fixture

Vehicle

Under lease :

Plant & Machinery

Equipment

Vehicle

Preceding Period

Depreciation for the perios has been

accumulated as under

Cost of goods manufactured

administration

CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-39

 File No. REFERENCE A/LS1
Client Name Date
Prepared by
Lead Schedule : : DISPOSAL OF FIXED ASSETS Reviewed by Manager / Partner
Year End :

Account Cost Accumulated Written down Sale proceed Gain/ Particulars of Mode of
No. Discription of assets Depreciation Value (Loss) Buyers Disposal

3-40
 Index
File No. Reference C
Client: Prepared by Date
Lead Schedule: Capital work in progress Reviewed by Date
Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

CAPITAL WORK - IN - PROGRESS C

Audit program C-AP

Lead schedule C/LS
Supporting Schedules and related information C1-C19
Stage of completion certificate/commencement of C-20
commercial production
Capitalization of work - in - progress and C-21
pre-operating costs
Pre-operating costs C-22
Allocation of exchange loss C-23
Allocation of financial costs C-24
Project wise progress position C-25

3-41
 File No. Reference C / LS
Client: Prepared by Date
Lead Schedule: Capital work in progress Reviewed by Date
Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees

- Civil Works C-1

- Plant and Machinery C-2

- Others C-3

- Mobilization and Other Advances

for Capital Expenditure C4-19

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-42

 Index
File No. Reference D
Client: Prepared by Date
Lead Schedule: Stores and spares held for Reviewed by Date
Capital Expenditure Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

Audit program D - AP

Stores and Spares held for Capital Expenditure D/LS

Lists D1-19
Discussion paper for Capitalization of D-21
these Stores

3-43
 File No. Reference D / LS
Client: Prepared by Date
Lead Schedule: Stores and spares held for Reviewed by Date
Capital Expenditure Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees

Stores D-1

Spares D-2

Advances for Acquisition D-3

Others D4-19

Provision regarding 6(B) and 6(F) of 4th schedule

i.e. basis of valuation and for the opinion of directors
it the value of current assets (stores and spares) is
less than the amount at which they are stated in the
financial statement.

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-44

 Index
File No. Reference E
Client: Prepared by Date
Lead Schedule: Intangible Assets Reviewed by Date
Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

INTANGIBLE ASSETS E

Audit program E-AP

Lead schedule E/LS
Supporting Schedules E1-19
Third party documents E-20
Extracts/copies of Agreements E-21
Patent documents E-22

3-45
 File No. Reference E / LS
Client: Prepared by Date
Lead Schedule: Intangible Assets Reviewed by Date
Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees

Goodwill E-1

Patent Rights E-2

Others E3-19

Copy rights

Trade marks and designs

Provisions regarding 2(B), 2(C), 2(D) and 2(F) of

4th schedule is regimed

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-46

 Index
File No. Reference H
Client: Prepared by Date
Lead Schedule: Unallocated Pre- Reviewed by Date
Production Expenditure Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

UNALLOCATED PRE-PRODUCTION H
EXPENDITURE

Audit program H-AP

Lead schedule H/LS
Trial balance of accounts with movement H-1-19
(Supporting Schedules)
Basis of allocation H-31

3-47
 File No. Reference H / LS
Client: Prepared by Date
Lead Schedule: Unallocated Pre- Reviewed by Date
Production Expenditure Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees

- Staff Salaries and Benefits

- Stationery and Office Supplies
- Travelling and Conveyance
- Entertainment
- Office Renovation
- Repairs and Maintenance
- Vehicles Running
- Fees and Subscription
- Auditors' Remuneration
- Legal and Professional
- Communications
- Advertisement
- Books and Periodicals
- Insurance
- Fuel and Power
- Rent, Rates and Taxes
- Security Services
- Depreciation
- Financial
- Sundries

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-48

 Index
File No. Reference K
Client: Prepared by Date
Lead Schedule: Long-Term Investments Reviewed by Date
Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

LONG - TERM INVESTMENTS K

Audit program K-AP

Lead schedule K/LS
Supporting Schedules K-1-19
Related information K-21
Physical verification summary and documents K-22
Stock exchange quotations K-23
Break-up value - summary and documents K-24
Board minutes K-25
Break- up of provision for diminution in value of
investments (if any)

3-49
 File No. Reference K/LS
Client: Prepared by Date
Lead Schedule: Long-Term Investments Reviewed by Date
Accounting
Period from

Current Period Previous Period

Reference
Rupees Rupees

- In Subsidiary Companies K-1

- In Controlled Firms K-2

- In Managed Modarabas K-3

- In other Associated Undertakings K-4

- In Listed Companies K-5

- Modarba

- In Unlisted Companies K-6

- Modarba

- In Immoveable Properties K-7

- In Redeemable Capital K-8

- In Debentures and Bonds issued by government, K-9

municipal committee on other local authority

- In Government securities K-10

- Others K-11

- Provisions regarding 3(B), 3(C), 3(D), 3(E), 3(F),and

3(G) of 4th schedule is regimed

CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matter to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-50

 Index
File No. Reference L
Client: Prepared by Date
Lead Schedule: Long Term Loans and Reviewed by Date
Advances Accounting
Period from

Whether Placed Initial

Reference in of
File Reviewer

LONG - TERM LOANS AND ADVANCES L

Audit program L-AP

Lead schedule L/LS
Supporting schedules L1-L19
Related information L-20
Company's Policy document L-21
Evaluation for provision L-22
Compliance to section 195 and 208 L-23
of the Companies Ordinance1984

Details of maximum month end balances

3-51
 File No. Reference L / LS
Client: Prepared by Date
Lead Schedule: Long Term Loans and Reviewed by Date
Advances Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees

(Considered good or Doubtful)

- Subsidiary Companies L-1

- Controlled Firms L-2

- Managed Modarabas L-3

- Other Associated Undertakings L-4

- Provision regarding 4(A) (ii), (iii), 4(B), 4(C), 4(D),

4(E), 4(F), and 4(G) of 4th schedule is required

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-52

 Index
File No. Reference M
Client: Prepared by Date
Lead Schedule: Long Term Deposits, Reviewed by Date
Prepayments and Accounting
Deferred costs Period

Whether Placed Initial

Reference in of
File Reviewer

LONG - TERM DEPOSITS, M

PREPAYMENTS AND DEFERRED COSTS

Audit program M-AP

Lead schedule M/LS

Supporting Schedules M1-19

Confirmation summary, reconciliation and documents M-20

Copies of Documents/Summary M-21

3-53
 File No. Reference M / LS
Prepared by Date
Lead Schedule: Long Term Deposits, Reviewed by Date
Prepayments and Accounting
Deferred costs Period

Current Period Previous Period

Reference
Rupees Rupees

a) Long Term Deposits M-1

b) Long Term Prepayments M-2
c) Deferred Costs

- Preliminary Expenses M-3

- Discount on Issue of Shares M-4
- Expenses Incurred on Issue of Shares M-5
- Commission/Brokerage on Issue
of Shares M-6
- Deferred Development Costs M-7
- Amortization M-8 ( ) ( )
- Provision regarding 5(C) of 4th schedule i.e.
basis of amortization or writing off

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-54

 Index
File No. Reference N
Client: Prepared by Date
Lead Schedule: Stores,Spares and Loose Reviewed by Date
Tools Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

STORES, SPARES AND LOOSE TOOLS N

Audit program N-AP

Lead schedule N/LS

Supporting Schedules N1-19

Stock held with third parties - including confirmations N-20

Test of inventory transactions from physical N-21

inventory date to year-end

Pricing tests (including tests of net realizable value) N-22

Obsolescence review N-23

Cutoffs tests N-24

3-55
 File No. Reference N / LS
Client: Prepared by Date
Lead Schedule: Stores,Spares and Loose Reviewed by Date
Tools Accounting
Period

Schedule Current Period Previous Period

Reference
Rupees Rupees
Note:
(i) Inventory of stores and spares
In hand : that are usually held for repairs,
- Stores (includes Rs___ (19_: Rs __) intransit) N-1 replacement and maintenance
- Spares (inlcudesRs___ (19_: Rs __) intransit) N-2 should be classified as current
- Loose Tools --do-- N-3 (ii) Provision if any, should be
- Others --do-- N-4 dislcosed separately against each
Total item.
In transit (iii) Also return note 2(B), (C) and
- Stores N-5 3 on GG
- Spares N-6
- Loose Tools N-7
- Others N-8
N-10
N-11
N-12
N-13
N-14
N-15
N-16
N-17
N-18
N-18
- Provision for Obsolescence N-19 ( ) ( )
Provision regarding 6(B) and 6(F) of 4th schedule i.e.
basis of valuation and for the opinion of directions
regarding value of stores, spares and loose tools which
is less than that stated in financial statements

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-56

 Index
File No. Reference R
Client: Prepared by Date
Lead Schedule: Stock-in Trade Reviewed by Date
Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

STOCK - IN - TRADE R

Audit program R-AP

Lead schedule R/LS

Supporting Schedules R1-R19

Stock held with third parties including confirmations R-20

Test of physical inventory R-21

Pricing tests (including tests of NRV) R-22

Obsolescence review R-23

Cut-offs R-24

3-57
 File No. Reference R / LS
Client: Prepared by Date
Lead Schedule: Stock-in Trade Reviewed by Date
Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees

Notes:
- Raw Material and component R-1 (i) Provision , if any, should be disclosed separately
against each items
- Packing Material R-2 (2) Disclosure to be made
(a) fixed production overhead excluded as cost compound
- Work in Process R-3 (b) FIFO or weighted average cost which is not used
(c) LIFO or base stock formula used (IAS-2)
- Finished Goods R-4 (3) Inventories to be valued at base of cost and net valuable value
(4) Disclosure to be made of stocks valued at NRV (IAS-2 para 34)
- Waste stock R-5 (5) Stock held by third parties to be disclosed by way of note
(IAS-2 para 34
- Stock-in-Bond R-6 (6) Amount and circumstances related to reversals of write-down
recognised as income in the period
- Stock-in-transit R-7

- Other stocks (to be specified) R-8

Provision regained 6(B) and 6(F) of 4th schedule i.e.

basis of valuation and direction opinion regarding value
of stock-in-trade which is less than that stated in
financial statements

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-58

 Index
File No. Reference S
Client: Prepared by Date
Lead Schedule: Trade Debts Reviewed by Date
Accounting
Period from

Whether Placed Initial

Reference in of
File Reviewer

TRADE DEBTS S

Audit program S-AP

Lead schedule S/LS

Supporting Schedules S1-S18

Detail trial balance and/or reconciliation of details S-19

to general ledger control account at year-end

Confirmations S-20

Aging of trade debts S-22

Review of activities Subsequent to the year-end S-23

Evaluation of allowance for doubtful accounts and S-24

supporting Schedules

3-59
 File No. Reference: S/LS
Client: Prepared by Date
Lead Schedule: Trade Debts Reviewed by Date
Accounting
Period

Current Period Previous Period Increase/ Remarks (including

Reference (decrease) details of security)
Rupees Rupees Amount %

- Trade Debts S-1

Amount %
Considered Good (i) secured _______ _______
(ii) unsecured(no security other ________ _______
then -----------security) ________ _______

Considered Doubtful

Less: Provision for Doubtful Debts S-24 ( ) ( )

i - specific Current year
Prior
ii- general 1- Due from:
Directors _________
____
Provision regarding 6(C) and 6(F) of 4th schedule i.e. Chief executives _________
____
director's opinion regarding value of trade debts which Managing agents _________
____
is less then that stated in financial statements and the Other executives _________
____
maximum aggregated amount due from directors /
chief executive / managing agents / executives / 2- Due from
associated undertakings / controlled firms / managed Associated undertakings _________
____
modarbas. Controlled firms _________
____
Managed modarba _________
____

3- Disclosure to be made of
amount not expected to
be realised within one year (IAS-13)

Note: Maximum amount held

at any, time during the year
calculated by reference to
month end balances. (i) above_________
____

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-60

 Index
File No. Reference V
Client: Prepared by Date
Lead Schedule: Trade Deposits,Short-Term Reviewed by Date
Prepayments/ Loans,Advances and Accounting
Other Receivables Period

Whether Placed Initial

Reference in of
File Reviewer

Trade Deposits, Short-Term Prepayments V

Loans, Advances and Other Receivables

Audit program V-AP

Lead Schedule V/LS

Supporting Schedules V1-V19

Confirmations V-20

Subsequent receipts against receivables V-21

3-61
 File No. Reference V/LS
Client: Prepared by Date
Lead Schedule: Trade Deposits,Short-Term Reviewed by Date
Prepayments/ Loans,Advances and Accounting
Other Receivables Period from

Current Period Previous Period

Reference
Rupees Rupees

Deposits V-1

Prepayments V-2

Loans V-3

Staff
Executives
Chief Executive
Considered good and bad

Advances V-4
Considered good and bad

Provision regarding 6(C) of 4th schedule i.e. the

maximum aggregate amount due from direction/
managing agents/ associated undertakings / controlled
firms / managed modarbas.

Others Receivables V-5

Tax Refunds PP-1

Others

Current account balance with statutory authorities V-6

CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matter to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-62

 Index
File No. Reference W
Client: Prepared by Date
Lead Schedule: Marketable Securities/Short-term Reviewed by Date
Investments Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

MARKETABLE SECURITIES / SHORT - W

TERM INVESTMENTS

Audit program W-AP

Lead schedule W/LS

Supporting Schedules W1-19

Confirmations / physical verification W-20

Valuation Tests W-21

Stock Exchange Quotations W-22

Comparison of cost & market value

B/S B/S
3-63
 File No. Reference W / LS
Client: Prepared by Date
Lead Schedule: Marketable Securities/Short-term Reviewed by Date
Investments Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees

- In Subsidiary Companies W-1

- In Controlled Firms W-2

- In Managed Modarabas W-3

- In Other Associated Undertakings W-4

- In Listed Companies W-5

- Modarba
- In Unlisted Companies W-6
- Modarba
W-7

- In Immoveable Properties W-8

- In Redeemable Capital W-9

- In Bonds issued by government, W-10

municipal committee or other local authority
- In Government Securities W-11

- Others W-12
- Provision regarding 6(D) relating, to provision
(3(B), 3(C), 3(D), 3(E) and 3(F) in the 4th
schedule is regimed

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-64

 Index
File No. Reference X
Client: Prepared by Date
Lead Schedule: Cash and Bank Balances Reviewed by Date
Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

CASH AND BANK BALANCES X

Audit program X-AP

Lead schedule X/LS

Supporting Schedules/Bank account reconciliation X1-19

Bank confirmations X-20

Cash count sheets/cash certificates X-21

Last document sheets X-22

Last document cutoff test X-23

Test of Frozen/Blocked accounts X-24

3-65
 File No. Reference X/LS
Client: Prepared by Date
Lead Schedule: Cash and Bank Balances Reviewed by Date
Accounting
Period

Schedule Current Period Previous Period Remarks

Reference
Rupees Rupees

- Cash in Hand X-1

- Cash in Transit X-2

- Cash at Bank (i) on deposit account

(ii) on current account
(iii) other accounts
a) In Current Accounts

Local Currency X-3

Foreign Currency X-4
Statistics Amount %
b) In Deposit Accounts Confirmed _______ _________
Physically _______ _________
Local Currency X-5 Verified _______ _________
Foreign Currency X-6

Balances in hand
(i) Cash
(ii) Cheques

Balances in transit
Total

B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-66

 Index
File No. Reference PL-1
Client: Prepared by Date
Lead Schedule: Sales Reviewed by Date
Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

SALES

Audit program PL1-AP

Lead Sehedule PL-1/LS

Monthly analysis

Related information

Sales cut - off

Test of Control- Sales

Quantitative reconciliation

Significant Customers (80/20) 20 percent customers

(in numbers who contribute 80 percent sales)

3-67
 File No. Reference PL1/LS
Client: Prepared by Date
Lead Schedule: Sales Reviewed by Date
Accounting
Period

Schedule Current Period Previous Period Increase/ Increase/ Reasons for

Reference (decrease) (decrease) variation
Rupees Rupees Amount %

Sales
(1) The working result of each line
- Exports of business to be separately given provided
the turnover of each line exceed
- Local 20% of the total turnover of the
company.
- Export Quota (2) Value of items exported during the financial
year to be disclosed provided such
- Waste value exceeds 20% of the
total turnover of the company.

Less:- Commission to sole selling agent and to

- Other Selling Agent

- Discount
- Sales Tax
- Export Duty
- Brokerage
- Brokerage and discount

Net sales

Statistics Amount %

Vouched _______ _______

Globally _______ _______
Verified _______ _______

P/L P/L
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-68

 Index
File No. Reference PL2
Client: Prepared by Date
Lead Schedule: Cost of Sales Reviewed by Date
Accounting
Period from

Whether Placed Initial

Reference in of
File Reviewer

COST OF SALES

Audit program PL2-AP

Lead schedule PL2/LS

Significant Suppliers (80/20) 20% suppliers from whom

80% purchases are made

Related Information

Purchases cut - off

Tests of Control- Purchases

3-69
 File No. Reference PL2/LS1
Client: Prepared by Date
Lead Schedule: Cost of Sales Reviewed by Date
Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees

- Work in Process
Opening
Closing R-3

- Cost of Goods Manufactured

- Finished Goods
Opening
Closing R-4

- Excise Duty

P/L P/L
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-70

 File No. Reference PL2/LS2
Client: Prepared by Date
Lead Schedule: Cost of Goods Manufactured Reviewed by Date
Accounting
Period

Schedule Current Period Previous Period Increase/ Reason for

PARTICULAR Reference (decrease) major
Rupees Rupees Amount % variation

- Raw & Packing Material Consumed

Opening Stock
Purchases

Closing Stock R-1

- Stores and Spares Consumed N

- Fuel and Power
- Salaries, Wages and Staff Welfare bonus, contribution
to provident and other funds
- Rent, Rates, and Taxes
- Insurance
- Repairs and Maintenance
- Patents, Copyrights, Trade Marks,
Designs
- Royalties and Technical Fees
- Amortization of Research and
Development Costs
- Vehicle Running and Maintenance
- Telephone, Telex and Postage
- Travelling and Conveyance
- Printing and Stationery
- Utilities, Rates and Taxes
- Depreciation
- Other expense (to be specified)
- Communications
- Entertainment

Total Statistic Amount %

Vouched _______ _______
Globally _______ _______
Verified _______ _______

3-71
 Index
File No. Reference PL3
Client: Prepared by Date
Lead Schedule: General and Administrative Reviewed by Date
Accounting
Expenses Period

Whether Placed Initial

Reference in of
File Reviewer

GENERAL AND ADMINISTRATIVE

EXPENSES

Audit program PL3-AP

Lead schedule PL3/LS

Monthly analysis

Significant Payments/accruals

Subsequent Payment Verification-Accrual

Compliance tests

3-72
 File No. Reference PL3/LS
Client: Prepared by Date
Lead Schedule: General and Administrative Reviewed by Date
Accounting
Expenses Period from

Current Period Previous Period Increase/ Increase/ Reasons for Major

Reference (decrease) (decrease) Variations
Rupees Rupees Amount %

- Directors Remuneration
- Salaries pages and Benefits In case of donations where any director
- Rent, Rates, and Taxes or his spouse has interest in the donees
- Vehicle Running and Maintenance the names of such directors their interest
- Printing and Stationery to the donee and the name and addresses of
- Telephone, Telex and Postage all donees shall be disclosed.
- Fees and Subscriptions
- Travelling and Conveyance & entertainment
- Legal and Professional Statistics %
- Auditors' Remuneration
Audit Fee Vouched _______
Other Services globally _______
Out of Pocket Expenses verified _______
- Advertisement & Sales promotions
- Entertainment
- Charities and Donations names and addresses of the Auditor's remunerations:
donees and of directors including their spouses and
children interested is required IF (--) of 4th schedule Audit fee
tax advisory
- Depreciation method of Depreciation services special
- Others report certs,
- Insurance sundry advisory
- Repairs & maintenance services other
- Bad debts written off - trade out of pocket
- others
- Provision for doubtful debts
- trade
- others
- Research & development cost included in bad debts
due by:
- Directors chief executive, managing agent & executive
- Associative undertakings

P/L P/L
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-73

 Index
File No. Reference PL4
Client: Prepared by Date
Lead Schedule: Selling and Distribution Reviewed by Date
Expenses Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

Audit program PL4/AP

Lead Shedule PL4/LS

Monthly Analysis

Significant Payments/Accrual

Subsequent Payment Verification

Test of Control - Payroll

3-74
 File No. Reference PL4/LS
Client: Prepared by Date
Lead Schedule: Selling and Distribution Reviewed by Date
Expenses Accounting
Period from

Current Period Previous Period

Reference
Rupees Rupees

- Ocean Freight

- Local Freight and Octroi

- Forwarding Expenses

- Export Development Surcharge

- Bank Charges

- Others

P/L P/L
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-75

 Index
File No. Reference PL5
Client: Prepared by Date
Lead Schedule: Financial Charges Reviewed by Date
Accounting
Period from

Current Period Previous Period

Reference
Rupees Rupees

FINANCIAL CHARGES

Audit program PL5-AP

Lead Schedule PL5/LS

Compliance tests

Significant Payments/Accruals

Monthly analysis

3-76
 File No. Reference PL5 / LS
Client: Prepared by Date
Lead Schedule: Financial Charges Reviewed by Date
Accounting
Period

Schedule Current Period Previous Period Reasons for

Reference Major variation
Rupees Rupees

- On Redeemable Capital DD

- On Long Term Loans EE

- On Finance Leases FF

- On Short Term Loans/Running Finance JJ

- On Borrowings from Associated Undertakings JJ

- On Borrowings from Directors JJ

Mark-up on
- Term finance
- Running finance

Other (to be specified)

CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-77

 Index
File No. Reference PL6
Client: Prepared by Date
Lead Schedule: Other Charges Reviewed by Date
Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

OTHER CHARGES

Audit program PL6/AP

Lead Schedule PL6/LS

3-78
 File No. Reference PL6/LS
Client: Prepared by Date
Lead Schedule: Other Charges Reviewed by Date
Accounting
Period

Schedule Current Period Previous Period Reasons for

Reference Major variation
Rupees Rupees

Workers Profit Participation Funds

Workers Welfare Fund

Provision for Doubtful Debts S

Provision for Diminution in Value of Investments W

Research and Development Costs

Amortization of Deferred Costs M

Loss on Disposal of Assets

Loss on Sale of Investments I &W

Loss or provision for loss on redeemable capital

Exchange loss

Others (specify)

CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-79

 Index
File No. Reference PL7
Client: Prepared by Date
Lead Schedule: Other Income Reviewed by Date
Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

OTHER INCOME

Audit program PL7/AP

Lead Schedule PL7/LS

3-80
 File No. Reference PL7/LS
Client: Prepared by Date
Lead Schedule: Other Income Reviewed by Date
Accounting
Period

Schedule Current Period Previous Period Reasons for

Reference Major variation
PARTICULARS Rupees Rupees

Income from investments

Gain on sale of Investments K/W

Gain on Disposal of Fixed Assets A

Interest Income

Income from Redeemable Capital income from each I&W

class of capital
Income from Modarabas or modarba certificates K

Scrap sale

Miscellaneous W
Income from investments in association undertakings/
others (I(A) (ii) in 4th schedule
Income from unusual items

P/L P/L
CONCLUSION

1. The audit has been completed in accordance with Audit program.

2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-81

 Index
File No. Reference PL8
Client: Prepared by Date
Lead Schedule: Provision for Taxation Reviewed by Date
Accounting
Period

Whether Placed Initial

Reference in of
File Reviewer

PROVISION FOR TAXATION

Audit program PL8/AP

Current

Deferred

Lead Schedule PL8/LS

3-82
 File No. Reference PL8/LS
Client: Prepared by Date
Lead Schedule: Provision for Taxation Reviewed by Date
Accounting
Period

Current Period Previous Period

Reference
Rupees Rupees

PROVISION FOR TAXATION

Current Year PP

Prior Period PP

Deferred GG-1

* Deferred taxation not accounted for shall be

disclosed in notes to the accounts

CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.

Job Supervisor :________________ Date ________________ 3-83

4.1 FINANCIAL STATEMENTS

Document the following financial statements:

Final Draft Accounts Signed By The Senior Financial Officer

Initialed / Signed Accounts (Cross Referenced To Working Papers)

Published Financial Statements (Current & Previous Year)

4-1
4.2 WORKINGS OF CASH FLOW STATEMENT

Document the workings of current and previous years cash flow statement and properly
refer each item with the final draft / initialled financial statements.

4-2
4.3 AUDIT COMPLETION CHECKLIST
CLIENT: YEAR ENDED:

Each section of this checklist should be completed by the supervising senior/manager at the end of each phase of the
audit, prior to partners review.

YES/NO/N.A. INITIAL &

DATE

1. Has all the work been planned before the start of detailed audit
procedures and properly documented in the planning file?

2. Has the continuing accuracy of the accounting and internal control

systems been confirmed by walk-through procedures or other means?
Have the necessary observations and conclusions been documented?

3. Is all the audit work executed & documented in the Execution File,
including:

(1) Audit programs that are initialed, dated, and cross-

referenced with each audit step performed during the
course of the audit?
(2) Lead schedules are completed and conclusions are
drawn on each financial statement component?
(3) Lead schedules are properly supported by the
evidence gathered during the course of the audit?
Ensure that they are properly referenced and cross-
referenced with supporting schedules.

4. Has the work of each audit staff been reviewed in detail by the
supervisory staff?

5. Have all matters raised in the last internal control memorandum /

management letter been resolved / followed up and the clients action
recorded?

6. Has a management letter detailing weaknesses of accounting and

internal control systems in respect of the current visit been drafted?
Have clients comments been recorded?

7. Have new client services opportunities, resulting from internal control

matters, arising during the audit been identified and highlighted?

8. Have all important matters been documented in the Audit Execution

File, including identified auditing and reporting problems which may
arise during final audit visit?

10. Have confirmations relating to banks, lawyers, debtors/creditors etc.

been obtained? If not, is the summary of the same documented in the
execution file & other alternative procedures been applied?

4-3
 YES/NO/N.A INITIAL / DATE
11. Has final draft / initialled accounts been referenced to the working
papers and documented in the Completion & Reporting File?

12. Have the workings of cash flow statement been documented and
properly referenced with final accounts?

13. Has accounts completion checklist been filled out before issuing
initialled accounts to the client?

14. Has partner review notes & queries been properly disposed off?

15. Have all significant matters relating to audit and other areas of
assignment been documented in the summary review memorandum?

16. Have analytical review procedures were followed at overall review

stage and comments on the same been documented?

17. Has a representation-letter been drafted based on the firms latest

standard letter?

18. Has letter to the board of directors been issued to the management
including areas, which needs to be communicated to/approved by the
board of directors?

19. Has matters of important nature that needs to be considered in the next
audit are properly documented in the points carried forward to next
year?

20. Has an appropriate financial statements disclosure checklist been

completed?

21. Have subsequent event review checklist been filled out covering
evaluation of all possible post balance sheet event up to the date of the
auditors report?

22. Has going concern checklist been filled out to ensure that going
concern assumption is appropriate?

23. Have all adjustments been entered into the books of account to make
them agree with the draft financial statements?

24. Has review by the second partner been carried out (in case of large
clients or as per firms policy) and proper evidence of the same is
documented in the completion and reporting file?

25. Have all related party transactions (e.g., transactions with directors and
associated undertaking) been identified and effect of these transactions
has considered?

Prepared By (Supervising Senior / Manager) ____________________________ Date: ___________________

Reviewed By (Partner) ____________________________________________ Date: ___________________

4-4
4.4 ACCOUNTS COMPLETION CHECKLIST
Name of client: ____________________ Year ended _______________
Prepared by: ____________________ Date _______________
Reviewed by ____________________ Date _______________

AUDITORS'REPORT:
S-No. DESCRIPTION FINAL DRAFT

1 Ensure that the entity's name is correctly spelled

2 Ensure that accounting period covered by the accounts is correctly

mentioned.

3 Para (b)(i):
If there is any change in accounting policy (ies) Para should be
amended by stating except for the changes as stated in note (s)
_____ with which we concur.

4 Statement in para (C) of the auditors' report should be drafted

appropriately after confirming whether there is profit/loss for the
period, from the profit and loss account (i.e. Profit/Loss after tax)
5 Ensure that para (d) of auditors' report regarding zakat is drafted
after confirming whether there was any zakat deductible. If it has
been deducted ensure that it has been deposited in the Central Zakat
Fund.
6 If the accounts are for more or less than 12 months then ensure that
the auditors' report uses the word "period instead of "year.
7 Ensure that audit report is printed on firm letterhead.

4-5
FINANCIAL STATEMENTS:
S. No. DESCRIPTION FINAL DRAFT

1 Ensure that name of the company appears correctly on the balance

sheet, profit and loss account, statement of changes in financial
position (cash flow statement), statement of changes in equities and
notes to the accounts.
2 Ensure that the correct period covered by the accounts appears on
the profit and loss account, statement of changes in financial position
(cash flow statement), statement of changes and equities and notes
to the accounts.
3 If the figures in the accounts are rupees in thousands then ensure that
this is reflected in the headings.
4 Ensure that totals of assets and liabilities in the balance sheet are in
agreement.
5 Ensure that accumulated profit/loss brought forward in profit and
loss account is correct.
6 Ensure that un-appropriated balance of profit/loss transferred to
balance sheet is correct.
7 Ensure that the words "Contingencies and Commitments" appear on
the Balance Sheet.

8 Ensure that last year's figures appearing in the accounts are traced
from last years signed accounts except where they have been
rearranged.

9 Ensure that all accounting policies are consistently applied, and if

not, this fact is disclosed accounting policy note.

10 Ensure that the statement i.e 'The annexed notes form an integral
part of these accounts." appears in the balance sheet and profit and
loss account

11 Ensure that all the carry forwards and brought forwards are in
agreement Ensure no rounding errors exist between brought
forwards and carry forwards.

4-6
12 Ensure that if the company is subject to any other ordinance or
regulations disclosures required by these have also been made.
Examples of such disclosures are Investment Advisers Rules, 1971
or SBP's prudential regulations.

13 Ensure that balance sheet, profit and loss account, statement of

changes in financial position (cash flow statement) and last page of
notes to the accounts bears signatures of Chief Executive and
Director (or whichever combination is approved by the Board of
Directors).

14 Check casting of all the totals and sub totals. Check all spellings and
grammar.

15 Ensure that depreciation charge computed under fixed assets

schedule is in agreement with depreciation expense disclosed in
expenses. Ensure that details of disposals agrees with fixed asset
note (if applicable).
16 Ensure that the Closing Stock figures in Cost of Sales agrees with
Stock on balance sheet. (Except for Items in transit).
17 Ensure that amortization of deferred cost is in agreement with
amortization expense disclosed in expenses.

18 Ensure that change in provisions appearing on the Balance Sheet

reconciles with the amounts reflected in the Profit and Loss Account.
19 Ensure that profit/(loss) is stated in correct order.
20 Ensure that boxes are drawn correctly in the accounts

4-7
4.5 Partner Review Notes & Queries

Name of client: ____________________ Year ended _______________

Prepared by: ____________________ Date _______________
Reviewed by ____________________ Date _______________

Observations/Notes Disposal

4-8
4.6 SUMMARY REVIEW MEMORANDUM

Name of client: ____________________ Year ended _______________

Prepared by: ____________________ Date _______________
Reviewed by ____________________ 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

Provisions

Acquisition of Long Term Loan/Leases

Major Contingencies/litigations including Tax etc.

4-9
Client File No.

Analytical Review-Balance Sheet-Liabilities

Name Initial Date
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Authorized capital

Issued, Subscribed & Paid-up Capital

General Reserves

Capital Reserves

Unappropriated Profit & Loss

Surplus on Revaluation of Fixed Assets

Redeemable Capital

Long Term Loans

Liabilities Against Assets Subject to

Finance Lease

Deferred Liabilities

Long Terms Deposits

Current Liabilities

Short Term Loans

Current Portion of Long Term Loans

Creditors, Accrued & Other Liabilities

Provision for Taxation

Proposed Dividend

Total Liabilities

4-10
Client File No.
Name Initial Date
Analytical Review-Balance Sheet

Assets Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Operating Fixed Assets

Capital-work-in-progress

Intangible Assets

Long Term Investments

Long Term Loan & Advances

Long Term Deposits , Prepayments &

Deferred Cost

Current Assets

Stores, Spares & Loose Tools

Stock-in-trade

Trade Debts

Short Term Deposits, Prepayments & Other

Receivable

Short Term Investment

Cash & Bank Balances

Total Assets

4-11
Client File No.
Name Initial Date
Analytical Review - Sales
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Export

Local

Add : Export Rebate

Less :

- Commission

- Brokerage and Discount

- Excise Duty

- Sales Tax

4-12
Client File No.
Name Initial Date
Analytical Review - Cost of Goods Sold
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Raw material consumed

Salaries, wages and benefits

Stores and spares consumed

Packing material consumed

Fuel and power

Rent, rates and taxes

Insurance

Repairs and maintenance

Depreciation

Other manufacturing overheads :

Vehicle Running & Maintenance

Telephone and postage
Utilities
Printing and stationery
Travelling and conveyance
Legal and professional
Others

Work in process :
Opening stock
Closing stock

Finished Goods:
Opening stock
Closing stock

Cost of Goods Sold

4-13
Client File No.
Name Initial Date
Analytical Review - Administrative
Expenses Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Directors' remmuneration

Staff salaries and benefits

Rent, rates and taxes

Insurance

Repairs and maintenance

Travelling and conveyance

Legal and professional

Vehicle running and maintenance

Utilities

Printing and stationery

Postage, telephone and telex

Fees, subscription and periodicals

Entertainment

Auditors' remmuneration

Advertisement

Charity and donation

Depreciation

Other

4-14
Client File No.

Analytical Review - Selling Expenses

Name Initial Date
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Salaries and Benefits

Freight and Octroi

Clearing and Forwarding

Travelling

Advertisement and Sample

Others :

Export Development Surcharge

Market Survey

Bank Charges

Insurance

4-15
Client File No.

Analytical Review - Financial Charges

Name Initial Date
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Markup / interest on :

- Redeemable Capital

- Debenture

- Long Term Loans

- Lease Finance

- Short Term Borrowings

- Loan from Directors &

Associated Undertaking

- Workers' Profit Participation Fund

Excise Duty on Borrowings

Bank Charges and Commission

Exchange (Gain) / Loss

Exchange Risk Fee on Foreign Currency

Loan

4-16
Client File No.
Name Initial Date
Analytical Review - Other Income
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner

Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %

Income from Investments - net of Zakat

Income from Redeemable Capital

Income from Modaraba or

Modaraba Certificates

Profit on Sale of Investment

Profit on sale of fixed assets

Rental Income

Scrap sales

Others

Unusual income

Prior year income

4-17
ANALYTICAL REVIEW RATIO ANALYSIS

FORMULA

Y1 Y2 Y3 Y4
A. PERFORMANCE ANALYSIS

1. Installed Capacity
2. Capacity utilized
3. Production in units i.e. Kgs. metres etc.
4. Production after convers ion, if any.
5. Gross Sale in % - Local Local Gross Sales
Gross Total Sales

- Export Export Gross Sales

Gross Total Sales

6. Gross Profit % to Net Sales Gross Profit

Net Sales

7. Raw material consumption cost to cost of Consumption Cost

goods manufactured. Cost of goods manufactured

8. Average raw material purchase price per unit. Total Purchase Price of Raw material
total units purchased

9. Average conversion cost per unit of Conversion Cost

production unit produced

10. Conversion cost without depreciation per unit Conversion Cost without depreciation
units produced

11. Labour cost per unit of production Labour Cost

units produced

12. Store and spares consumption per unit of Store & Spares consumption in
production. rupees
units produced

13. Electricity consumption per unit of production Electricity consumption in rupees

units produced

14. Packing material cost per unit of production Packing material cost
units produced

4-18
 FORMULA

Y1 Y2 Y3 Y4

15. Administrative expenses / unit of production Administration Expenses

units produced

16. Selling expenses per unit sold. Selling Expenses

units sold

17. Financial charges in rupees

18. Net Profit / (Loss) per unit sold Net Profit / (Loss)
unit sold

19. Net profit (Loss) percent of sales Net Profit / (Loss)

Sales X one hundred

20. Production in %

- Finished goods in production

- Visible waste Finished goods produced in units
- Invisible waste raw material consumed in units
100

21. Average selling rate per unit

- Local Local Sales

Total Units Sold

- Export Export Sales

Total Units Sold

In case of Textile

B. PROFITABILITY RATIOS

1. Return on assets (ROA) Net Profit after tax

Average total assets

2. Return on Capital Employed (ROCE) Net Profit after tax

Average total capital employed

3. Earning per share (EPS) Net profit available to equity holder

Number of ordinary shares
outstanding

Reasons for Fluctuations:

_________________________________________________________________________________

_________________________________________________________________________________

4-19
 FORMULA

Y1 Y2 Y3 Y4
4. Earning yield Earning per Share
Market value per share

5. Price Earning Ratio Market price as a Share

Earning per Share

6. Operating Expenses ratio Operating Expenses

(administrative Expenses ratio) Net Sales

7. Administrative Exp enses ratio Administrative Expenses

Net Sales

8. Selling Expenses ratio Selling Expenses

Net Sales

9. Financial Expenses ratio Financial Expenses

Net Sale

C. ACTIVITY RATIOS
1. Inventory Turnover

I Raw Material Turnover Cost of raw material used

Avg. raw material inventory

ii. Work in process turnover Cost of good manufactured

Avg. Work in process inventory

iii. Finished goods turnover Cost of good sold

Avg. finished goods inventory

2. Debtor turnover Credit Sales

Debtors

3. Average debt collection period Months (days) in a year

Debtor turnover

4. Assets turnover Cost of good sold

Average total assets

5. Fixed assets turnover Cost of goods sold

Average fixed assets

6. Current assets turnover Cost of good sold

Average current assets

7. Working Capital turnover Cost of good sold

Net working capital

4-20
 FORMULA

Y1 Y2 Y3 Y4
D. LIQUIDITY RATIOS

1. Current Ratio Current assets

Current liabilities

2. Acid - Test quick ratio Quick assets

Current liabilities

3. Creditors Net credit purchase

Average creditors

E. LEVERAGE / CAPITAL STRUCTURE

RATIOS

1. Debt - Equity ratio Total debt

Share holders equity

2. Equity Turnover Sales

Net worth

3. Owners stake in the fixed assets Fixed assets

Net worth

Reasons for Fluctuations:

_________________________________________________________________________________

_________________________________________________________________________________

_________________________________________________________________________________

4-21
4.8 MANAGER REVIEW NOTES & QUERIES

Name of client: ____________________ Year ended _______________

Prepared by: ____________________ Date _______________
Reviewed by ____________________ Date _______________

Observations/Notes Disposal

4-22
4.9 MANAGEMENT REPRESENTATION LETTER
A management representation letter (format enclosed) is a letter addressed to the auditor that has
been drafted by the auditor and given to the client to sign. The purpose of such a letter includes:
the minimization of misunderstandings between the client and the auditor.
the commitment to writing of representations previously made verbally by management
to the auditor.
the provision of corroborative evidence.

Note that where other evidence is available, the auditor does not rely solely on evidence obtained
through management representations. Where other evidence is not available, evidence gathered
solely by way of a management representation letter is not normally considered to be particularly
reliable.

Evidence obtained through a management representation letter may be particularly applicable to

the corroboration of evidence relating to both subsequent events and the appropriateness of the
going concern assumption.

4-23
SUGGESTED MANAGEMENT REPRESENTATION LETTER

FIRMS NAME AND ADDRESS

Dear Sirs

We confirm to the best of our knowledge and belief, the following representation made to you
during your examination of the financial statements of (clients name) for the (period of
examination).

1. We acknowledge managements responsibility for the fair presentation in the financial

statements of financial position, results of operations and changes in financial position in
conformity with prescribed accounting practices.

2. All minutes of the meetings of shareholders, directors and committees of directors and all
financial and accounting records and related data have been made available to you. We
are not aware of any accounts, transactions or material agreements not fairly described
and properly recorded in the financial and accounting records, underlying the financial
statements.

3. We are not aware of:

a. any irregularities involving management or employees who have significant roles
in the system of internal accounting control or any irregularities involving other
employees which could have a material effect on the financial statement; or

b. any violations or possible violations of laws or regulations whose effect should

be considered for disclosure in the financial statements or as a basis for recording
a loss contingency. There have been no communications from regulatory
agencies concerning non-compliance with or deficiencies in financial reporting
practices that could have a material effect on the financial statements. The
company has complied with all aspects of contractual agreements that would have
a material effect on the financial statements in the event of non-compliance (state
here exceptions, if any).

4-24
4. All cash and bank accounts and all other properties and assets of the company of which
we are aware are included in the financial statements at (balance sheet date). The
company has satisfactory title to all owned assets (state here exceptions, if any) and all
liens, encumbrances or security interests of any important consequence on any asset of
the company are disclosed in the statements or notes thereto.

5. The receivables in the aggregate gross amounts of Rs ___________ at (balance sheet

date) represent bonafide claims against debtors for sales or other charges arising on or
before that date and are not subject to discount except for normal cash discounts. These
receivables do not include any amounts which are collectible after one year (state here
exceptions, if any). The amount of Rs ___________ carried for doubtful accounts and
allowances is sufficient to provide for any losses which may be sustained on realisation
of the receivables.

6. Inventories at (balance sheet date) in the aggregate amount of Rs ___________ are stated
at the lower of cost or market, cost being determined on the basis of (LIFO, first-in-first-
out, or other basis) and consistently with the prior year, and due provision was made to
reduce all slow-moving, obsolete, or unusable inventories to their estimated useful or
scrap values. Inventory quantities at were determined from the companys
inventory records, which have been adjusted on the basis of physical inventories taken by
competent employees at (date of physical inventory count or various times during the
year). Liability, if unpaid, for all items included in inventories is recorded at (balance
sheet date) and all quantities billed to customers at that date are excluded from the
inventory balances. Inventories comprise the whole of the companys stocks, wherever
situated and that stocks held on behalf of other parties have been excluded.

7. All liabilities of the company which we are aware are included in the financial statements
at (balance sheet date). There are no other material liabilities or gain or loss contingencies
that are required to be accrued or disclosed and no unasserted claims or assessments
which must be disclosed.

8. Commitments for future purchases are for quantities not in excess of the anticipated
requirements and at prices which will not result in loss. Provision has been made for any
material loss to be sustained in the fulfillment of, or from inability to fulfill, any sales
commitments.

9. The financial statements and appended notes include all disclosures necessary for a fair
presentation of the financial position and results of operations of the company in
accordance with prescribed accounting practices, and disclosures otherwise required to be
included therein by the laws and regulations to which the company is subject. The
following have been properly recorded or disclosed in the financial statements (if none,
include under a separate caption having the introduction there are no .):

a) Related party transaction and related amounts receivable or payable, including

sales, purchases, loans , transfers, leasing arrangements and guarantees.

4-25
 b) Share capital repurchase options or agreements or share capital reserved for
options, warrants, conversions, or other requirements.
c) Arrangements with financial institutions involving compensations balances or
other arrangement involving restrictions on cash balances and line of credit or
similar arrangements.

d) Agreements to repurchase assets previously sold.

e) Other arrangements not in the ordinary course of business.

10. No matters or occurrences have come to our attention up to the present time which would
materially affect the financial statements and related disclosures for the year ended
(balance sheet date) or, although not affecting such financial statements or disclosures,
have caused or are likely to cause any material change, adverse or otherwise, in the
financial position or results of operations of the company. We have no plans or
intentions that may materially affect the carrying value of classification of assets and
liabilities.

Yours truly

..
(Senior Executive Officer)

(Senior Financial Officer)

Date:..

Note: Representation letter must be dated same as the date of audit report. (AS 22 Para 13)

Representation letter ordinarily be signed by senior executive officer and senior

financial officer. (AS 22 Para 14)

4-26
4.10 SUGGESTED LETTER TO THE BOARD OF DIRECTORS
(BOD)

Board of Directors, Date:

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) Management representation letter

ii) Approval of the Board regarding the following:

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

*(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/-

4-27
4.11 MANAGEMENT LETTER
Recommendations regarding internal control are a byproduct of the financial statements audit, not a
primary objective, but nonetheless should be of value to a client. The auditor needs to make
management aware, on a timely basis, of material weaknesses in the design or operation of the
accounting and internal control systems, which have come to auditors attention.

When an auditor prepares a written communication on internal control matters, it is suggested that the
communication:

Not include the language that has the effect of being in conflict with the opinion expressed in the
audit report;
State that the accounting and internal control systems were considered only to the extent
necessary to determine the auditing procedures to report on the financial statements and not to
determine the adequacy of internal control for management purposes or to provide assurance on
the accounting and internal control systems;
State that it discusses only weaknesses in internal control which have come to the auditors
attention as a result of the audit and that other weaknesses in internal control may exist;

The significance of findings relating to the accounting and internal control systems may change with the
passage of time. Suggestions from previous years audits which have not been adopted, if any, should
normally be repeated or referred to.

[For other guidance please refer International Auditing Practice Statement (IAPS 7)]

4-28
SUGGESTED FORMAT OF MANAGEMENT LETTER

The following letter is not intended to be a standard letter. Points for inclusion in the management letter
will vary from one entity to another and from one period to the next.

(Auditor Letterhead)

(To Board of Directors or appropriate representative of senior management)

(Date)

This management letter is provided in connection with our audit of your financial statements of for the
year ended _____________. The letter highlights those weaknesses in the accounting and internal
control systems, which have come to our notice during the course of the audit.

Because of the test nature and other inherent limitations of an audit, together with the inherent limitations
of an accounting and internal control system, there is an unavoidable risk that even some material
weaknesses or misstatements may remain undiscovered.

Issues Arising
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

Consequences/Risk
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

Recommendation
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

Management Response
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

(Management response should include agreed implementation)

4-29
4.12 POINTS FORWARD TO NEXT YEAR

Name of client: ____________________ Year ended _______________

Prepared by: ____________________ Date _______________
Reviewed by ____________________ Date _______________

Schedule
S.No. Description of issue Service Improvement Plan
Reference

Note: This schedule would be carried forward to the next year Audit Planning File as Points
Brought Forward From Previous Year.

4-30
4.13 FINANCIAL STATEMENTS DISCLOSURE CHECKLIST

Due to significant changes in the International Accounting Standards (IASs), financial statements
disclosure checklist has become outdated, the same is in the process of finalization.

4-31
CLIENT:- Initial
Date
YEAR END:- COMPLETED BY :
REVIEWED BY :
4.14 SUBSEQUENT EVENTS REVIEWCHECKLIST
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.

b. Property and investments: Evidence of permanent diminution in value.

- See valuation certificate.

c. Stock and work-in-process: Subsequent sale proceeds for evidencing of net

realizable value at balance sheet date.

d. Long-term contracts: Estimated final result shows the accrued profit

thereon was materially inaccurate.

e. Adequacy of provision for bad debts: Evidence as to collectabilty and

negotiation with debtors.

f. Claims receivable: Negotiated at the balance sheet date.

g. Discovery of frauds and errors: Indicating financial statement are in-

correct.

h. Dividend receivable/payable: Declared after balance sheet date.

4-32
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. Mergers and acquisitions of any business.

b. New issue of shares or acquisition of loan capital.
c. Acquisition or disposal of material assets or investments.
d. Major changes in market price of investments.
e. Losses of fixed assets or stocks as a result of catastrophe such as fire and
flood.
f. Opening/extending of trading activities.
g. Closing of significant part of trading activities not expected to close at
year-end.
h. Major exchange rate movements.
i. Effect of any new legislation or government regulation.
j. Strike and other labour disputes.
k. Significant reversal of sales and profit trend.
l. Reason of any suspension or interruption of operations.
m. Loss of major customers or contractors.
n. Potential losses on forward contracts.
o. Imposition of exchange controls.
p. Acquisition, or withdrawal, of short -term borrowings facilities.
q. Financial arrangements made but disbursements where not made.

C. Have evidences of such above events been documented and enclosed?

D. Have representations been taken from management for such events?

E. Review the minutes of meetings since the year-end of directors, shareholders and
appropriate key committees.

F. Obtain and read any post year-end management accounts and inquire the
significant variances, if any.

G. Consider whether the going concern assumption in relation to whole or a part of

the enterprise is appropriate.

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.

4-33
CLIENT:- Initial Date
YEAR END:- COMPLETED BY :
REVIEWED BY :
4.15 GOING CONCERN REVIEW CHECKLIST
1. Have the following points been discussed with client and observed during Yes/ No/ N.A.
the course of audit? Yes=Alarming Point
(Write brief note in
separate sheet)

A. Indication for Company may not be able to pay its debts:

- Substantial operating losses in excess of owner equity.

- Heavy dependence on short-term finances for long-term needs.

- Working capital deficiency.

- Adverse key financial ratios.

- Low liquidity ratios.

- Net liability or net current liability position.

- Under capitalization.

- Arrears or discontinuance of dividends.

- Default in complying with the terms of loan agreements.

- Excessive obsolete stock.

- Inability to pay creditors on due date.

- Long overdue debtors and excessive bad debts.

- Deterioration in the relationship with bankers and inability to

obtain finances or essential new product development or other
essential investments.

- Continuous use of fixed assets.

B.i. Indications for company about the continuation of business & lead
inability of paying debts (Internal Problems):

- Loss of key management or staff without replacement.

- Increasing stock level.

4-34
 - Work stoppage and other labour difficulties

- Shortages of important supplies

- Substantial dependence on success of particular project.

- Excessive reliance on new products.

- Uneconomic commitments.

- In case of any legal proceeding, if decided against the Company, liability

can not be met.

B.ii. (External Problems)

- Non compliance with capital or other statutory requirements.

- Loss of key patents.

- Loss of key or major market, franchise, license or principal supplier.

- Undue influence of market dominant competitors.

- Political risk.

- Pending legal proceedings against the entity that may, if successful result
in judgments that could not be met.

- Frequent financial failure of enterprise of same industry.

- Changes in legislation or government policy.

2. Have the sufficient evidences been obtained for above said points?

4-35
 PERMANENT AUDIT FILE

CLIENT_________________________________________________________________

INDEX

Section No. Description

1. Formation Information and Regulation

2. Minutes of the Board of Directors Meetings, Containing

Decisions of permanent nature & minutes of AGM / EGM
etc.

3. Loans & Other Long Term Agreements

4. Miscellaneous

Updation Date Updated By Reviewed By Remarks

_______________ _____________ ____________ ___________

_______________ _____________ ____________ ___________

_______________ _____________ ____________ ___________

_______________ _____________ ____________ ___________

_______________ _____________ ____________ ___________

_______________ _____________ ____________ ___________

5-1
FILE DESCRIPTION DATE
REF.

5.1 Formation Information and Regulation

5.1.1 Certificate of Incorporation

5.1.2 Certificate of Commencement of Business

5.1.3 Memorandum and Articles of Association

5.1.4 Prospectus

5.1.5 Other

5-2
FILE DESCRIPTION DATE
REF.

5.2. Minutes

5.2.1 Extracts of Important Minutes of Board of Directors

Containing decisions of Permanent nature.

5.2.2 Extracts of Important Minutes of Shareholders

Meetings (e.g. AGM)

5.2.3 Other

5-3
FILE DESCRIPTION DATE
REF.

5.3. Loans & Other Long Term Agreements.

5.3.1 Loans and Other Agreements of Permanent nature

(e.g. long term loans & lease agreements)

5.3.2 Other

5-4
FILE DESCRIPTION DATE
REF.

5.4. Miscellaneous

5-5
SUMMARY OF SOME INTERNATIONAL STANDARDS ON
AUDITING (ISAs)

Contents Page

1. AS 1 Objective and General Principles Governing an Audit of

Financial Statements 6-2

2. AS 2 Terms of Audit Engagements 6-3

3. AS 4 Audit Planning 6-4

4. AS 6 Risk Assessments and Internal Control 6-6

5. AS 7 Quality Control for Audit Work 6-9

6. AS 8 Audit Evidence 6-13

7. AS 9 Documentation 6-15

8. AS 12 Analytical Procedures 6-17

9. AS 13 Auditors Report on Financial Statements 6-18

10. AS 17 Related Parties 6-19

11. AS 19 Audit Sampling and Other Selective Testing Procedures 6-20

12. AS 21 Subsequent Events 6-22

13. AS 22 Management Representations 6-23

14. AS 23 Going Concern 6-24

15. AS 25 Audit Materiality 6-26

16. AS 28 Initial Engagements Opening Balances 6-27

17. AS 30 Knowledge of the Business 6-28

AS-1 - Objective and General Principles Governing an Audit of Financial
Statements

The objective of an audit of financial statements is to enable the auditor to express an a opinion
whether the financial statements are prepared, in all material respects, in accordance with an
identified financial reporting framework.

The auditor should comply with the Code of Ethics for Professional Accountants issued by the
International Federation of Accountants.

Ethical principles governing the auditors professional responsibilities are:

Independence;
Integrity;
Objectivity;
Professional competence and due care;
Confidentiality
Professional behaviour; and
Technical standards

The auditor should conduct an audit in accordance with ISAs. These contain basic principles and
essential procedures together with related guidance in the form of explanatory and other material.

The term of Scope of an audit refers to the audit procedures deemed necessary in the
circumstances to achieve the objective of the audit. The procedures required to conduct an audit
in accordance with ISAs should be determined by the auditor having regard to the requirements
of ISAs, relevant professional bodies, legislation, regulations and, where appropriate, the terms
of the audit engagement and reporting requirements.

An audit in accordance with ISAs is designed to provide reasonable assurance that the financial
statements taken as a whole are free from material misstatement. Reasonable assurance is a
concept relating to the accumulation of the audit evidence necessary for the auditor to conclude
that there are no material misstatements in the financial statements taken as a whole. Reasonable
assurance relates the whole audit process.

However, there are inherent limitations in an audit that affect the auditors ability to detect
material misstatement. These limitations result from factors such as:

The use of testing.

The inherent limitation of accounting and internal control system (e.g. the possibility of
collusion).
The fact that most evidence is persuasive rather than conclusive.

While the auditor responsible for forming and expressing an opinion on the financial statements,
the responsibility for preparing and presenting the financial statements is that of the management
of the entity. The audit of the financial statements does not relieve management of its
responsibilities.

6-2
AS-2 - Terms of Audit Engagements

The auditor and the client should agree on the terms of engagement.

It is in the interest of both client and auditor that the auditor sends an engagement letter,
preferably before the commencement of the engagement, to help in avoiding misunderstanding
with respect to the engagement.

The engagement letter documents and confirms the auditors acceptance of the appointment, the
objective and scope of the audit, the extent of auditors responsibilities to the client and the form
of any reports.
The agreed terms should be recorded in an audit engagement letter or other suitable
form of contract.
The engagement letter should be sent before the commencement of the engagement,
the purpose being to document and confirm the auditors acceptance of the
appointment, the objective and scope of the audit, the extent of the auditors
responsibilities to the client and the form of any reports.
Consideration should be given to a situation where revised terms of engagement are
required.
Where the terms of engagement are changed the auditor and the client should agree
on the new terms.
The letter would generally include the following:
- Objective of the audit of financial statements
- Managements responsibility for the financial statements
- Scope of the audit
- Explanation that because of the test nature and other limitations of an
audit, together with the inherent limitations of an accounting and internal
control system, there is an unavoidable risk that even some material
misstatements may remain undetected
- Form of any report
- Unrestricted access to whatever records and other information requested in
connection with the audit

On recurring audits, the auditor should consider whether circumstances require the
terms of the engagements to b revised and whether there is a need to remind the
client of the existing terns of the engagements.

An auditor who, before the completion of the engagement, is requested to change the
engagement to one which provides a lower level of assurance, should consider the
appropriateness of doing so.

6-3
AS-4 - Audit Planning

The auditor should plan the audit work so that the audit will be performed in an effective
manner.

Planning means developing a general strategy and a detail approach for the
expected nature, timing and extent of the audit.
Adequate planning ensures that appropriate attention is devoted to important areas
of the audit, potential problems are identified and the work is completed
expeditiously, planning also assists in proper assignment of work to assistants and
in coordination of work done by other auditors and experts.
The extent of planning will depend on the size of the entity, the complexity of the
audit and the auditors experience with the entity. However some form of
planning should be prepared for all assignments.
An overall audit plan describing the scope and conduct of the audit should be
developed and documented, after considering the following:
- Economic factors and industry conditions affecting business
- Changes, if any, since the prior audit
- Level of competence of management
- Accounting policies adopted by entity and changes in policies
- Effect of new accounting or auditing pronouncements

- Auditors Knowledge of accounting and internal control systems and

reliance to be placed thereon
- Assessment of risks and identification of significant audit areas
- Materiality level
- Extent of reliance on internal auditors and effect on external audit
procedures
- Staffing requirements
- Possibility that going concern assumption may be subject to question
- Timing of reports required and deadlines if any
- Analytical review procedures

- Number of locations

- Involvement of experts

- Condition requiring special attention, such as the existence of related

parties.

6-4
 - The terms of the engagement and statutory responsibilities.

The senior manager or partner in charge should approve the audit plan.
The overall audit plan and audit program should be revised as necessary during
the course of the audit.

Audit Program

An audit program setting out the nature, timing and extent of planned audit procedures to be
implemented should be developed and documented. It is a means to control and record the proper
execution of the work. A standard audit program may be developed by the firm to form the basis,
but it should be modified according to the requirements of a specific audit engagement.

The following points may be taken into account while preparing an audit program:

- It should be so designed to serve as a set of instructions for the assistants

carrying on the audit work.

- It should contain the audit objectives for each area covered by the audit.

- Time budget for performing various audit procedures.

- Consider specific assessments of inherent and control risks.

- Level of assurance to be provided by substantive procedures.

- The involvement of other auditors and experts, if any.

- The audit program should be cross-referenced to working papers and should

include the name of the company being audited

- Follow-up of audit findings should be included in audit program.

- Other matters of overall audit plan may also need to be considered

The person performing the procedures and the person reviewing the work should
sign the audit program.

6-5
AS-6 - Risk Assessments and Internal Control

The auditor should obtain an understanding of the accounting and internal control systems,
sufficient to plan the audit and develop an effective audit approach. The auditor should use
professional judgement to assess audit risk and to design audit procedures to ensure it is reduced
to an acceptably low level.

The auditor performs a walk-through test, that is, tracing a few transactions
through the accounting system to confirm their understanding of the accounting
and internal control system.

Audit Risk has three components: Inherent risk, Control risk and Detection risk.

Inherent Risk

When developing the audit plan, the inherent risk should be assessed at the
financial statements level. When developing the audit program, the auditor
should relate such assessment to material account balances and classes of
transactions.

To assess inherent risk, the auditor uses professional judgement to evaluate

numerous factors, examples of which are:

At the financial statement level

- Integrity of management
- Management experience and knowledge and changes in management during
the period
- Unusual pressures on management such as lack of capital or industry slump
- Nature of business potential for obsolescence of products, complexity of
capital structure, significance of related parties and number of locations of
production facilities
- Economic and competitive conditions of the industry

At the Account Balance and Class of Transactions Level

- Accounts involving a high degree of estimation

- Complexity of underlying transactions
- Degree of judgment involved in determining account balances
- Susceptibility of assets to loss or misappropriation
- The completion of unusual and complex transactions, particularly at or near
period end.

6-6
Control Risk
The preliminary assessment of control risk is the process of evaluating the
effectiveness of an entitys accounting and internal control systems in preventing
or detecting and correcting material misstatements.

The auditor should document in the working papers the understanding obtained of
the entitys accounting and internal control systems and the assessment of control
risk.

Tests of controls may include:-

- Inspection of documents supporting transactions and other events to gain

evidence that internal controls have operated properly, e.g. verifying that a
transaction has been authorised.
- Inquiries about, and observation of, internal controls which leave no audit trail
- Reperformance of internal controls, e.g. reconciliation of bank accounts

Based on the results of the tests of control, the auditor should evaluate whether
the internal controls are designed and operating as contemplated in the
preliminary assessment of control risk.

The auditor should consider whether the internal controls were in throughout the
period.

Detection Risk

The level of detection risk relates directly to the auditors substantive procedures.
The higher the assessment of inherent and control risk, the more audit evidence
the auditor should obtain from the performance of substantive procedures.

When the auditor determines that detection risk regarding a financial statement
assertion for a material account balance or class of transactions cannot be reduced
to an acceptable level, the auditor should express a qualified opinion or a
disclaimer of opinion.

Regardless of the assessed levels of inherent and control list the auditor should
perform some substantive procedures for material account balances or classes of
transaction.

The higher the assessment of inherent and control risk, the more audit evidence
the auditor should obtain from the performance of substantive procedures.

The auditor should obtain an understanding of the accounting system sufficient to

identify and understand:
Major classes of transactions in the entitys operation;
How such transactions are initiated;

6-7
 Significant accounting records, supporting documents and accounts in the
financial statements; and
The accounting and financial reporting process, from the initiation of
significant transactions and other events to their inclusion in the financial
statements

The auditor should obtain an understanding of the control environment sufficient

to assess directors and managements attitudes, awareness and actions regarding
internal controls and their importance in the industry.

Audit Risk in the Small Business

Many internal controls, which would be relevant to large entities, are not practical
in small businesses. For example, segregation of duties may be missing or
limited. In this instance if audit evidence of supervisory controls is lacking, the
audit evidence necessary to support the auditors opinion on the financial
statements may have to be obtained entirely through the performance of
substantive procedures.

6-8
AS-7 - Quality Control for Audit Work

The audit firm should implement quality control policies and procedures designed to ensure that
all audits are conducted in accordance with ISAs. The objectives of quality control policies will
incorporate the following: -

Professional Requirements
Skills and Competence
Assignment
Delegation
Consultation
Acceptance & Retention of clients
Monitoring

The firms general quality control policies and procedures should be communicated to its
personnel in a manner that provides reasonable assurance that the policies and procedures are
understood and implemented.

Professional Requirements

Personnel in the firm should adhere to the principles of independence, integrity, objectivity,
confidentiality and professional behaviour.

Obtain from personnel written representations on an annual basis in respect of non-

existence of prohibited relationships and prohibited investments. A list of clients may
be prepared each year to allow staff to determine their independence.

Assign responsibility for obtaining representations and reviewing independence

compliance files for completeness to a person with appropriate authority.

Skills and Competence

The firm is to be staffed by personnel who have attained and maintain the technical standards
and professional competence required to enable them to fulfill their responsibilities with due
care.

Maintain a program designed to obtain qualified personnel by planning for personnel

needs, establishing hiring objectives and setting qualifications for those involved in
the hiring function.

Assign to authorised persons the responsibility for employment decisions.

Conduct an orientation program relating to the firm and the profession for newly
employed personnel.
Outline the requirements for continuing professional education and communicate
them to personnel.

Encourage participation in external continuing professional education programs.

6-9
 Establish qualifications deemed necessary for the various levels of responsibility
within the firm.

Review periodically the performance of the personnel and discuss with them their
progress within the firm.

Conduct firm programs to develop and maintain expertise in specialised areas and
industries.

Maintain a reference library and technical literature including details regarding

current developments in the office for ready reference.

Provide personnel with professional literature relating to current developments in

professional technical standards.

Conduct in-house seminars on various topics for the personnel.

Assignment

Audit work is to be assigned to personnel who have the degree of technical training and
proficiency required in the circumstances.

Prepare time budgets for audits to determine manpower requirements and to schedule
audit work.

Give appropriate consideration to both continuity and rotation when deploying staff
to assignments.

Consider the experience and training of the audit personnel in relation to the
complexity or other requirements of the audit.

Delegation

There is to be sufficient direction, supervision and review of work at all levels to provide
reasonable assurance that the work performed meets the appropriate standards of quality.

Assign responsibility for planning an audit. Involve appropriate personnel assigned

to the audit in the planning process.

Develop background information or review information obtained from prior audits

and update for changed circumstances.

Prepare audit programs for various areas of audit interest.

Determine manpower requirements and estimated time to complete the audit.

6-10
 Consider current economic conditions affecting the client or its industry and their
potential effect on the conduct of the audit.

Develop guidelines for form and content of working papers.

Utilise standardised forms, checklists and questionnaires to the extent appropriate to

assist in the performance of audits.

Provide on-the-job training during performance of audits discuss with assistants the
relationship of the work they are performing to the audit as a whole

Encourage personnel to train and develop subordinates.

Consultation

Whenever necessary, consultation within or outside the firm is to occur with those who have
appropriate expertise.

Inform personnel of the firms consultation policies and procedures.

Specify areas requiring consultation because of the nature or complexity of the

subject matter.

Maintain or provide access to adequate reference libraries and other authoritative

sources.

Maintain consultation arrangements with other firms and individuals where necessary
to supplement firms resources.

Maintain subject files containing the result of consultation for reference and research
purposes.

Designate specialists for particular industries.

Acceptance and retention of clients
An evaluation of prospective clients and a review, on an ongoing basis, of existing clients is to be
conducted. The firms independence and ability to serve the client properly and the integrity of
the clients management should be considered.
Obtain and review available financial statements regarding the prospective client.

Inquire of third parties as to any information regarding the prospective client. The
inquiries may be directed to legal advisors, bankers and others.
Communicate with the predecessor auditor and make inquiries regarding the integrity
of management, accounting policies, audit procedures and other significant matters.
Consider circumstances, which would cause the firm to regard the engagement as one
requiring special attention or presenting unusual risks.

6-11
 Determine that the acceptance of the client would not violate codes of professional
ethics.
Inform appropriate personnel of the firms policies and procedures for accepting and
retaining clients.
Evaluate clients upon the occurrence of specified events to determine whether the
relationships ought to be continued.
Such events may include a change in one or more of the following:

- Management
- Directors
- Ownership
- Legal Advisers
- Financial condition
- Scope of the engagement
- Nature of clients business

Monitoring

The continued adequacy and operational effectiveness of quality control policies and procedures
are to be monitored.
Determine objectives and prepare instructions and review programs for use in
conducting monitoring activities.
Provide guidelines for the extent of work and criteria for selection of engagements for
review.
Establish the frequency and timing of monitoring activities.
Review and test compliance with firms general quality control policies and
procedures.
Provide for reporting findings to appropriate management levels, for monitoring
actions taken or planned and for overall review of the firms quality control system.

Determine need for modification of quality control policies and procedures in view of
results of monitoring activities and other relevant matters.

6-12
AS-8 - Audit Evidence
The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion.
Audit evidence is the information obtained by the auditor in arriving at the
conclusions on which the audit opinion is based.
Sufficient appropriate audit evidence depends on:
- Nature and level of inherent risk
- Nature of accounting and internal control systems
- Materiality of item examined
- Experienced gained during previous audits
- Source and reliability of information available
- Results of audit procedures including fraud or error which may have been
found
Reliability of audit evidence can be assessed as follows:
- External audit evidence is more reliable than that generated internally
- Internal audit evidence is more reliable when the accounting and internal
control systems are effective
- Audit evidence obtained directly by the auditor is more reliable than that
obtained from the company
- Audit evidence in the form of documents and written representations is more
reliable than oral representations
If the auditor is unable to obtain sufficient appropriate audit evidence in the case of a
material item, a qualified opinion or disclaimer of opinion should be expressed.
The auditor obtains audit evidence by one or more of the following methods:
- Inspection: Examining records, documents or tangible assets
- Observation: Looking at a process or procedure being performed by others
- Inquiry and Confirmation: Inquiring consists of seeking information from
knowledgeable persons inside or outside the entity. Conformation consist of
the response to an enquiry to corroborate information contained in the
accounting records
- Computation: Checking the arithmetical accuracy of source documents or
performing independent calculations
- Analytical procedures: analysis of significant ratios and trends
Audit Evidence - Specific Items
Attendance at Physical Inventory Counting
When inventory is material to the financial statements, the auditor should obtain
sufficient appropriate audit evidence regarding its existence and condition by
attendance at physical inventory counting unless impracticable.
If unable to attend the physical inventory count on the date planned due to unforeseen
circumstances, the auditor should take or observe some physical counts on an
alternative date and, when necessary, perform tests of intervening transactions.

6-13
To obtain assurance that managements procedures are adequately implemented; the
auditor would observe employees procedures and perform test counts. When
performing counts, the auditor would test both the completeness and accuracy of the
count records by tracing items selected from those records to the physical inventory
and items selected from the physical inventory to the count records.
The auditor would also consider cut off procedures including details of the movement
of inventory just prior to, during and after the count so that the accounting for such
movements can be checked at a later date.
Where inventory is under the custody and control of a third party, the auditor would
ordinarily obtain direct confirmation from the third party as to the quantities and
condition of inventory held on behalf of the entity.
Confirmation of Accounts Receivable
When the accounts receivable are material to the financial statements and when it is
reasonable to expect debtors to respond, the auditor should plan to obtain direct
confirmation of accounts receivable or individual entries in an account balance.
Direct confirmation provides reliable audit evidence as to the existence of debtors and
the accuracy of their recorded balances. However, it does not ordinarily provide
evidence as to the collectibility of balances or as to the existence of unrecorded
receivable balances.
When it is expected that debtors will not respond, the auditor should plan to perform
alternative procedures, for example, subsequent receipts.
Inquiry regarding litigation and claims
The auditor should carry out procedures in order to become aware of any litigation
and claims involving the entity which may have a material effect on the financial
statements.
Such procedures include:
- Make appropriate inquiries of management including obtaining representations
- Review board minutes and correspondence with the lawyers
- Examine legal expense accounts
When litigation or claims have been identified or when the auditor believes they may
exist, the auditor should seek direct communication with the entitys lawyers. The
reply should be sent directly to the auditor.

6-14
AS- 9 - Documentation

The auditor should document matters, which are important in providing evidence to support the
audit opinion, and evidence that the audit was carried out in accordance with ISAs.

Documentation means the working papers prepared by and for, or obtained and
retained by the auditor in connection with the performance of the audit. The auditor
should prepare working papers, which are sufficiently complete and detailed to
provide an overall understanding of the audit.

The following are the objectives of working papers:

- Assist in the planning and performance of the audit

- Assist in the supervision and review of the audit work

- Record the audit evidence resulting from the audit work performed to support the
auditors opinion.

Working papers should include the auditors reasoning on all significant matters,
which require the exercise of judgment, together with the auditors conclusion
thereon.

The use of standardised working papers, for example, checklists, specimen letters,
may improve the efficiency with which such working papers are prepared and
reviewed. They facilitate the delegation of work while providing a means to control
its quality.

To improve efficiency, the auditor may utilise schedules, analyses and other
documentation prepared by the company. In such cases the auditor would need to be
satisfied that those working papers have been properly prepared.

The working papers should include indications of the work undertaken for particular
sections.

Working Papers ordinarily include the following:

- Engagement letter.

- Evidence of the planning process and audit programs.

- Information concerning the legal and organisational structure of the company

- Evidence of the auditors understanding of the accounting and internal control

systems.

- Evidence of inherent and control risk assessments.

- Extracts or copies of important legal documents, agreements and minutes.

6-15
 - Evidence of the auditors consideration of the work of internal auditing and
conclusions reached.

- Analyses of significant ratios and trends.

- Analyses of transactions and balances.

- Record of nature, timing and extent of the audit procedures performed and the
results thereof.

- Evidence that the work performed by assistants was supervised and reviewed.

- An indication as to who performed the audit procedures and when they were
performed.

- Copies of communication with other auditors, experts and third parties.

- Management letter.

- Representation letter.

- Conclusions drawn from the audit evidence obtained.

- Copies of the financial statements and auditors report.

- Working papers should be adequately referenced and cross-referenced.

In the case of recurring audits, there could be two types of audit files. One is the
permanent audit file that is updated with new information of continuing importance,
and the other is the current audit file which contains information relating primarily to
the audit of a single period.

The auditor should adopt appropriate procedures for maintaining the confidentiality
and safe custody of the working papers.

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AS 12 Analytical Procedures
The auditor should apply analytical procedures at the planning and overall review stages of the
audit.
Analytical procedures means the analysis of significant ratios and trends including the
resulting investigation of fluctuations and relationships that are inconsistent with
other relevant information or deviate from predicted amounts.
Examples of analytical procedures include:
- Reviewing comparable information for prior periods
- Anticipating budgets and forecasts
- Reviewing comparable information for other entities in industry
Analytical procedures can be applied to financial information, e.g. gross margin
percentages and non financial information such as comparing payroll costs to the
number of employees
The objectives of performing analytical procedures are as follows:
- To assist the auditor in planning the nature, timing and extent of other audit
procedures, understanding the business and identifying areas of potential risk.
- Used as substantive procedures when their use is more effective or efficient than
tests of details in reducing detection risk for specific financial statement
assertions.
- Used for overall review of the financial statements in the final review stage of the
audit, to conclude whether the financial statements as a whole are consistent with
the auditors knowledge of the business.
The auditor should apply analytical procedures at the planning stage to assist in
understanding the business and in identifying areas of potential risk.
The extent of reliance that the auditor places on the results of analytical procedures
depends on the following factors:
- Materiality of the items involved.
- Other audit procedures directed towards the same audit objectives.
- Accuracy with which the expected results of analytical procedures can be
predicted.
- Assessment of inherent and control risks. If controls are effective, greater reliance
could be placed on the reliability of the information.
It may be efficient to use analytical data prepared by the company, provided that the
auditor is satisfied that such data is properly prepared.
When analytical procedures identify significant fluctuations or relationships that are
inconsistent with other relevant information, the auditor should investigate and obtain
adequate explanations and appropriate corroborative evidence.

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AS 13 Auditors Report on Financial Statements

The auditor should review and assess the conclusions drawn from the audit evidence obtained as
the basis for the expression of an opinion on the financial statements.
The auditors report should contain a clear written expression of opinion on the
financial statements taken as a whole
The auditors report should state clearly the auditors opinion as to whether the
financial statements give a true and fair view or are presented fairly, in all material
respects in accordance with the financial reporting framework and, where appropriate,
whether the financial statements comply with statutory requirements.
A qualified opinion should be expressed when the auditor concludes that an
unqualified opinion cannot be expressed but that the effect of any disagreement with
management, or limitation on scope is not so material and pervasive as to require an
adverse opinion or a disclaimer of opinion. A qualified opinion should be expressed
as being except for the effects of the matter to which the qualification relates.
A disclaimer of opinion should be expressed when the possible effect of a limitation
on scope is so material and pervasive that the auditor has not been able to obtain
sufficient appropriate audit evidence and accordingly is unable to express an opinion
on the financial statements.
An adverse opinion should be expressed when the effect of a disagreement is so
material and pervasive to the financial statements that the auditor concludes that a
qualification of the report is not adequate to disclose the misleading or incomplete
nature of the financial statements.
Whenever the auditor expresses an opinion that is other than unqualified, a clear
description of all the substantive reasons should be included in the report and, unless
impracticable, a quantification of the possible effects on the financial statements.
Where there is a limitation on the scope of the auditors work that requires expression
of a qualified opinion or a disclaimer of opinion, the auditors report should describe
the limitation and indicate the possible adjustments to the financial statements that
might have been determined to be necessary had the limitation not existed.
The auditor may disagree with management about matters such as the acceptability of
accounting policies selected, the method of their application, or the adequacy of
disclosures in the financial statements. If such disagreements are material to the
financial statements, the auditor should express a qualified or an adverse opinion.
In certain circumstances, an auditors report may be modified by adding an emphasis
of matter paragraph to highlight the matter affecting the financial statements, which is
included in a note to the financial statements that discusses the matter more
extensively. The addition of such an emphasis of matter paragraph does not affect the
auditors opinion.

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AS- 17- Related Parties

The auditor should perform audit procedures designed to obtain sufficient appropriate audit
evidence regarding the identification and disclosure by management of related party transactions
that are material to the financial statements.
The auditor should review information provided by the directors and management
identifying the names of all known related parties and should perform the following
procedures in respect of the completeness of this information:
- Review prior years working papers for names of known related parties
- Review the entitys procedures for identification of related parties
- Inquire as to the affiliation of directors and officers with other entities
- Review shareholder records to determine the names of principal shareholders or,
if appropriate, obtain a listing of principal shareholders from the share register
- Review minutes of the meetings of shareholders and the board of directors and
other relevant statutory records such as the register of directors interests
- Inquire of other auditors currently involved in the audit, or predecessor auditors,
as to their knowledge of additional related parties
When obtaining an understanding of the accounting and internal control systems and
making a preliminary assessment of control risk, the auditor should consider the
adequacy of control procedures over the authorisation and recording of related party
transactions.
During the course of the audit, the auditor needs to be alert for transactions that
appear unusual in the circumstances and may indicate the existence of previously
unidentified related parties.
Examples include:
- Transactions which have abnormal terms of trade, such as unusual prices, interest
rates, guarantees and repayment terms
- Transactions in which substance differs from form
- Transactions which lack an apparent logical business reason for their occurrence
- Transactions processed in an unusual manner
- High volume or significant transactions with certain customers or suppliers as
compared with others
- Unrecorded transactions such as the receipt or provision of management services
at no charge
The auditor should obtain a written representation from management concerning:
- The completeness of information provided regarding the identification of related
parties; and
- The adequacy of related party disclosures in the financial statements
If the auditor is unable to obtain sufficient appropriate audit evidence concerning related
parties and transactions with such parties or concludes that their disclosure in the
financial statements is not adequate, the auditor should modify the audit report
accordingly.

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AS-19 - Audit Sampling and Other Selective Testing Procedures

When designing audit procedures, the auditor should determine appropriate means for selecting
items for testing so as to gather audit evidence to meet the objectives of audit test.

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 non-statistical approach.

When performing substantive test of details, audit sampling and other means of selecting items
for testing and gathering audit evidence may be used to verify one or more assertions about a
financial statement amount (for example, the existence of accounts receivable), or to make an
independent estimate of some amount (for example, the value of obsolete inventories).

Selecting Items for Testing to Gather Audit Evidence

When designing audit procedures, the auditor should determine appropriate means of selecting
items for testing. The means available to the auditor are:

1. Selecting all items (100% examination)

The auditor may decide that it will be most appropriate to examine the entire population
of items that make up an account balance or class of transactions. 100% examination is in
unlikely in the case of test of control; however, it is more common for substantive
procedures. For example 100% examination may be appropriate when population
constitutes a small number of large value items, when both inherent and control risks are
high and other means do not provide sufficient appropriate audit evidence, or when the
repetitive nature of a calculation or other process performed by a computer information
system makes a 100% examination cost effective.

2. Selecting specific items

The auditor may decide to select specific items from a population based on such factor as
knowledge of the client business, preliminary assessment of inherent and control risk, and
the characteristics of the population being tested. The judgmental selection of specific
items is subject to non-sampling risk.

3. Audit Sampling

The auditor may decide to apply audit sampling to an account balance or class of
transactions. Audit sampling can be applied using either non-statistical or statistical
sampling methods.

The auditor should select items for the sample with the expectation that all sampling units in the
population have a chance of selection.

6-20
The principal methods for selecting samples are the use of random number tables or computer
programs, systematic selection and haphazard selection.

The auditor should perform audit procedures appropriate to the particular test objective on each
item selected.

The auditor should consider the sample results, the nature and cause of any errors identified, and
their possible effect on the particular test objective and on other areas of the audit.

For substantive procedures, the auditor should project monetary errors found in the sample to the
population, and should consider the effect of the projected error on the particular test objective
and on other areas of the audit.

The auditor should evaluate the sample results to determine whether the preliminary assessment
of the relevant characteristic of the population is confirmed or needs to be revised.

6-21
AS- 21- Subsequent Events

The auditor should consider the effect of subsequent events on the financial statements and on
the auditors report.

The auditor should perform procedures designed to obtain sufficient evidence that all
events up to the date of the auditors report that may require adjustment of, or disclosure
in, the financial statements have been identified.

The procedures to identify events that may require adjustment, should be performed as
near as practicable to the date of the audit report, include:

- Reviewing procedures management has established to ensure that subsequent events

are identified

- Reading minutes of the meetings of shareholders and the board of directors held after
the balance sheet date

- Reading the companys latest available financial statements, including budgets, cash
flows and other related reports

- Inquiring or extending previous oral or written inquiries, of the companys lawyers

concerning litigation and claims

- Inquiring of management as to whether any subsequent events have occurred which

might effect the financial statements. Such inquiries include:

The current status of items that were accounted for on the basis of preliminary or
inconclusive data

Whether new commitments, borrowings or guarantees have been entered into

Whether sales of assets have occurred or are planned

Whether the issue of new shares or an agreement to merge or liquidate has been made or
is planned

Whether there have been any developments regarding risk areas and contingencies

When the auditor becomes aware of events which materially affect the financial
statements, the auditor should consider whether such events are properly accounted for
and adequately disclosed in the financial statements

6-22
AS- 22- Management Representations

The auditor should obtain appropriate representations from management.

The auditor should obtain evidence that management acknowledges its responsibility for
the fair presentation of the financial statements and has approved the financial statements.

Evidence may be in the form of minutes of meetings of the board of directors, written
representation from management or a signed copy of the financial statements.

The auditor should obtain written representations from management on matters material
to the financial statements when other audit evidence does not exist.

Representations by management cannot be a substitute for other audit evidence that the
auditor could reasonably expect to be available. If the auditor is unable to obtain
sufficient audit evidence regarding a material matter and such evidence is expected to be
available, this will constitute a limitation in scope of the audit, even if a representation
from management has been received.

The auditor should include in audit working papers evidence of managements

representations in the form of a summary of oral discussions with management, however
written representations constitute better audit evidence.

A representation letter is commonly used it should be addressed to the auditor, contain

specified information and be appropriately dated and signed. The date should be the
same as the date of the audit report. It should be signed by the members of management
who have primary responsibility for entity and its financial aspects (Ordinarily the senior
executive officer and the senior financial officer).

If the management refuses to provide a representation that the auditor considers

necessary, this constitutes a scope limitation and the auditor should express a qualified
opinion or a disclaimer of opinion.

6-23
AS- 23- Going Concern

When planning and performing audit procedures and in evaluating the results thereof, the auditor
should consider the appropriateness of the going concern assumption underlying the preparation
of the financial statements.
The entitys continuance as a going concern for the foreseeable future, generally a period
not to exceed one year after period end, is assumed in the preparation of financial
statements in the absence of information to the contrary.
The auditor should consider the risk that the going concern assumption may no longer be
appropriate
Indications of the same include:
- net liability or net current liability position
- fixed term borrowings approaching maturity without prospects of renewal or
repayment or excessive reliance on short term borrowings to finance long term assets
- adverse key financial ratios
- substantial operating losses
- inability to pay creditors on due dates
- loss of key management without replacement
- loss of a major market or principal supplier
- pending legal proceedings which could result in large payments
The auditor should carry out procedures to resolve doubt over the companys ability to
continue in operation for the foreseeable future.

Such procedures include:

- analyse and discuss cash flow, profit and other relevant forecasts
- review events after the period end
- analyse and discuss the latest interim financial statements
- review terms of loan agreements and ensure none have been breached
- refer to minutes of directors and shareholders meetings
- inquire of the entitys lawyer regarding litigation and claims
- confirm the existence, legality and enforceability of arrangements to provide or
maintain financial support with related and third parties and assess the financial
ability of such parties to provide additional funds
If in the auditors judgement, the going concern assumption is appropriate because of
mitigating factors, the auditor should consider whether such plans need to be disclosed in
the financial statements. If adequate disclosure is not made, the auditor should express a
qualified or adverse opinion.
If, in the auditors judgement, the going concern question is not satisfactorily resolved,
the auditor would consider whether appropriate disclosure of such has been made. If
adequate disclosure is made, the auditor should express an unqualified opinion and
modify the auditors report by adding an emphasis of matter paragraph that highlights the
going concern problem by drawing attention to the note in the financial statements.

6-24
 If the results of the inappropriate assumptions used in the preparation of the financial
statements is so material & pervasive as to make the financial statements misleading, the
auditor should express an adverse opinion.

6-25
AS- 25- Audit Materiality

The auditor should consider materiality and its relationship with audit risk when conducting an
audit.

Information is material if its omission or misstatement 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. Thus, materiality provides a threshold or cut-off point rather than being a
primary qualitative characteristic which information must have if it is to be useful.

At the planning stage the auditor establishes an acceptable materiality level so as to detect
quantitatively material misstatements. However, qualitative misstatements need to be
considered as well, for example, failure to disclose an accounting policy.

The auditor needs to consider the possibility of misstatements of relatively small amounts
that, cumulatively, could have a material effect on the financial statements.

The higher the materiality level the lower the audit risk audit procedures are determined
on this basis.

In evaluating the fair presentation of the financial statements the auditor should assess
whether the aggregate of uncorrected misstatements that have been identified during the
audit is material.

If management refuses to adjust the financial statements and the results of extended audit
procedures do not enable the auditor to conclude that the aggregate of uncorrected
misstatements is not material, the auditor should consider the appropriate modification to
the auditors report.

If the auditor concludes that the misstatements may be material, the auditor needs to
consider reducing audit risk by extending audit procedures or requesting management to
adjust the financial statements.

6-26
AS- 28- Initial Engagements Opening Balances

For initial audit engagements, the auditor should obtain sufficient appropriate audit evidence
that:

The opening balances do not contain misstatements that materially affect the current
periods financial statements
The prior periods closing balances have been correctly brought forward to the
current period
Appropriate accounting policies are consistently applied

The auditor may be able to obtain sufficient evidence regarding the opening balances by
reviewing the predecessor auditors working papers.

If the prior periods financial statements were not audited, other procedures must be
adopted:

- Stock: attending a physical stock-take and reconciling it back to the opening

inventory quantities, testing valuation of opening inventory and testing gross profit
and cut-off.

- Fixed assets: investments, long term debts: examining the records underlying the
opening balances.

- Debtors/Creditors: receipts and payments during the period will verify the existence
of the opening balance

If after performing procedures, the auditor is unable to obtain sufficient appropriate audit
evidence concerning opening balances, the auditors report should include qualified
opinion or disclaimer of opinion as appropriate.

If the effect of the misstatement is not properly accounted for and adequately disclosed,
the auditor should express a qualified or an adverse opinion, as appropriate.

If the current periods accounting policies have not been consistently appliedin relation to
opening balances and if the changes has not been properly accounted for and adequately
disclosed, the auditor should express a qualified opinion or an adverse opinion, as
appropriate.

However, if a modification regarding the prior periods financial statements, the auditor
should modify the current auditors report accordingly.

6-27
AS- 30- Knowledge of the Business
In performing an audit of financial statements, the auditor should obtain knowledge of the
clients business sufficient to understand the events, transactions and the practices that, in the
auditors judgement, may have a significant effect on the financial statements or audit report.
Prior to accepting an engagement, the auditor would obtain a preliminary knowledge of
the industry and of the ownership, management and operations of the entity to be audited.
Following acceptance of the engagement, further and more detailed information would be
obtained.
For continuing engagements, the auditor would update and re-evaluate information
gathered previously, including information in the prior years working papers.
Knowledge about the clients business could be obtained from the following sources:
- Publications related to the industry.
- Visiting clients premises and plant facilities.
- Previous experience with the entity and its industry.
- Discussion with clients management.
- Discussion with the internal audit department.
- Financial statements and other reports produced by the industry.
- Manual of accounting and internal control.
Understanding the business and using this information assists the auditor in:
- Assessing inherent and control risk.
- Developing the overall audit plan and the audit program.
- Determining a materiality level.
- Assessing audit evidence to establish its appropriateness and the validity of the
related financial statement assertions.
- Evaluating accounting estimates and management representations.
- Recognising unusual circumstances.
- Considering the appropriateness of accounting policies.
The auditor should ensure that assistants assigned to an audit engagement obtain
sufficient knowledge of the business to enable them to carry out the audit work delegated
to them.
To make effective use of knowledge about the business, the auditor should consider how
it affects the financial statements taken as a whole and whether the assertions in the
financial statements are consistent with the auditors knowledge of the business.

6-28
QUALITY CONTROL REVIEW COMMITTEE:
Chairman:

Mr. Ahmed Dawood Patel

Members:

Mr. Amir Jamal Abbasi

Mr. M. Iqbal Ahmed
Mr. Usman Ghani Akbandi
Mr. Mohammad Basheer
Mr. Mushtaq Ali Hirani
Mr. Majeed Uddin Khan
Mr. Fazal Mahmood
Mr. Aqueel Ebrahim Merchant
Mr. Muhammad Naseem
Syed Mohammad Rehan
Mr. Asad Ali Shah
Mr. Adnan Zaman
Mr. Anis Wahab Zuberi

SUB-COMMITTEE ON AUDIT PRACTICES MANUAL

Chairman:

Mr. Asad Ali Shah

Members:

Mr. Ather Ali

Mr. Hussain Lalani
Mr. Saad Kaliya
Mr. Shafiq Ahmed
Mr. Sharjeel Butt
Mr. Mazhar H. Hameedi
Mr. Nadeem Yousaf Adil