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AUDIT INTERNSHIP REPORT

Hamza Liaqat Rao 20110247

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Note on Audit Firm KPMG

History: summarized history of local firm

KPMG International was formed as a merger in 1987 of the of its leading founding
members Peat Marwick International (PMI) and Klynveld Main Goerdeler (KMG) and their
respective firms. KPMG Taseer Hadi & Co is a partnership of KPMG and an independent firm in
Pakistan.

Services Provided: locally

Audits and Assurance: The firm provides audit services including internal and external audit.
Their course of action is to use KAM (KPMG Audit Methodology) and its six key principles
which are:

 Technical experience.
 Focus
 Involvement
 Insight
 Integrated
 Consistency

The team focuses on true and fair view of the financial statements to avoid any
inaccuracy. Moreover, they also provide audit related services apart from the internal and
external audit which include Financial Statement Review & Compilation, SOX 404 compliance,
Compliance testing, and Reporting for consolidation purposes. (KPMG Accountants
B.V.) KPMG is one of the market leaders due to its audit services as it offers the most
technologically empowered audit named eAudit which provides fully customised electronic
workflows to extend flexibility for the projects
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Tax: KPMG provides effective and efficient tax services to its clients which includes tax
compliance and planning through strategies to help create sustainable long term tax saving. A
wide variety of services are provided in terms of Indirect Tax, International Tax
Services, Merger and Acquisition,Transfer Pricing Solutions, Tax Compliance and
Management, Global Mobility Services, Trade and Customs by the department.

Advisory: This department branches out into four sub-departments namely Management
Consulting, Risk Consulting, Deal advisory and Strategy.
In Management consulting the firm takes three main things into consideration which are
business insights, structural changes and sustainable performance. This also comprises of
Customer and Operations, IT advisory services, People and Change (HR Consultancy), Financial
Management, and Transforming Operations. The firm tries to give the best consultation so that
the implementation for the client is well planned.
In Risk Consulting, the company carries out internal audits to constantly review the risk profile
for anticipated risks and identify any trends to keep the business performance efficient.
Deal Advisory focuses on buying or selling a business, partnerships, and funding or fixing a
business. The firm provides the best strategies to every client through qualitative and quantitative
analysis of the market as well as the dealing business.
The Strategy department’s capabilities include Growth Strategy, Operations and Cost Strategy
as well as Enterprise-wide strategy to lead the business head on for upcoming challenges.

Financial Services: includes banking, insurance and investment management. KPMG makes
sure to maintain trust and transparency with the best recommendations for its clients to achieve a
well sought clientele.

International Affiliations (Summarised history of international firm)

KPMG International is primarily a Swiss Entity and it has a global network of

independent firms affiliated with it all around the world, specifically, in 122 countries including
Pakistan. Taseer Hadi & Co. is part of this international firm through this network.
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Major Clients (local)

 MCB Bank Limited

 Allied Bank Limited
 JDW Group and Sugar Mills
 Nestle
 Quaid-e-Azam Thermal Power (Private) Limited
 PEL
 Orient
 Berger Paints
 Al Buraq International
 Defence Housing Authority
 Fauji Foods
 General Electrics
 National Incubation Center LUMS

Specializations (local)

KPMG specialises in the audit and assurance services provided to the clients. Most of its
revenue is generated from this department and it has been the most profitable one as of yet.
KPMG has provided these services to banks (commercial as well as Islamic banks), Insurance
and takalful companies, Investment management companies (catering towards mutual funds),
development finance institutions, brokerage houses, as well as oil and gas producing and power
generation & distribution companies both in the public and private sector, moreover
multinational chemical and pharmaceuticals companies, telecommunication, cellular phone
operators, various hotels and one of the largest chains of fast food restaurants in the country
and Infrastructure, healthcare and to government owned companies.
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Quaid-e-Azam Thermal Power Ltd. QATPL

Introduction and history of the client:

Quaid-e-Azam thermal power is a public sector unlisted company which was established
by the Government of Punjab. It is owned by the government of Punjab through the energy
department. The company started because of the ongoing energy crisis in Pakistan. It was
established to create and maintain thermal power plants all over Punjab based on 1180 MW
regasified and liquefied natural gas. The company started its first project and installed the first
thermal power plant in Bikki, district Sheikhupura which extends over the area of 578 Kenals.

Under the aegis of Companies ordinance 1984, the company shares have been limited by
the Government of Punjab thus changing its status from private sector industry to public sector
Company which is expanding very fast by initiating more and more thermal power projects.
Since then, the company has hired NesPak as their project consultants and Lahmeyer
international was sub hired for technical purposes. Ernst and young was further hired as legal and
financial advisors and internal auditors for their projects whereas external audit is being carried
out by KPMG Taseer Hadi and Co. The company has following goals:

 The company intends to launch the biggest ever utility power plant based on
thermal energy at the cheapest cost.
 It aims to start various energy programs specially related to thermal energy.
 It also aims to initiate numerous projects based on thermal energy generation
power plants.

Products and Services:

Quaid-e-Azam thermal power Ltd. as indicated in the name, provides:

 Energy through projects on renewable energy resources.

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 Energy largely through thermal energy power plants.

 Various thermal energy programs to provide electricity at the lowest cost
 The thermal energy power plant has generated 5,616,915,800 kWh electricity
units since COD.

Ownership structure and Organization chart:

QATPL is owned by the Government of Punjab through energy department under aegis
of companies’ ordinance, 1984. However, the company has a very complex organizational
structure with downward trajectories. It’s a large scale industry with so many departments
including the head business office, production plant and various other departments therefore its
chart stems out so much. Generalized organizational hierarchy of public unlisted company has
been attached below with the detailed organizational information of its employees.
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Industry Analysis:

Pakistan electricity sector has been on a roller coaster and currently it’s a developing
market. Approximately 42 independent power generators are currently working and producing
power in Pakistan. The country has had a severe outage of energy since the 2007 crisis which
was followed by a lot of blackouts and load shedding. Until 2016, Pakistan has been facing
severe downfalls as the government was unable to create a balance between the demand and
supply of the people. There have been a lot of factors which added to the shortfall of power and
caused energy crisis in Pakistan which include;
 Political instability
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 Rising demands for energy

 Lack of efficiency
 Provincial and federal agencies being the largest consumers of electricity didn’t pay
the bills most often.
 Lack of resources
 Rampant corruption and unauthorized connections.
To overcome such issues, government has been taking some initiatives by starting out
projects and installing power plants. The private sector was also appreciated to enter the market
because of the growing shortage of the energy. Total capacity according to 2017 reports of these
production plants was as follows;

Total installed capacity: 25000 MW

Average Demand: 17000 MW

Since the industry is developing, therefore there’s a lot of scope in it. Nepra has
issues separate tariffs to all the power plants. There are no clear competitors because all the
power generations plants have tariffs from Nepra and operate on fixed defined terms with no
market share. Halmore Power Generation Company limited and Orient generation company are
two of the prominent competitors of my client but they both have separate tariffs.
Therefore, Quaid e azam thermal power limited is a stable business with a
foreseeable future.

Associated concerns (Related parties):

Since, Quaid e azam thermal is owned by the government of Punjab through the
energy department, therefore, all the entities related to the government of Punjab are the
associated concerns. These include:
 Quaid e azam Solar
 Punjab Thermal Limited
 Bank of Punjab
 Directorate General Public Relations DGPR
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Major revenues and expenses:

Since, it’s a power plant which produces energy in form of electricity therefore its
only source of revenue is through retailing electricity to federal or provincial agencies, business
entities, industries and for domestic household purposes.
Materiality as calculated through the KPMG’s audit strategy was Pkr. 455730000 (455 million).
Considering, this materiality, several risky areas were highlighted, and control and substantive
testing were completed.
Major expense areas were then again very few and specific to the industry because
of the nature of production. Main expense was of Gas bills to run the power generators. Other
expenses were administration bills and plant maintenance expenses.

Market position and future prospects:

The company has no going concern issues and can run for a foreseeable future.
Moreover, it has 15% return on equity which keeps the status of the company as a stable
business.

KPMG-The Audit
Audit Methodology:
KPMG Taseer Hadi & Co. like its parent international firm follows the International
Standard on Auditing (ISAs), the International Standard on Review Engagements (ISREs), the
International Standards on Assurance Engagements (ISAEs) and the International Standards on
Related Services (ISRSs) issued by the International Auditing and Assurance Standards Board
(IAASB) [an independent body of the International Federation of Accountants (IFAC)] and the
Technical Releases issued by the Institute of Chartered Accountants of Pakistan (ICAP). Apart
from this, KPMG Taseer Hadi & Co. follows an internationally accepted strategy named as
KPMG Audit Manual (KAM). KAM is widely used in all the KPMG partner firms. Moreover,
KPMG has a strict system for ensuring integrity and technological advancements are highly paid
heed to, to keep up pace with the fast growing economies. KPMG has a specific methodology
which remains unchanged over the course of time and has set defined rules and IOR makes sure
that KPMG follows this methodology.
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Generic audit methodology consists of following four phases;

 Client Acceptance and engagement

 Planning and Selecting the Audit Team
 Control Testing and Completion of the audit
 Evaluation, Judgement and Audit Report

Client Acceptance and engagement:

There is a standard procedure that the firm undergoes to accept and get engaged with the
client. As soon as the client approaches the firm through the engagement letter, the audit risk
committee starts working on risky areas in their financials and in the process, they start inquiring
the BOD and the management some queries related to the risks associated with their business.
The audit risk committee comprises of competent individuals with immense experience to go
through the financials with professional skepticism and find the material misstatements in the
process.

In case of Quaid e Azam thermal power limited, the materiality was calculated by the
software to be 455 million Pakistani rupees. As QATPL was already the client of KPMG
therefore, the committee had already enough information but still they followed the procedure to
cater for the current ongoing conditions.

Planning and Selecting the Audit Team:

The firm has a very comprehensive way of selecting the audit team for the given audit.
The firm checks out the individuals with the skillset and knowledge of the given field. The
manager is selected on this basis and so is his team. The team consists of 8-10 individuals with
one supervisor. They have diverse skillset for different areas of the financials.

Planning is a very significant process which is carried out right from the start and it
initiates with the audit timeline. The auditors have meet ups with the internal auditors and the
BOD to discuss about the materially misstated and risky areas. The client provides with all the
data required for the audit which also includes the formal letter by the management.
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Control Testing and Completion of the audit:

Control testing and transaction testing are two types of tests which mark this phase of
audit as the most crucial. In this phase, the data provided by the client is given the due
concentration and considering the materiality, the materially misstated areas of higher risks are
assessed and tests are performed on them. Moreover, working papers for each line item of the
balance sheet and income statements are made. In the end, these working papers are reviewed by
the manager and eventually the accounts are made and delivered to the client based on these
working papers for the given period of the time.

Evaluation, Judgement and Audit Report:

After the completion of the audit, the audit team devises a comprehensive audit report
and gives modified, unmodified or the adverse opinion and a management letter consisting of
various management problems and material misstatements.

Application of IT in audit:

KPMG Taseer Hadi & Co. has access to all the IT softwares which the KPMG
international owns and uses worldwide. The firm has access to various Computer aided audit
technologies CAAT’s such as:

 Excel
 IDEA Interactive Data Extraction and Analysis
 KSP KPMG Sampling Plan
 eAudit
 KAM KPMG Audit Manual (methodology)

Excel:

Excel has a lot of role in conducting the audit. All the work papers are made on excel
using excel formulas, references and techniques. Excel aids in a lot of processes such as sorting,
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filtering out the required item or amount in the large data and calculate numbers amounting to
trillions.

IDEA Interactive Data Extraction and Analysis:

Audit is a risk based process and with the evolution and growth of businesses, it has become even
riskier, so to cater to that a lot of new technologies have been introduced. IDEA is used by KPMG for the
data analysis and aging analysis. It is used to filter out the duplicate transactions, fake invoices and the
invoices that are repeating. Our audit team also used this while completing the audit of QATPL.

KSP KPMG Sampling Plan:

Sampling is an integral part and is carried out for the items being audited. You take the
population and divide it by number of transactions to find out materiality. Randomness of
sampling helps in finding out whether the sample is right or materially misstated.

eAudit:

eAaudit is an in house built database which is also known as the digital file used by
KPMG to store all kinds of information on it from the start till the end. The information can be
stored, accessed and is readily available at any point in time.

Note on Areas assigned:

Quaid e Azam thermal power limited had a year end of June 2018 and I was assigned in
the 2nd batch of internship so there were no stock or cash counts at that time. The areas assigned
to me were:

 Vouching
 Cash & bank
 Transaction testing
 Working papers: PPE, Intangible assets, Prepayments, long term advances, Long term
deposits
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 General ledger

I had to ensure the accuracy, completeness, occurrence, classification, cutoff, and verification of
each transaction. In order to do so I had to collect the data from the Finance Dept of the Quaid e
Azam thermal power limited.

My senior manager had also identified areas of risk and calculated a control frequency. I along
with the trainees were allotted work based on risk assessed. According to the control frequency it
was decided what the degree of control testing and substantive testing would be taken up in order
to identify errors and misstatements in line items. Specific to this, the following were the
accounts identified with substantial risk:

 PPE
 Intangibles
 Prepayments
 Long-term advances

These were also the accounts assigned to me and my fellow trainees where we had to ensure
their completeness and accuracy during the assignment. In order to carry these tasks out I was
provided with the General Ledger for the year ended June 2018.

Steps Performed:

Our work constituted for both controls testing and substantive testing. We had to go through
client’s documents. We also had to perform walkthrough technique for some accounts and
transactions as well. Our main purpose was to find whether there existed any material
misstatement or not.

During my audit at QATPL, I performed the following steps

General Ledger and account handling:

General ledger is a set of numbered accounts prepared by the company to keep track of
the entity’s financials. It shows comprehensive accounts for each item and is used to prepare
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entity’s financial reports. It has a unique way of summarizing the assets, liabilities, equity,
expenses and revenue. It’s the ultimate database and source of information provided by the client
to the auditors to conduct the audit apart from the supporting documents. I learnt to manage the
ledger and to cross check several transactions and their double entries.

Transaction Testing; bank statement tracing, supporting documents, vouching, invoices:

Bank Statement tracing:

For the given work, I had to reconcile all the transactions from the bank statement and highlight
them.

Working Papers PPE, Intangibles and prepayments:

With the help of my seniors, I completed the task of making the working papers. A pre-
existing format was already available which I used for PPE, intangibles, prepayments. The first
page of the working paper is called main lead which consists of title and the balances of current
and prior period. This allowed me to check if the audit work had been performed by the team.
The next pages were according to the type of each account under work with their supporting
documents.

For PPE I was one of those who were assigned to work to check for the assertion of
completeness and accuracy. To ensure this, I had to check with the Fixed Asset Register of the
Company made available to us by the management and compare it with the line items reported.
To verify the opening balances of existing PPE I used Ledger balances to cross check the
numbers. I also had to attach supporting of each document by embedding the pdf into the excel
workbook.

For intangibles, I was assigned to check for existence. For that it was required to examine
documentation. As this is a complex area, I was not alone but was only an observer while the
procedures were carried out by my seniors. The senior requested for documents relating to
patents of the company and cross-validated the information.
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For Prepayments, it was mentioned very specifically by my manager how it is an area where
finances can be manipulated easily through capitalizing expenses that should have been expensed
instead. I worked very cautiously, to ensure that I checked the following:

 amount
 name of supplier
 invoice number of supporting document

This allowed me to verify whether prepaid expenses existed or not.

Sampling Technique:

Sampling is an integral part and is carried out for the items being audited. You take the
population and divide it by number of transactions to find out materiality. Randomness of
sampling helps in finding out whether the sample is right or materially misstated. It was done
through KSP (KPMG Sampling Plan) and MSU (Monetary Sampling Unit) IDEA.

Learning Experiences
My internship was a wholesome experience and I feel that it was not only important to
gain experience but also I learnt a great deal of skills.

Management Skills
This internship honed me to be flexible given any situation. I learned a lot of lessons over
the course of time which I believe will help me not only in the job environment but apart from
that in my personal life too. I interacted with clients and heads of the companies in the process of
collecting the supporting documents which taught me the mannerism shown in professional
meetings. I had to work with people I hadn’t ever met before which was new for me and gave me
an opportunity to enhance my communication skills. The most challenging thing about the
internship was the working hours as we had to work later than the stipulated time which gave me
a lot of practice on how to manage things on my own. I developed a professional as well as
personal relationship with the team as well as the supervisor which made me strengthen my
temperament which will help me later in life when I actually start working. I had developed a
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proper routine during the internship, which included daily tasks which were only my
responsibility and I had to complete them without anyone reminding me.

Presentation skills
Soft skills like these are the most important ones. I developed a great deal of confidence
by interacting with clients and presenting in front of a whole team without a well prepared script
at all.

Interpersonal skills
In the process, I had to meet a lot of client officials ranging to a whole hierarchy. I had to
deal with the kitchen servants as well as the CEO of the company therefore, I developed strong
interpersonal skills which made my communication skills even better in the process.

Organisational behaviour
As students we do not have an idea about the real job environment and how the
explanations in the textbook is completely different from the actual work done. Personally, I’ve
been thinking quite low about the firm KPMG. They are fostering a culture in which you have to
complete the task on hand in a very short span which is humanly impossible.

Time management skills

I learned a great deal of time management in the professional context as I had to be
punctual every day.
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Works Cited
http://qathermal.com/wp-content/uploads/2016/04/QATPL-
Annual-Report-2017.pdf
https://qathermal.com/
https://home.kpmg.com/pk/en/home.html