COURSE OUTLINE
Cont’d P/G 2
(-2-)
- Balance Sheet
The assets and liabilities shall be classified in the following order :-
i) Fixed Assets.
ii) Long Term Investments.
iii) Long Term Loans and Advances.
iv) Long Term Deposits, Prepayments and Deferred Costs.
v) Current Assets.
vi) Share Capital and Reserves.
vii) Surplus on Revaluation of Fixed Assets.
viii) Redeemable Capital.
ix) Debentures and Long Term Loans.
x) Liabilities against Assets Subject to Finance Lease.
xi) Deferred Liabilities.
xii) Long Term Deposits.
xiii) Current Liabilities.
xiv) Contingencies and Commitments.
- Profit & Loss Account
The income and expenditure shall be disclosed in the following order:
i) The gross turnover and deductions therefrom in respect of commission,
brokerage, discount.
income from various sources.
ii) Value of stock in trade as at the commencement and end of the financial
year.
iii) Expenditure on
* Stores and spares consumed.
* Fuel and power.
* Salaries, wages and benefits.
* Rent, rates & taxes.
* Insurance.
* Repairs & maintenance.
* Patents, copyrights, trade marks, designs, royalties and technical
assistance.
iv) Auditors remuneration.
v) Other expenses.
vi) Amount provided for depreciation.
vii) Various losses / expenditure including taxation.
vii) Proposed dividend.
Cont’d P/G 3
(-3-)
3) CODE OF CORPORATE GOVERNANCE
(Text of the code is annexed)
The Securities and Exchange Commission of Pakistan for the purpose of establishing
a framework of good corporate governance, directed the Stock Exchanges to insert
into their listing regulations the Code of Corporate Governance (The Code).
Cont’d P/G 4
(-4-)
Cont’d P/G 5
(-5-)
Cont’d P/G 6
(-6-)
Cont’d P/G 7
(-7-)
Cont’d P/G 8
(-8-)
WD = Withdrawn
Cont’d P/G 9
(-9-)
WD = Withdrawn
Cont’d P/G 10
(-10-)
Prepared by : Date
Reviewed by : Date
AUDITORS REPORT :
Cont’d P/G 11
(-11-)
FINANCIAL STATEMENTS :
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.
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)
Cont’d P/G 13
(-13-)
Each section of this checklist should be completed by the supervising senior / manager at the end of
each phase of the audit, prior to partner's review.
YES/NO/ INITIAL &
N.A. 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
conclusion 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 referred 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 client's action recorded?
6. Has a management letter detailing weakness of accounting
and internal control systems in respect of the current visit
been drafted? Have client's 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 et c. been obtained? If not, is the summary of the
same documented in the execution file & other alternative
procedures been applied?
11. Has final draft initialed 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 initialed 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 firm's
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 auditor's 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 firm's 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 ?
Cont’d P/G 15
(-15-)
CLIENT : Initial
Date
YEAR END : COMPLETED BY : ______
REVIEWED BY : _______
14. SUBSEQUENT EVENTS REVIEW CHECKLIST
Yes/No N.A.
(Any note on
separate
sheets)
EVENTS DISCOVERED UPTO SIGNING OF AUDIT REPORT
1. Adjustable Events :
Cont’d P/G 16
(-16-)
B) Have under noted possible events been discussed with client's officials
and disclosed in accounts in compliance with IAS-10?
Cont’d P/G 17
(-17-)
CLIENT : Initial
Date
YEAR END : COMPLETED BY : ______
REVIEWED BY : _______
15. GOING CONCERN REVIEW CHECKLIST
1. Have the following points been discussed with client and observed Yes/No N.A.
during the course of audit ? (Any note on
separate
sheets)
A) Indication for Company may not be able to pay its debts :
- Under capitalization.
B.i. Indications for company about the continuation of business & lead
inability of paying debts (Internal Problems) :
Cont’d P/G 18
(-18-)
- Uneconomic commitments.
- Political risk.
2. Have the sufficient evidences been obtained for above said points?
(-1-)
COURSE OUTLINE
Cont’d P/G 2
(-2-)
2. FIFTH SCHEDULE OF THE COMPANIES ORDINANCE, 1984
(Text of the fifth schedule is annexed)
- Balance Sheet
The assets and liabilities shall be classified in the following order :
i) Fixed Assets.
ii) Long Term Investments.
iii) Long Term Loans and Advances.
iv) Long Term Deposits, Prepayments and Deferred Costs.
v) Current Assets.
vi) Share Capital and Reserves.
vii) Surplus on Revaluation of Fixed Assets.
viii) Redeemable Capital.
ix) Debentures and Long-Term Loans.
x) Liabilities against Assets subject to Finance Lease.
xi) Defend Liabilities.
xii) Long Term Deposits.
xiii) Current Liabilities.
xiv) Contingencies and Commitments.
Cont’d P/G 3
(-3-)
BALANCE SHEET :-
* Long-Term Investments
Cont’d P/G 4
(-4-)
- In respect of other loans and advances, the name of the borrower and
terms of repayment together with the particulars of collateral security
held, if any.
* Current Assets.
- In respect of trade debts, loans and advances due for repayments within
a period of twelve months from the date of the balance sheet and other
receivables, the maximum amount of debts at any time since the date of
incorporation or since the date of the previous balance sheet, whichever
is the later. Such maximum amounts to be calculated by reference to
month-end balance.
* Other expenses, showing separately every material item and the nature of each
such item. In the case of donations, where any director or his spouse has
interest in the donee, the names of such directors, their interest in the donee
and the names and address of all donees.
Cont’d P/G 5
(-5-)
* In the case of sale of fixed assets otherwise than through a regular auction,
made to chief executive or a director or managing agent or an executive or a
share-holder holding not less than ten percent of the voting shares of the
company or any associated undertaking, irrespective of the value of assets, and
in the case of any other person, if the book value of the asset or assets exceeds
in the aggregate five thousand rupees, particulars of the assets and in aggregate
(a) cost or valuation, as the case may be (b) the book value, and (c) the sale
price and mode of disposal (e.g. by tender or negotiation) and the particulars
of the purchaser.
* Disclosure in respect of transactions with associated undertakings.
The Section 234(3) of the Companies Ordinance, 1984 requires that every listed
company to comply with certain International Accounting Standards for the purpose
of preparing their annual accounts. The C.O. neither requires nor forbid the unlisted
public companies and private limited companies to comply with these IASs.
However, the preface to statements of IASs makes it very clear that IASs apply to the
published financial statements of every commercial, industrial or business enterprise
irrespective of its corporate and legal status.
Moreover, ICAP and ICMAP, as members have undertaken to support the objective of
IASC (to promote the acceptance and observances of IASs) by using their best
endeavours.
IASC has also does not distinguish between the legal and corporate status of the
companies and as such all companies have to comply with applicable IASs.
However, certain IASs such as IAS-14 "Segment Reporting" and IAS-33 "Earning per
Share" etc. have been specifically formulated for the enterprises whose securities are
publicly traded (listed companies) and as such these IASs shall not be applicable to
unlisted public companies and private limited companies.
(-1-)
AUDIT OF FUNDS
COURSE OUTLINE
1. FUND - DEFINITION
2. PROVIDENT FUND
3. GRATUITY FUND
Cont’d P/G 2
(-2-)
AUDIT OF FUNDS
1. FUND
Fund is defined under Fourth Schedule to the Companies Ordinance, 1984, as "Fund
in relation to any reserve, shall be used only where such a reserve is represented by
specifically earmarked investments or other assets realizable at not less than the
amount of the reserve
2. PROVIDENT FUND
Provident fund is a fund established for the benefit of all permanent employees of an
organization. The fund is being contributed as a Trust and is being managed by the
trustees, whose decision shall be final and binding upon all the members.
Trustees
Members
All the employees of the company being permanent employees, who have opted for
the membership of fund, are called members of the fund.
Concept
Every member contributes every month to the Fund an amount equal to 10% or such
other percentage as may be prescribed in the Provident Fund Rules, of his fixed
monthly salary. The contribution of each member is being deducted at the time of
payment of such monthly salary and being paid over to the fund.
The organization at the end of each month contribute and pay to the Fund a sum
equal to the aggregate contributions of all the members during the month.
Cont’d P/G 3
(-3-)
Recognized / Unrecognized
A Provident Fund Scheme which is registered under Part I of the Sixth Schedule to
the Income Tax Ordinance, 2001 shall be treated as recognized Provident Fund
Scheme. A Provident Fund Scheme which is not so registered, shall be treated as
unrecognized Provident Fund.
When a trust has been created by a company with respect to any Provident Fund, the
company shall be bound to collect the contributions of the employees concerned and
pay such contributions as well as its own contributions, to the trustees within fifteen
days from the date of collection, and thereupon, the obligation shall devolve on the
trustees and shall be discharged by them instead of the company.
- Government Securities : or
- In bonds, redeemable capital, debt securities or instruments issued by
Pakistan Water and Power Development Authority and in listed
securities subject to the conditions as may be prescribed by SECP.
Where it is decided to make investment, out of the provident fund constituted for the
employees of a company, in securities of the companies listed on any stock exchange
in Pakistan, such investment shall be subject to the following conditions, namely :-
Cont’d P/G 4
(-4-)
3. GRATUITY FUND
Gratuity fund is a fund establisted for the benefit of all employers / workers,
fulfilling certain conditions of an organization. The fund is being constituted
as a Trust and being managed by the trustees, whose decision shall be final
and binding upon all the members.
Trustees
Members
All the employees of the company being eligible employees, who have
opted for the membership of fund, are called members of the fund.
Cont’d P/G 5
(-5-)
Rate of Gratuity
The rate of gratuity is thirty (30) days wages for every completed year of
service or for any period in ecess of six months in the same establishment.
Hence for a period of service which is six months or less no gratuity is
payable.
Recognized / Unrecognized
A Gratutity Fund Scheme which is registered under Part III of the Sixth
Schedule to the Income Tax Ordinance, 2001 shall be treated as recognized
Gratuity Fund Scheme. A Gratuity Fund Scheme which is not so registered,
shall be treated as unrecognized Gratutity Fund.
(-1-)
COURSE OUTLINE :
Cont’d P/G 2
(-2-)
International Accounting Standards - IAS - 18 to IAS 30
SUBJECT MATTER
IAS – 18 Revenue
IAS – 19 Employee Benefits
IAS – 20 Accounting for Government Grants and Disclosure
of Government Assistance.
IAS – 21 The Effects of Changes in Foreign Exchange Rates.
IAS – 22 Business Combinations
IAS – 23 Borrowing Costs
IAS – 24 Related Party Disclosures
IAS – 26 Accounting and Reporting by Retirement Benefit
Plans.
IAS – 27 Consolidated Financial Statements and Accounting
for investments in Subsidiaries.
IAS – 28 Accounting for investments in Associates
IAS – 29 Financial Reporting in Hyperinflationery Economies.
IAS – 30 Disclosures in the Financial Statements of Banks and
Similar Financial Institutions.
Cont’d P/G 3
(-3-)
♦ Objective :
To prescribe the accounting treatment of revenue arising from certain types of
transactions and events.
♦ Scope :
This standard should be applied in accounting for revenue arising from the
following transactions and events.
♦ Definition :
'Revenue' is the gross inflow of economic benefits during the period arising in the
course of the ordinary activities of an enterprise when those inflows result in
increases in equity, other than increases relating to contribution from equity
participants.
'Fair Value' is the amount for which an asset could be exchanged or a liability
settled, between knowledgeable, willing parties in an arm's length transaction.
♦ Measurement of Revenue :
Revenue should be measured at the fair value of the consideration received or
receivable.
Fair value is the market value taking into account the amount of any trade
discount and relate allowed by the enterprise.
When goods or services are exchanged or swapped for goods or services which
are of a similar nature and value, the exchange is not regarded as a transaction
which generates revenue. This is often the case with commodities like oil or milk
where suppliers exchange or swap inventories in various locations to fulfill
demand on a timely basis in a particular location.
When goods are sold or services are rendered in exchange for dissimilar goods or
services, the exchange is regarded as a transaction which generates revenue. The
revenue is measured at the fair value of the goods or services received, adjusted
by the amount of any cash or cash equivalents transferred.
Cont’d P/G 4
(-4-)
Revenue Recognition
- Sale of Goods
When
a) the enterprise has transferred to the buyer the significant risks and
rewards of ownership of the goods.
- Rendering of Services
When
c) the stage of completion of the transaction at the balance sheet date can
be measured reliably; and
d) the costs incurred for the transaction and the costs to complete the
transaction can be measured reliably.
Cont’d P/G 5
(-5-)
Cont’d P/G 6
(-6-)
EMPLOYEE BENEFITS
♦ Objective :
To prescribe the accounting and disclosure for employee benefits.
♦ Scope :
This standard should be applied by an employer in accounting for employee
benefits.
♦ Definition :
Employee benefits include :
(-7-)
All other post employment benefit plans are defined benefit plans. Defined
benefit plans may be unfunded, or they may be wholly or partly funded.
Accounting by an enterprise for defined benefit plans involves the following
steps.
b) discounting that benefit using the projected unit credit method in order to
determine the present value of the defined benefit obligation and the current
service cost.
e) where a plan has been introduced or changed, determining the resulting past
service cost; and
f) where a plan has been curtailed or settled, determining the resulting gain or
loss.
a) the present value of the defined benefit obligation at the balance sheet date;
b) plus any actuarial gains less any actuarial losses not recognized;
d) minus the fair value at the balance sheet date of plan assets (if any) out of
which the obligations are to be settled directly;
e) a reconciliation showing the movements during the period in the net liability
(or asset) recognised in the balance sheet;
f) the total expense recognised in the income statement for each of the following,
and the line items of the income statement in which they are included :
Cont’d P/G 8
(-8-)
(-9-)
Cont’d P/G 10
(-10-)
♦ Disclosure :
The following matters should be disclosed :
a) the accounting policy adopted for government grants, including the methods of
presentation adopted in the financial statements;
Cont’d P/G 11
(-11-)
♦ Objective :
The principal issues in accounting for foreign currency transactions and foreign
operations are to decide which exchange rate to use and how to recognise in the
financial statements the financial effect of changes in exchange rates.
♦ Scope :
This standard should be applied :
♦ Definition :
- Foreign Operation is a subsidiary, associate, joint venture or branch of
the reporting enterprise, the activities of which are based or conducted
in a country other than the country of the reporting enterprise.
- Closing rate is the spot exchange rate at the balance sheet date.
Cont’d P/G 12
(-12-)
♦ Initial recognition of foreign currency transaction :
Should be recognised by applying to the foreign currency amount the exchange
rate between the reporting currency and the foreign currency at the date of the
transaction.
a) foreign currency monetary items should be reported using the closing rate;
♦ Disclosure :
1. An enterprise should disclose :
Cont’d P/G 13
(-13-)
a) the amount of exchange differences included in the net profit or loss for the
period.
2. When the reporting currency is different from the currency of the country in
which the enterprise is domiciled the reason for using a different currency
should be disclosed. The reason for any change in the reporting currency
should also be disclosed.
Cont’d P/G 14
(-14-)
♦ Definition :
A 'business combination' is the bringing together of separate enterprises into one
economic entity as a result of one enterprise merging with or obtaining control
over the net assets and operations of another enterprise.
'Fair value' is the amount for which an asset could be exchanged or a liability
settled between knowledgeable, willing parties in an arm’s length transaction.
♦ Acquisition :
In virtually all business combinations, one of the combining enterprises obtains
control over the other combining enterprise, thereby enabling an acquirer to be
identified. Control is presumed to be obtained when one of the combining
enterprises acquir morethan one half of the voting rights of the other combining
enterprise unless, in exceptional circumstances, it can be clearly demonstrated
that such ownership does not constitute control.
Cont’d P/G 15
(-15-)
♦ Uniting of Interest :
In exceptional circumtances, it may not be possible to identify an acquirer. Instead
of a dominant party emerging, the shareholders of the combining enterprises join
in a substantially equal arrangement to share control over the whole, or effectively
the whole, of their net assets and operations. In addition, the managements of the
combining enterprises participate in the management of the combined entity. As a
result, the shareholders of the combining enterprises share mutually in the risks
and benefits of the combined entity. Such a business combination is accounted for
as uniting of interests.
Cont’d P/G 16
(-16-)
♦ Objective :
To prescribe the accounting treatment for borrowing costs. This standard
generally requires the immediate expensing of borrowing costs. However, the
standard permits as an allowed alternative treatment, the capitalization of
borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset.
♦ Definition :
"Borrowing Costs" are interest and other costs incurred by an enterprise in
connection with the borrowing of funds.
"A qualifying asset" is an asset that necessarily takes a substantial period of time
to get ready for its intended use or sale.
- Manufacturing plants;
- investment properties
Cont’d P/G 17
(-17-)
♦ Disclosure :
Benchmark Treatment
The financial statements should disclose the accounting policy adopted for
borrowing costs.
Cont’d P/G 18
(-18-)
♦ Scope :
This standard should be applied in dealing with related parties and transactions
between a reporting enterprise and its related parties.
This standard deals only with those related party relationships described in.
b) associates ;
♦ Definition :
"Related Party", parties are considered to be related if one party has the ability to
control the other party or exercise significant influence over the other party in
making financial and operating decision.
(-19-)
♦ Disclosure :
1. Related party relationship where control exists should be disclosed
irrespective of whether there have been transactions between the related
parties.
2. If there have been transactions between related parties, the reporting enterprise
should disclose the nature of the related party relationships as well as the types
of transactions and the elements of the transactions necessary for an
understanding of the financial statements.
Cont’d P/G 20
(-20-)
♦ Scope :
This standard should be applied in the reports of retirement benefits plans where
such reports are prepared.
♦ Definition :
'Retirement benefit plan' are arrangements whereby an enterprise provides
benefits for its employees on or after termination of service (either in the form of
an annual income or as a lump sum) when such benefits, or the employer's
contributions towards them, can be determined or estimated in advance of
retirement from the provision of a document or from the enterprise's practices.
'Defined contribution plans' are retirement benefits plans under which amounts to
be paid as retirement benefits are determined by contributions to a fund together
with investment earnings thereon.
'Defined benefit plans' are retirement benefit plans under which amounts to be
paid as retirement benefits are determined by reference to a formula usually based
on employees' earning and / or years of service.
a) a description of significant activities for the period and the effect of any
changes relating to the plan, and its membership and terms and conditions;
Cont’d P/G 21
(-21-)
If an actuarial valuation has not been prepared at the date of the report, the most
recent valuation should be used as a base and the date of the valuation disclosed.
Cont’d P/G 22
(-22-)
♦ Disclosure :
The report of a retirement benefit plan, whether defined benefit or defined
contribution, should also contain the following information.
c) a description of the plan and the effect of any changes in the plan during the
period.
The report of a retirement benefit plan contain a description of the plan, either as
part of the financial information or in a separate report. It may contain the
following :
g) changes in items (a) to (f) during the period covered by the report.
Cont’d P/G 23
(-23-)
♦ Scope :
This standard should be applied in the preparation and presentation of
consolidated financial statements for a group of enterprises under the control of a
parent. This standard should also be applied in accounting for investments in
subsidiaries in a parent's separate financial statements.
♦ Definitions :
'Control' is the power to govern the financial and operating policies of an
enterprise so as to obtain benefits from its activities.
'Minority interest' is that part of the net results of operations and of net assets of a
subsidiary attributable to interests which are not owned, directly or indirectly
through subsidiaries, by the parents.
A parent that is a wholly owned subsidiary or is virtually wholly owned, need not
present consolidated financial statements provided, in the case of one that is
virtually wholly owned, the parent obtains the approval of the owners of the
minority interest. Such a parent should disclose the reasons why consolidated
financial statements have not been presented together with the basis, on which
subsidiaries are accounted for in its separate financial statements. The name and
registered office of its parent that publishes consolidated financial statements
should also be disclosed.
Cont’d P/G 24
(-24-)
Control also exists even when the parent owns one half or less of the voting
power of an enterprise when there is :
a) power over more than one half of the voting rights by virtue of an agreement
with other investors;
b) power to govern the financial and operating policies of the enterprise under a
statute or an agreement;
b) accounted for using the equity method as described in IAS-28, Accounting for
investments in associates; or
c) accounted for as available for sale financial assets as described in IAS - 39,
Financial Instruments; Recognition and Measurement.
a) carried at cost;
c) accounted for as available for sale financial asset as described in IAS - 39.
Cont’d P/G 25
(-25-)
♦ Disclosure :
a) in consolidated financial statements, a listing of significant subsidiaries
including the name, country of incorporation or residence, proportion of
ownership interest and, if different, proportion of voting power held;
ii) the nature of the relationship between the parent and a subsidiary of which
the parent does not own, directly or conductly through subsidiaries, more
than one half of the voting power;
iii) the name of an enterprise in which more than one half of the voting power
is owned, directly or indirectly through subsidiaries, but which, because of
the absence of control, is not a subsidiary;
(-26-)
♦ Scope :
This standard should be applied in accounting by an investor for investments in
association.
♦ Definition :
An 'associate' is an enterprise in which the investor has significant influence and
which is neither a subsidiary nor a joint venture of the investor.
♦ Significant Influence :
The existence of significant influence by an investor is usually evidenced in one
or more of the following ways :
Cont’d P/G 27
(-27-)
a) carried at cost;
a) carried at cost ;
b) accounted for using the equity method as described in this standard if the
equity method would be appropriate for the associate if the investor issued
consolidated financial statements; or
c) accounted for under IAS - 39, as an available for sale financial asset or
financial asset held for trading, based on the definition in IAS-39.
♦ Disclosure :
The following disclosures should be made :
(-28-)
a) the fact that the financial statements and the corresponding figures for
previous periods have been restated for the changes in the general purchasing
power of the reporting currency and, as a result, are stated in terms of the
measuring unit current at the balance sheet date;
b) whether the financial statements are based on a historical cost approach or a
current cost approach; and
c) the identity and level of the price index at the balance sheet date and the
movement in the index during the current and the previous reporting period.
Cont’d P/G 29
(-29-)
♦ Scope :
This standard should be applied in the financial statements of banks and similar
financial institutions.
For the purposes of this standard, the term 'bank' includes all financial institutions,
one of whose principal activities is to take deposits and to borrow with the
objective of lending and investing and which are within the scope of banking or
similar legislation. The standard is relevant to such enterprises whether or not
they have the word 'bank' in their name.
♦ Accounting Policies :
In order to comply with IAS - 1, Presentation of Financial Statements, and thereby
enable users to understand the basis on which the financial statements of a bank
are prepared, accounting policies dealing with the following items may need to be
disclosed.
c) the distinction between those transactions and other events that result in the
recognition of assets and liabilities on the balance sheet and those transactions
and other events that only give rise to contingencies and commitments.
d) the basis for the determination of losses on loans and advances and for writing
off uncollectable loans and advances; and
e) The basis for the determination of charges for general banking risks and the
accounting treatment of such charges.
♦ Income Statement :
A bank should present an income statement which groups income and expenses
by nature and discloses the amounts of the principal types of income and
expenses.
Cont’d P/G 30
(-30-)
♦ Balance Sheet :
A bank should present a balance sheet that groups assets and liabilities by nature
and lists them in an order that reflects their relative liquidity.
♦ Assets :
Cash and balance with the central bank;
Treasury bills and other bills eligible for rediscounting with the central bank;
Government and other securities held for dealing purposes;
Placements with, and loans and advances to, other banks;
Other money market placements;
Loans and advances to customers; and
investment securities.
♦ Liabilities :
Deposits from other banks;
Other money market deposits;
Amount owned to other depositors;
Certificates of deposits;
Promissory notes and other liabilities evidenced by paper; and other borrowed
funds.
(-1-)
SUBJECT MATTER
Cont’d P/G 2
(-2-)
ISA-22/IFAC-SM NO-580
MANAGEMENT REPRESENTATIONS
PURPOSE
Signature:
A management representation letter would ordinarily be signed by the members of
management who have primary responsibility for the entity and its financial aspects
(ordinarily the senior executive officer and the senior financial officer) based on the
best of their knowledge and belief.
Cont’d P/G 3
(-3-)
ISA-23/IFAC-SM NO-570
GOING CONCERN
PURPOSE
To establish standards and provide guidance on the auditors responsibility in the audit
of financial statements with respect to the going concern assumption used in the
preparation of the financial statements, including considering management's
assessment of the entity's ability to continue on a going concern.
Financial:
♦ Net liability or net current liability position.
Operating:
♦ Loss of key management without replacement.
♦ Labour difficulties.
Cont’d P/G 4
(-4-)
Others:
♦ Non compliance with capital or other statutory requirements.
AUDITOR'S RESPONSIBILITY
The auditor's responsibility is to consider the appropriateness of management's use of
the going concern assumption in the preparation of financial statements and consider
whether there are material uncertainties about the entity's liability to continue as a
going concern that need to be disclosed in the financial statements. The auditor
considers the appropriateness of management's use of the going concern assumption.
When events or conditions have been identified which may cast significant doubt on
the entity's ability to continue as a going concern, the auditor should:
a) Review management's plans for future action based on its going concern
assessment. Such plans include plans to liquidate assets, borrow money or
restructure debt, reduce or delay expenditures, or increase capital.
c) Seek written representation from management regarding its plans for future
action.
Cont’d P/G 5
(-5-)
If adequate disclosure is made in the financial statements, the auditor should express
an unqualified opinion but modify the auditors report by adding an emphasis of
matter paragraph that highlights the existence of a material uncertainty relating to the
event or condition that may cast significant doubt on the entity's ability to continue as
a going concern and draws attention to the note in the financial statements that
discloses the matters set out in above paragraph.
In extreme cases such as situations involving multiple material uncertainties that are
significant to the financial statements, the auditor may consider it appropriate to
express a disclaimer of opinion instead of adding an emphasis of matter paragraph.
If adequate disclosure is not made in the financial statements, the auditor should
express a qualified or adverse opinion, as appropriate. The report should include
specific reference to the fact that there is a material uncertainty that may cast
significant doubt about the entity's ability to continue as a going concern.
If in the auditors judgment, the entity will not be able to continue as a going concern,
the auditor should express an adverse opinion if the financial statements have been
prepared on a going concern basis.
Cont’d P/G 6
(-6-)
ISA-24/IFAC-SM NO-800
THE AUDITOR'S REPORT ON SPECIAL PURPOSE
AUDIT ENGAGEMENTS
PURPOSE
To establish standards and provide guidance in connection with special purpose audit
engagements including:
GENERAL CONSIDERATION
Before undertaking a special purpose audit engagement the auditor should ensure
there is agreement with the client as to the exact nature of the engagement and the
form and content of the report to be issued.
When requested to report in a prescribed format, the auditor should consider the
substance and wording of the prescribed report and when necessary, should make
appropriate changes to conform to the requirements of this ISA, either by rewording
the form or by attaching a separate report.
(-7-)
If the financial statements prepared on an other comprehensive basis are not suitably
titled or the basis of accounting is not adequately disclosed, the auditor should issue
an appropriately modified report.
In determining the scope of the engagement, the auditor should consider those
financial statement items that are interrelated and which could materially affect the
information on which the audit opinion is to be expressed.
Unless the auditor has expressed an audit opinion on the financial statements from
which the summarized financial statements were derived, the auditor should not
report on summarized financial statements.
Cont’d P/G 8
(-8-)
ISA-25/IFAC-SM NO-320
AUDIT MATERIALITY
PURPOSE
To establish standards and provide guidance on the concept of materiality and its
relationship with audit risk.
DEFINITION
CONSIDERATION OF MATERIALITY
Materiality should be considered by the auditor when:
Cont’d P/G 9
(-9-)
ISA-26/IFAC-SM NO-540
AUDIT OF ACCOUNTING ESTIMATES
PURPOSE
To establish standards and provide guidance on the audit of accounting estimates
contained in financial statements.
Examples are:
♦ Allowances to reduce inventory and accounts receivable to their estimated
realizable value.
♦ Provision to allocate the cost of fixed assets over their estimated useful lives.
♦ Accrued revenue.
♦ Deferred tax.
♦ Provision for a loss from a lawsuit.
AUDIT PROCEDURES
The auditor should adopt one or a combination of the following approaches in the
audit of an accounting estimate:
a) Review and test the process used by management to develop the estimate;
Cont’d P/G 10
(-10-)
ISA-27/IFAC-SM NO-810
THE EXAMINATION OF PROSPECTIVE
FINANCIAL INFORMATION
PURPOSE
Financial information based on assumptions about events that may occur in the future
and possible actions by an enterprise. It is highly subjective and its preparation
requires the exercise of considerable judgment. Prospective financial information can
be in the form of a forecast, a projection or a combination of both.
ACCEPTANCE OF ENGAGEMENT
♦ The nature of the assumptions, that is, whether they are best estimate or
hypothetical assumptions.
(-11-)
PERIOD COVERED
The auditor should consider the period of time covered by the prospective financial
information.
The following are some of the factors that are relevant to the auditor's consideration
of the period of time covered by the prospective financial information:
♦ Operating cycle, for example, in the case of a major construction project the time
required to complete the project may dictate the period covered.
EXAMINATION PROCEDURES
When determining the nature, timing and extent of examination procedures, the
auditor's consideration should include:
b) The accounting policies are clearly disclosed in the notes to the prospective
financial information.
Cont’d P/G 12
(-12-)
c) The assumption are adequately disclosed in the notes to the prospective financial
information.
e) Any change in accounting policy since the most recent historical financial
statements is disclosed, along with the reason for the change and its effect on the
prospective financial information.
♦ When the auditor believes that the presentation and disclosure of the prospective
financial information is not adequate, the auditor should express a qualified or
adverse opinion in the report on the prospective financial information, or
withdraw from the engagement, as appropriate.
♦ When the auditor believes that one or more significant assumptions do not
provide a reasonable basis for the prospective financial information on the basis
of best-estimate assumptions or that one or more significant assumptions do not
provide a reasonable basis for the prospective financial information given the
hypothetical assumption, the auditor should either express an adverse opinion in
the report on the prospective financial information, or withdraw from the
engagement.
(-13-)
ISA-28/IFAC-SM NO-510
INITIAL ENGAGEMENT - OPENING BALANCES
PURPOSE
To establish standards and provide guidance regarding opening balances when the
financial statements are audited for the first time or when the financial statements for
the prior period were audited by another auditor.
For initial audit engagement, the auditor should obtain sufficient appropriate audit
evidence that:
a) The opening balances do not contain misstatements that materially affect the
current period's financial statements.
b) The prior period's closing balances have been currently brought forward to the
current period or, when appropriate, have been restated; and
OPENING BALANCES
Opening balances means those account balances which exist at the beginning of the
period. Opening balances are based upon the closing balances of the prior period and
reflect the effects of:
a) Transactions of prior periods; and
In an initial audit engagement, the auditor will not have previously obtained audit
evidence supporting such opening balances.
AUDIT PROCEDURES
The sufficiency and appropriateness of the audit evidence the auditor will need to
obtain regarding opening balances depends on such matters as:
♦ Whether the prior period's financial statements were audited, and if so whether
the auditor's report was modified.
♦ The nature of the accounts and the risk of misstatement in the current period's
financial statements.
Cont’d P/G 14
(-14-)
♦ The materiality of the opening balances relative to the current period's financial
statements.
♦ If the current period's accounting policies have not been consistently applied in
relation to opening balances and if the change has not been properly accounted
for and adequately disclosed, the auditor should express a qualified opinion or an
adverse opinion, as appropriate.
Cont’d P/G 15
(-15-)
ISA-30/IFAC-SM NO-310
KNOWLEDGE OF THE BUSINESS
PURPOSE
The auditor can obtain a knowledge of the industry and the entity from a number of
sources. For example:
♦ Discussion with people with the entity (for example directors and senior operating
personnel)
♦ Discussion with internal audit personnel and review of internal audit reports.
♦ Discussion with other auditors and with legal and other advisors who have
provided services to the entity or within the industry.
♦ Discussion with knowledgeable people outside the entity (for example, industry
economists, industry regulators, customers, suppliers, competitors).
Cont’d P/G 16
(-16-)
♦ Determining a materiality level and assessing whether the materiality level chosen
remain appropriate.
♦ Assessing audit evidence to establish its appropriateness and the validity of the
related financial statement assertions.
♦ Identifying areas where special audit consideration and skills may be necessary.
♦ Recognizing unusual circumstances (for example, fraud and non compliance with
laws and regulations)
(-17-)
ISA-31/IFAC-SM NO-250
CONSIDERATION OF LAWS AND REGULATIONS IN AN
AUDIT OF FINANCIAL STATEMENTS
PURPOSE
To establish standards and provide guidance on the auditor's responsibility to
consider laws and regulation in an audit of financial statements.
When planning and performing audit procedures and in evaluating and reporting the
results thereof, the auditor should recognize that non compliance by the entity with
laws and regulation may materially affect the financial statements.
An audit is subject to the unavoidable risk that some material misstatements of the
financial statements will not be detected even though the audit is properly planned
and performed in accordance with ISA. This risk is higher with regard to material
misstatements resulting from noncompliance with laws and regulations due to factors
such as.
♦ The effectiveness of audit procedures is affected by the inherent limitations of the
accounting and internal control systems and by the use of testing.
Cont’d P/G 18
(-18-)
♦ Much of the evidence obtained by the auditor is persuasive rather than conclusive
in nature.
The auditor should plan and perform the audit with an attitude of professional
skepticism recognizing that the audit may reveal conditions or events that would lead
to questioning whether an entity is complying with laws or regulations.
In order to plan the audit, the auditor should obtain a general understanding of the
legal and regulatory framework applicable to the entity and the industry and how the
entity is complying with that framework. To obtain the general understanding of laws
and regulations, the auditor would ordinarily.
After obtaining the general understanding, the auditor should perform procedures to
help identify instances of non compliance with those laws and regulations where non
compliance should be considered when preparing financial statements, specifically:
Further, the auditor should obtain sufficient appropriate audit evidence about
compliance with those laws and regulations generally recognized by the auditor to
have an effect on the determinations of material amounts and disclosures in financial
statements. The auditor should have a sufficient understanding of these laws and
regulations in order to consider them when auditing the assertions related to the
determination of the amounts to be recorded and the disclosures to be made.
The auditor should be alert to the fact that procedures applied for the purpose of
forming an opinion on the financial statements may bring instances of possible
noncompliance with laws and regulations to the auditors attention.
The auditor should obtain written representations that management has disclosed to
the auditor all known actual or possible noncompliance with laws and regulations
whose effects should be considered when preparing financial statements.
Cont’d P/G 19
(-19-)
When the auditor believes there may be noncompliance, the auditor should document
the finding and discuss them with management.
Cont’d P/G 20
(-20-)
ISA-32/IFAC-SM NO-710
COMPARATIVES
PURPOSE
To establish standards and provide guidance on the auditor's responsibility to
regarding comparatives.
(-1-)
ACCOUNTING TECHNICAL RELEASES
SUBJECT MATTER
Cont’d P/G 2
(-2-)
RECOMMENDATION
The terms financial statements covers balance sheets, income statements or profit and
loss accounts, cash flow statements or statements of fund flows, notes and other
statement and explanatory material which are identified as being part of the financial
statements. Financial Statements do not, however, include such items as reports by
directors, statements by the chairman, discussion and analysis by management and
similar items that may be included in a financial or annual report.
♦ Investors
♦ Employees
♦ Lenders
♦ Customers
♦ Public
Cont’d P/G 3
(-3-)
Section 230 of the Companies Ordinance, 1984 requires every company to keep
proper books of accounts with respect to a number of items which includes all assets
of the company. Fixed assets comprise a significant portion of a company's assets.
Except for the companies engaged in production, processing, manufacturing or
mining activities to which section 230(1) (2) applies and which under separate
costing rules are required to maintain separate fixed assets records, no guidance is
available for other companies.
RECOMMENDATION
g) Accumulated depreciation.
Cont’d P/G 4
(-4-)
Whether WPPF is to be calculated after or before charging it against the profits of the
year ?
For illustration purpose an example is given here under:
RECOMMENDATION
RECOMMENDATION
Cont’d P/G 5
(-5-)
b) When the potential tax liability is foreseen deferred tax on such sale could
be appropriated from surplus on revaluation.
c) No credit could be taken against the current tax charge from deferred tax
account by way of a claw back because provision for deferred tax for
potential tax liability is intended to meet such liability in case of sale only.
RECOMMENDATION
Fixed assets in a business include assets in use and held with reasonable expectation
of these being used. Depreciation should, therefore, normally be charged on all fixed
assets. Temporarily idle, reserve or stand-by assets should also continue to be
depreciated.
If the assets are persistently idle, there is a need to review the remaining useful lives
of such assets in accordance with IAS 16 Property Plant and Equipment. IAS 16
provides that the useful lives of major depreciable assets or classes of depreciable
assets should be reviewed periodically and depreciation rates adjusted for the current
and future periods if expectations are significantly different from the previous
estimates.
ISSUE
b) Whether on assets used by a company in business or operation of seasonal nature,
depreciation be charged commensurate with the extent of their use in a season?
RECOMMENDATION
With regard to assets used in the operation of seasonal nature, the rates of
depreciation determined initially, impliedly take into account, the useful lives based
on such seasonal operation. The rate and consequently the amount of annual
depreciation so determined should thus not be adjusted further to commensurate with
the length of seasonal operation in an accounting period.
Cont’d P/G 6
(-6-)
TR-12 - DEBT EXTINGUISHMENT
ISSUE
This technical release explains circumstances for an extinguishment of debt, and the
reporting of gains and losses on extinguishment.
a) The debtor pays the creditor and is relieved of all its obligations with respect to
the debt.
b) The debtor is legally released from being the primary obligor under the debt either
judicially or by the creditor and that the debtor will not be required to make future
payments with respect to the debt under any guarantees.
ACCOUNTING TREATMENT
Gains and losses from extinguishment of debt should be included in the
determination of net income and, if material, classified as an extraordinary or unusual
item. This shall apply whether an extinguishment is early or at scheduled maturity
date or late.
Cont’d P/G 7
(-7-)
There is a conflict between IAS 16 and Companies Ordinance, 1984 regarding the
treatment of recognizing increase in carrying amount of assets. The Companies
Ordinance, 1984 in sub-section (2) of section 235 requires that except and to the
extent actually realized on disposal of the assets which are revalued, the surplus on
revaluation of fixed assets shall not be applied to set off or reduce any deficit or loss
whether past, current or future, or in any manner applies, adjusted or treated so as to
add to the income, profit or surplus of the company, or utilized directly or indirectly
by way of dividend or bonus. IAS – 16 in paragraph 37 however provides when an
assets carrying amount is increased as a result of a revaluation the increase should be
credited directly to equity under the heading of Revaluation Surplus. However a
revaluation increase should be recognized as income to the extent that it reverses a
revaluation decrease of the same asset previously recognized as an expense.
RECOMMENDATION
To recognize increase in assets’ carrying amount, the requirement of Companies
Ordinance, 1984 should be followed.
In the first instance, generally the profits are appropriated and transferred to reserve
for issue of bonus share. The reserve is then utilized for issue of capital on
completion of necessary formalities.
Cont’d P/G 8
(-8-)
ISSUE
How the issue of bonus shares should be accounted for by the Issuer and the
Recipient.
RECOMMENDATION
Issuer:
A bonus issue does not give rise to any change in either the Company's assets or its
respective shareholder’s proportionate interest therein. The Company issuing bonus
shares shall account for such shares by transferring from Reserves to Issued Share
Capital an amount equal to the par value of additional shares issued.
In the first instance, generally the profits are appropriated and transferred to Reserve
for issue of Bonus share. The Reserve is then utilized for issue of capital on
completion of necessary formalities.
Recipient:
Capitalization of accumulated profits by the issue of fully paid bonus shares by a
company does not infact change the net worth of that company and by the same token
does not add anything to the assets or income of the recipient shareholder. The
correct treatment of bonus shares, therefore, in the hands of the recipient would be
merely to add to the number of shares it owns without giving any monetary effect in
the accounts either in terms of cost or value thereof as no accretion in fact is taking
place in the hands of the recipient.
RECOMMENDATION
Paragraph 7 of IAS-2 'Inventories states:
" The cost of inventories should comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their present
location and condition".
Excise duty is generally levied at rate fixed per unit, a percentage of value, or on
capacity basis. Irrespective of the basis of computation or time at which the duty is
collected, such duty is in the nature of a tax on production and manufacture of
excisable goods.
RECOMMENDATION
♦ Formation expenses such as preliminary expenses shall be written off during a
period not exceeding five years commencing from the financial year in which the
costs are incurred as provided in paragraph 5(c) of Part II of the Fourth Schedule
to the Companies Ordinance, 1984.
Cont’d P/G
10
(-10-)
♦ Direct project costs such as, invoice costs, import duties etc. should be
capitalized.
♦ Borrowing costs such as financial charges shall be dealt with in accordance with
IAS 23 and provisions of the Companies Ordinance, 1984.
♦ Any revenues including profit on trial run earned during construction period shall
be set off against expenditure incurred during construction period.
RECOMMENDATION
Date of commencement of commercial production is the date when the plant is ready
for the production of intended products in commercially feasible quantities. The cut
off date so established is without regard when the plant actually commences
commercial production. Where the construction of an asset is completed in parts and
each part is capable of being used while construction continues on the other parts,
capitalization of costs for each part should cease as it is completed.
RECOMMENDATION
Book value per share in the equity capital of the company is the amount each share is
worth on the basis of carrying value per balance sheet, prepared in accordance with a
framework of recognized accounting standards.
Book value per share is computed by dividing shareholders equity with the number of
shares issued. Shareholders equity includes:
Cont’d P/G 11
(-11-)
♦ Paid-up capital
♦ Capital reserves
Whether the exchange risk fee paid on foreign currency loans acquired for capital
requirements be capitalized after commencement of commercial production or not.
RECOMMENDATION
Exchange risk fee is incurred in order to eliminate, or reduce substantially, the risk of
loss from changes in exchanges rates. This involves use of forward exchange contract
to establish the amount required at settlement date of transaction.
IAS 23', Borrowing Costs', provides that borrowing costs include exchange
differences arising from foreign currency borrowing to the extent that they are
regarded as an adjustment to interest costs. The exchange risk fee is therefore in the
nature of borrowing costs and its accounting treatment should be in accordance with
IAS 23. 'Borrowing Costs', Accordingly, exchange risk fee incurred by an entity after
commencement of commercial production should be recognized as an expense and
not be capitalized.
Cont’d P/G 12
(-12-)
The matter has been examined by council of the institute and it has been decided to
issue following guidance in this respect:
a) In case the organization is being closed down, all such expenses will have to
be treated as period cost.
c) In case such expenses are treated as period cost then those should be shown
separately as a line item in the profit and loss account with appropriate
disclosure in the notes to the accounts.
d) Such expenses may be treated as deferred cost only when it is probable that
future economic benefits associated with the scheme will flow to the
enterprise and:-
e) These deferred expenses should be amortized over the period the benefits are
expected to accrue restricted to a maximum period of five years including, the
year in which these are incurred and complete disclosure about such treatment
should be made in the notes to the financial statements, until such time the
deferred cost is fully amortized.