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Audit Practice Manual

(Revised)
Volume 2
Audit Practice Manual – Revised

CONTENTS

PRE ENGAGEMENT PHASE 1


1. Prospective Client Acceptance Memorandum 1
2. Existing Client Continuation/ Retention Memorandum 6
Part “A” Client relating matters 6
Part “B” Professional risk related matters 6
Conclusion 7

PLANNING PHASE 8

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3. Suggested Engagement Letter 8


4. Audit Strategy and Planning Document 11
I Client Overview 12
(a) Client History and Background 12
(b) Client Business Objectives and Related Business Strategies 12
(c) Client Business Components 13

II External Business Forces 15


III Strategic Management Process 20
IV Business Control Environment 21
V Computer Information Systems (CIS) 24
VI Financial Reporting Environment 25
VII Critical Audit Areas / Significant Financial Statement Components 27
VIII Involvement of specialists and other parties 31
IX Audit programme overview 34
X Logistical plan 40
XI Management Span 42
XII Audit Materiality 43
5. Control Overview and Risk Assessment Document 45
I Introduction 45
II Risk 45
(a) Control environment 46
(b) Entity’s risk assessment process 50
(c) Information system, and business processes for financial reporting, and
communication 51
(d) Control activities 52
(e) Monitoring of controls 55
6. Fraud Risk Assessment Document 57
I Introduction 57
(a) Fraud 57
(b) Responsibilities 58

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II Discussions with Management 58


(a) Results of enquiries of management 59
(b) Discussions with those charged with governance 60

III Fraud Risk Factors and Response 61


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

IV Procedures when Circumstances Indicate a Possible Misstatement 69


(a) Circumstances that may indicate the possibility of fraud or error 69
(b) Audit procedures 71

V Evaluation and Disposition of Misstatements 71


7. Computer Information Systems Questionnaire 72
I. Level of Dependence the Entity has on Computer Information Systems (include a
list of the entity’s computer information systems) 72
II. Application Controls (ERP, Supply Chain, CRM, Logistics) 73
III. Computer information systems skills and resources 74
VI. Information Security 75
V. Reliability of Computer Information Systems 77
VI. Degree and Rate of Change in Computer Information Systems 80
VII. Dependence on External Computer Processing 81
VIII. Direction and Operation of Computer Information Systems 82
8. General Purpose CIS Checklist 84
I Purpose 84
II Preparation and Staffing 84
III Questions 84
IV Conclusion 85
(a) Organisation and Management Policies 85

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(b) Segregation of Duties 88


(c) Logical Access Controls 91
(d) Physical Access Controls 93
(e) Systems Development and Program Change Controls 94
(f) Business Continuity and Computer Operations 97
(g) User Management e.g. Finance Director / Financial Controller / Chief
Accountant 100

V CIS Control Reliance 102


9. Analytical Review – Ratio Analysis 106
10. Review of Financial Performance of the Client 110
Suggested Format of Financial Performance Review 111
(a) Summary Financial Data Period Ending (Indicate) 111
(b) Profitability of Operations 111
(c) Financial Leverage 111
(d) Asset Turnover 112
(e) Liquidity 112
11. Internal Audit Function Evaluation 113
Section I—Preliminary assessment of the internal audit function 114
Section II—Evaluate and test the work of internal auditing 115
(a) Evaluate 115
(b) Test 116

Section III—Obtaining direct assistance 117


Conclusion 118
12. Using the Work of Another Auditor 119
Section I 120
Professional competence of the other auditor 120
Professional competence of the other auditor 121

Section II - Main areas of judgment 122


(a) Critical audit objectives and significant audit areas 122
(b) Significant features of the year’s results 123
(c) Evaluation of internal control 124

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(d) Errors and exceptions 126


(e) Matters of judgment brought to the partner’s attention 126
(f) Matters giving arise to a qualification in the audit report 127
(g) Other items attesting the accounts / disclosures 127
13. Minimum Hourly Charge Out Rates
For Audit Work By Practicing Members 129
ATR 14 (Revised) 129
14. Staff Planning and Time Allocation 132
15. Time Sheet 135
16. Client Profile 136
17. List of Authorised Signatories 137
18. Notes of Meeting With Client 138
Agenda for Meeting 139
19. Notes of Review of Correspondence File 143
20. Points Forward to Next Year 144
Assess Client Satisfaction and Team Debriefing 145

EXECUTION PHASE 146

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21. General Instructions for Documentation of Audit Execution File 146


22. Sampling 147
I Definition of sampling 147
II Importance of sampling 147
III Risks 147
(a) Appropriateness of sample to the objective 148
(b) Completeness of sample population 148

IV Planning The Sample 148


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

V Sampling methodology 150


VI Sampling techniques 150
(a) Statistical sampling 151
(b) Judgemental sampling 151

VII Using Sampling in Auditing 152


(a) Some Precautions before Undertaking Statistical Sampling 152
(b) Worksheet for Evaluation of Statistical Sample for Attributes 155
23. Sample Audit Programs 156
I Balance Sheet – Assets 158
(a) Fixed assets (tangible, intangible & CWIP) 159
(b) Investment properties 166
(c) Investments (subsidiaries, associates, and others) 173
(d) Long term loans and advances 179
(e) Long term deposits and prepayments 184
(f) Stores, spares and stock-in-trade 188
(g) Advances, Deposits, Prepayments & Other receivables 193
(h) Trade debts 199
(i) Cash and bank balances 203

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II Balance Sheet – Liabilities 207


(a) Accrued Expenses 208
(b) Contingencies & Commitments 218
(c) Deferred Liabilities 221
(d) Direct Taxation 226
(e) Dividend Payable 230
(f) Equity 232
(g) Liabilities Against Assets 238
(h) Long Term Debt 242
(i) Long Term Deposit 251
(j) Payables 253
(k) Short Term Borrowings 266
(l) Surplus on Revaluation 275

III Profit & Loss 279


(a) Sales 280
(b) Cost of Sales 283
(c) Admin Expense 286
(d) Financial Charges 289
(e) Other Income 292

IV Others 295
(a) WWF / WPPF 296
(b) Laws and Regulations 298
24. Leads 303
25. Leads Schedule 304
26. Format of Confirmation 305
I Bank Confirmation 305
II Debtors / Creditor Confirmation 309
III Lease Confirmation 310
IV Legal Confirmation 311
V Loan Confirmation 312
VI Tax Confirmation 313

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27. Inventory Count Attendance Programe 314


I Guidelines for observation of physical inventories 314
II Production Costs and Inventories 317
(a) Observation of Physical Inventory Count Checklist 317
(b) Conclusions 320
28. Going Concern Assessment 322
29. Related Party Transactions Checklist 329
30. Companies Ordinance Compliance Checklist 334
I. Secretarial Formalities 334
II. Disclosure and Other Requirements Under The Companies Ordinance, 1984 338
31. Income Tax Provision Checklist 341
32. Labour Laws Compliance Checklist 361
I Gratuity 362
II Workers’ Profit Participation Fund 365
33. Tax Position 370
34. Adjusting Entries 371

REPORTING PHASE 372

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35. Financial Statements 372


36. Working of Cash Flow Statement 373
37. Final Analytical Review Procedures 374
38. Reclassification Entries 376
39. Manager Review Notes & Queries 377
40. Partner Review Notes & Queries 378
41. Audit Issues Control Document 379
42. Points for Next Year 381
43. Assess Client Satisfaction and Team Debriefing 382
44. Summary Review Memorandum 383
45. Audit Completion and Reporting 385
46. Audit Completion Checklist – Part I 387
I Engagement Partner Sign-off 388
II Computer Information System (CIS) Specialist Sign-off 390
III Considerations and Procedures 391
47. Audit Completion Checklist – Part II 400
48. Subsequent Events Review Checklist 402
49. Format of Representation Letter 405
50. Exceptions and Control Weaknesses 411
51. Suggested Letter to the Board of Directors (BOD) 416
52. Auditors’ Report To The Members - Form 35A 417
53. Auditors’ Report To The Members or Directors in Case of Branches of
Foreign Banks - Form 35B 419
54. Auditors’ Report To The Members of
a Non-Life Insurance Company 421
55. Auditors’ Report To The Members of
a Life Insurance Company 423
56. Auditors’ Report To The Certificate Holders - Form No. XI 425
57. Auditors’ Report To The 1Trustees / Board of Governors / Management
Committee 427

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58. Auditors’ Report To The 1Trustees / Board of Governors / Management


Committee 428
59. Auditors’ Report on Consolidated Financial Statements - Form 35C 429

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Acceptance and Retention of Client –
New Client Evaluation

PRE ENGAGEMENT PHASE


Prospective Client Acceptance Memorandum WP Ref.:
Prepared by:
Date:
Client:
Period

Purpose
The purpose of the prospective client acceptance memorandum is to assess whether the client is
one with which the auditor wishes to associate and to document a consideration of the issues
influencing the decision to accept or reject an invitation to act as auditor. The prospective client
evaluation process seeks to determine this through an examination of the professional risk that
may result from providing services to a client. The evaluation also seeks to identify higher-risk
clients.

This memorandum should be filled and signed before accepting all new audit engagement.

i. Prospective client identity and source (consider following questions)

n What has been auditor’s experience with the client or member of the same group?

n Has the work been referred by a long-standing professional contract?

n Is the prospective client a foreign-office referral?

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Acceptance and Retention of Client –
New Client Evaluation

ii. Background information on the business (consider following questions)

n What is known about the prospective business client?

n What is known about the parties associated with the business?

n What is the reason of auditor selection?

n What is the business reputation of the prospective client, its owners, and its
management?

n How capable is management?

n What is known about the integrity of the principal owners and management ?

n What is the financial status of the prospective client (particularly liquidity and
viability)?

n What is known about the industry in which the prospective client operates and the
risks it presents?

n What is the prospective client’s relationship with other professional audit


firms/auditors?

n Has the auditor contacted the predecessor auditor for information including any
reason for the change?

iii. Results of inquiries with third parties

Enter details of discussions with third parties.

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New Client Evaluation

iv. Auditor’s association with the prospective client (consider following questions)

n Are there any relationship that may impair auditor’s objectivity or ability to meet
any relevant independence requirements?

n Are there any potential conflict of interest affecting auditor’s ability to accept the
engagement?

n Does the auditor has sufficient information about the client’s expectations form
the engagement?

n Are the relevant skills to carry out the work available with the auditor?

n Have any relevant statutory or other regulatory provision been identified,


including any implications on the auditor’s ability to act for the client?

n Consider that no conflict of interest arise in respect of services being provided as


a result of accepting audit of a listed company in view of listing regulations.

1. Conflicts of interest

Enter details of issues that might lead to potential conflict of interest.

2. Expertise

Enter details of the skills and experience the auditor has that makes it a suitable
for this client.

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New Client Evaluation

3. Fee recovery

Enter details of estimated fees, and confirm that an acceptable level of recovery is
expected.

4. Other services

Comment on the potential for providing other services to the client and suggest
actions for taking advantage of these.

v. Initial assessment of risk associated with the prospective client

Specify the areas of concern that the client presents and explain how the risk will be
managed.

vi. Result of enquiries with predecessor auditor

Document the results of enquiries with predecessor auditor and comment on the same.

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New Client Evaluation

vii. Other

Enter details of any other areas of concern or issues for consideration.

viii. Conclusion

On the basis of the above, we conclude that there is no reason to believe that the overall
level of risk associated with__________________________-is sufficient to prevent the
client from being accepted and there are no other circumstances of which we are aware
associated with __________ _________________that suggest that the client should not
be accepted.

Signed

Engagement partner Date

Senior partner Date

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Acceptance and Tetention of Client –
Existing Client Evaluation

Existing Client Continuation/ Retention Memorandum

Instructions

This section has to be completed by the engagement partner. However, the engagement partner
may delegate some of the evaluation procedures to other partner or professional staff. In case of
“yes” attach details.

Part “A” Client relating matters

1. Is there a significant change in the circumstances of the client or in the terms


or conditions of the engagement? Yes/No

2. Is there a request by another partner for re-evaluation of the engagement? Yes/No

3. Is there any new legal, regulatory or professional requirements that alter the
reporting responsibilities and the nature, timing or extent of the audit
procedures? Yes/No

4. Is there a significant change in the nature, size or structure of the client's


business? Yes/No

5. Is there a significant change in management or other personnel? Yes/No

Part “B” Professional risk related matters

1. Is there any reason to question or be concerned about the reputation, character,


or integrity of management and/or the owners of the prospective client? Yes/No

2. Would the member or representative firm's association with the client be likely
to affect the firm's image adversely either currently or in the future? Yes/No

3. Are there any features of the business generally or the way the particular client
operates which present unacceptable professional risks or call for special
attention if the engagement is continued? Yes/No

4. Is there any known problem of independence by reason of activities or


relationships of partner or professional staff in relation to the client? Yes/No

5. Is there any potential for adverse publicity? Yes/No

6. Is the client involved in any significant current or possible litigation? Yes/No

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Acceptance and Tetention of Client –
Existing Client Evaluation

Conclusion

I believe the firm should / should not continue our client engagement and I have considered all the factors
mentioned.

Engagement Partner ________________________________________ _________


(Signature) (Date)

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Planning Phase –
Engagement Letter

PLANNING PHASE
Suggested Engagement Letter
Addressee (To the Board of Director or appropriate
Senior Management Person)
Date

Dear Sir

Sub: Audit for the year ending _____________

You have requested that we audit the financial statement of ________ comprising of balance
sheet as at ________, and the related profit and loss account, cash flow statement and statement
of changes in equity for the year then ending together with the notes forming part thereof. We
are pleased to confirm our acceptance and our understanding of this engagement by means of
this letter. Our audit will be made with the objective of our expressing an opinion on the
financial statements.

At the outset you agree that the responsibility for the preparation of financial statements
including adequate disclosure is that of the management of the company. This includes the
maintenance of adequate accounting records and internal controls, the selection and application
of accounting policies, and the safeguarding of the assets of the company. Our responsibility is
to express an opinion on these financial statements based on our audit.

We will conduct our audit in accordance with International Standards on Auditing as applicable
in Pakistan with the objective of expressing an opinion whether the financial statements conform
with approved accounting standards as applicable in Pakistan, and, give the information required
by the Companies Ordinance, 1984, in the manner so required and respectively give a true and
fair view of the state of the Corporation’s affairs as at ------ and of the profit, its cash flows and
changes in equity for the year then ended. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation.

Because of the test nature and other inherent limitations of an audit, together with the inherent
limitations of any accounting and internal control system, there is an unavoidable risk that even
some material misstatements may remain undiscovered.

In addition to our report on the financial statements, we expect to provide you with a separate
letter concerning any material weaknesses in accounting and internal control systems, which
come to our notice during the course of our normal audit work. We are not required by auditing
standards to make an examination of internal controls beyond that which we make in
determining the nature, extent and timing of our other audit procedures, and we have not been
engaged to report on the company's internal control structure. As part of our audit process, we

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Engagement Letter

will request from management written confirmation concerning representations made to us in


connection with the audit.

As part of our audit, we are also required by the Companies Ordinance, 1984 to form our opinion
on whether:

a) proper books of account have been kept by the company as required by the Companies
Ordinance, 1984;

b) the balance sheet and profit and loss account together with the notes thereon have been
drawn up in conformity with the Companies Ordinance, 1984 and are in agreement with
the books of account and are further in accordance with accounting policies consistently
applied;

c) the expenditure incurred during the year was for the purpose of the company’s business;

d) the business conducted, investments made and the expenditure incurred during the year were
in accordance with the objects of the company; and

e) zakat deductible at source under the Zakat and Ushr Ordinance, 1980, was deducted by the
company and deposited in the Central Zakat Fund established under section 7 of that
Ordinance.

In addition, International Standard on Auditing ISA 240, The Auditor's Responsibility to


consider Fraud and Error in an Audit of Financial Statements, requires that we obtain specific
written representations from management that:

n it acknowledges its responsibility for the implementation and operations of accounting and
internal control systems that are designed to prevent and detect fraud and error,

n it believes the effects of those uncorrected financial statements misstatements aggregated by


us during the audit are immaterial, both individually and in the aggregate, to the financial
statements taken as a whole,

n it has disclosed to us all significant facts relating to any frauds or suspected frauds known to
management that may have affected the entity, and

n it has disclosed to us the results of its assessments of the risk that the financial statements
may be materially misstated as a result of fraud.

These specific items will be included in our request for written confirmation concerning
representations made to us in connection with the audit. In addition to the above management
also is responsible for identifying and ensuring that the Company complies with laws and
regulations applicable to its activities.

If you require us to complete our work under this engagement contract or, any part of it, by a
specific date or time, you will inform us in writing of your requirement. Whilst we will make
every effort to complete such work by the date specified, you acknowledge that meeting any

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Engagement Letter

such requirement will rely on you providing reasonable notice of your requirement and the
timely provision of such information, as we may need to complete the work concerned.

We agree that we will treat as such all confidential proprietary information obtained from you
and will not disclosed such information to others, except to those persons engaged in providing
services to you, or use such information except in connection with the performance of the
services agreed to this letter. This undertaking shall not apply to any of the information that we
are required by law or by the requirements of any regulators or by specific professional standards
to disclose, that is in, or hereafter enters the public domain. We wish to inform you that our
working papers files for the audit of the financial statements of your company would be subject
to review by the Institute of Chartered Accountants of Pakistan’s Quality Control Review
Committee without any further reference to you.

We look forward to full cooperation with your staff and we trust that they will make available to
us whatever records; documentation and other information including minutes of all management,
board of directors, committees and shareholders’ meetings are requested in connection with our
audit. We shall request sight of all documents or statements, including the Chairman’s statement
and director’s report (if any) required to be issued with the financial statements.

Our fees, which will be billed as work progresses, are based on the time required by the
individuals assigned to the engagement plus out-of-pocket expenses. Individual hourly rates vary
according to the degree of responsibility involved and the experience and skill required.

This letter will be effective for future years unless it is terminated, amended or superseded.
Unless we hear from you to the contrary, we will assume your concurrence with the contents of
this letter.

Please sign and return the attached copy to indicate that it is in accordance with your
understanding of the audit arrangements.

Yours truly

Firm’s Name

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Planning Phase –
Strategy and Planning Document

Audit Strategy and Planning Document WP Ref.:


Prepared by:
Date:
Client:
Period:

Purpose

The purpose of this working paper is to obtain an understanding of the entity’s business. It
documents:

n the entity’s objectives, strategies and the components of its business (i.e., markets,
products/services, customers, alliances)

n the entity’s relevant external business drivers (i.e., general business environment, specific
industry characteristics and management’s response to the expectations of significant
constituencies).

n how the entity formulates and implements its objectives and strategies (strategic
management process)

n the business control environment management has created to support its objectives and
strategies

n how computer information systems facilitate business processes and are utilised by the
entity

n the financial reporting environment

n Critical Audit Areas / Significant Financial Statement Components

n Involvement of specialists and other parties

n Logistical plan

This understanding will assist in understanding business risks that threaten the entity’s
objectives. Such as understanding should be reviewed with the entity’s management.

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Planning Phase –
Strategy and Planning Document

I Client Overview
(a) Client History and Background
Provide a description of relevant client background

(b) Client Business Objectives and Related Business Strategies


Management responds to external business drivers by developing objectives and
strategies to achieve those objectives. Provide a summary of the objectives,
strategies and method of implementing the strategies.

Business Objectives Related Business Strategies

1.

2.

3.

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Strategy and Planning Document

(c) Client Business Components


Feasible objectives and strategies need to reflect a client’s existing circumstances and
take into account its markets, products and services, relationship with customers and
alliances (including relationship with suppliers). Provide a description of these
components

(i) Major Markets

(ii) Major Products and Services

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Strategy and Planning Document

(iii) Major Customers

(iv) Major Competitors

(v) Alliances (including suppliers) and other relationships

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Strategy and Planning Document

(vi) SWOT Analysis (entity's and competitors')

Entity Competitors

Strengths

n n

n n

Weaknesses

n n

n n

Opportunities

n n

n n

Threats

n n

n n

II External Business Forces

External business drivers are forces created by a client’s:

n general business environment (PEST) and specific industry characteristics (Porter’s


Five Forces);

n significant stakeholders.

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Strategy and Planning Document

General business environment and specific industry characteristics (PEST and Porter’s
Five Forces)

Provide a discussion of current forces facing the client that may have an impact on the
client achieving its objectives and the relevance of those aspects of the environment to the
client, given its chosen strategies. Consider the following forces in analysing the general
business environment and specific industry characteristics

n PEST - political, economic, social, and technology forces;

n Porter’s Five Forces - threat of new entrants, bargaining power of suppliers,


bargaining power of buyers, substitute products or services, rivalry amongst
existing competitors.

General Business Environment (PEST Analysis)

1. Political

Forces Relevance to the Client

2. Economic

Forces Relevance to the Client

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Planning Phase –
Strategy and Planning Document

3. Social

Forces Relevance to the Client

4. Technological

Forces Relevance to the Client

Specific Industry Characteristics (Porter's Five Forces)

1. Threat of New Entrants

Forces Relevance to the Client

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Strategy and Planning Document

2. Bargaining Powers of Suppliers

Forces Relevance to the Client

3. Bargaining Powers of Buyers

Forces Relevance to the Client

4. Substitute Services/ Products

Forces Relevance to the Client

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Strategy and Planning Document

5. Rivalry Among Existing Competitors

Forces Relevance to the Client

Significant Constituencies

Management may have incentives to manipulate the results of the business and the
impression given by the financial statements considering significant stakeholders.
Provide a discussion of individual stakeholders that management perceives as
significant and discuss how management responds to expectations of significant
stakeholders.

Constituency/ Management Response to the Expectations


Stakeholders

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Strategy and Planning Document

III Strategic Management Process

When analysing the client’s strategic management process understand how management:

n sets the overall direction for the client;

n monitors the external environment and assesses the strategic implications of potential
opportunities and threats;

n monitors the extent to which strategies have been implemented;

n understands the strategies and capabilities of the major competitors;

n analyses the client’s strengths and weaknesses;

n allocates resources, including capital, people and facilities to its business processes;

n aligns process objectives with strategic objectives.

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Strategy and Planning Document

IV Business Control Environment

When analysing the business control environment understand the client’s:

n business structure;

n culture and ethics;

n remuneration management;

n personnel profiles;

n communication of information;

n risk assessment process;

n control environment

n monitoring and control activities

Business structure

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Strategy and Planning Document

Culture and ethics

Remuneration management

Personnel profiles

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Planning Phase –
Strategy and Planning Document

Communication of information

Risk Assessment Process

Control Environment

Monitoring and Control Activities

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Planning Phase –
Strategy and Planning Document

V Computer Information Systems (CIS)

Business processes are often facilitated by computer information systems. Obtain an


understanding of the:

n level of dependence the client has on computer information systems (include a list
of the client’s computer information systems);

n computer information systems’ personnel structure and skills;

n security of computer information systems;

n reliability of computer information systems;

n degree and rate of change in computer information systems;

n dependence on external computer processing;

n direction and operation of computer information systems.

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Planning Phase –
Strategy and Planning Document

VI Financial Reporting Environment

Financial reporting environment involves understanding what management does to bring


together financial information to prepare the financial statements. Obtain an
understanding of the:

n accounting policies applied by the entity and applied within the industry;

n potential impact of management’s reporting strategy upon specific aspects of the


financial statements.

Financial Reporting Issues

Consider the following for identification of financial reporting issues to be


addressed while carrying out research or consulting with coleagues, experts:

n client's accounting practices and policies;

n new accounting pronoucements;

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Planning Phase –
Strategy and Planning Document

n the going concern assumption;

n legal and regulatory changes

Financial reporting issue Reason for identification

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Strategy and Planning Document

VII Critical Audit Areas / Significant Financial Statement Components

Critical audit areas are generally those where judgment is involved and significant
estimation is used. The approach to those areas and resulting impact on the
financial statements relating to the audit is documented. It also includes
consideration of previous years brought forward issues. Following are some of the
critical areas for only guidance purposes. Other critical areas may be included in
this section as per the auditor's assessment.

Critical Audit Reason for Management Proposed Audit


Areas/ Objective identification Response Approach

V of Receivables

VP of Investments

CEA of Taxation

VP of Defined
benefit plans

VP of Litigation &
Claims

V of Inventories

CVP of Related party


transactions

V Impairment of
assets

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Planning Phase –
Strategy and Planning Document

Examples of other major critical areas may include:

Review of other significant estimates made

New borrowings with extra-ordinary terms and conditions

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Planning Phase –
Strategy and Planning Document

Discontinuation of major suppliers

Acquisition of a significant asset

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Planning Phase –
Strategy and Planning Document

Discontinuation of a major customer

Loss of a significant market share

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Planning Phase –
Strategy and Planning Document

VIII Involvement of specialists and other parties

Description iclude a summary of the issue, why it is considered significant and its
potential financial statement effects. Depending on the phase of the audit workflow in
which the issue is identified, the financial statement assertion to which the issue relates
may or may not have been combined into an audit objective yet. As a result, the issue
may be included as a significant issue on the basis that the potential financial statement
effect may be a significant non-routine transaction, requires a great deal of judgement or
is complex, and not necessarily that it has been confirmed as a critical audit objective.

Involvement of: Computer Information System (CIS) Specialist

Description of basis, nature, extent and conclusions related to the involvement of


CIS Specialist:

[Description]

Findings

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Strategy and Planning Document

Involvement of: Taxation

Description of basis, nature, extent and conclusions related to the involvement of


taxation:

[Description]

Findings

Audit Practice Manual – Revised 32


Planning Phase –
Strategy and Planning Document

Involvement of: Other specialist or other party involved in the audit e.g.Actuary,
Valuers, Internal audit, Co-auditor

Description of significant issue and decision related to the involvement of others:

[Description]

Findings

Audit Practice Manual – Revised 33


Planning Phase –
Strategy and Planning Document

IX Audit programme overview


Financial Principal Risk Assessment Principal substantive
Statement Audit procedures
Caption Objectives
IR CR ROSM

Fixed assets VOP n Inspect assets & trace to


records

n Vouch additions & deletions


with supporting documents.

n Examine documents of title.

n Recompute gain/loss on
disposals.

n Check/recalculate
depreciation charge.

n Check impairment.

Capital work in EAV n Review board minutes


progress regarding significant
additions.

n Verify cost incurred with


supporting documents.

n Borrowing cost capitalized


are directly attributable to
construction, acquisition or
production.

Audit Practice Manual – Revised 34


Planning Phase –
Strategy and Planning Document

Financial Principal Risk Assessment Principal substantive


Statement Audit procedures
Caption Objectives
IR CR ROSM

Long term loans CEAP n Review agreements

n Circularise direct
confirmations.

n Recompute interest and


exchange loss.

n Check subsequent repayment

n Check disclosure.

Investments EVP n Inspect securities in hand and


evidence for title of securities
held.

n Review investments for


income reconciliation.

n Vouch sale and recompute


gain/loss.

n Review classification and


description.

n Vouch purchases made during


the year.

Cash & Bank CEA n Perform physical cash count.


Balances
n Circularize direct
confirmations.

n Obtain reconciliation
statements.

n Review age analysis of long


outstanding cheques.

Audit Practice Manual – Revised 35


Planning Phase –
Strategy and Planning Document

Financial Principal Risk Assessment Principal substantive


Statement Audit procedures
Caption Objectives
IR CR ROSM

Long term EP n Vouch deposits made during


deposits the year.

n Review classification and


description.

Store & Spares CEV n Perform physical


count/inspection.

n Investigate reasons for any


difference between the
physical and records.

n Check valuation as per


company’s policy.

n Identify slow moving items.

Trade Debtors CAV n Circularise direct


confirmations.

n Check subsequent clearance.

n Perform age analysis.

Commitment and CEA n Obtain list of commitment


Contingencies and contingencies

n Circularise direct
confirmations to legal
advisors.

n Review legal fees.

n Review minutes of Board of


Directors meeting.

Audit Practice Manual – Revised 36


Planning Phase –
Strategy and Planning Document

Financial Principal Risk Assessment Principal substantive


Statement Audit procedures
Caption Objectives
IR CR ROSM

Creditors CEA n Circularise direct


confirmations.

n Check subsequent clearance.

n Perform age analysis.

Loans CEAP n Review agreements

n Circularise direct
confirmations.

n Check interest and exchange


effects.

n Check subsequent repayment

n Check disclosure.

Deferred CEAP n Obtain actuarial report and


Liabilities- assess reasonableness of
Gratuity/ Pension assumptions

n Vouch payments during the


period to ensure completeness

n Ensure disclosure requirement


of IAS 19

Audit Practice Manual – Revised 37


Planning Phase –
Strategy and Planning Document

Financial Principal Risk Assessment Principal substantive


Statement Audit procedures
Caption Objectives
IR CR ROSM

Taxation-Current CEAP n Review updated tax position


& deferred
n Check working of provision
for taxation

n Vouch payments.

n Check working of deferred


taxation

n Ensure disclosure with IAS 12

Sales CEA n Perform analytical review

n Vouch sales on sample basis

Cost of sales CEA n Perform analytical review

n Vouch purchases on sample


basis

n Ensure classification in
appropriate heads

n Vouch consumptions made


during the period

n Ensure calculation of
overhead on reasonable basis

n Ensure appropriate treatment


of difference of actual cost
with standard cost

Audit Practice Manual – Revised 38


Planning Phase –
Strategy and Planning Document

Financial Principal Risk Assessment Principal substantive


Statement Audit procedures
Caption Objectives
IR CR ROSM

Admin & General CEA n Perform analytical review


Expenses
n Ensure classification in
appropriate heads

n Vouch expenses incurred


during the period

n Perform reasonableness test


on salary expense

Audit Practice Manual – Revised 39


Planning Phase –
Strategy and Planning Document

X Logistical plan

Engagement team

Engagement Partner

Engagement Manager

Job-in-Charge

Team members

Key management personnel

Chief Executive

Finance Director/CFO

Manager Finance

Factory Manager

Sales Manager

Staff and allocation of work

Staff Allocated area

Audit Practice Manual – Revised 40


Planning Phase –
Strategy and Planning Document

Key dates and deadlines

Activity Date

Kick off meeting

Initial meeting with client

Confirmation circularisation

Manager review

Partner review

Covering letter/Management Letter

Board meeting and Audit report

Reportings/ deliverables:
Location of client:
Telephone:
Fax:
Email:
Web site:

Audit Practice Manual – Revised 41


Planning Phase –
Strategy and Planning Document

XI Management Span

Board of Directors
(BOD)

President and
Chief Executive

GM GM Credit HR
IT Financial
Centralised Card Execut-
Executive Controller
Operations Operations ive

Compliance Manager In-house


Manager Planning Finance
and Internal Administra- Legal
Operations Manager Manager
Audit tion Advisor

Manager Manager Manager Manager


Manager
Underwriting Collections Manager Underwriting Collections
Disburse-
Centralised Centralised Payments Credit Cards Credit Crads
ments
Operations Operations Operations Operations

Audit Practice Manual – Revised 42


Planning Phase –
Strategy and Planning Document

XII Audit Materiality


There are two aspects to materiality - Planning materiality, and Reporting materiality.

Planning materiality is concerned with whether a misstatement, or an aggregation of


misstatements, in an underlying financial statement item, account balance or class of
transaction, is likely to result in a material misstatement in the financial statements as a whole.
Auditors use planning materiality to determine which financial statement items, account
balances and transactions to test and which to not test. Financial statement items, account
balances and transactions, which equal or exceed their materiality level are selected for testing.

Level of Aggregation Materiality Level Evaluation

Financial statement level A misstatement of a financial Materiality at the financial


statement item is material statement level may be
when the misstatement, evaluated by reference to (i)
aggregated with reporting materiality and (ii)
misstatements of other the expected nature, number
financial statement items, is and value of financial
likely to equal or exceed the statement items included in
level of reporting materiality. the financial statements.
Account balance level A misstatement of an account Materiality at the account
balance underlying a financial balance level is evaluated by
statement item is material reference to (i) materiality at
when the misstatement, the financial statement level
aggregated with and (ii) the expected nature,
misstatements in other number and value of account
account balances underlying balances underlying the
the financial statement item, financial statement item.
is likely to result in a material
misstatement of the financial
statement item.
Class of transaction level A misstatement of a Materiality at the class of
transaction underlying an transaction level is evaluated
account balance is material by reference to (i) materiality
when the misstatement, at the account balance level
aggregated with and (ii) the expected nature,
misstatements in other volume and value of
transactions underlying the transactions underlying the
account balance, is likely to account balance.
result in the material
misstatement of 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.

Audit Practice Manual – Revised 43


Planning Phase –
Strategy and Planning Document

Reporting materiality refers to the extent of a misstatement.

Reporting materiality is concerned with whether a misstatement of a financial statement item, or


an aggregation of such misstatements, is likely to affect the judgments of users of financial
statements. It requires an evaluation by the auditor in both the client acceptance/ retention stage
and the opinion formulation stage.

In the client acceptance stage the auditor evaluates whether, if the client is accepted or retained,
the audit risk (the risk of a material misstatement in the audited financial statements) can be
reduced to an acceptable level. In this, the initial audit stage, "a material misstatement" refers to
the level of reporting materiality. Similarly in the final opinion formulation stage, the auditor
evaluates the likelihood of the audited financial statements containing a material misstatement.
Again, this evaluation is based on the level of reporting materiality.

Auditors to assess reporting materiality use the following materiality guidelines:

Pre-tax income 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).

Audit Practice Manual – Revised 44


Planning Phase –
Control Overview and Risk Assessment

Control Overview and Risk Assessment WP Ref.:


Prepared by:
Document Date:

Client:
Period:

I Introduction

The purpose of this document is to:

n obtain an understanding of client and its environment

n document the assessment of risk of material misstatement

Documentation may be included in this working paper, or other working papers (with
cross-reference to the Control Overview and Risk Assessment Document).

Summary of our understanding of internal control

Does the control environment appear to be satisfactory? YES NO

Does the entity's risk assessment process appear to be satisfactory? YES NO

Does the information system, and business processes for financial


YES NO
reporting, and communication appear to be satisfactory?

Does control activities appear to be satisfactory YES NO

Does monitoring of controls appear to be satisfactory YES NO

II Risk
Audit risk means the risk that the auditor gives an inappropriate audit opinion when the
financial statements are materially misstated.

Control risk is the risk that a misstatement, that could occur in an account balance or class
of transactions and that could be material individually or when aggregated with
misstatements in other balances or classes, will not be prevented or detected and corrected
on a timely basis by the accounting and internal control systems.

Audit Practice Manual – Revised 45


Planning Phase –
Control Overview and Risk Assessment

Internal control system means all the policies and procedures adopted by the management
of an entity to assist in achieving management's objective of ensuring, as far as practicable,
the orderly and efficient conduct of its business, including adherence to management
policies, the safeguarding of assets, the prevention and detection of fraud and error, the
accuracy and completeness of the accounting records, and the timely preparation of
reliable financial information.

Control procedures means those policies and procedures in addition to the control
environment which management has established to achieve the entity's specific objectives.

(a) Control environment


The control environment includes the attitudes, awareness, and actions of management
and those charged with governance concerning the entity’s internal control and its
importance in the entity. The control environment also includes the governance and
management functions and sets the tone of an organization, influencing the control
consciousness of its people. It is the foundation for effective internal control,
providing discipline and structure.

Communication and enforcement of integrity and ethical values

Consider

n What are entity’s ethical and behavioral standards

n How they are communicated

n How they are reinforced in practice.

Audit Practice Manual – Revised 46


Planning Phase –
Control Overview and Risk Assessment

Commitment to competence

Consider

n Management’s consideration of the competence levels for particular jobs

n How those levels translate into requisite skills and knowledge

Participation by those charged with governance

Consider

n Independence from management

n Their experience and stature

n The extent of their involvement and scrutiny of activities

n The appropriateness of their actions

n The information they receive

n The degree to which difficult questions are raised and pursued with
management

n Their interaction with internal and external auditors

Audit Practice Manual – Revised 47


Planning Phase –
Control Overview and Risk Assessment

Management’s philosophy and operating style

Consider

n Management’s approach to taking and monitoring business risks

n Management’s attitudes and actions toward financial reporting (conservative


or aggressive selection from available alternative accounting principles, and
conscientiousness and conservatism with which accounting estimates are
developed)

n Management’s attitudes toward information processing and accounting


functions and personnel

Organizational structure

Consider

n Key areas of authority and responsibility

n Appropriate lines of reporting

Audit Practice Manual – Revised 48


Planning Phase –
Control Overview and Risk Assessment

Assignment of authority and responsibility

Consider

n How authority and responsibility for operating activities are assigned

n How reporting relationships and authorization hierarchies are established.

Human resource policies and practices

Consider

n Standards for recruiting the most qualified individuals

n Training policies that communicate prospective roles and responsibilities

n Promotions driven by periodic performance appraisals

Audit Practice Manual – Revised 49


Planning Phase –
Control Overview and Risk Assessment

(b) Entity’s risk assessment process


An entity’s risk assessment process is its process for identifying and responding to
business risks and the results thereof. For financial reporting purposes, the entity’s
risk assessment process includes how management

n identifies risks relevant to the preparation of financial statements

n estimates their significance,

n assesses the likelihood of their occurrence, and

n decides upon actions to manage them.

Once risks are identified, management considers their significance, the likelihood of their
occurrence, and how they should be managed. Management may initiate plans,
programs, or actions to address specific risks or it may decide to accept a risk
because of cost or other considerations.

When documenting the entity’s risk assessment process risks can arise or change due to
circumstances such as the following

n Changes in operating environment

n New personnel

n New or revamped information systems

n Rapid growth

n New technology

n New business models, products, or activities

n Corporate restructurings

n Expanded foreign operations

n New accounting pronouncements

Audit Practice Manual – Revised 50


Planning Phase –
Control Overview and Risk Assessment

(c) Information system, and business processes for financial reporting, and
communication
An information system consists of infrastructure (physical and hardware components),
software, people, procedures, and data. Infrastructure and software will be absent, or
have less significance, in systems that are exclusively or primarily manual.

An information system encompasses methods and records that:

n Identify and record all valid transactions.

n Describe on a timely basis the transactions in sufficient detail to permit proper


classification of transactions for financial reporting.

n Measure the value of transactions in a manner that permits recording their


proper monetary value in the financial statements.

n Determine the time period in which transactions occurred to permit recording


of transactions in the proper accounting period.

n Present properly the transactions and related disclosures in the financial


statements.

Audit Practice Manual – Revised 51


Planning Phase –
Control Overview and Risk Assessment

(d) Control activities


Control activities are the policies and procedures that help ensure that management
directives are carried out. Control activities, whether within IT or manual systems,
have various objectives and are applied at various organizational and functional
levels.

Certain control activities may depend on the existence of appropriate higher-level policies
established by management or those charged with governance. For example,
authorization controls may be delegated under established guidelines, such as
investment criteria set by those charged with governance; alternatively, non-routine
transactions such as major acquisitions or divestments may require specific high
level approval, including in some cases that of shareholders

Performance reviews

Consider how management:

n Reviews and analyses of actual performance versus budgets, forecasts, and


prior period performance

n Relating different sets of data – operating or financial – to one another,

n Analyses of the relationships and investigative and corrective actions

n Comparing internal data with external sources of information

n Review of functional or activity performance

Audit Practice Manual – Revised 52


Planning Phase –
Control Overview and Risk Assessment

Information processing

Controls are performed to check accuracy, completeness, and authorization of


transactions.

n Application controls apply to the processing of individual applications. These


controls help ensure that transactions occurred, are authorized, and are
completely and accurately recorded and processed. Examples of application
controls include checking the arithmetical accuracy of records, maintaining
and reviewing accounts and trial balances, automated controls such as edit
checks of input data and numerical sequence checks, and manual follow-up of
exception reports.

n General IT-controls are polices and procedures that relate to many


applications and support the effective functioning of application controls by
helping to ensure the continued proper operation of information systems.
General IT-controls commonly include controls over data center and network
operations; system software acquisition, change and maintenance; access
security; and application system acquisition, development, and maintenance.

Audit Practice Manual – Revised 53


Planning Phase –
Control Overview and Risk Assessment

Physical controls

These activities encompass the physical security of assets, including adequate


safeguards such as secured facilities over access to assets and records; authorization
for access to computer programs and data files; and periodic counting and
comparison with amounts shown on control records (for example comparing the
results of cash, security and inventory counts with accounting records).

Segregation of duties

Ensure that following three activities are separately assigned:

n authorizing transactions

n recording transactions, and

n maintaining custody of assets

Audit Practice Manual – Revised 54


Planning Phase –
Control Overview and Risk Assessment

This would reduce the opportunities to allow any person to be in a position to both
perpetrate and conceal errors or fraud in the normal course of the person’s duties.

(e) Monitoring of controls


It is management responsibility is to establish and maintain internal control on an
ongoing basis. Management’s monitoring of controls includes considering whether
they are operating as intended and that they are modified as appropriate for changes
in conditions.

Examples are:

n management’s review of whether bank reconciliations are being prepared on a


timely basis

n internal auditors’ evaluation of sales personnel’s compliance with the entity’s


policies

n legal department’s oversight of compliance with the entity’s ethical or


business practice policies.

Consider:

n assessment and reassessment of design and operation of controls on a timely


basis

n necessary corrective actions

Audit Practice Manual – Revised 55


Planning Phase –
Control Overview and Risk Assessment

n ongoing monitoring activities (activities are built into the normal recurring
activities)

n separate evaluations

Audit Practice Manual – Revised 56


Planning Phase –
Fraud Risk Assessment Document

Fraud Risk Assessment Document WP Ref.:


Prepared by:
Date:
Client:
Period:

I Introduction

The purpose of this document is to:


n obtain an understanding of management’s assessment of the risk that the financial
statements may be materially misstated as a result of fraud, and the accounting and
internal control systems in place to address such risk and prevent and detect error

n document the results of team discussions and enquiries with management


concerning fraud and error

n document the fraud risk factors identified that indicate the possibility of either
fraudulent financial reporting or misappropriation of assets, and our response

n document circumstances that we have encountered that may indicate that there is a
material misstatement in the financial statements resulting from fraud or error and
the audit procedures performed to determine whether the financial statements are
materially misstated.

Documentation may be included in this working paper, or other working papers (with
cross-reference to the Fraud Risk Document).

Preparation of this document is started when fraud risk factors are initially identified
during the planning phase of the audit and updated during the substantive procedures,
evaluation and reporting stage if additional fraud risk factors are identified that cause us to
believe that additional audit procedures are necessary.

(a) Fraud

Fraud refers to an intentional act by one or more individuals among management


(management fraud), those charged with governance, employees (employee fraud), or third
parties involving the use of deception to obtain an unjust or illegal advantage. Two types
of intentional misstatements are relevant to the auditor's consideration of fraud (a)
fraudulent financial reporting involves intentional misstatement or omission of amounts
and disclosures in financial statement to deceive financial statement users (b)
misappropriation of assets involves the theft of an entity's assets.

Fraud involves (a) motivation to commit fraud; and (b) a perceived opportunity to commit
fraud.

Audit Practice Manual – Revised 57


Planning Phase –
Fraud Risk Assessment Document

(b) Responsibilities

The primary responsibility for the prevention and detection of fraud rests with those
charged with governance and the management of an entity by setting the proper tone,
creating and maintaining a culture of honesty and high ethics, and establishing appropriate
controls to prevent and detect fraud within the entity. However, systems of accounting and
internal control system may reduce but cannot eliminate the risk of misstatements caused
by fraud hence management assumes responsibility for any remaining risk.

An audit conducted in accordance with ISAs is designed to provide reasonable assurance


(not absolute assurance) that the financial statements taken as whole are free from material
misstatement hence an auditor is not and cannot be held responsible for the prevention (not
detection) of fraud. An auditor plans and performs an audit with an attitude of professional
skepticism, which is necessary for the auditor to identify and evaluate matters that
increases the risk of fraud, circumstances that make the auditor suspect that the financial
statements are materially misstated and evidence obtained that brings into question the
reliability of management representation. Discovery of a fraud subsequent to an audit does
not, in and itself, indicate (a) a failure to obtain reasonable assurance, (b) inadequate
planning, performance or judgment (c) absence of professional competence and due care,
or (d) failure to comply with ISAs. Whether an auditor has performed an audit in
accordance with ISAs is determined by the (a) adequacy of the audit procedures performed
in the circumstances and (b) the suitability of the auditor's report based on the results of
those procedures.

II Discussions with Management

During the planning phase of an audit, auditor makes enquiries of management concerning
fraud and error. We may also seek the views of those charged with governance.

Matters that may be discussed as part of these enquiries include:

n whether there are subsidiary locations, business segments, types of transactions,


account balances or financial statement categories where the possibility of error may
be high, or where fraud risk factors may exist, and how they are being addressed by
management

n the work of the entity’s internal audit function and whether internal audit has
identified fraud or any material weaknesses in the system of internal control

n how management communicates to employees its view on responsible business


practices and ethical behaviour, such as through ethics policies or codes of conduct.

Audit Practice Manual – Revised 58


Planning Phase –
Fraud Risk Assessment Document

If the entity has established a programme that includes steps to prevent and detect fraud,
we enquire of those persons overseeing such programmes as to whether the programme
has identified fraud risk factors.

(a) Results of enquiries of management

Document the results of our enquiries below. State which member of management we
enquired of and the date of the enquiry.

Management’s fraud risk assessment

Document our understanding of management’s assessment of the risk that the financial
statements may be materially misstated as a result of fraud.

Accounting and internal control systems

Document the results of our enquiries of management concerning the accounting and
internal control systems management has put in place to address the risk of material
misstatement due to fraud, and to prevent and detect error.

Audit Practice Manual – Revised 59


Planning Phase –
Fraud Risk Assessment Document

Fraud and error

Document the results of our enquiries to determine whether management is aware of any
known or suspected fraud and discovered any material errors.

(b) Discussions with those charged with governance

Following our enquiries, consider whether there are matters of governance interest to
discuss with those charged with governance of the entity

Audit Practice Manual – Revised 60


Planning Phase –
Fraud Risk Assessment Document

III Fraud Risk Factors and Response


(a) Audit Team Discussions

During the audit, the team should discuss the susceptibility of the entity to material
misstatements in the financial statements resulting from fraud or error.

Based on these discussions, we:

n consider where errors may be most likely to occur or how fraud may by perpetrated

n gain a better understanding of the potential for material misstatements in the


financial statements resulting from fraud or error in the specific areas of the audit
assigned to team members

n gain a better understanding of how the results of the audit procedures that are
performed may affect other aspects of the audit

n decide which members of the audit team will conduct certain enquires or audit
procedures

n decide how the results of our enquiries and audit procedures will be shared.

We may also discuss matters that were taken into consideration during our Client
Acceptance or Client Continuance procedures as they relate to fraud risk.

Fraud risk factors

During the audit, we consider whether events or conditions that provide an opportunity, a
motive or a means to commit fraud, or indicate that fraud may already have occurred, are
present. Such events or conditions are referred to as “fraud risk factors”. We identify fraud
risk factors that may indicate the possibility of either fraudulent financial reporting or
misappropriation of assets.

Response

Our response to fraud risk factors is influenced by their (a) nature and (b) significance. In
some cases, our judgment may be that the audit procedures, including both tests of control
and substantive procedures already planned, are sufficient to respond to the fraud risk
factors. In other circumstances we may need to modify the nature, timing and extent of
substantive procedures to address fraud risk factors present. In these circumstances,
consider whether the assessment of the risk of significant misstatement calls for (a) an
overall response, (b) a response specific to a particular account balance, class of
transactions or assertion, or (c) both types of responses.

Audit Practice Manual – Revised 61


Planning Phase –
Fraud Risk Assessment Document

(i) Fraudulent financial reporting


Fraud risk factors

Fraud risk factors relating to fraudulent financial reporting may be grouped as follows:

(a) Management Characteristics and Influence over the Control Environment

n Significant portion of management compensation contingent upon


achieving aggressive targets etc.

n Excessive interest by management in maintaining or increasing the


entity's share price or earning trends through the unusual practices

n Domination by single person/ small group without compensating


controls

n Setting of unduly financial target and expectations for operating


personnel

n Display of significant disregard for regulatory authorities

n Employing ineffective accounting, IT or internal auditing staff

n Participation of non-financial management in selection of accounting


principles etc.

n High turnover of management staff or board members

n Strained relationship with existing/ predecessor auditor including


frequent disputes, unreasonable demands, restriction on auditors and
domineering management behaviour

n Weak or ineffective corporate governance structure

(b) Industry Conditions

n New regulatory etc. requirements, which may impair entity's stability or


performance

n Increasing competition and market saturation and declining margins/


customer demands

Audit Practice Manual – Revised 62


Planning Phase –
Fraud Risk Assessment Document

n Declining industry with increasing business failures

n Rapid changes in industry like rapidly changing technology / rapid


product obsolescence

(c) Operating Characteristics and Financial Stability

n Reporting earning/ growth while inability to generate cash flows

n Balances and/ or transactions based on significant estimates involving


unusually subjective judgments/ uncertainties

n Significant related party transactions out of normal course of business

n Significant, unusual, or complex transaction particularly at or near the


year-end

n Significant bank account or business locations without clear business


justification

n Over complex organisational structure involving various/ unusual legal


entities, lines of authority or contractual arrangements without
apparent business purpose

n Unusual rapid growth/ profitability as compare to competitors/ industry

n Dependence on debt, marginal ability to pay debt and difficult to


maintain debt covenant

n Threat of imminent bankruptcy, foreclosure, or hostile takeover

n Adverse consequences on significant pending transactions if poor


results are reported

n A poor or deteriorating financial position when management has


personally guaranteed significant debts of the entity

Audit Practice Manual – Revised 63


Planning Phase –
Fraud Risk Assessment Document

Document the fraud risk factors identified, for example while obtaining or updating our
understanding of the business, as a result of our enquiries of management or during
our audit team discussions, that may indicate the possibility of fraudulent financial
reporting.

Response

Document our response to the fraud risk factors identified. Consider the examples of
possible responses in ISA 240, Appendix 2.

Audit Practice Manual – Revised 64


Planning Phase –
Fraud Risk Assessment Document

(ii) Misappropriation of assets

Fraud risk factors

Fraud risk factors relating to misappropriation of assets may be grouped as follows:

(a) Susceptibility of Assets to Misappropriation

n Large amounts of cash on hand or processed

n Inventory and other assets' characteristics such as small size with high
value and high demand accompanied with lack of ownership
identification

n Easily convertible assets such as bearer bonds, diamonds or computer


chips

(b) Susceptibility of Assets to Misappropriation

n Lack of management oversight

n Lacking to screen job applicants for positions where employees have


access to assets susceptible to misappropriation

n Inadequate record keeping for assets susceptible to misappropriation

n Lack of appropriate segregation of duties

n Lack of appropriate system of authorization and approval of


transactions

n Poor physical safeguards over assets susceptible to misappropriation

n Lack of timely and appropriate documentation

n Lack of mandatory vacations/ job rotations for employees performing


key control functions

Audit Practice Manual – Revised 65


Planning Phase –
Fraud Risk Assessment Document

Document the fraud risk factors identified, for example while obtaining or updating our
understanding of the business, as a result of our enquiries of management or during
our audit team discussions, that may indicate the possibility of misappropriation of
assets.

Response

Document our response to the fraud risk factors identified. Consider the examples of
possible responses in ISA 240, Appendix 2.

(b) Overall consideration


Professional skepticism:

Assignment to the audit team members:

Accounting principles and policies:

Audit Practice Manual – Revised 66


Planning Phase –
Fraud Risk Assessment Document

Controls:

Modification in nature, timing, and extent of audit procedures:

(c) Consideration at the account balance, class of transaction and assertion level
Specific responses to the auditor's assessment of the risk of fraud will depend upon the
types or combinations of fraud risk factors or conditions identified, and the account
balance, class of transaction and assertion may affect.

(d) Specific responses- Fraudulent financial reporting


Revenue recognition

Inventory quantities

Audit Practice Manual – Revised 67


Planning Phase –
Fraud Risk Assessment Document

Non-standard journal entries

Others

(e) Specific responses- Misappropriation of assets


Differing circumstances would necessarily dictate different responses. Document the
specific responses.

Audit Practice Manual – Revised 68


Planning Phase –
Fraud Risk Assessment Document

IV Procedures when Circumstances Indicate a Possible Misstatement


When we identify any audit difference, we consider whether it may be indicative of fraud.
If there is such an indication we bring the matter to the attention of the engagement partner
and manager. We consider the implications in relation to other aspects of the audit,
particularly the reliability of management representations.

During the course of the audit, when we encounter circumstances that may indicate that
there is a material misstatement in the financial statements resulting from fraud or error,
we perform audit procedures to determine whether the financial statements are materially
misstated.

(a) Circumstances that may indicate the possibility of fraud or error


Document circumstances that we have encountered that may indicate that there is a
material misstatement in the financial statements resulting from fraud or error. Consider
the example circumstances in ISA 240, Appendix 3.

Examples:

n Unrealistic time deadlines for audit completion imposed by management

n Reluctance by management to engage in frank communication with third parties

n Imposing limitation on audit scope

n Identification of important matters not previously disclosed by management

Audit Practice Manual – Revised 69


Planning Phase –
Fraud Risk Assessment Document

n Significant difficult-to-audit figures in the accounts

n Aggressive application of accounting principles

n Conflicting or unsatisfactory evidence provided by management or employees

n Unusual documentary evidence such as handwritten alteration to document or


handwritten documentation which is ordinarily electronically printed

n Information provided unwillingly or after unreasonable delay

n Seriously incomplete or inadequate accounting records

n Unsupported transactions

n Unusual transactions, by virtue of their nature, volume or complexity

n Transactions not recorded in accordance with management’s specific or general


authorization

n Significant unreconciled differences between control account and subsidiary


records or between physical count and the related account balance which were not
appropriately investigated and corrected on timely basis

n Inadequate controls over computer processing

n Significant differences from expectations disclosed by analytical procedures

n Fewer confirmation responses than expected or significant differences revealed by


confirmation responses

n Evidence of an unduly lavish lifestyle by officers or employees

n Unreconciled suspense accounts

n Long outstanding account receivable balances

Audit Practice Manual – Revised 70


Planning Phase –
Fraud Risk Assessment Document

(b) Audit procedures


Document the additional audit procedures performed as a result of the circumstances noted
above.

V Evaluation and Disposition of Misstatements


When we confirm that the financial statements are materially misstated as a result of fraud,
or is unable to conclude whether, we consider the implication for the audit in accordance
with ISA 320 “Audit Materiality” paragraphs 12-16 and ISA 700 “The Auditor’s Report
on Financial Statements” paragraphs 36-46.

Audit Practice Manual – Revised 71


Planning Phase –
CIS Questionnaire

Computer Information Systems W.P.Ref.


Prepared by
Questionnaire
Date

Business processes are often facilitated by computer information systems. In planning the audit,
we obtain an understanding of the:

W.P. Ref

I. Level of Dependence the Entity has on Computer


Information Systems (include a list of the entity’s computer
information systems)
Obtain an overview of the Company’s IT infrastructure platform and
architecture, including network, servers, firewalls, EDI/Internet, extranet,
operating systems and versions, database management systems and versions, etc.
(addresses architecture and inventory of applications).

Obtain a wide area network diagram.

Obtain a descripton of the e-Business infrastructure.

Where are the main data centers located? Does the Company have
other significant IT centers?

What are the Company’s mission-critical systems and applications?

What functions do these systems perform?

What platform are the systems on and where are they located?

Which of the systems and applications are network-centric, i.e.,


depend on the network for user, customer, vendor, or partner access?

What data is maintained on I.T. systems that would be considered


“intellectual properties” of the company?

Audit Practice Manual – Revised 72


Planning Phase –
CIS Questionnaire

W.P. Ref

II. Application Controls (ERP, Supply Chain, CRM, Logistics)


1. Please describe the primary application(s), including
interface(s).

n For example, if the company uses an ERP system (SAP,


PeopleSoft, Oracle, JD Edwards, BaaN) then note the version in
use as well as modules implemented.

n Include other significant applications, such as bolt-on’s and


reporting tools (Siebel, Manugistics, i2, Commerce One, Ariba,
Hyperion, Crystal)
2. Please describe how the application is used by the business,
i.e., is it a transaction processing engine or is it used to enable a
competitive business practice such as Supply Chain Management or
Customer Relationship Management, or both?

3. Please describe how the application is supported.

n Such as: IT staff, superusers, business analysts.

n Is vendor support provided? (note that in some cases it is


possible to have the vendor support expire if the version is not
upgraded, for example in SAP versions prior to 3.1I and in
Oracle Applications 10.7)

n Are patches and fixes current?

4. Please describe the interaction between IT and users, for


example Business Analysts (IT staff in each functional department)
and Help Desk.

5. Please describe any changes made to the application(s) or


interface(s) during the last year including controls used.

n For example, data conversion and migration from an existing


Legacy system to the application, upgrades. Controls would
include testing, balancing, etc.

6. Please describe future plans for the applications during the next
1-2 years.

For example, upgrades, adding new functionality (CRM, SCP, Web), use of
a data mart/warehouse, migrating to a new application (BaaN customers),
developing an in-house application (“make vs. buy”).

Audit Practice Manual – Revised 73


Planning Phase –
CIS Questionnaire

W.P. Ref

III. Computer information systems skills and resources


1. Please provide an overview of the IT organization’s
management (governance) structure, including roles and
responsibilities. Note if a separate Information Security Officer role
is used or planned.

2. What is the number of IT staff?

3. Where is most time spent by the IT department?

4. What training is provided for IT staff? How is it tracked?

5. What is the process and timing for performance reviews?

6. Please describe how segregation of duties is accomplished (for


example, developer should not migrate program to production).

Audit Practice Manual – Revised 74


Planning Phase –
CIS Questionnaire

W.P. Ref

VI. Information Security


1. What is the approach to network security?

n For example, use/restrictions of analog lines and other telecom


entry points into the network, security policies and procedures
for using the company network, Internet access policies,
firewall configuration (external services
permitted/offered/available and monitoring of violations),
controls to ensure segregation of Internet/Intranet.

2. How is access to the Company’s systems from inside and


outside the Company campus secured?.

n For example, use of a Virtual Private Network, RAS servers

3. How are database(s) secured.

4. How are operating systems secured?

5. What logical security mechanisms and procedures are in place


at the Company?

n For example, password conventions (length, expiration,


characteristics), unsuccessful user login lock-outs, automatic
logoff if inactive user, all users must have unique ID’s, generic
ID’s are not used.

6. What are the security administration procedures for


establishing, changing and deleting user access to the network and to
applications.

7. What role does the Help Desk have to assist in administering


and/or enforcing security?

8. What level and type of access is permitted to external parties


(customers, vendors)?

9. What virus scanning and detection techniques and procedures


have been implemented?

10. What physical security controls have been established for the IT
environment. Obtain a description of access security, environmental
controls, etc.

Audit Practice Manual – Revised 75


Planning Phase –
CIS Questionnaire

W.P. Ref

11. How is intellectual property secured (logically on the system,


and physically for other media)? Do employees who work with
intellectual property sign non-disclosure and non-compete
agreements?

12. Are shredders or secure recycling services provided for secure


disposal of confidential documents?

13. How is data privacy is achieved?

14. How are developers are restricted from altering production


data?

15. How does the Company ensure its security controls (policies,
access procedures, maintenance) remain relevant and effective?

n For example, with a migration to e-commerce, web-enabled


systems.

16. Please describe monitoring and review procedures, i.e., is


network scanning performed every quarter? Do internal IT Auditors
perform an annual review?

Audit Practice Manual – Revised 76


Planning Phase –
CIS Questionnaire

W.P. Ref

V. Reliability of Computer Information Systems


1. How does the company ensure that its IT environment (technologies,
platforms and architecture) can support its business strategy?

n High availability (critical for some companies, downtime is


expensive)

n Systems/data recovery

2. What redundancy and diversity have been built into the wide area
network? How is the network monitored and how frequently? Do
automated alarms and/or notifications signal support personnel in case
part of the network fails?

3. What recoverability capability exists for identified mission critical


systems and applications?

4. Please describe the current systems development procedures (if


software is internally developed). If the procedures are documented,
please provide a copy.

5. What change management policies, standards, and procedures are


implemented? What software tools support change management?
What is the scope of changes managed (applications, systems,
networks, all changes)? What is the organization scope (corporate
site, domestic, international, everywhere)?

6. What are the procedures for emergency changes?

7. Please describe the current approach for application software changes.


Include change initiation, review and approval, development, testing
(unit, system and user), and implementation. If the approach is
documented, please provide a copy.

n Please indicate whether there are separate persons involved in


migrating approved objects to production.

n Please describe procedures and controls that apply to


application objects, database objects, and batch scripts.

Audit Practice Manual – Revised 77


Planning Phase –
CIS Questionnaire

W.P. Ref

n Please describe security and control over source objects, and


procedures for version control.

n What project control mechanisms are followed for such


projects?

n Such as: project management methodology, systems


development methodology, capital authorization processes,
project plans, status reports, etc.

n Try to determine if there are any issues in this area, companies


may have “flavor of the month” projects (issue of need to
prioritize initiatives by executives)

9. Are changes tracked and trended in total volume, and by project or


type of change? Is any analysis performed to identify ways to reduce
the volume of changes?

10. Are applications subject to version control with changes accumulated


for version release? How are changes communicated to affected
users? What are the most significant recurring types of changes?

11. What problem management policies, standards, and procedures are


implemented? What software tools support problem management?
What is the scope (applications, systems, networks, all problems in
I.T., all problems)? What is the organizational scope (corporate site,
domestic, international, everywhere)?

12. Are problems tracked and trended in total volume, and by project or
type of problem? Is any analysis performed to identify recurring
problems and implement permanent corrections? What are the most
significant types of problems?

13. What are the data file backup procedures, including frequency,
retention, and storage location of back-up media? What objects are
included in the back-up procedures (source, scripts, database objects,
etc.)?

Audit Practice Manual – Revised 78


Planning Phase –
CIS Questionnaire

W.P. Ref

14. Does I.T. have documented contingency plans including such things
as:

n Individual hardware components failures

n Software failures

n Network failures

n Power interruption

n Voice communications failure

15. Does the Company have an I.T. Disaster Recovery Plan (provide a
copy if possible) including;

16. Prioritization of mission critical systems and data

17. System availability strategy and standards, including the use of any
outsourced service providers, if applicable.

18. Schedule for testing the plan and results of the last test

19. Do the sites and business units have a business resumption plan,
including plans for recovery from:

n Loss of office facilities

n Significant interruption in I.T. services.

Audit Practice Manual – Revised 79


Planning Phase –
CIS Questionnaire

W.P. Ref

VI. Degree and Rate of Change in Computer Information


Systems
1. Have there been significant changes to the IT environment in the past
year?

n Note any physical changes such as data center relocations or


logical changes such as migration of data from legacy systems
to new databases

2. Has the company made significant expansions or experienced


downsizing?

3. How often are mission critical applications upgraded? When was the
last upgrade?

4. What significant projects are currently in progress, or planned?

n For example:

n new applications/packages being implemented and


deployed,

n changes or upgrades to applications or packages,

n new development projects (e-business, data warehouse,


privacy, enterprise security architecture, new platform)

n shift to a Citrix-based platform (all products run from


server, not on user’s PC’s)

6. What is the business case for the significant IT projects? What


benefits are to be derived?

Audit Practice Manual – Revised 80


Planning Phase –
CIS Questionnaire

W.P. Ref

VII. Dependence on External Computer Processing


1. Does the company depend on any outsourcing (including Application
Service Provider) arrangements?

2. Have Third Party Reports (SAS 70) been obtained and reviewed?
What steps have been taken to assess and act on any client control
considerations or signficant weaknesses identified in the reports?
Review the reports for the following:

n any control weaknesses noted which could present a strategic


business risk

n any user control considerations that the Company has not


adequately addressed.

3. What procedures and controls are use to establish third-party


providers/contract services?

4. What procedures are established to monitor service levels?

5. What procedures are established to assure processing integrity?

6. How are licenses monitored?

Audit Practice Manual – Revised 81


Planning Phase –
CIS Questionnaire

W.P. Ref

VIII.Direction and Operation of Computer Information Systems


1. Are the current system(s) meeting the business’ needs?

2. What are the relevant IT KPI’s for management reporting


(availability, response time, projects on budget/time) and how are they
used? What is the history of meeting KPI’s and SLA’s?

3 What are the business risks, concerns and issues you have focused on
during the past year?

n New strategy (moving to an e-commerce platform, web-enabled


self service access, developing strategic alliances,
outsourcing/ASP, or bringing functions “in house”)

n Mergers, acquisitions (may have experienced issues with


integrating systems)

n Budget cuts, layoffs, downsizing (impacts ability to maintain


environment)\

n Projects

4. What are the key business drivers and how does IT enable them?

5. Who determines the direction of IT and the IT strategy?

1. For example:

n Chief Technology Officer

n IT Steering Committee

n IT Project Management Office

Audit Practice Manual – Revised 82


Planning Phase –
CIS Questionnaire

W.P. Ref

6. What is the current business strategy?

n Note if e-business is part of the Company’s strategy.

n Note if achieving the Company’s strategy involves significant


changes, new risks may be introduced to the Company as a
result.

n Consider: magnitude of impact of the changes, time frame to


accomplish the changes, and velocity of change.

7. What is the current IT strategy? If an IT strategy document exists,


please provide a copy.

8. What is the annual IT budget? How is the budget developed


(benchmark, percent of sales)?

9. What technology and security policies, standards, and


procedures are published. How are they communicated (for example,
on an Intranet or employee handbook)? How are they enforced?
Obtain a list, and obtain and review key policies, standards, and
procedures to confirm existence. Obtain copies of relevant sections or
parts to support evidence of existence or findings.

Audit Practice Manual – Revised 83


Planning Phase –
General Purpose IT Control Checklist

General Purpose CIS Checklist WP Ref.:


Prepared by
Date
Reviewed by
Date
Client:
Period:

I Purpose
Completion of General Purpose CIS Checklist should be considered in planning an audit.
Where a more detailed review of the IT control environment is required, other CIS
questionnaires should be completed. This checlist assists in a high level evaluation of the
IT control environment to identify any control weaknesses for discussion with the client.
It also assists in forming a preliminary assessment as to whether reliance on CIS controls
may be possible. The output of this checklist is a Client IT Discussion Agenda (CDA).

II Preparation and Staffing


The involvement of a computer audit specialist is typically not necessary. However, a
computer audit specialist might be considered, for example, on new engagements, clients
undergoing IT expansion or development, or perhaps on a three year cyclical basis.

The answers to the questions on this worksheet would usually be determined by


observation and enquiry, based primarily on discussions with the client's IT staff.

III Questions
The worksheet is divided into seven sections, consisting of generic questions applicable to
all computing environments. Each section is headed by a control objective. Supporting
questions provide information to assist the auditor in assessing the stated objective. For
most of the supporting questions, there is a 'Consider', providing the reviewer with issues
to think about when answering the question. The 'Consider' points are not mandatory;
their aim is to provide guidance only.

The questions are designed as an aid to evaluating the IT control environment. The
auditor will usually describe the relevant control features in narrative in the 'Comments /
WP Ref.' column, cross-referenced to supporting working papers as necessary. The 'Y/N'
column is used to highlight overall conclusions and the 'CDA' column to flag items for
discussion with the client.

Audit Practice Manual – Revised 84


Planning Phase –
General Purpose IT Control Checklist

Guidance notes are included on the facing page of each question, including the implication
of a 'No' answer which is noted in italics. These notes are for guidance only in completing
the questionnaire and do not necessarily cover all relevant issues.

IV Conclusion
If issues are raised from this document, a decision should be made whether to include
points, specifically for 'No' answers, in the Client IT Discussion Agenda, for discussion by
the engagement partner with the client. This should be indicated in the column marked
'CDA'.

(a) Organisation and Management Policies Objective Summary of findings


Satisfied

Y/N

1. To ensure that organisational policies


and management procedures are in
place to enable the IT function to be
properly controlled.

Y/ CD Comments / WP Ref.
N A
Y/N

IT Strategy

1.1 Is there a formal documented plan for IT


covering systems to be developed or
enhanced over the next 1 - 3 years?

1.2 Is there an IT Steering Committee?

Consider

n Other, less formal, means of establishing


and communicating IT strategy

n User management representation

Audit Practice Manual – Revised 85


Planning Phase –
General Purpose IT Control Checklist

Y/ CD Comments / WP Ref.
N A
Y/N

Computer Security Policy

1.3 Is there a formal computer security policy?

Consider

n Approval at board level

n Objectives

n Scope and coverage

n Responsibility for monitoring or update

n Distribution to staff

1.4 Is there an end user computing policy?

Consider

n Software licencing or copyright

n Use of standard software

n Anti-virus procedures

n Security

n Distribution to staff

Audit Practice Manual – Revised 86


Planning Phase –
General Purpose IT Control Checklist

Y/ CD Comments / WP Ref.
N A
Y/N

Internal Audit

1.5 Is there an internal audit department?

Consider

n Terms of reference

n Organisation chart

n Independence

n Expertise in IT

n Training or experience

Control Consciousness

1.6 Is the attitude of management and the structure


of the organisation conducive to control
consciousness?

Audit Practice Manual – Revised 87


Planning Phase –
General Purpose IT Control Checklist

(b) Segregation of Duties Objective Summary of findings


Satisfied

Y/N

2. To ensure there is reasonable segregation of


duties for staff, both within the IT
department and between the IT and user
functions, to prevent and/or detect errors or
irregularities.

Y/N CD Comments / WP Ref.


A
Y/N

2.1 Is there an organisation chart for the IT


department?

(Obtain a copy)

Audit Practice Manual – Revised 88


Planning Phase –
General Purpose IT Control Checklist

2.2 Is segregation of duties within the IT


department appropriate for the size of the
organisation?

Consider

n Segregation of functions e.g.

n Number of IT staff
n Systems programmers
n Application programmers
n Database administrator
n IT operations
n Data input
n Network security

n Reliance on key personnel

n Reliance on contract staff

Audit Practice Manual – Revised 89


Planning Phase –
General Purpose IT Control Checklist

Y/N CD Comments / WP Ref.


A
Y/N

2.3 Do IT staff only have responsibilities for


functions within the IT department?

Consider

n Responsibility for initiating or


authorising transactions

n Custody of valuable or moveable assets

n Amendments to master files

n Correction of input errors

Audit Practice Manual – Revised 90


Planning Phase –
General Purpose IT Control Checklist

(c) Logical Access Controls Objective Summary of findings


Satisfied

Y/N

3. To ensure that unauthorised access cannot


be gained to sensitive data or programs.

Y/N CD Comments / WP Ref.


A
Y/N

3.1 Have sensitive data or applications been


identified?

3.2 Have appropriate security measures been


implemented to restrict users' access to data
and programs?

Consider

n User-id and passwords

n Menu facilities

n Management approval of menu options

3.3 Are passwords changed regularly? (Note how


often)

Audit Practice Manual – Revised 91


Planning Phase –
General Purpose IT Control Checklist

Y/N CD Comments / WP Ref.


A
Y/N

3.4 Are development staff prevented from


accessing data and software in the production
environment?

Consider

n Segregation of production and test


environments

n Procedures for emergency changes eg

n documentation

n review

3.5 Is the allocation, authorisation and use of


powerful user-ids or passwords controlled and
monitored?

(Note to whom these passwords are assigned)

Audit Practice Manual – Revised 92


Planning Phase –
General Purpose IT Control Checklist

(d) Physical Access Controls Objective Summary of findings


Satisfied

Y/N

4. To ensure that the risk of accidental or


malicious damage to, or theft of, computer
equipment or media is minimised.

Y/N CD Comments / WP Ref.


A
Y/N

4.1 Is there adequate physical security over


computer equipment, data, media and
documentation?

Consider

n Buildings (including the protection of


terminals)

n Computer room

n Communications equipment

n Fire proof storage for magnetic media

n Fire prevention or detection

n Off-site storage

Audit Practice Manual – Revised 93


Planning Phase –
General Purpose IT Control Checklist

(e) Systems Development and Program Objective Summary of findings


Change Controls Satisfied

Y/N

5. To ensure that systems development and


program changes are authorised, tested,
documented and operate as designed.

Y/N CD Comments / WP Ref.


A
Y/N

5.1 In-house developments


For in-house developed systems, is there a
formal methodology?

Consider

n Note the methodology eg

n SSADM (Structured Systems


Analysis & Design Methodology)

n Internal procedures developed by the


systems development team

n Prototyping software

n Programming standards

Audit Practice Manual – Revised 94


Planning Phase –
General Purpose IT Control Checklist

Y/N CD Comments / WP Ref.


A
Y/N

5.2 Packages

Is the business dependent on externally


supplied and maintained application systems?

Consider:

n Maintenance agreement with the supplier

n Changes and upgrades checked and


tested before installation

n Source code provided

n Measures to prevent unauthorised access to the


software

n If the software is owned by the supplier,


is there an escrow agreement?

5.3 Are users appropriately involved in the systems


development process?

Consider

n Specification of requirements

n Contribution to priority setting

n User sign offs

n User acceptance testing

n Training

n Formal approval before implementation

n Development of user manuals etc.

Audit Practice Manual – Revised 95


Planning Phase –
General Purpose IT Control Checklist

Y/N CD Comments / WP Ref.


A
Y/N

5.4 Are development staff restricted from


implementing new program versions into the
production environment?

5.5 Is comprehensive systems and program


documentation produced?

Consider

n Compliance with standards

n System documentation

n Operating instructions

n User documentation

5.6 Are there program change control procedures?

Consider

n Program change documentation

n Management authorisation

n Test procedures

n User involvement in authorising and


testing

Audit Practice Manual – Revised 96


Planning Phase –
General Purpose IT Control Checklist

(f) Business Continuity and Computer Objective Summary of findings


Operations Satisfied

Y/N

6. To ensure that the business will be able to


resume effective operations (within a
reasonable period of time) in the event that
the existing processing facilities are no
longer available.

Y/N CD Comments / WP Ref.


A
Y/N

Back Up Procedures

6.1 Are back up copies of data files and programs


taken regularly?

(Note the back up cycle)

Consider

n Data at end of day, week, month, year

n Programs taken once modification is


implemented

6.2 Are back up copies held in a secure location


remote from the computer site?

Consider

n Data files

n Programs

n Systems software

n Systems documentation

n Operating procedures

n User procedures

n Disaster Recovery Plan

Audit Practice Manual – Revised 97


Planning Phase –
General Purpose IT Control Checklist

Y/N CD Comments / WP Ref.


A
Y/N

6.3 Are back up versions taken offsite regularly?

6.4 Have the back up and recovery procedures been


tested?

Consider

n Time taken to recover

Disaster Recovery Planning

6.5 Have the business's critical systems been


identified?

Consider

n How long could the business operate


effectively without their critical computer
systems?

eg. hours, < 7 days, etc.

6.6 Has a disaster recovery plan been developed,


documented and tested?

Consider

n Regular review and update of the plan


(Note when it was last updated)

n Periodic testing

(Note when last tested)

Audit Practice Manual – Revised 98


Planning Phase –
General Purpose IT Control Checklist

Y/N CD Comments / WP Ref.


A
Y/N

Insurance

6.7 Does the organisation have adequate insurance


cover relating to its IT risks?

Consider

n Loss of computer equipment and data

n Consequential loss

n Additional cost of working

n Denial of access

n Exclusion clauses

Operations

6.8 Are operating procedures documented?

Consider

n Processing requirements

n Recovery or restart procedures

n Emergency changes

n Incident reporting

n Housekeeping

Audit Practice Manual – Revised 99


Planning Phase –
General Purpose IT Control Checklist

(g) User Management e.g. Finance Director / Objective Summary of findings


Financial Controller / Chief Accountant Satisfied
Y/N

7. To ensure that IT systems satisfy the


business needs.

Y/N CD Comments / WP Ref.


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

Audit Practice Manual – Revised 100


Planning Phase –
General Purpose IT Control Checklist

7.3 Are the systems stable?


Consider
n Few modifications since, say, six months
before the start of the accounting period
n New systems planned

Audit Practice Manual – Revised 101


Planning Phase –
General Purpose IT Control Checklist

V CIS Control Reliance

Summarise the internal control weaknesses identified during our review which have an impact on the
following control objectives, for consideration when planning reliance on CIS controls.

1. Personnel duties, both within the IT department and between the IT and user functions, are
reasonably segregated to prevent and/or detect errors or irregularities.

_____________________________________________________________________________

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

2. Access to sensitive data or programs is restricted to authorised personnel only.

_____________________________________________________________________________

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

3. Systems development and program changes are authorised, tested and documented, and should
operate as designed.

_____________________________________________________________________________

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

Audit Practice Manual – Revised 102


Planning Phase –
General Purpose IT Control Checklist

Client:

CLIENT IT DISCUSSION AGENDA

1. IT strategy.

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

2. Computer security policy and procedures.

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

3. Segregation of duties in the IT department.

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

4. Controls over access to the computer systems.

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

Audit Practice Manual – Revised 103


Planning Phase –
General Purpose IT Control Checklist

5. Physical security over computer equipment.

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

6. Systems development and program change procedures.

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

7. Back up copies of data and programs.

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

8. Disaster recovery plan.

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

Audit Practice Manual – Revised 104


Planning Phase –
General Purpose IT Control Checklist

9. User satisfaction with IT.

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

10. Other (eg relevant issues from the Engagement Overview and Client IT information form)

n Critical Business Areas

n Reliance on key personnel

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

Audit Practice Manual – Revised 105


Planning Phase –
Analytical Procedures at Planning Stage
Analytical Review – Ratio Analysis

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 conversion, 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 Consumption Cost


of goods manufactured. Cost of goods manufactured

8. Average raw material purchase price Total Purchase Price of Raw


per unit. material
total units purchased

9. Average conversion cost per unit of Conversion Cost


production unit produced

10. Conversion cost without depreciation Conversion Cost without


per unit depreciation
units produced

11. Labour cost per unit of production Labour Cost


units produced

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

13. Electricity consumption per unit of Electricity consumption in rupees


production
units produced

14. Packing material cost per unit of Packing material cost


production
units produced

15. Administrative expenses / unit of Administration Expenses


production
units produced

16. Selling expenses per unit sold. Selling Expenses


units sold

Audit Practice Manual – Revised 106


Planning Phase –
Analytical Procedures at Planning Stage
Analytical Review – Ratio Analysis

FORMULA Y1 Y2 Y3 Y4

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:


______________________________________________________________________________________________

______________________________________________________________________________________________

______________________________________________________________________________________________

______________________________________________________________________________________________

Audit Practice Manual – Revised 107


Planning Phase –
Analytical Procedures at Planning Stage
Analytical Review – Ratio Analysis

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. 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

Audit Practice Manual – Revised 108


Planning Phase –
Analytical Procedures at Planning Stage
Analytical Review – Ratio Analysis

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. Owner’s stake in the fixed assets Fixed assets


Net worth

Reasons for Fluctuations:


______________________________________________________________________________________________

______________________________________________________________________________________________

______________________________________________________________________________________________

______________________________________________________________________________________________

Audit Practice Manual – Revised 109


Planning Phase –
Analytical Procedures at Planning Stage
Review of Financial Performance of the Client

Review of Financial Performance of the Client


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

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

Audit Practice Manual – Revised 110


Planning Phase –
Analytical Procedures at Planning Stage
Review of Financial Performance of the Client

Suggested Format of Financial Performance Review


(a) Summary Financial Data Period Ending X1 X2 X3 X4
(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

Audit Practice Manual – Revised 111


Planning Phase –
Analytical Procedures at Planning Stage
Review of Financial Performance of the Client

(d) Asset Turnover X1 X2 X3 X4

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

Audit Practice Manual – Revised 112


Planning Phase –
Internal Audit Function Evaluation

Internal Audit Function Evaluation WP Ref.:


Prepared by:
Date:
Client:
Period:

I Introduction
This working paper is relevant when auditor consider the work of internal auditing to:

n provide audit evidence and when


n internal auditing provides direct assistance.

We consider how the internal audit function affects the entity’s accounting and internal
control systems and develop an effective audit approach in the following manner.

Approach Documentation

Understand internal Strategy and Planning Document


audit’s activities
We obtain and document an understanding of the internal audit
function, to the extent that it operates as part of management’s
control system.

Perform a preliminary Section I of this working paper


assessment
We document our information obtained, and preliminary
assessment of the internal audit function.

Modify nature, timing Strategy and Planning Document


and extent of audit
procedures If it is determined that utilising internal auditing will have a
significant effect on the planning and scoping of the audit then
we document our use of internal auditing.

Evaluate and test work Section II of this working paper


of internal auditing
When we intend to use specific work of internal auditing we
document our evaluation and testing of the effectiveness of
internal auditing’s work.

Obtaining direct Section III of this working paper


assistance
If we request direct assistance from internal auditing we
document our procedures.

Refer to ISA 610, “Considering the Work of Internal Auditing” for further guidance.

Audit Practice Manual – Revised 113


Planning Phase –
Internal Audit Function Evaluation

Section I—Preliminary assessment of the internal audit function


When it appears that internal auditing is relevant to the external audit of the financial statements
in specific audit areas, we make a preliminary assessment of internal auditing by obtaining
information about matters such as:

n the nature and extent of the internal audit function's assignments

n whether management acts on internal auditing's reports and recommendations and how
this is evidenced

n the technical competence of the internal audit function

n the due professional care of internal auditing, especially whether the work is adequately
planned, supervised and reviewed

n the objectivity of internal auditing.

Comments/Preliminary Assessment

Audit Practice Manual – Revised 114


Planning Phase –
Internal Audit Function Evaluation

Section II—Evaluate and test the work of internal auditing


When we intend to use specific work of internal auditing, we evaluate and test that work to
confirm its adequacy for our purposes.

(a) Evaluate
1. We consider whether:

n the work is performed by people with adequate technical training and proficiency

n the work of assistants is properly supervised, reviewed and documented

n sufficient appropriate audit evidence is obtained to afford a reasonable basis for the
conclusions reached

n conclusions are appropriate in the circumstances and reports are consistent with the
results of the work performed

n any exceptions or unusual matters disclosed by internal auditing are properly


resolved by management.

Evaluation

Audit Practice Manual – Revised 115


Planning Phase –
Internal Audit Function Evaluation

(b) Test
List any of the procedures below relating to testing of internal auditing that may be considered
given specific client circumstances. Our tests of the internal audit function's work may include
the following procedures.

n Observe the internal audit function perform audit procedures

n Enquire of the internal audit function about the nature of its work

n Re-perform some of the audit procedures previously performed by the internal audit
function

For example, we may test the same controls, transactions or balances as the internal audit
function tested.

n Perform different audit procedures

For example, we may test controls, transactions or balances other than those the internal
audit function tested.

n Examine internal auditing's working papers.

[List any other procedures relating to internal auditing issues that may be considered given
specific circumstances. Our procedures, and the documentation of those procedures, are to
be sufficient to support our decision to rely on internal auditing’s work.]

# Procedure(s) Done by W/P Ref.


and date

Audit Practice Manual – Revised 116


Planning Phase –
Internal Audit Function Evaluation

Section III—Obtaining direct assistance


We may request direct assistance from the internal audit function. When the internal audit
function provides direct assistance, we:

1. Perform a preliminary assessment of the internal audit function

2. Inform internal auditing of their responsibilities, the objectives of the procedures they are
to perform and matters that may affect the nature, timing and extent of audit procedures

3. Supervise the work and review the working papers that the internal audit function prepares
on our behalf

Audit Practice Manual – Revised 117


Planning Phase –
Internal Audit Function Evaluation

Conclusion

Audit Practice Manual – Revised 118


Planning Phase –
Guidelines for Observation of Physical Inventories

Using the Work of Another Auditor WP Ref.:


Prepared by:
Date:
Client:
Period:

I Introduction
This document should be prepared by an auditor when:

n the audit is to be carried out with co-auditor; or

n financial statement of component (any entity whose financial information is included in


the financial statement of the client) are audited by some other auditor

Documentation may be included in this document, or other working papers (with cross-reference
to this document).

Details of co-auditors / components and their auditor

S. No. Description of component (subsidiary, associate, Co-auditor/Auditor


joint venture, division, branch or others)

Audit Practice Manual – Revised 119


Planning Phase –
Guidelines for Observation of Physical Inventories

Section I
Professional competence of the other auditor
Consider:

(1) membership with professional organization

(2) membership or affiliation with other audit firm

(3) result of inquires and discussion with other auditor and banker(s)

Advise the other auditor at planning stage and obtain written representation about:

(1) compliance with independence requirements with respect to client/ component

(2) the use that is to be made of other auditor work

(3) areas requiring special attention

(4) timetable for completion of audit

(5) the accounting, auditing and reporting requirements

Discuss with other auditor:

(1) audit procedures applied by them

(2) review other auditor's procedures (questionnaires/ checklists)

Consider re-performing these procedures. Nature, timing and extent will depend on circumstance
of the engagement and professional competence of other auditor.

Consider the significant findings of the other auditor and discuss with management and other
auditor.

Audit Practice Manual – Revised 120


Planning Phase –
Guidelines for Observation of Physical Inventories

Professional competence of the other auditor

Audit Practice Manual – Revised 121


Planning Phase –
Guidelines for Observation of Physical Inventories

Section II - Main areas of judgment


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

Critical / significant audit area Audit approach

Audit Practice Manual – Revised 122


Planning Phase –
Guidelines for Observation of Physical Inventories

(b) Significant features of the year’s results


Please give details of significant features of the year’s results and of significant changes
from previous year’s profit and loss account and balance sheet and reasons for major
variations.

Significant features and financial Comments and explanations


statement captions with significant
changes

Audit Practice Manual – Revised 123


Planning Phase –
Guidelines for Observation of Physical Inventories

(c) Evaluation of internal control


Please identify all areas where you have relied on internal controls in restricting your
substantive tests, and provide details of work done to ascertain that the controls are
reliable.

Please provide details of areas where you have documented the company’s system by
means of flowcharts and / or notes indicating for each area the method used.

Audit Practice Manual – Revised 124


Planning Phase –
Guidelines for Observation of Physical Inventories

Please provide details of all significant weaknesses in the company’s system of internal
controls or deficiencies in the accounting records. If these have been reported in
writing to the company’s management please attach a copy of this report together with
the company’s response if any.

Where significant elements of the accounting records are processed by EDP systems,
describe your audit approach (e.g. use of specialists or other suitably trained staff; use
of enquiry programs or other computer assisted techniques) and explain how you have
satisfied yourselves about the operation of any internal controls with EDP elements
upon which you have relied.

Audit Practice Manual – Revised 125


Planning Phase –
Guidelines for Observation of Physical Inventories

(d) Errors and exceptions


Please provide details of significant errors and exceptions found and whether the financial
statements have been adjusted for these.

Details of Errors and exceptions Disposition

(e) Matters of judgment brought to the partner’s attention


Please provide details of matters of judgment, which were formally brought to the
partner’s attention during the audit and how these were resolved.

Matters of judgment How resolved

Audit Practice Manual – Revised 126


Planning Phase –
Guidelines for Observation of Physical Inventories

(f) Matters giving arise to a qualification in the audit report


Please provide full details of matters, if any, which resulted or will result in the audit
report being qualified.

(g) Other items attesting the accounts / disclosures


Please provide details of any other areas, which have a significant bearing on the
amounts and / or disclosures, stated in the accounts (e.g. related party transactions,
going concern problems) where you have had difficulty in determining whether these
amounts and/or disclosures are fairly presented.

Audit Practice Manual – Revised 127


Planning Phase –
Guidelines for Observation of Physical Inventories

Please provide details of any transactions (e.g. purchase and sale of assets, loans,
guarantees, contracts, etc.) with the directors of the company, the parent company,
other group companies or other related parties and indicate whether these are disclosed.

Conclusions:

Signed _________________________ Date _________________________

Audit Practice Manual – Revised 128


Planning Phase –
Audit Administration
Minimum Hourly Charge Out Rates for Audit Work

Minimum Hourly Charge Out Rates


For Audit Work By Practicing Members
ATR 14 (Revised)
1. The Council in its meeting held on 14 April 2003 reconsidered the minimum hourly
charge out rates for audit work by practicing members and decided to suitably increase the
same. The Council has authorized the following minimum hourly rates, which it considers
reasonable under the present conditions, as an indication, of the range of professional
charges for audit work presenting no exceptional characteristics. These are exclusive of
travelling, hotel expenses, out of pocket expenses and other disbursements:

Rupees
Partner 3,500
Qualified Assistants
Senior (5 years and above) 2,100
Junior (0-5 years) 1,400
Supervisor 500
Senior 350
Semi-Senior 285
Junior 175

2. The level of fee is to be mutually agreed between the auditor and his client, which largely
depends upon the volume of work involved and estimated time to be incurred by the
auditor. The Council whilst recognizing this principle is however, of a view that there has
to be minimum threshold of audit fee.

3. To achieve the desired objective, the following parameters are being prescribed which
shall govern the determination of a minimum prescribed audit fee (which may be increased
by consent having regard to specific circumstances of a company) based on the
applicability of any two parameters within a category. In case of applicability of a
combination of parameters in a specific situation, the highest prescribed minimum audit
fee shall be applicable.

Category Turnover Equity Fixed Assets Prescribed minimum Audit fee


Rupees in million Listed Other
Companies Companies

A Up to Rs. 10 Up to Rs. 10 Up to Rs. 10 Rs. 60,000 Rs. 40,000


B Rs.10 – 50 Rs.10 – 30 Rs.10 – 50 Rs. 75,000 Rs. 50,000
C Rs.50 – 100 Rs.30 – 50 Rs.50 – 100 Rs. 100,000 Rs. 60,000
D Over Rs.100 Over Rs. 50 Over Rs. 100 Rs. 125,000 Rs.100,000

Audit Practice Manual – Revised 129


Planning Phase –
Audit Administration
Minimum Hourly Charge Out Rates for Audit Work

Note:

i) The terms “turnover”, and “fixed assets” shall have the meanings assigned to them
in the Fourth Schedule to the Companies Ordinance, 1984 and the term “equity” as
defined in IASC Framework for the Preparation and Presentation of Financial
Statements.

ii) Considering the practical difficulties being faced by various practicing members in
the determination of audit fee, the Council has decided that the prescribed minimum
audit fee shall be charged without any exception. However, in case of an existing
audit client, the present audit fee shall be enhanced to the aforesaid prescribed level
over a period of three years with mutual consent provided it is not less than 60% of
the prescribed minimum in the first year. Nevertheless, in case of acceptance of an
audit client by a practicing member for the first time the prescribed fee levels shall
be strictly observed.

4. Minimum Audit Fee in Certain Circumstances

For audit engagements of clients in the pre-incorporation / pre-operation stages or in case


where less than two of the aforesaid parameters are attracted for whatever reason including
sickness of the project or closed operations or discontinuation of business, the prescribed
minimum audit fee chargeable by the practicing members shall be as under.

Listed Other
Companies Companies

Minimum audit fee Rs. 25,000 Rs. 15,000

5. The Code of Corporate Governance requires the auditors to:

n Attend the Audit Committee Meetings of clients

n Issue a Review Report on Statement of Compliance with Best Practices of


Corporate Governance

n Issue Review Report on half – yearly financial statements

n Special certification required by regulators over and above normal scope of


audit.

The minimum audit fee prescribed above is exclusive of the above additional services to
be rendered by a statutory auditor and professional fee for such services shall be charged
separately by mutual consent.

Audit Practice Manual – Revised 130


Planning Phase –
Audit Administration
Minimum Hourly Charge Out Rates for Audit Work

6. In case of joint audits, fee may be shared among the auditors as may be mutually agreed
between them.

7. The fee may be reviewed annually to cover inflationary effects in costs.

8. The hourly rates and fee are exclusive of traveling and hotel expenses, out of pocket
expenses and other incidental costs which would be reimbursable to auditors at actual.

9. In case of a religious or charitable institution or a company “not for profit”, the practicing
members may undertake to do the audit on a token fee or on an honorary basis.

10. At the time of quality control review, the reviewer will ensure the compliance of this ATR.

This ATR supersedes ATR 14 (revised) issued pursuant to the Council's decision of 30
July 2001.

Audit Practice Manual – Revised 131


Planning Phase –
Audit Administration
Detail Performance Summary

Staff Planning and Time Allocation


n Detailed Performance Summary

n Time Budget

Audit Practice Manual – Revised 132


Planning Phase –
Audit Administration
Detail Time Budget

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

Budget

BUDGET (hours) ACTUAL (hours)


Sup. Sr. S.Sr. Jr. Total 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

Audit Practice Manual – Revised 133


Planning Phase –
Audit Administration
Detail Time Budget

BUDGET (hours) ACTUAL (hours)


Sup. Sr. S.Sr. Jr. Total 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
Manager
Partner
COST
FEE
OVER (UNDER) RECOVERY

Audit Practice Manual – Revised 134


Planning Phase –
Audit Administration
Daily Time Control / Staff Attendance Sheet

Time Sheet

n Daily Time Control / Staff Attendance Sheet

Audit Practice Manual – Revised 135


Planning Phase –
Client Profile / Client Prepared Scheduled Request

Client Profile
n Nature of client business

n Number of Branches (if any)

n Company Secretary

n Legal Advisor(s)

n Tax Advisor

n Major Banks

n Organizational Charts, etc.

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

Audit Practice Manual – Revised 136


Planning Phase –
List of Authorised Signatories

List of Authorised Signatories


Name Designation Monetary Limit Allowed Signature

____ __________ _____________________ ________


____ __________ _____________________ ________
____ __________ _____________________ ________
____ __________ _____________________ ________
____ __________ _____________________ ________
____ __________ _____________________ ________
____ __________ _____________________ ________
____ __________ _____________________ ________
____ __________ _____________________ ________
____ __________ _____________________ ________
____ __________ _____________________ ________

Note : Information shall be used in performing audit procedures (e.g. Test of Controls &
Substantive Testing). If there are no significant changes since previous audit, this may
be transferred to the permanent file.

Audit Practice Manual – Revised 137


Planning Phase –
Notes of Meeting with Client

Notes of Meeting With Client


(for recurring audits)

CLIENT NAME

DATE

VENUE

TIME

FIRM Name Designation


REPRESENTATIVES

CLIENT Name Designation


REPRESENTATIVES

CONCLUDING
REMARKS

Sign off
Prepared by Reviewed by

Date Date

Audit Practice Manual – Revised 138


Planning Phase –
Notes of Meeting with Client

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. Value 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

Audit Practice Manual – Revised 139


Planning Phase –
Notes of Meeting with Client

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

n Banks

n Debtors

n Creditors

n Legal Advisors

n Tax Advisors

n Other

Changes in economic
conditions

Changes in industry and


operations

Significant Changes in
Business since Last year

Changes in key finance and


operations managers

Changes in management /
Stake holders / Owners

Business objectives and


whether they are being met

Changes in market strategies

Audit Practice Manual – Revised 140


Planning Phase –
Notes of Meeting with Client

Availability of latest cash


flows / budgets

Actual results to date


(comment generally)

Financial restriction placed by


debt covenants

Risk / Probability of breach of


debt covenants

Changes in credit terms for


customers since last year

Changes in information
systems and technology in use

Changes in significant
accounting processes

Effects of any recent or


pending government
legislation / actions

Effects of outcomes of
litigation since last year

Effect of any new tax rules /


legislation

New competitors in product


lines of the company

Changes in market share

Significant changes in major


customers / suppliers

Acquisitions / disposals of
associates or any anticipation
thereof

Changes in internal reporting


formats

Changes in capital structure of


the entity

Audit Practice Manual – Revised 141


Planning Phase –
Notes of Meeting with Client

Names of key financiers and


changes thereto.

Significant changes in system


of internal controls since last
year

Significant changes in
accounting policies

Effect of new accounting


pronouncements

Clients international reporting


requirements and changes
thereto

Miscellaneous

Audit Practice Manual – Revised 142


Planning Phase –
Notes of Review of Correspondence File

Client:_____________________________ Prepared by:____________ Date:______________


Accounting Period:___________________ Reviewed by:___________ Date:______________

Notes of Review of Correspondence 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”.

Audit Practice Manual – Revised 143


Planning Phase –
Points Forward to Next Year

Client:_____________________________ Prepared by:____________ Date:______________


Accounting Period:___________________ Reviewed by:___________ Date:______________
Points Forward to Next Year

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

Audit Practice Manual – Revised 144


Planning Phase –
Points Forward to Next Year

Assess Client Satisfaction and Team Debriefing

Audit Practice Manual – Revised 145


Execution Phase –
General Instructions for Documentation of Audit Execution File

EXECUTION PHASE
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.

Audit Practice Manual – Revised 146


Execution Phase –
Sampling

Sampling
I Definition of sampling
Para 3 of AS 19, 'Audit sampling and other selective procedures' states that: "Audit sampling
(sampling) involves the application of audit procedures to less than 100% of items within an
account balance or class of transactions such that all sampling units have a chance of selection.
This will enable the auditor to obtain and evaluate audit evidence about some characteristic of
the items selected in order to form or assist in forming a conclusion concerning the population
from which the sample is drawn. Audit sampling can use either a statistical or a non-statistical
approach."

II Importance of sampling
Bulks of business transactions do not justify a review or audit of the entire account balances and
class of transactions. An auditor must apply various methods and techniques in selection of a
limited size of population to verify or review. Selected sample helps the auditor in forecasting
conclusion on the entire population based on the selected sample.

Based on sample size may be varied based on the conclusion. Appendix 1 of AS 19, 'Audit
sampling and other selective procedures' depicts the following examples of factors in framing
sample size for Test of controls.

Factors Effect on
sample size

An increase in the auditor's assessment of inherent risk Increase

An increase in the auditor's assessment of control risk Increase

An increase in the use of other substantive procedures directed at the Decrease


same financial statement assertion

An increase in the auditor's required confidence level (or conversely, a Increase


decrease in the risk that the auditor will conclude that a material error
does not exist, when in fact it does exist)

An increase in total error that the auditor is willing to accept (tolerable Decrease
error)

An increase in the amount of error the auditor expects to find in the Increase
population

III Risks
The risk associated with the sampling is the fact that the incorrect fake / fraudulent transaction or
procedure may not be selected in sampling. This may result in drawing incorrect conclusions /
opinion based on the result of the samples being selected.

Audit Practice Manual – Revised 147


Execution Phase –
Sampling

The question is how to encounter these risks associated with sampling? The auditor has to
consider the following factors and sampling methodology in selection of a sample:

(a) Appropriateness of sample to the objective


Sampling procedures applied shan be consistent with the objectives of the auditor.

(b) Completeness of sample population


In order to achieve the objective of sampling the auditor shall ensure that population is complete
in all respects. For example, if the auditor intends to select a sample of payment vouchers from a
file, conclusions cannot be drawn unless the auditor is satisfied that all vouchers have in fact
been filed.

Whichever form of sampling is used by the auditor all the population shall have a chance of
selection. Further, as the purpose of sampling is to draw conclusions about the entire population,
the internal auditor shall endeavor to select a representative sample by choosing samples, which
have characteristics typical of the population.

IV Planning The Sample


When planning the sample, the following needs to be considered:

(a) The Audit Objectives


In particular, this would be whether tests are for over or under statement of an account balance
or class of transactions.

(b) The Population


The parameters of the population to be tested need to be determined. It must be ensured that the
population from which the sample is to be drawn, is appropriate for the specific audit objective
(for example, if testing debtors, the population should be the debtors balances listing; if testing
creditors, the population should be subsequent disbursements, or unpaid invoices or suppliers’
statement). When defining a population, the following should be remembered:

- the results of a test on a sample can only be evaluated to form a conclusion on the
population from which the sample is taken

- sampling from a population does not establish the completeness of that population (i.e.
for completeness other specific tests are performed e.g. checking subsequent period expense
vouchers, delivery challans / good receiving notes before and after year end etc.).

- the extent of key or high value items must be considered

- the different considerations that apply to debit or credit balances within an account
balance

- the extent of key or high value items must be considered

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- the different considerations that apply to debit or credit balances within an account
balance

- the extent to which a population can be divided into smaller populations, each of which
is a group of sampling units with similar characteristics (that is, how stratified the population
can be).

e.g. In net debtors, we have some credit balances alongwith debit balances, thus, the
population is stratified into two, (a) Credit Balances and (b) Debit Balances.

(c) The Sampling Unit


The sampling unit needs to be defined, as the selection of the sample and the evaluation of the
test results depend on the unit selected. The value of all units must equal the total value of the
account balance or class of transactions. Often the population can be divided into sampling units
in a variety of ways (for example, in debtor balances confirmation requests, customer balances,
individual invoices or items on invoices can be used).

(d) Defining Tolerable Error


n in substantive testing, the tolerable error is the maximum amount or level of monetary error
which can be accepted to still conclude that the audit objective has been achieved. Tolerable
error is considered at the planning stage and, for substantive procedures, is related to
judgement on materiality. The smaller the tolerable error, the greater the sample size will
need to be.

n All errors found from all tests should be recorded on an overall ‘summary of error’ schedule;
the cumulative effect of all errors found from all audit tests may be material, even if, on an
individual test basis, errors are less then the tolerable error level.

n Consideration should also be given as to what level or amount of error is expected from the
test. A high expected error rate will imply that a larger sample should be taken. Presently, we
are considering a medium risk factor i.e. 1.8 as we heavily rely on the results of our
substantive procedures.

(e) Setting the sample size for substantive tests of transactions and balances
n The following factors are particularly important when setting a sample size:

n the sampling risk

n the tolerable error rate

n the expected error rate

n the population value (substantive tests of account balances only)

n the number of items in the population (small populations only)

n sampling risk

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Sampling risk is the risk that the conclusion, based on the sample tested, would differ from
the conclusion that would be reached if the entire population were subject to testing.
Sampling risk will always be present if a sample is tested, rather than 100% of a population;
the key factor is to decide the level of sampling risk to accept. The vital element in this
decision is how much reliance is being placed on the test. The reliance on the test will be low
if:

n the population tested is inherently unlikely to contain errors

n reliance is being placed on analytical procedures, or

n reliance is being placed on internal controls.

n The lower the risk the auditor is willing to accept, the greater the sample size will need to be
and lesser the transaction will be selected for verification. Therefore, the level of sampling
risk to accept will be decided by his assessment of inherent, analytical and control risk.
Presently based on our experience with clients and management attitude of companies, we
are setting risk factor to 1.8.

n Sampling risk can be contrasted with non-sampling risk, which occurs during any audit
procedures, since most evidence is persuasive rather than conclusive. The auditor may use
inappropriate procedures or misinterpret evidence and fail to recognise an error and he
attempts to reduce non-sampling risk by appropriate planning, supervision and review
procedures.

V Sampling methodology
Sample shall be drawn from the most current period that is from the immediately ended quarter.
Drawing of sample could be extended to a full year in circumstances where the result of tests
signifies nonconformity with the internal controls assessed during the preliminary review stage.
In these cases the best practice shall be to draw majority of samples from the most recent period.

Various techniques may be used in selection of a sample depending on the nature, size of
population and judgment of auditor. The following are some of the examples of sampling
techniques.

VI Sampling techniques
Sampling is classified as probabilistic (statistical sampling) or non-probabilistic.

n A probabilistic sample must be unbiased so that each element of the population has the same
chance of selection, and the probability of selection is known. The result can then be
statistically evaluated, objectively interpreted, and precision and reliability can be calculated.
Bias can be avoided by choosing samples using a randomization process.

n Non-probability sampling techniques result in samples that may not contain each element of
the population. There is also no attempt to control bias, as the auditor decides which item to
select.

Sample plans are necessary for any audit as they document:


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n The testing objectives;

n the population size and composition (the population is the class of transactions being tested,
and a sampling unit is an individual element in the population);

n the method of sampling and the sample size; and

n interpretation of the results.

(a) Statistical sampling


Statistical sampling provides a method to arrive at an informed opinion of the whole population,
on the basis of mathematical concepts. The major advantage of statistical sampling will be
evident if the auditor has to justify the methods used, as statistical sampling provides an
objective, acceptable methodology to determine the sampling risk, sample size, and an
evaluation of the results.

The most practical use of statistical sampling is in the testing of attributes to determine whether
prescribed control procedures are in use. For example, attributes to be tested in a sample of
vouchers would include the verification that each was appropriately authorised.

The methods used for selecting the statistical sample include:

Random selection

The most appropriate method of selection is by use of random numbers. Random number tables
or computer program can provide the numbers. Each item in the population is equally likely to
be selected and the result can be statistically evaluated.

Systematic selection

The main characteristic of this method is the use of an interval, for example, selecting every
tenth item in a sequence. There is a potential bias as only the first item is selected randomly.
Therefore a statistical evaluation of the sample selected is not appropriate.

Rupee unit sampling

This method has the simplicity of attributes sampling but provides a statistical result in rupees. It
tests details of balances to determine whether the account balance being audited is fairly stated.
The population is the recorded aggregate rupee amount of the entire population, and a sample
unit is an individual account balance in rupees.

(b) Judgemental sampling


The selection of a judgemental sample requires professional judgement. It is more efficient and
economic to use judgement where the sample sizes are small, or where randomisation is not
expected to provide representative samples. If a preliminary survey indicates that the quality of
control in a system is of a high standard, a review of a small judgemental sample may provide an
assurance that the system is actually in operation. This approach is appropriate in areas where

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the transaction populations are relatively small, and the auditor has prior knowledge of the
population.

In order to ensure that a judgemental sample is representative, the auditor shall consider the
following:

n Ensure that each major type of transaction is included.

n Include transactions processed by each person employed during the period.

n Test high value items more heavily than the smaller ones. If these are error free there is a
high chance that the more normal transactions will also be error free.

If errors occur in the sample, judgement is required to arrive at an opinion on the total
population. There may be a need to extend or even abandon a sampling procedure.

Other non-probabilistic sampling includes:

Block sampling

Several items are selected in sequence. When the first item is selected, the remainder are chosen
automatically. A sample of 100 items could consist of 5 blocks of 20. For example, a block
sample might include all input forms in a daily batch. The limitation of the approach is that the
sample is not necessarily representative.

Haphazard selection

Such sampling is performed without any regard to the size of the sample population, source or
other distinguishing characteristics. The most serious limitation is that the selection cannot be
performed without some bias, especially if the auditor is seen to select items that are easily
located.

On the basis errors found in the sample of the population the auditor shall project monetary
errors for the whole population.

VII Using Sampling in Auditing


(a) Some Precautions before Undertaking Statistical Sampling
The use of sampling in this section is restricted to the following two stages:

a) Determine Sample Size

b) Use Statistical Technique

We, now, make out a simple table for calculating Sample Size:

Table A

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Extract of sample sizes for Sampling Attributes Expected Rate of occurrence not over 5%
Confidence Level 95%.

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Desired Precision
Number of items in population ± 1% ± 2% ± 3%

8000 1485 431 198


9000 1517 434 198
10000 1543 436 199
15000 1626 43 200
20000 1672 446 201

Table A meats that the auditors would like a 95% level of assurance or confidence that his results
will be within ± 2% (say) precision level of the actual amount. At this point, it would be
noteworthy that the auditor can use a spreadsheet package in computer to calculate random
numbers. This is illustrated below:

Step 1: Open a blank worksheet in the LOTUS-123 spreadsheet package.

Step 2: Write down the total sample size in cell A1.

Step 3: Co to cell A3. Press / Range Format Fixed A3..A20 Enter.

Step 4: In cell A3, Type @Rand*$A$1 and press Enter key.

Step 5: Press / Copy A3 Enter A4..A20 Enter.

Step 6: Note Down the random number in cells A3 to A20.

Step 7: Change the total sample size figure in A1 and all figures will automatically
change.

Explanation: The @RAND is the random number function. It is dependent upon time and will
change each time you type it. The $A$1 is the absolute address of cell A1, which if copies, will
not change relatively.

Step 3 is necessary to format the range to zero decimal places. The @RAND give a number
between 0 and 1 (say 0.0235). This is multiplied by sample size to get random number.

An exhaustive illustration of audit sampling of attributes:

An example of the application of sampling techniques on an attributes problem is give below:

The population: (field)

The audit procedure being following is the sending of letters to selected customers to obtain
confirmation of their balances. The client has approximately 15,000 customers. Balances range
from small amounts to seven digit figures. Over 80% of replies have been received in the past.
As to the balance 20%, it is assumed that the auditors gets satisfaction equivalent to the receipt

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of a signed confirmation from a “no reply” because there exist certain customers who will not
reply no matter how persuasive the request might be. So, the sample will be considered to
comprise all requests not only the replies.

(b) Worksheet for Evaluation of Statistical Sample for Attributes


1 The Population Number Amount
.

Total Population 15000 Rs. 32,375,000

2 The Sample
.

a) Sample Size 443 (Table A) ± 2% precision

b) Errors found 42

c) Percentage of total sample (42 / 443) x 100 9.48%

d) Amount of total error Rs. 20,500

e) Average Error per account Rs. (20,500 / 443) Rs. 46.28

f) We assume that Standard Error is


negligible:

g) Applying Average error per account to (46.28 x 15000) Rs. 694,200


total number of accounts:

This implies that the total error will range around Rs. 7 lakhs. Thus the auditor may modify his
audit programme accordingly.

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Sample Audit Programs


As per ISA 300 Planning, the auditor should develop and document an audit program setting out
the nature (what), timing (when) and extent (how much) of planned audit procedures required to
implement the overall audit plan. In preparing the audit programs, the auditor would consider the
specific assessments of inherent (IR) and control risk (CR) and the required level of assurance to
be provided by the substantive procedures. The audit programs should be revised as necessary
during the course of the audit because of changes in conditions or unexpected results of audit
procedures. The reason for significant changes would be recorded.

The following table shows how the acceptable level of detection risk (shaded area) may vary
based on assessments of inherent and control risk.

Auditor's Assessment of control


risk is:
High Medium Low
Auditor's High Lowest Lower Low
Assessment of
Medium Lower Medium Higher
inherent risk is:
Low Medium Higher Highest

Purpose

The purpose of an audit program is to group management assertions in the form of financial
statements into auditor's audit objectives and then link the understanding obtained during the
planning phase related to the financial statement assertions to the assessment of the risk of
significant misstatement (ROSM) and planned audit procedures. It documents:

n A summary of the audit objectives related to this process and whether the audit objectives
are critical

n Financial statement assertions that were combined into each audit objective

n The assessment of ROSM for each audit objective

n Planned procedures to gain audit evidence to support ROSM for each audit objective (may
also include results of the procedures)

n Planned substantive audit procedures for each audit objective (may also include results of
the procedures).

The enclosed list contains possible suggested audit procedures for different financial statement
components (mostly for the manufacturing concern). All of these procedures will rarely be
selected to minimize the detection risk to an acceptably low level.

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The following alphabets have been used to indicate the assertion addressed in a step:

Assertion Alphabet Class of Account Presentation


transaction balances at and
and events period end disclosure

Occurrence O  

Completeness C   

Accuracy A  

Cut off T 

Classification L  

Existence E 

Rights and obligation R  

Valuation V  

Allocation K 

Understandability U 

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I Balance Sheet – Assets


S. No. Financial Statement Caption Reference No. Page No.

1. Fixed assets (Tangible, intangible and CWIP)

2. Investment Properties

3. Investments

4. Long term loans and advances

5. Long term deposits and Prepayments

6. Stores, spares and stock-in-trade

7. Trade debts

8. Advances, Deposits, Prepayments & Other


receivable

9. Cash & Bank Balances

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Audit Program WP Ref.:


Prepared by:
(a) Fixed assets (tangible, intangible & CWIP) Date:
Reviewed by
Date
Client:
Period:
Subject: Fixed assets (tangible, intangible & CWIP)

Amount in Rs.
Account balances:
Tangible fixed assets (owned and leased)
Intangible fixed assets
CWIP

Classes of transactions:
Depreciation
Amortisation
Loss/ gain on disposal

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

1. Fixed assets are completely and accurately


recorded CA

2. All recorded fixed assets actually exist. E

3. Fixed assets are recorded at appropriate values. V

4. Fixed assets recorded are owned by the client


and title is also in the name of client. R

5. Depreciation /amortisation expense and gain/


loss on disposal has been accurately calculated
and appropriately disclosed. OCATL

6. Fixed assets are presented and all disclosures


have been given in accordance with the Fourth
Schedule of the Companies Ordinance, 1984 OCAL
and relevant IASs. RVU

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S. No. Audit Procedures Objective Done by W. P. Ref.

Test of Controls

1. Assess the reasonableness of design of system ALL


of internal control by enquiring relevant client
personnel and documenting the same (if not a
documented system manual has been
developed by the client). A walk through test
would be necessary to confirm the
understanding as documented. Identify the
preventive (exercised before incurrence of
transactions and event) and detective
(exercised after incurrence of transactions and
event) controls established by management to
support its assertions.

2. Check on sample of selected transactions ALL


covering the whole period that all preventive
controls are exercised on all transactions.

3. Check that proper fixed assets register has been ALL


maintained and entries are made in the register
on prompt and consistent basis and the same is
reconciled with general ledger and physically
verified assets on periodical basis in
accordance with TR-6 of ICAP.

4. Check on a sample of transactions that CE


detective controls are appropriately been
exercised and in case of any detection of error/
fraud, proper steps have been taken to avoid
recurrence of the same.

5. Ensure that management does not override the


designed controls by

n Enquiring from the designated staff


person

n - Remain skeptical during performing test


of design and test of effective operation

6. Document the conclusion after performing test N/A


of controls and required level of assurance
from substantive procedures.

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Analytical Procedures

1. Assess the appropriateness of depreciation/ U


amortisation method and rate in view of the
flow of economic benefits and life of the
assets.

2. Check the reasonableness of depreciation CAL


expense by applying depreciation rate to
closing cost/ carrying value as per the method
adopted

3. Document logical commercial reasons for AU


major additions and disposal made during the
year

4. Compare current year balances and expense CEA


with last year balances and ensure that any
significant variation should be properly and
logically reasoned.

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Test of Details

1. Obtain movement schedule of tangible and CEA


intangible fixed assets and Capital work-in-
progress both for cost and accumulated
depreciation. Check casting and cross casting
of the schedule.

2. Trace opening balances from fixed assets CE


register, general ledger and last year’s
working papers.

3. Make a selection of fixed assets held by client CEV


at year-end and physically inspect them to
ensure that:

(a) Asset is owned and held by client.

(b) Remaining useful life appears to be


correct

4. For selected additions during the current CEV


period:

(a) For purchases in current year, capital


expenditure approvals and vendor’s
invoices.

(b) Ensure that additions to fixed assets do


not include any amount of a nature of
revenue expenditure.

(c) Ensure that where full payment has not


been made for what so ever reason, asset
is recorded at full cost and balance has
been recognized as liability.

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5. For selected assets disposed of during the OAL


current period:

(a) Examine documents authorizing


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

6. To check depreciation expense: OCAL

(a) Determine the reasonableness of


accounting policy and depreciation
method, rates and their consistency with
prior years.

(b) Check calculation of depreciation of


selected assets.

(c) Assess the reasonableness of allocation


to manufacturing costs, admin cost etc.

7. Ensure that none of the assets is impaired or V


the recoverable amount of an asset is not less
than its carrying amount. If the carrying
amount of an asset is more than its
recoverable amount, that same should be
reduced to recoverable amount recognising
the reduction as impairment loss

Ensure that any subsequent addition should be


depreciated over remaining life and not simply
depreciated by applying the depreciation rate.

8. Inspect evidence of ownership e.g. vehicle R


registration, property documents, machinery
import documents etc.

9. Ascertain the nature of each significant E


intangible asset by inquiry or reviewing
information contained in prior-year’s working
papers.

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10. Ensure that all intangible assets fully comply EVR


with the recognition criteria of the IAS 38 i.e.

(a) Flow of economic benefits to enterprise


is expected in future, and

(b) Cost of the asset may be determined

11. For selected intangibles additions during the V


year: -

(a) Trace the recorded value to supporting


documents e.g. independent valuation
for purchases in current year.

(b) Obtain authorization or board minutes.

12. For selected intangible assets disposed-off CEV


during the year: -

(a) Examine supporting documents (e.g.


cash receipts).

(b) Calculate gain or loss on sale of assets

13. Determine that client's accounting policies for U


amortization are appropriate and applied
consistently and are not inconsistent with the
IAS 38.

14. For additions in leased assets during the year, CEKR


check from lease agreements that the lease is a
finance lease in substance.

15. Ensure that depreciation on leased assets is OCV


calculated on the same rates as for owned
assets.

If there is no reasonable certainty that the


lessee will obtain ownership by the end of the
lease term, the assets should be fully
depreciated over the shorter of the lease term
or its useful life.

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16. For selected additions to CWIP during the E


year: -

(a) Check supporting documents like


vendors' invoices, contractor bills, and
other evidences.

(b) Check proper authorization and


approval.

17. For selected transfers to fixed assets during K


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

18. For items stuck-up for considerable period of V


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

19. In case of revalued assets ensure that V

n Entire class of assets has been revalued


on periodical basis
n Any asset's revaluation results in deficit
should not be adjusted against other
assets' surplus but should be
immediately charged.
20. Ensure that closing balances as per our N/A
working paper file are in match with general
ledger.

21. Determine that disclosures have been made in OCAL


accordance with the requirements of Fourth RVU
Schedule to the Companies Ordinance, 1984
and the applicable IASs.

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Audit Program WP Ref.:


Prepared by:
Date:
(b) Investment properties
Reviewed by
Date
Client:
Period:
Subject: Investment properties

Amount in Rs.
Account balances:
Investment properties

Classes of transactions:
Depreciation / gain/ loss due to change in fair value

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

1. Investment properties are completely and


accurately recorded CA

2. All recorded investment properties actually


exist. E

3. Investment properties are recorded at


appropriate values. V

4. Investment properties recorded are owned by


the client and title is also in the name of
client. R

5. Depreciation expense / gain /loss due to


change in fair value and gain/ loss on disposal
has been accurately calculated and
appropriately disclosed. OCATL

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S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

6. Investment properties and all disclosures have


been given are presented in accordance with
the Fourth Schedule of the Companies OCAL
Ordinance, 1984 and relevant IASs. RVU

Note: Steps should be carried out on the basis of model (cost or fair value) adopted by the client.

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S. No. Audit Procedures Objective Done by W. P. Ref.

Test of Controls

1. Assess the reasonableness of design of system ALL


of internal control by enquiring relevant client
personnel and documenting the same (if not a
documented system manual has been
developed by the client). A walk through test
would be necessary to confirm the
understanding as documented. Identify the
preventive (exercised before incurrence of
transactions and event) and detective
(exercised after incurrence of transactions and
event) controls established by management to
support its assertions.

2. Check on sample of selected transactions ALL


covering the whole period that all preventive
controls are exercised on all transactions.

3. Check that proper subsidiary records have ALL


been maintained and entries are made in the
same on prompt and consistent basis and the
same is reconciled with general ledger.
Separately identifiable assets like lifts, electric
installations and other fixtures etc. should be
physically verified on periodical basis and any
adjustment is accounted for both in subsidiary
records and general ledger.

4. Check on a sample of transactions that CE


detective controls are appropriately been
exercised and in case of any detection of
error/ fraud, proper steps have been taken to
avoid recurrence of the same.

5. Ensure that management does not override the


designed controls by

n Enquiring from the designated staff


person
n Remain skeptical during performing test
of design and test of effective operation

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S. No. Audit Procedures Objective Done by W. P. Ref.

6. Document the conclusion after performing N/A


test of controls and required level of assurance
from substantive procedures.

Analytical Procedures

1. Assess the appropriateness of depreciation/ U


amortisation method and rate in view of the
flow of economic benefits and life of the
properties.

2. Check the reasonableness of depreciation CAL


expense by applying depreciation rate to
closing cost/ carrying value.

3. Document logical commercial reasons for AU


major additions and disposal made during the
year

4. Compare current year balances and expense CEA


with last year balances and ensure that any
significant variation should be properly and
logically reasoned.

Test of Details

1. Obtain movement schedule of investment CEA


properties both for cost and accumulated
depreciation. Check casting and cross casting
of the schedule.

2. Trace opening balances from investment CE


properties' subsidiary records, general ledger
and last year’s working papers.

3. Ensure that: CEV

(a) Properties are owned and held by client.

(b) Remaining useful life appears to be


correct

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S. No. Audit Procedures Objective Done by W. P. Ref.

4. If a client holds property partly held to earn K


rentals or for capital appreciation and partly
held for own use then the property should be
classified as investment property only if these
portions could be sold separately (or leased
out separately under a finance lease) or if an
insignificant portion is held for own use.
Ensure the compliance with requirement of
IAS 40.

5. Ensure that a property is classified as K


investment property only if its cost may be
determined. Under construction properties
should not be classified as investment
properties.

6. For selected capitalsations during the current CEV


period:

(a) Appropriate approvals and bills/


invoices and certificates.

(b) Ensure that expenditure relating to an


investment property should be debited to
the investment property when it is
probable that future economic benefits,
in excess of the originally assessed
standard of performance of the existing
investment property, will flow to the
enterprise. All other expenditure should
be recognised as an expense in the
period in which it is incurred. .

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S. No. Audit Procedures Objective Done by W. P. Ref.

7. For any property disposed of during the OAL


current period:

(a) Examine documents authorizing


disposal.

(b) Examine documents supporting amounts


for which sale was affected e.g. cash
receipts

(c) Calculate gain or loss on disposal of


fixed assts

8. To check depreciation expense: OCAL

(a) Determine the reasonableness of


accounting policy and depreciation
method, rates and their consistency with
prior years.

(b) Check calculation of depreciation.

9. Ensure that none of the property is impaired V


or the recoverable amount of any property is
not less than its carrying amount. If the
carrying amount of an asset is more than its
recoverable amount, that same should be
reduced to recoverable amount recognising
the reduction as impairment loss.

10. Inspect property documents to ensure R


ownership.

11. Ensure that where fair value model has been V


adopted the fair value of investment property
should reflect the actual market state and
circumstances as of the balance sheet date, not
as of either a past or future date.

12. Ensure that valuer's assumptions are V


reasonable.

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S. No. Audit Procedures Objective Done by W. P. Ref.

13. Ensure that there is no restrictions on the


realisability of investment property or the
remittance of income and proceeds of
disposal.

14. Ensure that closing balances as per our N/A


working paper file are in match with general
ledger.

20. Determine that disclosures have been made in OCAL


accordance with the requirements of Fourth RVU
Schedule to the Companies Ordinance, 1984
and the IAS 40.

Audit Practice Manual – Revised 172


Execution Phase –
Sample Audit Programs
Assets

Audit Program WP Ref.:


Prepared by:
Date:
(c) Investments (subsidiaries, associates, and others)
Reviewed by
Date
Client:
Period:
Subject: Investments (subsidiaries, associates, and others)

Amount in Rs.
Account balances:
Investments
n In subsidiaries and associates
n Held to maturity
n Available for sale
n Held for trading

Classes of transactions:
Dividend
Interest
Gain/ loss on revaluation
Gain/ loss on disposal

S. No. Audit Objectives Assertions Risk Assessment


IR CR ROSM
1. Investments are completely and accurately
recorded. CA
2. All recorded investments actually exist. E
3. All investments are appropriately valued. V
4. All investments are owned by the client and
title is also in the name of client. R
5. Dividend and interest income, gain/ loss on
revaluation and gain/ loss on disposal has
been accurately calculated, completely
recorded and appropriately disclosed. OCATL
6. Investments are presented and all disclosures
have been given in accordance with the
Fourth Schedule of the Companies OCAL
Ordinance, 1984 and relevant IASs. RVU

Audit Practice Manual – Revised 173


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

Test of Controls

1. Assess the reasonableness of design of ALL


system of internal control by enquiring
relevant client personnel and documenting
the same (if not a documented system manual
has been developed by the client). A walk
through test would be necessary to confirm
the understanding as documented. Identify
the preventive (exercised before incurrence of
transactions and event) and detective
(exercised after incurrence of transactions
and event) controls established by
management to support its assertions.

2. Check on sample of selected transactions ALL


covering the whole period that all preventive
controls are exercised on all transactions.

3. Check that proper subsidiary records have ALL


been maintained and entries are made in the
same on prompt and consistent basis after
proper approval and appropriate
authorisation.

4. Check on a sample of transactions that CE


detective controls have appropriately been
exercised and in case of any detection of
error/ fraud, proper steps have been taken to
avoid recurrence of the same.

5. All investments in subsidiaries and associates Laws and


should with the board's specific approval and Rgulation
in accordance with requirements of section
208 of the Companies Ordinance, 1984.

Audit Practice Manual – Revised 174


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

6. Ensure that management does not override


the designed controls by

n Enquiring from the designated staff


person

n Remain skeptical during performing


test of design and test of effective
operation

7. Document the conclusion after performing N/A


test of controls and required level of
assurance from substantive procedures.

Analytical Procedures

1. Document logical commercial reasons for AU


major additions and disposal made during the
year

2. Compare current year balances and income CEA


with last year amounts and ensure that any
significant variation should be properly and
logically reasoned.

Test of Details

1. Obtain a movement schedule of investments CE


(shares, TFCs and PIBs) both for numbers and
amounts.

2. Trace the opening balances from the general C


ledger, subsidiary records, and last year
working papers.

Audit Practice Manual – Revised 175


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

3. Trace the carrying value of selected E


investments to supporting documents e.g.

(a) Broker's notes for investments


purchased in the current year, to confirm
date of purchase description and number
of shares.

(b) Carrying costs in our prior year’s


working papers

4. Check the computation of valuation of V


investments in subsidiaries, joint ventures and
associates is made as per the accounting
policies of the company.

5. Obtain and recompute amortisation schedule OCAL


and check its accuracy for fixed interest
securities whether purchased at premium or
discount.

6. Re-perform the marked to market valuation of V


PIBs and TFCs at year-end to check the
valuation of these securities.

7. Where any lien marked on the investments, U


check the disclosure thereof.

8. Perform cut-off at year-end. T

9. Check redemptions of principal during the EV


year and obtain supports to ascertain the
overdue instalments. Check if such payments
were as per the terms of the redemption
agreement.

10. Check that brokerage expenses are accurately AO


recorded.

Audit Practice Manual – Revised 176


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

11. For selected shares disposed of during the COA


year:

(a) Examine supporting documents of


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.

12. Test the casting and cross casting of the CE


schedule.

13. Obtain the schedule of capital gain earned / O


interest income received during the year and
vouch few transactions on test basis.

14. Check the accrual of interest and amortization CVT


of premium / discount on fixed income
securities with the one calculated on IRR
basis.

15. Ensure that closing balances of investments in N/A


working papers agree with the general ledger.

16. For investments held by client at period end, RE


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.

Audit Practice Manual – Revised 177


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

17. For selected investments, compute market V


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.
18. Ensure that investments are presented and all OCAL
disclosures have been given in accordance RVU
with the Fourth Schedule of the Companies
Ordinance, 1984 and relevant IASs. As per
IAS 39 all investments should be properly
classified in Held for trading, available for
sale and held to maturity.

Investment Income

19. Obtain a schedule showing opening and CE


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

20. Trace opening balance of accrued income C


from general ledger/ trial balance.

21 Ensure that accrual of dividend income is RA


made only where AGM is held before year-
yen.

22. Ensure proper accounting treatment of bonus V


share received and right shares subscribed.

23. Make a selection of accruals and examine E


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

24. Examine subsequent receipts of income EV


accrued at period-end.

25. Ensure that closing balances of accrued N/A


income in working papers agree with general
ledger.

Audit Practice Manual – Revised 178


Execution Phase –
Sample Audit Programs
Assets

Audit Program WP Ref.:


Prepared by:
Date:
(d) Long term loans and advances
Reviewed by
Date
Client:
Period:
Subject: Long term loans and advances

Amount in Rs.
Account balances:
Long term loan and advances
Provision against long term loan and advances

Classes of transactions:
Interest income

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

1. Long term loans and advances are


completely and accurately recorded CA

2. All recorded long term loans and advances


actually exist. E

3. Long term loans and advances are recorded


at appropriate values and all bad and
doubtful balances have been provided for/
written off. V

4. Long term loans and advances recorded are


the right of the company. R

5. Long-term loans and advances to associated


undertaking were in accordance with legal Laws &
requirements. Regulation

6. Long term loans and advances are presented


and all disclosures have been given in
accordance with the Fourth Schedule of the
Companies Ordinance, 1984 and relevant OCAL
IASs. RVU

Audit Practice Manual – Revised 179


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

Test of Controls

1. Assess the reasonableness of design of ALL


system of internal control by enquiring
relevant client personnel and documenting
the same (if not a documented system manual
has been developed by the client). A walk
through test would be necessary to confirm
the understanding as documented. Identify
the preventive (exercised before incurrence of
transactions and event) and detective
(exercised after incurrence of transactions
and event) controls established by
management to support its assertions.

2. Check on sample of selected transactions ALL


covering the whole period that all preventive
controls are exercised on all transactions.

3. Check that proper subsidiary records have ALL


been maintained and entries are made in the
same on prompt and consistent basis and the
same is reconciled with general ledger.

4. Check on a sample of transactions that CE


detective controls are appropriately been
exercised and in case of any detection of
error/ fraud, proper steps have been taken to
avoid recurrence of the same.

5. For sample of disbursements made during the EV


year: -

(a) Check approval of appropriate level of


management.

(b) Check that the employee has fulfilled


all formalities necessary before
disbursement of loans.

Audit Practice Manual – Revised 180


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

6. Ensure that management does not override


the designed controls by

n Enquiring from the designated staff


person

n Remain skeptical during performing


test of design and test of effective
operation

7. Document the conclusion after performing N/A


test of controls and required level of
assurance from substantive procedures.

Analytical Procedures

1. Compare current year balances and expense CEA


with last year balances and ensure that any
significant variation should be properly and
logically reasoned.

Test of Details

1. Obtain a employee-wise movement schedule CE


of principal amount of loans and advances
and interest thereon and trace the opening
balances from the general ledger, subsidiary
records, and last year working papers. Check
casting and cross casting of the schedule.

2. For disbursements made during the year E


check disbursements of funds with
disbursement register and bank statement.

Audit Practice Manual – Revised 181


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

3. For a sample of repayments made during the EVR


year: -

(a) Ensure that amount and date of


repayment was accordance with
repayment schedule or agreement.

(b) Check receipt of funds with receipt


records and bank statement.

(c) Recovery of interest is in accordance


with the policy (i.e. along with
principal or after recovery of full
principal, as the case may be).

4. Circularize confirmations to selected parties. CER


Match replies with the amounts outstanding
against each party.

5. Obtain age-analysis of long-term loans and VK


advances and perform the following:-

(a) Verify that loans have been classified


in correct categories.

(b) Current maturity has been appropriately


calculated and separately disclosed.

(b) Consider the value of securities


available against each loan for the
purpose of calculation of provision for
doubtful loans and advances.

6. Check subsequent recovery of loans etc. EV

7. Ensure that all loans and advances to Laws etc.


associated undertakings are granted after due
compliance with legal requirements.

Audit Practice Manual – Revised 182


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

8. Ensure that none of the loans and advances V


are impaired or the recoverable amount of a
loan or advance is not less than its carrying
amount. If the carrying amount of a loan/
advance is more than its recoverable amount,
then same should be reduced to recoverable
amount recognising the reduction as
impairment loss

9. For items stuck-up for considerable period of V


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

10. Ensure that loans and advances should be


measured at amortised cost using the
effective interest rate method.

11. Re-perform calculation of interest income on OATE


test basis: -

(a) Verify rate of interest from agreement/


policy.

(b) Check the number of days for which


interest is to be charged.

12. Test check loan agreement and legal RU


documents to verify the terms and conditions
of the advances

13. Ensure that closing balances as per our CE


working paper file are in match with general
ledger.

14. Determine that disclosures have been made in OCAL


accordance with the requirements of Fourth RVU
Schedule to the Companies Ordinance, 1984
and the applicable IASs.

Audit Practice Manual – Revised 183


Execution Phase –
Sample Audit Programs
Assets

Audit Program WP Ref.:


Prepared by:
Date:
(e) Long term deposits and prepayments
Reviewed by
Date
Client:
Period:
Subject: Long term deposits and prepayments

Amount in Rs.
Account balances:
Long term deposits and prepayments
Provision against long term deposits and prepayments

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

1. Long term deposits and prepayments are


completely and accurately recorded CA

2. All recorded long term deposits and


prepayments actually exist. E

3. Long-term deposits and prepayments are


recorded at appropriate values and all bad
and doubtful balances have been provided
for/ written off. V

4. Long-term deposits and prepayments


recorded are the right of the company. R

5. Long-term deposits and prepayments are


presented and all disclosures have been given
in accordance with the Fourth Schedule of
the Companies Ordinance, 1984 and relevant OCAL
IASs. RVU

Audit Practice Manual – Revised 184


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

Test of Controls

1. Assess the reasonableness of design of ALL


system of internal control by enquiring
relevant client personnel and documenting
the same (if not a documented system manual
has been developed by the client). A walk
through test would be necessary to confirm
the understanding as documented. Identify
the preventive (exercised before incurrence of
transactions and event) and detective
(exercised after incurrence of transactions
and event) controls established by
management to support its assertions.

2. Check on sample of selected transactions ALL


covering the whole period that all preventive
controls are exercised on all transactions.

3. Check that proper subsidiary records have ALL


been maintained and entries are made in the
same on prompt and consistent basis and the
same is reconciled with general ledger.

4. Check on a sample of transactions that CE


detective controls are appropriately been
exercised and in case of any detection of
error/ fraud, proper steps have been taken to
avoid recurrence of the same.

5. For sample of deposits and prepayments EV


made during the year: -

(a) Ensure the commercial and logical


reason.

(b) Check approval of appropriate level of


management.

Audit Practice Manual – Revised 185


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

6. Ensure that management does not override


the designed controls by

n Enquiring from the designated staff


person

n Remain skeptical during performing


test of design and test of effective
operation

7. Document the conclusion after performing N/A


test of controls and required level of
assurance from substantive procedures.

Analytical Procedures

1. Compare current year balances and expense CEA


with last year balances and ensure that any
significant variation should be properly and
logically reasoned.

Test of Details

1. Obtain a party-wise movement schedule of CE


deposits and prepayments and trace the
opening balances from the general ledger,
subsidiary records, and last year working
papers. Check casting and cross casting of the
schedule.

2. For deposits and prepayments made during E


the year check disbursements of funds with
disbursement voucher and bank statement.

3. For a sample of refund of deposits during the EVR


year: -

(a) Ensure that amount and date of refund


was in accordance with agreement.

(b) Check receipt of funds with receipt


records and bank statement.

Audit Practice Manual – Revised 186


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

4. Circularize confirmations to selected parties. CER


Match replies with the amounts outstanding
against each party.

5. Obtain age-analysis of long-term deposits and VK


perform the following:-

(a) Verify that deposits have been


classified in correct categories.

(b) Current maturity has been appropriately


identified and separately disclosed.

6. Check subsequent recovery of deposits and EV


adjustment of prepayments etc.

7. Ensure that none of the deposits or V


prepayments are impaired or the recoverable
amount of same is not less than its carrying
amount. If the carrying amount of a deposits
or prepayments is more than its recoverable
amount, then same should be reduced to
recoverable amount recognising the reduction
as impairment loss

8. For items stuck-up for considerable period of V


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

9. Ensure that closing balances as per our CE


working paper file are in match with general
ledger.

10. Determine that disclosures have been made in OCAL


accordance with the requirements of Fourth RVU
Schedule to the Companies Ordinance, 1984
and the applicable IASs.

Audit Practice Manual – Revised 187


Execution Phase –
Sample Audit Programs
Assets

Audit Program WP Ref.:


Prepared by:
Date:
(f) Stores, spares and stock-in-trade
Reviewed by
Date
Client:
Period:
Subject: Stores, spares and stock-in-trade

Amount in Rs.
Account balances:
Stores
Spares
Raw material
Work-in-process
Finished goods

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

1. Stock-in-trade is completely and accurately


recorded CA

2. All recorded stocks-in-trade actually exist. E

3. Recorded stocks-in-trade are valued


appropriately. V

4. Recorded stock-in-trade are owned by the


client and title is also in the name of client. R

5. Stock-in-trade are presented and all


disclosures have been given in accordance
with the Fourth Schedule of the Companies OCAL
Ordinance, 1984 and relevant IASs. RVU

Audit Practice Manual – Revised 188


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

Test of Controls

1. Assess the reasonableness of design of ALL


system of internal control by enquiring
relevant client personnel and documenting
the same (if not a documented system manual
has been developed by the client). A walk
through test would be necessary to confirm
the understanding as documented. Identify
the preventive (exercised before incurrence of
transactions and event) and detective
(exercised after incurrence of transactions
and event) controls established by
management to support its assertions.

2. Check on sample of selected transactions ALL


covering the whole period that all preventive
controls are exercised on all transactions.

3. Check that proper inventory listing has been ALL


maintained and entries are made in the same
on prompt and consistent basis and the same
is reconciled with general ledger and
physically verified inventories on periodical
basis at least on annual basis.

4. Check on a sample of transactions that CE


detective controls are appropriately been
exercised and in case of any detection of
error/ fraud, proper steps have been taken to
avoid recurrence of the same.

5. Ensure that management does not override


the designed controls by

n Enquiring from the designated staff


person

n Remain skeptical during performing


test of design and test of effective
operation

Audit Practice Manual – Revised 189


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

6. Document the conclusion after performing N/A


test of controls and required level of
assurance from substantive procedures.

Analytical Procedures

1. Assess the appropriateness of purchases and U


consumptions method and rate in view of the
flow of economic benefits.

2. Check the reasonableness of consumption CAL


allocated to inventories at different stages.

3. Document logical commercial reasons for AU


purchases and consumption made during the
year

4. Check the appropriateness of compilation of OAL


overheads and allocation basis of the same to
different products.

5. Compare current year balances and expense CEA


with last year and ensure that any significant
variation should be properly and logically
reasoned.

Test of Details

1. Observe physical counting of inventories CE


carried out by the client at year-end or at any
other date and perform tests of intervening
transactions to ensure existence and
conditions unless impracticable. Also check
on sample basis some items to ensure
reliability.

2. Check that third party inventories are CR


identified and excluded from physical count.

3. For items owned by client but not physically ER


held, obtain independent confirmations from
custodians.

Audit Practice Manual – Revised 190


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

4. Obtain final inventory compilation schedule C


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, select CO


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

6. Determine that the basis of valuation of e.g. V


FIFO or average cost is appropriate and
followed consistently.

7. Obtain stock card of some items and ensure AC


that cost formula is correctly applied on
receipts and issues.

8. Compare cost of closing stock with its NRV V


by comparing raw material with last invoice
from supplier, WIP with expected cost to
completion and finished goods with market
value less expenses necessary to make the
sale.

9. Obtain aging of inventories and compute V


provision for obsolete, damaged, or slow
moving stocks, if any. Ensure that raw
material of loss making and discontinued
products are adequately provided for.

10. Ensure that stores and spares related to


specific machinery should lie longer than the
machine.

Audit Practice Manual – Revised 191


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

10. Ensure that closing balances as per our N/A


working paper file are in match with general
ledger.

11. Determine that disclosures have been made in OCAL


accordance with the requirements of Fourth RVU
Schedule to the Companies Ordinance, 1984
and the applicable IASs.

Audit Practice Manual – Revised 192


Execution Phase –
Sample Audit Programs
Assets

Audit Program WP Ref.:


Prepared by:
Date:
(g) Advances, Deposits, Prepayments & Other
Reviewed by
receivables
Date
Client:
Period:
Subject: Advances, Deposits, Prepayments & Other receivables

Amount in Rs.
Account balances:
Advances
Deposits
Prepayments
Other receivables
Provision against advances, deposits, prepayments & other receivables

Classes of transactions:
Payments of advances, deposits, prepayments & other receivable
Refund/ adjustment of advances, deposits, prepayments & other receivable
Provision for the year against bad and doubtful balances

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

1. Advances, deposits, prepayments & other


receivables are completely and accurately
recorded CA

2. All recorded advances, deposits,


prepayments & other receivables actually
exist. E

3. Advances, deposits, prepayments & other


receivables are recorded at appropriate
values and all bad and doubtful balances
have been provided for/ written off. V

Audit Practice Manual – Revised 193


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

4. Advances, deposits, prepayments & other


receivables recorded are the right of the
company. R

5. Advances to associated undertaking were in Laws &


accordance with legal requirements. Regulation

6. Advances, deposits, prepayments & other


receivables are presented and all disclosures
have been given in accordance with the
Fourth Schedule of the Companies OCAL
Ordinance, 1984 and relevant IASs. RVU

Audit Practice Manual – Revised 194


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

Test of Controls

1. Assess the reasonableness of design of ALL


system of internal control by enquiring
relevant client personnel and documenting
the same (if not a documented system manual
has been developed by the client). A walk
through test would be necessary to confirm
the understanding as documented. Identify
the preventive (exercised before incurrence of
transactions and event) and detective
(exercised after incurrence of transactions
and event) controls established by
management to support its assertions.

2. Check on sample of selected transactions ALL


covering the whole period that all preventive
controls are exercised on all transactions.

3. Check that proper subsidiary records have ALL


been maintained and entries are made in the
same on prompt and consistent basis and the
same is reconciled with general ledger.

4. Check on a sample of transactions that CE


detective controls are appropriately been
exercised and in case of any detection of
error/ fraud, proper steps have been taken to
avoid recurrence of the same.

5. Ensure that management does not override


the designed controls by

n Enquiring from the designated staff


person

n Remain skeptical during performing


test of design and test of effective
operation

6. Document the conclusion after performing N/A


test of controls and required level of
assurance from substantive procedures.

Audit Practice Manual – Revised 195


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

Analytical Procedures

1. Compare current year balances and expense CEA


with last year balances and expense and
ensure that any significant variation should be
properly and logically reasoned.

Test of Details

1. Obtain a party-wise movement schedule of CE


advances, deposits, prepayments & other
receivables and trace the opening balances
from the general ledger, subsidiary records,
and last year working papers. Check casting
and cross casting of the schedule.

2. For disbursements made during the year E


check disbursements of funds with
disbursement register and bank statement.

3. For a sample of repayments made during the EVR


year: -

(a) Ensure that amount and date of


repayment was accordance with
repayment schedule or agreement.

(b) Check receipt of funds with receipt


records and bank statement.

4. Inquire about the nature of trade deposits. CER


Corroborate movements in trade deposits
with supporting documents

Audit Practice Manual – Revised 196


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

5. Obtain age-analysis of advances, deposits, VK


prepayments & other receivables and perform
the following:-

(a) Verify classification in correct


categories.

(b) Current maturities of advances,


deposits, prepayments, & other
receivables has been appropriately
calculated and separately disclosed.

(c) Consider the value of securities


available if any, for the purpose of
calculation of provision for doubtful
loans and advances.

6. Check subsequent realizations / adjustments EV


etc.

7. Ensure that all loans and advances to Laws etc.


associated undertakings are granted after due
compliance with legal requirements.

8. Ensure that none of the advances, deposits, V


prepayments & other receivables are
impaired or the recoverable amount is not
less than its carrying amount. If the carrying
amount is more than its recoverable amount,
then same should be reduced to recoverable
amount recognising the reduction as
impairment loss

9. For items stuck-up for considerable period of V


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

10. Document the nature of other receivables, U


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

Audit Practice Manual – Revised 197


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

11. For short-term loans and advances to staff, CEV


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

12. Test check loan agreement and legal RU


documents to verify the terms and conditions
of the advances

13. Ensure that closing balances as per our CE


working paper file are in match with general
ledger.

14. Determine that disclosures have been made in OCAL


accordance with the requirements of Fourth RVU
Schedule to the Companies Ordinance, 1984
and the applicable IASs.

Audit Practice Manual – Revised 198


Execution Phase –
Sample Audit Programs
Assets

Audit Program WP Ref.:


Prepared by:
Date:
(h) Trade debts
Reviewed by
Date
Client:
Period:
Subject: Trade debts

Amount in Rs.
Account balances:
Trade debts

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

1. Trade debts are completely and accurately


recorded CA

2. All recorded trade debts actually exist. E

3. Trade debts are appropriately valued. V

4. Trade debts recorded are owned by the client. R

5. Trade debts are presented and all disclosures


have been given in accordance with the
Fourth Schedule of the Companies Ordinance, OCAL
1984 and relevant IASs. RVU

Audit Practice Manual – Revised 199


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

Test of Controls

1. Assess the reasonableness of design of system ALL


of internal control by enquiring relevant client
personnel and documenting the same (if not a
documented system manual has been
developed by the client). A walk through test
would be necessary to confirm the
understanding as documented. Identify the
preventive (exercised before incurrence of
transactions and event) and detective
(exercised after incurrence of transactions and
event) controls established by management to
support its assertions.

2. Check on sample of selected transactions ALL


covering the whole period that all preventive
controls are exercised on all transactions.

3. Check that proper party wise subsidiary ledger ALL


has been maintained and entries are made in
the same on prompt and consistent basis and
the same is reconciled with general ledger.

4. Check on a sample of transactions that CE


detective controls are appropriately been
exercised and in case of any detection of error/
fraud, proper steps have been taken to avoid
recurrence of the same.

5. Ensure that management does not override the


designed controls by

n Enquiring from the designated staff


person

n Remain skeptical during performing test


of design and test of effective operation

6. Document the conclusion after performing test N/A


of controls and required level of assurance
from substantive procedures.

Audit Practice Manual – Revised 200


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

Analytical Procedures

1. Assess the appropriateness of discount and U


credit policy in view of the flow of economic
benefits.

2. Check the reasonableness of impairment CAL


expense.

3. Document logical commercial reasons for AU


major balances' additions and deletions made
during the year

4. Compare current year balances and expense CEA


with last year balances and ensure that any
significant variation should be properly and
logically reasoned.

Test of Details

1. Obtain a party-wise movement schedule and CE


trace the opening balances from the general
ledger, subsidiary records, and last year
working papers. Check casting and cross
casting of the schedule.

2. Make a selection of customers' balances and EVR


circularize confirmations of selected parties.
Compare replies to requests. Ensure that
reconciling items, if any, are properly
supported and appropriately adjusted.

3. Check subsequent clearance. ER

4. Inquire into significant disputed balances, if V


any.

5. Obtain a movement schedule of allowance for C


doubtful debts and ensure completeness.

6. Obtain aging of debtors and ensure that no V


unreasonably delayed balances are appearing.

Audit Practice Manual – Revised 201


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

7. Ensure the recoverability of the debtors V


considered good. No subsequent event has
raised any doubts about their recoverability.

8. Assess the reasonableness of methods used by V


management in the business circumstances of
the client to estimate that the doubtful debts
are appropriate and ensure that the same is
applied consistently.

9. Calculate provision for doubtful debts based V


on age-analysis of debtors.

10. Review documents, supporting E


correspondence and authorization for selected
write-offs during the year. Obtain board
approval for write-offs.

11. Select transactions from sales invoices and T


customer returns notes pertaining to some
days prior to and after year-end and ensure
that they have been recorded in the correct
period.

12. Ensure that closing balances as per our N/A


working paper file are in match with general
ledger.

13. Determine that disclosures have been made in OCAL


accordance with the requirements of Fourth RVU
Schedule to the Companies Ordinance, 1984
and the applicable IASs.

Audit Practice Manual – Revised 202


Execution Phase –
Sample Audit Programs
Assets

Audit Program WP Ref.:


Prepared by:
Date:
(i) Cash and bank balances
Reviewed by
Date
Client:
Period:
Subject: Cash and bank balances

Amount in Rs.
Account balances:
Cash in hand
Cash at bank- Current
- PLS

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

1. All cash and bank balances are completely


and accurately recorded CA

2. All recorded cash and bank balances actually


exist. E

3. All cash and bank balances are recorded at


appropriate values. V

4. All cash and bank balances recorded are


owned by the client and title is also in the
name of client. R

5. All cash and bank balances are presented and


all disclosures have been given in accordance
with the Fourth Schedule of the Companies OCAL
Ordinance, 1984 and relevant IASs. RVU

Audit Practice Manual – Revised 203


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

Test of Controls

1. Assess the reasonableness of design of ALL


system of internal control by enquiring
relevant client personnel and documenting
the same (if not a documented system manual
has been developed by the client). A walk
through test would be necessary to confirm
the understanding as documented. Identify
the preventive (exercised before incurrence of
transactions and event) and detective
(exercised after incurrence of transactions
and event) controls established by
management to support its assertions.

2. Check on sample of selected transactions ALL


covering the whole period that all preventive
controls are exercised on all transactions.

3. Check on a sample of transactions that ALL


detective controls are appropriately been
exercised and in case of any detection of
error/ fraud, proper steps have been taken to
avoid recurrence of the same.

4. Check that proper bank reconciliations are ALL


prepared, checked and approved. Long
outstanding items are followed up and proper
disposition of such items is made.

5. Proper segregation of duties between CE


custodian and accounting and approving
personnel exist.

6. Payments vouchers are appropriately ECA


prepared and properly approved by
designated authority.

Audit Practice Manual – Revised 204


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

7. Ensure that management does not override


the designed controls by

n Enquiring from the designated staff


person

n Remain skeptical during performing


test of design and test of effective
operation

8. Document the conclusion after performing N/A


test of controls and required level of
assurance from substantive procedures.

Analytical Procedures

1. Document logical commercial reasons for AU


new bank accounts opened and closed during
the year.

2. Compare current year balances with last year CEA


balances and ensure that any significant
variation should be properly and logically
reasoned.

Test of Details

1. Attend year-end cash count and deposit E


verification.

2. Circularize direct confirmations to all banks. ER

3. Trace opening balance in general ledger from CE


last year working papers.

Audit Practice Manual – Revised 205


Execution Phase –
Sample Audit Programs
Assets

S. No. Audit Procedures Objective Done by W. P. Ref.

4. Obtain and examine bank reconciliations CEA


ensure the following: -

n No long outstanding item should


remain unfollowed,

n No revenue nature item should be


appearing

n All deposit made should be cleared


within two days

n No long outstanding cheques of


significant amount are unpresented; if
so then check their payment voucher
and ensure that no discrepancy is
involved.

5. Ensure that all balances etc. reported by bank CA


in replies to bank confirmation request are
included in records of the client.

6. Ensure that no balances are subject any U


encumbrance, if so then disclosure is made.

7. Convert FCY accounts into PKR at year-end V


rate.

8. Ensure that all bank accounts are in R


company's name.

9. Ensure that closing balances as per our N/A


working paper file are in match with general
ledger.

10. Determine that disclosures have been made in OCAL


accordance with the requirements of Fourth RVU
Schedule to the Companies Ordinance, 1984
and the applicable IASs.

Audit Practice Manual – Revised 206


Execution Phase –
Sample Audit Programs
Liabilities – Accrued Expenses

II Balance Sheet – Liabilities


S. No. Financial Statement Caption Reference No. Page No.

1. Accrued Expenses

2. Contingencies & Commitments

3. Deferred Liabilities

4. Direct Taxation

5. Dividend Payable

6. Equity

7. Liabilities Against Assets

8. Long Term Debt

9. Long Term Deposit

10. Payables

11. Short Term Borrowings

12. Surplus on Revaluation

Audit Practice Manual – Revised 207


Execution Phase –
Sample Audit Programs
Liabilities – Accrued Expenses

Audit Program WP Ref.:


Prepared by:
Date:
(a) Accrued Expenses
Reviewed by
Date
Client:
Period:
Subject: Accrued Expenses

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment


IR CR ROSM
To ensure that accrued expenses
represent valid claims by suppliers
against goods delivered or services Existence, Rights
rendered to the entity. & Obligations

To ensure that all goods and services


received by the entity have been
accounted for in the books of the
company on a timely basis. Completeness

To ensure that liability is recorded at


the correct amount. Valuation

To ensure that payables have been


presented, classified and disclosed in
the financial statements in accordance
with the requirements of applicable
financial reporting framework i.e.
Companies Ordinance, 1984 and
applicable International Financial Presentation &
Reporting Standards. Disclosure

Audit Practice Manual – Revised 208


Execution Phase –
Sample Audit Programs
Liabilities – Accrued Expenses

S. No. Audit Procedures Objective Done by W. P. Ref.

Test of Controls

Select purchase transactions over the


period under audit and ensure the
following controls have existed during
the period:

Purchase orders are approved at an Only authorized


appropriate level. purchases are
made

Purchase orders are serially numbered. All purchase


orders are entered
into the records

Entries are made only on the basis of Credit to accrued


approved Goods Received Notes expenses represent
(GRN). goods actually
received

Entry to accrued expense account is All entries to


authorized at appropriate level and Accrued expenses
supported by appropriate calculations. are authorized

Suppliers’ invoices are checked for Accrued expenses


calculation and casting by a person are recorded in the
independent of the purchase appropriate
department amount

Price charged by the supplier is Accrued expenses


verified for appropriateness, for e.g. by are recorded at the
agreeing the rates charged to approved appropriate
price lists or quotations. amount

An independent person compares the Accrued expenses


purchase orders, goods received notes have been booked
and suppliers invoices for consistency. at appropriate
amount and
represent valid
claims by third
party

Suppliers’ statements are obtained and Accrued expenses


reconciled to accounting records on a are accurately
regular basis recorded

Audit Practice Manual – Revised 209


Execution Phase –
Sample Audit Programs
Liabilities – Accrued Expenses

S. No. Audit Procedures Done by W. P. Ref.

Credit notes are checked for Credit Notes


correctness of calculation by a person issued are
independent of the preparer. properly
calculated and
recorded at
appropriate
amount

Credit notes have been entered in the Credit Notes are


same period to which the purchases recorded in an
relate. appropriate period

Analytical Procedures

1. Compare accrued expenses to prior periods and budgets


seeking explanations for unusual items and significant
variances.

2. Review monthly movement of accrued expenses in order to


identify any inconsistency particularly towards the period
end.

3. Analyse the turnover of trade creditor – ratio of creditors to


total operating costs and compare to prior periods and
budgets, seeking explanations for unusual items and
significant variances.

4. Review the ratio of individual expense accounts to sales or


other appropriate base.

5. Review the accrued expense, purchases or expense ledgers


to identify whether there are any significant purchases or
expenses towards the period end. Check that these have
been accounted for in the correct period.

Audit Practice Manual – Revised 210


Execution Phase –
Sample Audit Programs
Liabilities – Accrued Expenses

S. No. Audit Procedures Done by W. P. Ref.

Test of Details

1. TEST THE PROPRIETY OF ACCRUED EXPENSE


ACCOUNTING POLICIES AND PROCEDURES

A. Review the information in prior-year working papers


and/or inquire concerning the nature of each
significant accrued expense account and the policies
and procedures used to account for them.

B. Inquire as to the reasons for significant changes in


accrued expense balances since the prior year.

C. Determine that the accounting policies and procedures


for identifying when liabilities should be recorded are
appropriate and applied consistently.

D. In the course of performing the following procedures


in this Program, consider whether audit evidence we
examine supports our understanding of accrued
expense accounting policies and procedures and their
propriety.

2. TEST ACCRUED EXPENSES BALANCES

A. Perform Procedure 1, Steps B to D, in the Model


Audit Program for Payables. For selected subsequent
cash disbursements or unpaid invoices that indicate
liabilities incurred but not recorded as accounts
payable in the audit period, ascertain that they were
recorded in an appropriate accrued expense account.

Audit Practice Manual – Revised 211


Execution Phase –
Sample Audit Programs
Liabilities – Accrued Expenses

S. No. Audit Procedures Done by W. P. Ref.

B. Inquire and/or review information in prior-year


working papers concerning the nature of recorded
accrued expenses. Inquire and consider other
available evidence, if any, that unrecorded or under-
recorded liabilities exist. Consider the following
sources of evidence, among others, as applicable:
prior-year balances of accrued expense accounts;
prior and current-year balances of related expense
accounts; minutes of meetings of the board of
directors; discussions with internal legal counsel;
responses to letters of inquiry to independent legal
counsel; employee benefit plans (e.g., pension,
medical, vacation, deferred compensation) and reports
from actuaries, insurance companies, etc.; subsequent
payroll records; significant contracts for services
performed in the audit period.

C. Make a selection of the significant accrued expenses


noted while performing Steps A and B (including any
that appear to exist but are unrecorded or under-
recorded).

1. For selected accruals that are based primarily on


known data (i.e., that are not accounting
estimates), examine documents supporting the
amounts accrued (e.g., service contracts or
invoices, subsequent payroll records, property tax
statements).

2. For selected accruals that are accounting


estimates (e.g., liabilities for certain employee
benefits plans and legal contingencies):

2.1 Evaluate the reasonableness of the methods


and assumptions management used to
make the estimates.

2.2 If management's methods and assumptions


were reasonable, test the data and
assumptions underlying the estimates, and
re-compute the estimates.

Audit Practice Manual – Revised 212


Execution Phase –
Sample Audit Programs
Liabilities – Accrued Expenses

S. No. Audit Procedures Done by W. P. Ref.

2.3 If management's methods and assumptions


were not reasonable, develop an
independent range of reasonable estimates
and determine whether management's
estimates fall within that range. (Note:
The factors that might be considered will
vary according to the nature of the
liabilities.)

3. For selected accruals with significant balances in


the prior year that no longer exist or that have
significantly lower balances in the current year:

3.1 Assess whether the circumstances requiring


the accruals in the prior year no longer
exist or whether they warrant reductions in
the amounts accrued.

3.2 If the accounts consist of only one or very


few transactions (e.g., a prior-year accrual
for a legal liability), trace the disposition of
the liability (or partial disposition) to
supporting documents (e.g., cancelled
checks).

4. Evaluate results of the tests.

3. TEST PRESENTATION OF ACCRUED EXPENSES

A. Determine that the following balances, if any, are


properly classified:

1. Debit balances in accrued expenses.

2. Non-current accrued expenses.

Audit Practice Manual – Revised 213


Execution Phase –
Sample Audit Programs
Liabilities – Accrued Expenses

S. No. Audit Procedures Done by W. P. Ref.

B. Determine that the following, if any, are properly


recorded, classified, and/or disclosed, as appropriate:

1. Accrued expenses owed to related parties.

2. Loss contingencies.

3. Retirement plans.

4. Post retirement health care and life insurance


benefit plans.

5. Property taxes estimated with a substantial


measure of uncertainty.

6. Lease obligations.

4. TEST BALANCES DENOMINATED IN FOREIGN


CURRENCIES

A. Agree the closing exchange rate(s) used to published


records and test the translation calculations.

5. TEST PRESENTATION OF RELATED-PARTY


BALANCES

A. Inquire and consider available evidence, if any, to


identify all related parties. Obtain a schedule of
related-party balances and determine that all identified
related parties with balances at year end are included
in the schedule. Trace the amounts in the schedule to
the trial balance.

B. Determine that the economic substance of the related-


party balances supports their recording.

C. Evaluate the reasonableness of presentation and/or


footnote disclosures of related-party balances.

D. Consider requesting positive confirmation of material


balances with related parties.

Audit Practice Manual – Revised 214


Execution Phase –
Sample Audit Programs
Liabilities – Accrued Expenses

S. No. Audit Procedures Done by W. P. Ref.

6. TEST ACCOUNTING ESTIMATES FOR BIAS

A. Perform a retrospective review of significant


accounting estimates reflected in the financial
statements of the prior year to determine whether
management judgments and assumptions relating to
the estimates indicate a possible bias on the part of
management.

1. The significant accounting estimates selected for


testing should include those that are based on highly
sensitive assumptions or are otherwise significantly
affected by judgments made by management.

2. Consider the results of this retrospective review in


evaluating the current-year estimates. If we identify a
possible bias on the part of management in making
prior-year accounting estimates, we should evaluate
whether circumstances producing such a bias represent
a risk of a material misstatement due to fraud.

B. Consider whether differences between estimates best


supported by the audit evidence and the estimates
included in the financial statements, even if they are
individually reasonable, indicate a possible bias on the
part of the entity's management. If so, reconsider
estimates taken as a whole.

Audit Practice Manual – Revised 215


Execution Phase –
Sample Audit Programs
Liabilities – Accrued Expenses

S. No. Audit Procedures Done by W. P. Ref.

7. TEST UNUSUAL ENTRIES RECORDED TO THE


GENERAL LEDGER

A. Investigate journal entries from sources that are


typically not associated with this account.

1. When selecting items to be tested, consider (a)


our assessment of the risk of material
misstatement due to fraud, (b) the effectiveness
of controls over the preparation and posting of
journal entries, (c) the entity's financial reporting
process and the nature of the evidence that can be
examined, (d) the nature and complexity of the
accounts, and (e) the amount and number of such
entries. Because fraudulent journal entries often
are made at the end of a reporting period, our
testing ordinarily should focus on the journal
entries and other adjustments made at that time.
In addition, because material misstatements in
financial statements due to fraud can occur
throughout the period and may involve extensive
efforts to conceal entries at the end of the
reporting period, we should consider whether
there also is a need to extend the testing of
journal entries to other periods within the period
under audit.

B. Examine related accounting records and determine


whether the selected debit/credit is valid, appropriate,
and authorized. Determine whether the selected entry
was properly recorded in the correct period and
consider the possible implications of such journal
entries on internal control.

Audit Practice Manual – Revised 216


Execution Phase –
Sample Audit Programs
Liabilities – Accrued Expenses

S. No. Audit Procedures Done by W. P. Ref.

C. Determine whether the entries exhibit characteristics


of inappropriate or unauthorized journal entries such
as (a) entries made to unrelated, unusual, or seldom-
used accounts or business segments, (b) entries
recorded at the end of the period or as post-closing
entries that have little or no explanation or description,
(c) entries made either before or during the preparation
of the financial statements that do not have account
numbers, and (d) entries that contain round numbers
or a consistent ending number.

D. Evaluate the reasonableness of other adjustments (e.g.,


entries posted directly to financial statement drafts,
consolidating adjustments, report combinations, and
reclassifications) made in the preparation of the
financial statements.

8. EVALUATE BUSINESS RATIONALE FOR


SIGNIFICANT UNUSUAL TRANSACTIONS

A. If we become aware of significant transactions that are


outside the normal course of business or that otherwise
appear to be unusual given our understanding of the
entity and its environment, perform the following
procedures:

1. Gain an understanding of the business rationale


for such significant unusual transaction.

2. Consider whether the transactions involve


previously unidentified related parties or parties
that do not have the substance or the financial
strength to support the transaction without
assistance from the entity we are auditing.

3. Determine whether that rationale (or the lack


thereof) suggests that the transactions may have
been entered into to engage in fraudulent
financial reporting.

Audit Practice Manual – Revised 217


Execution Phase –
Sample Audit Programs
Liabilities – Contingencies & Commitments

Audit Program WP Ref.:


Prepared by:
Date:
(b) Contingencies & Commitments
Reviewed by
Date
Client:
Period:
Subject: Contingencies & Commitments

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

To ensure that contingencies and


commitments have been disclosed in
the financial statements in accordance
with the requirements of applicable
financial reporting framework i.e.
Companies Ordinance, 1984 and
applicable International Financial Presentation &
Reporting Standards. Disclosure

Audit Practice Manual – Revised 218


Execution Phase –
Sample Audit Programs
Liabilities – Contingencies & Commitments

S. No. Audit Procedures Done by W. P. Ref.

Analytical Procedures

1. Review contingencies and commitments appearing in


last year’s accounts and inquire about the status this
year.

2. Compare current year disclosures with last year and


obtain explanations for any significant or unusual
items.

Test of Details

1. CONTINGENCIES AND COMMITMENTS

1. Inquire of and discuss with management the client’s


policies and procedures for identifying, evaluating,
and accounting for contingencies, including those
resulting from litigation and claims. The inquiry
should consider addressing oral arrangements, such as
an oral guarantee for the debt of others, as well as
written arrangements.

2. Obtain from management or legal adviser a


description and evaluation of the litigation and claims
that existed at the balance sheet date and during the
period from the balance sheet date to the date the
information is provided to the auditors.

3. Examine documents, including correspondence and


invoices from lawyers, in the client’s possession
concerning litigation, claims and unasserted claims.

4. Obtain and evaluate letters from legal advisors.

5. Inquire of and discuss with management the client’s


policies and procedures for identifying, evaluating,
and accounting for commitments.

6. Review the results of audit procedures performed in


other accounts.

Audit Practice Manual – Revised 219


Execution Phase –
Sample Audit Programs
Liabilities – Contingencies & Commitments

S. No. Audit Procedures Done by W. P. Ref.

7. Read the minutes of corporate meetings (e.g.,


shareholders, board of directors, and relevant
committees of the board) held during the period being
examined and through to the date of the auditor’s
report.

8. Read significant contracts, loan agreements, leases,


service guarantees, insurance policies (or note the lack
of insurance), and other applicable to sales, purchases
or lease contracts.

9. Determine, through inquiry and review of sales


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

10. Determine, through inquiry and review of minutes,


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

11. Examine bank confirmations for contingent


liabilities, letters of credit, and compensating balance
arrangements.

12. Inquire as to material commitments to complete


sales contracts at a loss.

13. Inquire as to any commitments to repurchase assets


previously sold; purchase quantities in excess of
requirements or at prices in excess of prevailing
market prices; construct or acquire property, plant,
equipment, investments, investments, intangibles, or
other non current assets.

14. Review cost and progress estimation procedures for


long term projects.

15. Evaluate the possibility of subsequent events, to


ensure that there is no unrecorded contingency

16. Obtain the client’s representation regarding


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

Audit Practice Manual – Revised 220


Execution Phase –
Sample Audit Programs
Liabilities – Deferred Liabilities

Audit Program WP Ref.:


Prepared by:
Date:
(c) Deferred Liabilities
Reviewed by
Date
Client:
Period:
Subject: Deferred Liabilities

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

All deferred liabilities on the balance Existence


sheet represent amounts owed by the
entity to tax authorities, employees or
other third parties.

The deferred liabilities represent Rights &


obligations of the entity at the balance Obligations
sheet date.

All deferred liabilities owed by the Completeness


entity and all related expenses that have
accrued at the balance sheet date have
been recorded.

Audit Practice Manual – Revised 221


Execution Phase –
Sample Audit Programs
Liabilities – Deferred Liabilities

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

Deferred Liabilities have been included Valuation


on the balance sheet at appropriate
amounts.

To ensure that deferred liabilities have Presentation &


been presented, classified and Disclosure
disclosed in the financial statements in
accordance with the requirements of
applicable financial reporting
framework i.e. Companies Ordinance,
1984 and applicable International
Financial Reporting Standards.

Audit Practice Manual – Revised 222


Execution Phase –
Sample Audit Programs
Liabilities – Deferred Liabilities

S. No. Audit Procedures Done by W. P. Ref.

Analytical Procedures

1. Compare current year balances with prior year and


ensure reasonableness of changes during the year.

2. Enquire into and obtain explanations for any unusual


changes during the year.

3. Compare income tax expense to previous year and


assess whether variance is consistent with change in
profits after taking into account any changes in income
tax rates.

Test of Details

1. TEST DEFERRED LIABILITIES

A. Obtain a schedules of all Deferred liabilities showing


beginning and ending balances , provision payments
during the year, and perform the following:

1. To obtain assurance about the completeness of


the schedule:

1.1 Make inquiries of knowledgeable


management.

2. Test the summarization and trace the ending


balances to the general ledger.

B. For deferred liability regarding gratutity perform the


following procedures

1. Obtain copy of company’s rules and policies


regarding staff gratuity.

2. Verify the last salaries drawn by selected


employees from payroll or salary sheet.

Audit Practice Manual – Revised 223


Execution Phase –
Sample Audit Programs
Liabilities – Deferred Liabilities

S. No. Audit Procedures Done by W. P. Ref.

3. Verify the date of appointment from personal


files.

4. Check the calculation of number of years


completed from date of appointment to date of
the balance sheet.

5. Check the calculation of charge of the gratutity


for the year.

6. Verify the payments of the gratuity to staff


retired during the year from the company’s rule
and bank statements.

7. Check other requirements as per IAS 19.

C. For deferred liability regarding pensions:-

1. Obtain a copy of company’s rules and policies


regarding pension (whether funded or unfunded).

2. For funded pension plans, check payment of


contribution of client towards fund according to
the fund’s rules.

3. For unfunded pension plan, verify provisions for


deferred liability in light of actuarial valuations.

4. Check other requirements as per IAS-19


(revised).

Audit Practice Manual – Revised 224


Execution Phase –
Sample Audit Programs
Liabilities – Deferred Liabilities

S. No. Audit Procedures Done by W. P. Ref.

D. For deferred liability regarding taxation:-

1. Calculate taxable and deductible timing


differences.

2. Apply appropriate rate of taxation on total of


reversible timing differences (as per old IAS 12.
However, as per revised IAS 12, all timing
differences whether reversing in the foreseeable
future or not, are required to be incorporated
into the accounts)

Ensure that proper amount has been taken in profit


and loss account by taking difference of opening
and closing balance of deferred tax liability.

E. Evaluate results of the tests.

2. TEST VALUATION AND PRESENTATION

A. Determine that disclosures have been made in


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

Audit Practice Manual – Revised 225


Execution Phase –
Sample Audit Programs
Liabilities – Direct Taxation

Audit Program WP Ref.:


Prepared by:
Date:
(d) Direct Taxation
Reviewed by
Date
Client:
Period:
Subject: Direct Taxation

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

All liabilities for income taxes on the Existence


balance sheet represent amounts owed to
income tax authorities.

The income taxes payable on the balance Rights &


sheet represent obligations of the entity Obligations
at the balance sheet date.

All liabilities for income taxes owed by Completeness


the entity and all income tax expense
that had accrued at the balance sheet date
have been recorded.

Income taxes payable are included on the Valuation


balance sheet at the appropriate amounts.

Audit Practice Manual – Revised 226


Execution Phase –
Sample Audit Programs
Liabilities – Direct Taxation

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

To ensure that liabilities for income tax Presentation &


and the related expense has been Disclosure
presented, classified and disclosed in
the financial statements in accordance
with the requirements of applicable
financial reporting framework i.e.
Companies Ordinance, 1984 and
applicable International Financial
Reporting Standards.

Audit Practice Manual – Revised 227


Execution Phase –
Sample Audit Programs
Liabilities – Direct Taxation

S. No. Audit Procedures Done by W. P. Ref.

Analytical Procedures

1. Compare current year balances with prior year and ensure


reasonableness of changes during the year.

2. Enquire into and obtain explanations for any unusual changes


during the year.

3. Compare income tax expense to previous year and assess


whether variance is consistent with change in profits after
taking into account any changes in income tax rates.

Test of Details

1. DIRECT TAXATION

A. Obtain (or prepare) a movement schedule of taxation


liabilities, showing beginning balance, activity during
the year, and ending balance by tax jurisdiction and tax
years. Agree opening and closing balances to the
general ledger. Test transactions for the year, and
investigate unusual items.

B. Review status of open years' returns, and examine


related correspondence from tax authorities for
indications that the actual liability may differ
significantly from the amount provided.

C. Where liabilities have been finalized, verify appropriate


payment or refund. Determine that adjustments have
been made for any difference between the final liability
and the amount provided, and consider the effect of any
such adjustments on subsequent tax years and taxes
imposed by other jurisdictions.

D. Obtain calculation of the tax liability identifying all


items constituting the difference between net pretax
income and taxable income, and compare calculation to
that of the previous year. Review calculation to
determine that correct tax rates have been used and that
all significant tax matters have been addressed. Agree
with tax returns, if prepared.

Audit Practice Manual – Revised 228


Execution Phase –
Sample Audit Programs
Liabilities – Direct Taxation

S. No. Audit Procedures Done by W. P. Ref.

E. If applicable, ensure that any tax losses have been


correctly calculated and appropriately dealt with.

F. If applicable, consider whether any provisions for


deferred taxes have been appropriately dealt with. Test
calculation of deferred taxes and whether timing
differences have been appropriately considered.

G. Evaluate results of the tests.

2. TEST ACCOUNTING ESTIMATES FOR BIAS

A. Perform a retrospective review of significant


accounting estimates reflected in the financial
statements of the prior year to determine whether
management judgments and assumptions relating to the
estimates indicate a possible bias on the part of
management.

1. The significant accounting estimates selected for


testing should include those that are based on
highly sensitive assumptions or are otherwise
significantly affected by judgments made by
management.

2. Consider the results of this retrospective review


in evaluating the current-year estimates. If we
identify a possible bias on the part of
management in making prior-year accounting
estimates, we should evaluate whether
circumstances producing such a bias represent a
risk of a material misstatement due to fraud.

B. Consider whether differences between estimates best


supported by the audit evidence and the estimates
included in the financial statements, even if they are
individually reasonable, indicate a possible bias on the
part of the entity's management. If so, reconsider
estimates taken as a whole.

Audit Practice Manual – Revised 229


Execution Phase –
Sample Audit Programs
Liabilities – Dividend Payable

Audit Program WP Ref.:


Prepared by:
Date:
(e) Dividend Payable
Reviewed by
Date
Client:
Period:
Subject: Dividend Payable

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment


IR CR ROSM
To ensure that dividend payable
represents established liability as at the
year end payable to the shareholders of Existence, Rights
the company. & Obligations

To ensure that the company’s liability


in respect of dividends has been
recorded in the books in full. Completeness

To ensure that liability is recorded at the


correct amount. Valuation

To ensure that dividend payable has


been presented, classified and disclosed
in the financial statements in
accordance with the requirements of
applicable financial reporting
framework i.e. Companies Ordinance,
1984 and applicable International Presentation &
Financial Reporting Standards. Disclosure

Audit Practice Manual – Revised 230


Execution Phase –
Sample Audit Programs
Liabilities – Dividend Payable

S. No. Audit Procedures Done by W. P. Ref.

Analytical Procedures

1. Review the percentage of declaration as compared to


previous year.

2. Determine whether the declaration is consistent with the


profits of the company

3. Review movement during the year and ensure that any


unpaid dividends carried forward have been properly
classified as unclaimed dividends.

Test of Details

1. TEST DIVIDEND PAYABLE BALANCES

1. Trace opening balance from general ledger.

2. Obtain a list of members of the company as at the book


closure date.

3. Obtain copy of the board resolution to verify the rate of


the dividend (interim and final ) announced.

4. Check that Zakat has been deducted at source and


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

5. Check that income tax has been deducted from dividend


under the provisions of the income tax Ordinance 2001.

6. Check payment of the dividend (i.e. dispatch of the


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

7. Agree closing balance with general ledger.

8. Evaluate results of the tests.

2. TEST PRESENTATION OF DIVIDEND PAYABLE

A. Determine that disclosures have been made in


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

Audit Practice Manual – Revised 231


Execution Phase –
Sample Audit Programs
Liabilities – Equity

Audit Program WP Ref.:


Prepared by:
Date:
(f) Equity
Reviewed by
Date
Client:
Period:
Subject: Equity

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment


IR CR ROSM
All the equity accounts on the balance Existence, Rights
sheet are appropriately authorized and & Obligations
issued.

To ensure that all changes to equity Completeness


accounts including transfer to reserve
and dividends have been accounted for
in the books of the company on a timely
basis.

To ensure that all equity accounts are Valuation


stated on the balance sheet at the
appropriate amounts.

To ensure that all equity accounts have Presentation &


been presented, classified and disclosed Disclosure
in the financial statements in
accordance with the requirements of
applicable financial reporting
framework i.e. Companies Ordinance,
1984 and applicable International
Financial Reporting Standards.

Audit Practice Manual – Revised 232


Execution Phase –
Sample Audit Programs
Liabilities – Equity

S. No. Audit Procedures Done by W. P. Ref.

Analytical Procedures

1. Compare current year balances with prior year and


ensure reasonableness of changes during the year.

2. Enquire into and obtain explanations for any unusual


changes during the year.

Test of Details

1. TEST EQUITY BALANCES

A. Obtain a schedule of all equity accounts showing


number of shares authorized, issued, and outstanding at
the beginning and end of the year and all transactions
affecting equity (e.g., dividends, retained earnings)
occurring during the year.

1. Test the summarization of the schedule.

2. Trace totals to the general ledger.

3. Check the number of shares and amount of issued,


subscribed and paid up capital from

a) Memorandum of association

b) Form ‘A’

4. Agree changes in authorized or issued shares to


minutes and documents filed with the SECP.

5. Examine all changes in capital.

5.1 Trace to appropriate authorizations (e.g.,


board minutes, member’s register).

5.2 Agree number of shares and proceeds from


issuance of new shares to cash receipts and
supporting records. Compute the entries to
par value of outstanding shares and paid in
capital.

Audit Practice Manual – Revised 233


Execution Phase –
Sample Audit Programs
Liabilities – Equity

S. No. Audit Procedures Done by W. P. Ref.

5.3 Agree number of shares and value of redemptions


to cash disbursements and supporting records.

5.4 For shares issued as bonus shares

a) Check board resolution

b) Check member’s register to ensure that


changes have been made in number of shares
of each member.

B. Test entries to paid-up capital other than from the


issuance of securities.

C. Test entries to retained earnings other than from net


income, dividends, and treasury shares.

D. Examine documents supporting treasury shares


transactions during the period. Confirm outstanding
treasury shares.

E. Examine schedule of shares owned off record and


beneficially by major officers.

F. Evaluate results of the tests.

2. TEST DIVIDENDS AND RETAINED EARNINGS

A. Determine that dividend payment and liability have


been correctly recorded.

1. Review extracts of board minutes for dividends


proposed and paid.

2. Re-compute calculation of dividends and trace


total dividends to earnings statement.

3. Re-compute the liability for dividends.

B. Agree changes in retained earnings (e.g., income,


dividends) to supporting documentation and trace
ending balance to general ledger and equity accounts.

C. Evaluate results of the tests.

Audit Practice Manual – Revised 234


Execution Phase –
Sample Audit Programs
Liabilities – Equity

S. No. Audit Procedures Done by W. P. Ref.

3. TEST PRESENTATION OF EQUITY

A. Determine that for each class of authorised shares, the


title of issue, par or stated value per share, and the
number of shares authorized, issued, and outstanding
are properly recorded and disclosed.

B. Determine that authorised shares, paid-in capital,


reserves, and retained earnings are properly recorded,
classified and/or disclosed, as appropriate.

C. Determine that any shares options, warrants, rights, or


conversion privileges existing at the balance-sheet date
are disclosed properly.

D. Determine that all transactions affecting shareholders'


equity are properly recorded in conformity with
applicable state laws.

4. TEST SHARES OPTIONS

A. Obtain a schedule of options granted, cancelled, and


exercised during the audit period, and options
outstanding, exercisable and available for future grant
at the balance-sheet date.

1. Test the summarization of the schedule.

2. Review descriptions of the shares option plans and


determine that all activity during the year is in
compliance.

3. Agree options granted to board minutes and to


schedule of changes in outstanding shares.

4. Determine that outstanding options are valid.

5. Agree option price of qualified shares options


granted to market source.

6. Determine that compensation expense has been


recorded on nonqualified shares options when
appropriate.

7. Agree options cancelled or expired to supporting


documentation (e.g., employee termination
notice).

8. Evaluate results of the tests.

Audit Practice Manual – Revised 235


Execution Phase –
Sample Audit Programs
Liabilities – Equity

S. No. Audit Procedures Done by W. P. Ref.

5. TEST UNUSUAL ENTRIES RECORDED TO


THE GENERAL LEDGER

A. Investigate journal entries from sources that are


typically not associated with this account.

1. When selecting items to be tested,


consider (a) our assessment of the risk of
material misstatement due to fraud, (b) the
effectiveness of controls over the
preparation and posting of journal entries,
(c) the entity's financial reporting process
and the nature of the evidence that can be
examined, (d) the nature and complexity
of the accounts, and (e) the amount and
number of such entries. Because
fraudulent journal entries often are made
at the end of a reporting period, our
testing ordinarily should focus on the
journal entries and other adjustments
made at that time. In addition, because
material misstatements in financial
statements due to fraud can occur
throughout the period and may involve
extensive efforts to conceal entries at the
end of the reporting period, we should
consider whether there also is a need to
extend the testing of journal entries to
other periods within the period under
audit.

B. Examine related accounting records and


determine whether the selected debit/credit is
valid, appropriate, and authorized. Determine
whether the selected entry was properly
recorded in the correct period and consider the
possible implications of such journal entries on
internal control.

Audit Practice Manual – Revised 236


Execution Phase –
Sample Audit Programs
Liabilities – Equity

S. No. Audit Procedures Done by W. P. Ref.

C. Determine whether the entries exhibit


characteristics of inappropriate or unauthorized
journal entries such as (a) entries made to
unrelated, unusual, or seldom-used accounts or
business segments, (b) entries recorded at the
end of the period or as post-closing entries that
have little or no explanation or description, (c)
entries made either before or during the
preparation of the financial statements that do
not have account numbers, and (d) entries that
contain round numbers or a consistent ending
number.

D. Evaluate the reasonableness of other


adjustments (e.g., entries posted directly to
financial statement drafts, consolidating
adjustments, report combinations, and
reclassifications) made in the preparation of the
financial statements.

6. EVALUATE BUSINESS RATIONALE FOR


SIGNIFICANT UNUSUAL TRANSACTIONS

A. If we become aware of significant transactions


that are outside the normal course of business
or that otherwise appear to be unusual given
our understanding of the entity and its
environment, perform the following
procedures:

1. Gain an understanding of the business


rationale for such significant unusual
transaction.

2. Consider whether the transactions


involve previously unidentified related
parties or parties that do not have the
substance or the financial strength to
support the transaction without assistance
from the entity we are auditing.

3. Determine whether that rationale (or the


lack thereof) suggests that the
transactions may have been entered into
to engage in fraudulent financial
reporting.

Audit Practice Manual – Revised 237


Execution Phase –
Sample Audit Programs
Liabilities – Liabilities Against Assets

Audit Program WP Ref.:


Prepared by:
Date:
(g) Liabilities Against Assets
Reviewed by
Date
Client:
Period:
Subject: Liabilities Against Assets

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment


IR CR ROSM
To ensure that liability represents valid
claims by lessor against assets leased to
the entity under finance lease Existence, Rights
arrangements. & Obligations

To ensure that the entire liability against


finance lease arrangements has been
accounted for in the books of the
company on a timely basis. Completeness

To ensure that liability is recorded at the


correct amount. Valuation

To ensure that the liability has been


presented, classified and disclosed in
the financial statements in accordance
with the requirements of applicable
financial reporting framework i.e.
Companies Ordinance, 1984 and
applicable International Financial Presentation &
Reporting Standards. Disclosure

Audit Practice Manual – Revised 238


Execution Phase –
Sample Audit Programs
Liabilities – Liabilities Against Assets

S. No. Audit Procedures Done by W. P. Ref.

Analytical Procedures

1. Compare balances to prior periods and budgets seeking


explanations for unusual items and significant
variances.

2. Review movement during the year in long term deposits


and ensure reasonableness of changes during the year.

Test of Details

1. TEST LIABILITIES AGAINST ASSETS SUBJECT TO


FINANCE LEASE.

A. Obtain a schedule(s) of Finance and operating leases


(including any that existed at the end of the prior year,
as well as any new leases). For finance leases, the
schedule should show beginning and ending balances
and borrowings and repayments during the year. For
operating leases, the schedule should show current-year
rent expense.

1. To obtain assurance about the completeness of the


schedule:

1.1 Make inquiries of knowledgeable


management.

1.2 Consider any evidence of additional leases


obtained through examination of minutes of
the board, significant contracts,
confirmations of bank accounts, support for
subsequent cash disbursements (when
testing payables) or for property additions,
and other documents.

2. Test the summarization and trace the ending


balances (for operating leases, the current-year
amount of rent expense) to the general ledger.

B. Read the lease agreements (or descriptions thereof in


our permanent files) and determine that each is
accounted for as a capital or an operating lease, as
appropriate. Determine that the leased property is still
in use.

Audit Practice Manual – Revised 239


Execution Phase –
Sample Audit Programs
Liabilities – Liabilities Against Assets

S. No. Audit Procedures Done by W. P. Ref.

C. Make a selection of finance leases. Prepare, or have the


client prepare, confirmation requests, and perform the
following:

1. Ascertain that the confirmations request all


information likely to be relevant to our tests of
the leases and related interest balances (e.g.,
applicable interest rates, due dates, the date to
which interest has been paid, and the nature and
original value of the property leased).

2. Mail the request under our control to the lessor.

3. Send second requests for non-replies.

4. Compare replies to requests. Prepare, or have the


client prepare, reconciliations of exceptions.
Trace reconciling items to supporting documents.

D. For new lease obtained during the year:

1. Review the lease agreements to ascertain its


nature as to finance or operating lease.

2. Check proper approval of lease transaction.

3. Ensure that only principal portion has been


recorded as liability against assets subject to
finance lease.

4. Review the security documents.

5. Evaluate results of the tests.

2. TEST RENTAL EXPENSE

A For rentals paid during the year check the following:

1. The amount of lease rentals from lease


amortization schedule.

2. Proper bifurcation of lease rental into principal


portion paid and finance charges paid.

Audit Practice Manual – Revised 240


Execution Phase –
Sample Audit Programs
Liabilities – Liabilities Against Assets

S. No. Audit Procedures Done by W. P. Ref.

3. Verify payment from bank statements.

4. Check calculation financial charges amortization


schedule.

B. For selected parties, circularize confirmation requests.


Match replies to confirmation with amount given in the
schedule.

C. Evaluate results of the tests.

3. TEST VALUATION AND PRESENTATION

A. Check that lease liabilities are properly bifurcated into


current and non-current portions.

B. Determine that disclosures have been made in


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

Audit Practice Manual – Revised 241


Execution Phase –
Sample Audit Programs
Liabilities – Long Term Debt

Audit Program WP Ref.:


Prepared by:
Date:
(h) Long Term Debt
Reviewed by
Date
Client:
Period:
Subject: Long Term Debt

Amount in Rs.
Account balances:
Long term debt

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment


IR CR ROSM
All long term debts on the balance sheet
represent valid claims by banks or other Existence, Rights
third parties. & Obligations

To ensure that all goods and services


received by the entity have been
accounted for in the books of the
company on a timely basis. Completeness

To ensure that liability is recorded at the


correct amount. Valuation

To ensure that long term debts have


been presented, classified and disclosed
in the financial statements in
accordance with the requirements of
applicable financial reporting
framework i.e. Companies Ordinance,
1984 and applicable International Presentation &
Financial Reporting Standards. Disclosure

Audit Practice Manual – Revised 242


Execution Phase –
Sample Audit Programs
Liabilities – Long Term Debt

S. No. Audit Procedures Done by W. P. Ref.

Analytical Procedures

1. Compare current year balances with prior year and


ensure reasonableness of changes during the year.

2. Enquire into and obtain explanations for any unusual


changes during the year.

Test of Details

1. CONFIRM DEBT

A. Obtain a schedule of notes payable and long-term debt


(including debt outstanding at the end of the prior year,
as well as any new debt) showing beginning and ending
balances and borrowings and repayments during the
year, and perform the following:

1. To obtain assurance about the completeness of the


schedule:

1.1 Make inquiries of knowledgeable


management.

1.2 Consider any evidence of additional debt


obtained through examination of minutes of
the board, significant contracts, confirmations
of bank accounts, support for subsequent cash
disbursements (when testing payables), and
other documents.

2. Test the summarization and trace the ending


balances to the general ledger.

B. For each lender (or, in some circumstances, selected


lenders) with which the client had debt outstanding at
the prior year end or during the current year, prepare, or
have the client prepare, a confirmation request for the
amount(s) owed to the lender, and perform the
following:

Audit Practice Manual – Revised 243


Execution Phase –
Sample Audit Programs
Liabilities – Long Term Debt

S. No. Audit Procedures Done by W. P. Ref.

1. Ascertain that the confirmation asks for all


information likely to be relevant to our tests of debt
and related interest balances (e.g., applicable
interest rates, due dates, the date to which interest
has been paid, collateral and security interests).

2. Mail the requests under our control to a person


within the lending institution who would be
expected to be knowledgeable about the client's
obligations, including any contingent liabilities,
guarantees, letters of credit, security agreements, or
similar matters with which the lender may be
involved.

3. Send second requests for non-replies.

4. Compare replies to requests. Prepare, or have the


client prepare, reconciliations of exceptions. Trace
reconciling items to supporting documents.

2. TEST ACCRUED INTEREST

A. Obtain a schedule of accrued interest expense (which


may be prepared in connection with the schedule of debt
in Procedure 1 above). Test the summarization and
trace the total or the individual amounts, as applicable,
to the general ledger.

B. Make a selection of debt instruments tested in Procedure


1 and, for each item selected, perform the following:

1. Based on the information in the confirmation


concerning the date through which interest was
paid and the applicable interest rate, re-compute the
amount of accrued interest.

2. If the information needed to re-compute the amount


was not confirmed:

2.1 Examine the debt agreement evidencing the


interest rate.

2.2 Obtain and examine cash disbursement


records (usually the paid check) evidencing
the most recent payment of interest.

Audit Practice Manual – Revised 244


Execution Phase –
Sample Audit Programs
Liabilities – Long Term Debt

S. No. Audit Procedures Done by W. P. Ref.

2.3 Re-compute the amount of accrued interest.

C. Evaluate results of the tests.

3. TEST INTEREST EXPENSE

A. Calculate overall interest expense on loans for the year,


and compare with recorded interest expense.

4. TEST VALUATION AND PRESENTATION OF DEBT


AND INTEREST ACCOUNTS

A. Determine that the following items, if any, are properly


recorded, classified, and/or disclosed, as appropriate:

1. Debt owed to related parties.

2. Long-term debt and current portion of long-term


debt.

3. Debt callable by the creditor (e.g., due to loan


covenant violations).

4. Short-term obligations expected to be refinanced.

5. Capitalized interest (e.g., related to construction


financing).

6. Imputed interest (e.g., when there is no stated


interest rate).

7. Discounts or premiums and related amortization.

8. Unconditional purchase obligations.

B. Obtain a schedule(s) of amounts due to be repaid in the


next five years under the terms of long-term debt
agreements (including, separately, amounts due under
capitalized leases and/or unconditional purchase
obligations, if any). Test the summarization of the
schedule and re-compute (possibly on test basis) the
amounts.

Audit Practice Manual – Revised 245


Execution Phase –
Sample Audit Programs
Liabilities – Long Term Debt

S. No. Audit Procedures Done by W. P. Ref.

C. Read the provisions in loan and debt agreements (and


update descriptions thereof contained in our permanent
files, if applicable) and perform the following:

1. Test that the client is in compliance with loan


covenants and other significant provisions of the
agreements.

2. If there are any provisions with which the client is


not in compliance, determine whether the debt
should be classified as current. If enforcement of
the provisions has been waived by the lender,
obtain confirmation of the waiver from the lender.

D. Determine that the accounting policies and methods of


recording debt are appropriate and applied consistently.

5. ROLLFORWARD TEST FOR DEBT TESTED PRIOR


TO YEAR END

A. Inquire, and consider any other evidence that comes to


our attention (e.g., in reading the minutes of the board),
as to the existence of any new debt agreements, or
modifications to existing agreements, in the intervening
period from the interim testing date to the balance-sheet
date. Test any new debt (and related accrued interest) as
in Procedures 1 through 4 of this Program.

1. Evaluate results of the tests.

B. Inquire, and consider any other evidence that comes to


our attention (e.g., in reading the minutes of the Board),
as to the existence of any new debt agreements, or
modifications to existing agreements, in the intervening
period from the interim testing date to the balance-sheet
date. Test any new debt (and related accrued interest) as
in Procedures 1 through 4 of this Program.

C. Test transactions during the intervening period between


the interim testing date and year end:

Audit Practice Manual – Revised 246


Execution Phase –
Sample Audit Programs
Liabilities – Long Term Debt

S. No. Audit Procedures Done by W. P. Ref.

1. Obtain reconciliations of the interim debt balances


to the year-end balances:

1.1 Agree new borrowings to cash receipts


journals or to entries in cash accounts.

1.2 Agree payments to cash disbursements


journals or to entries in cash accounts.

1.3 Examine supporting documents to verify other


significant entries.

2. Make a selection of entries in cash disbursement


journals (or those entries recorded directly in cash
accounts that represent debt payments):

2.1 Determine that the amounts of the payments


are in accordance with the terms of the debt
agreements (e.g., by re-computing the
payments).

2.2 Examine related paid checks or bank advices


(for wire transfers) for evidence of receipt and
deposit by the authorized payee (i.e. the
lender).

3. Evaluate results of the tests.

6. CLIENT SERVICE CONSIDERATIONS

Consider whether we can make useful recommendations to


the client with respect to any of the following:

A. When debt is retired, the client ensures that a discharge


is received on assets securing the debt.

7. TEST BALANCES DENOMINATED IN FOREIGN


CURRENCIES

A. Agree the closing exchange rate(s) used to published


records and test the translation calculations.

Audit Practice Manual – Revised 247


Execution Phase –
Sample Audit Programs
Liabilities – Long Term Debt

S. No. Audit Procedures Done by W. P. Ref.

8. TEST PRESENTATION OF RELATED-PARTY


BALANCES

A. Inquire and consider available evidence, if any, to


identify all related parties. Obtain a schedule of related-
party balances and determine that all identified related
parties with balances at year end are included in the
schedule. Trace the amounts in the schedule to the trial
balance.

B. Determine that the economic substance of the related-


party balances supports their recording.

C. Evaluate the reasonableness of presentation and/or


footnote disclosures of related-party balances.

D. Consider requesting positive confirmation of material


balances with related parties.

9. TEST UNUSUAL ENTRIES RECORDED TO THE


GENERAL LEDGER

A. Investigate journal entries from sources that are typically


not associated with this account.

1. When selecting items to be tested, consider (a) our


assessment of the risk of material misstatement due
to fraud, (b) the effectiveness of controls over the
preparation and posting of journal entries, (c) the
entity's financial reporting process and the nature of
the evidence that can be examined, (d) the nature
and complexity of the accounts, and (e) the amount
and number of such entries. Because fraudulent
journal entries often are made at the end of a
reporting period, our testing ordinarily should focus
on the journal entries and other adjustments made
at that time. In addition, because material
misstatements in financial statements due to fraud
can occur throughout the period and may involve
extensive efforts to conceal entries at the end of the
reporting period, we should consider whether there
also is a need to extend the testing of journal entries
to other periods within the period under audit.

Audit Practice Manual – Revised 248


Execution Phase –
Sample Audit Programs
Liabilities – Long Term Debt

S. No. Audit Procedures Done by W. P. Ref.

B. Examine related accounting records and determine


whether the selected debit/credit is valid, appropriate,
and authorized. Determine whether the selected entry
was properly recorded in the correct period and consider
the possible implications of such journal entries on
internal control.

C. Determine whether the entries exhibit characteristics of


inappropriate or unauthorized journal entries such as (a)
entries made to unrelated, unusual, or seldom-used
accounts or business segments, (b) entries recorded at
the end of the period or as post-closing entries that have
little or no explanation or description, (c) entries made
either before or during the preparation of the financial
statements that do not have account numbers, and (d)
entries that contain round numbers or a consistent
ending number.

D. Evaluate the reasonableness of other adjustments (e.g.,


entries posted directly to financial statement drafts,
consolidating adjustments, report combinations, and
reclassifications) made in the preparation of the financial
statements.

10. EVALUATE BUSINESS RATIONALE FOR


SIGNIFICANT UNUSUAL TRANSACTIONS

A. If we become aware of significant transactions that are


outside the normal course of business or that otherwise
appear to be unusual given our understanding of the
entity and its environment, perform the following
procedures:

B. If we become aware of significant transactions that are


outside the normal course of business or that otherwise
appear to be unusual given our understanding of the
entity and its environment, perform the following
procedures:

1. Gain an understanding of the business rationale for


such significant unusual transaction.

Audit Practice Manual – Revised 249


Execution Phase –
Sample Audit Programs
Liabilities – Long Term Debt

S. No. Audit Procedures Done by W. P. Ref.

2. Consider whether the transactions involve


previously unidentified related parties or parties
that do not have the substance or the financial
strength to support the transaction without
assistance from the entity we are auditing.

3. Determine whether that rationale (or the lack


thereof) suggests that the transactions may have
been entered into to engage in fraudulent financial
reporting.

Audit Practice Manual – Revised 250


Execution Phase –
Sample Audit Programs
Liabilities – Long Term Deposit

Audit Program WP Ref.:


Prepared by:
Date:
(i) Long Term Deposit
Reviewed by
Date
Client:
Period:
Subject: Long Term Deposit

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

To ensure that long term deposits Existence, Rights


represent valid claims by third parties. & Obligations

To ensure that all deposits received


from customers or other third parties
have been accounted for in the books of
the company on a timely basis. Completeness

To ensure that long term deposits are


recorded at the correct amount. Valuation

To ensure that long term deposits have


been presented, classified and disclosed
in the financial statements in
accordance with the requirements of
applicable financial reporting
framework i.e. Companies Ordinance,
1984 and applicable International Presentation &
Financial Reporting Standards. Disclosure

Audit Practice Manual – Revised 251


Execution Phase –
Sample Audit Programs
Liabilities – Long Term Deposit

S. No. Audit Procedures Done by W. P. Ref.

Analytical Procedures

1. Compare balances to prior periods and budgets seeking


explanations for unusual items and significant variances.

2. Review movement during the year in long term deposits


and ensure reasonableness of changes during the year.

Test of Details

1. TEST LONG TERM DEPOSIT BALANCES

A. Ascertain the nature of deposits by inquiry or by


reviewing prior year’s working papers

B. Examine the supporting documents of deposits e. g.


contracts with customers etc.

C. Circularize confirmations to selected parties. Match


replies with the amounts shown in general ledger.

D. Check that the amounts of deposits to which Sec 226 of


the Companies Ordinance, 1984 applies have been
credited by the client in a separate bank account as
required by that Section.

2. TEST PRESENTATION

A. Determine that disclosures have been made in


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

Audit Practice Manual – Revised 252


Execution Phase –
Sample Audit Programs
Liabilities – Payables

Audit Program WP Ref.:


Prepared by:
(j) Payables Date:
Reviewed by
Date
Client:
Period:
Subject: Payables

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

To ensure that payables represent valid


claims by suppliers against goods
delivered or services rendered to the Existence, Rights
entity. & Obligations

To ensure that all goods and services


received by the entity have been
accounted for in the books of the
company. Completeness

To ensure that liability is included on


the balance sheet at the correct amount. Valuation

To ensure that the liability is recorded


in the appropriate period and there are
not cut off issues. Completeness

Audit Practice Manual – Revised 253


Execution Phase –
Sample Audit Programs
Liabilities – Payables

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

To ensure that payables have been


presented, classified and disclosed in
the financial statements in accordance
with the requirements of applicable
financial reporting framework i.e.
Companies Ordinance, 1984 and
applicable International Financial Presentation &
Reporting Standards. Disclosure

Audit Practice Manual – Revised 254


Execution Phase –
Sample Audit Programs
Liabilities – Payables

S. No. Audit Procedures Objective Done by W. P. Ref.

Test of Controls

Select purchase transactions over the


period under audit and ensure the
following controls have existed during
the period:

n Purchase orders are approved at an Only authorized


appropriate level. purchases are
made

n Purchase orders are serially All purchase


numbered. orders are entered
into the records

n Entries are made only on the basis Credit to accounts


of approved Goods Received Note payable represent
(GRN). goods actually
received

n Suppliers’ invoices are checked for Accounts Payable


calculation and casting by a person are recorded at the
independent of the purchase appropriate
department amount

n Price charged by the supplier is Accounts Payable


verified for appropriateness, for are recorded at the
e.g. by agreeing the rates charged appropriate
to approved price lists or amount
quotations.

n An independent person compares Accounts payable


the purchacse orders, goods have been booked
received notes and suppliers at appropriate
invoices for consistency. amount and
represent valid
claims by third
party

n Suppliers’ statements are obtained Accounts Payable


and reconciled to accounting are accurately
records on a regular basis recorded

Audit Practice Manual – Revised 255


Execution Phase –
Sample Audit Programs
Liabilities – Payables

S. No. Audit Procedures Objective Done by W. P. Ref.

n Entries to Accounts Payable are All entries to


approved at an appropriate level Accounts payable
are authorized

n Credit notes are checked for Credit Notes


correctness of calculation by a issued are
person independent of the preparer. properly
calculated and
recorded at
appropriate
amount

n Credit notes have been entered in Credit Notes are


the same period to which the recorded in the
purchases relate. appropriate period

Audit Practice Manual – Revised 256


Execution Phase –
Sample Audit Programs
Liabilities – Payables

S. No. Audit Procedures Done by W. P. Ref.

Analytical Procedures

1. Compare trade creditors, purchases and payments to prior


periods and budgets seeking explanations for unusual items
and significant variances.

2. Review monthly movement of trade creditors in comparison


to purchases and payments particularly around the period
end.

3. Analyse the turnover of trade creditor – ratio of creditors to


total operating costs and compare to prior periods and
budgets, seeking explanations for unusual items and
significant variances.

4. Analyze the ratio of purchases in the last month of the period


to total purchases.

5. Review the gross profit margin achieved particularly around


the period end and compare to prior periods and budgets
seeking explanations for any unusual variance.

6. Review the ratio of individual expense accounts to sales or


other appropriate base.

7. Review the accounts payable, purchases or expense ledgers


to identify whether there are any significant purchases or
expenses towards the period end. Check that these have been
accounted for in the correct period.

Test of Details

1. TEST PAYABLES

A. Obtain the payables trial balance. Test the


summarization and the reconciliation of the total to the
general ledger. Trace significant reconciling items, if
any, to supporting documents.

B. Make a selection of cash disbursements from subsequent


cash disbursement records during an appropriate period
following the date of the payables trial balance (usually
at least one trade payables cycle, or, if payables are
tested at year end, to the end of field work), and:

Audit Practice Manual – Revised 257


Execution Phase –
Sample Audit Programs
Liabilities – Payables

S. No. Audit Procedures Done by W. P. Ref.

1. Trace selected disbursements to receiving


documents, purchase invoices, and/or other
supporting documents.

2. Determine whether those selected disbursements


that indicate a liability as of the trial balance date
are recorded in the trial balance or the
reconciliation to the general ledger.

C. On or after the date of the test in Step B, make a


selection of unpaid suppliers' invoices and unmatched
receiving reports. Determine whether those that indicate
a liability as of the trial balance date are recorded in the
trial balance or the reconciliation to the general ledger.

D. Review the year-end accounts payable trial balance to


determine whether significant debits are included in the
account balance. For material debit balances that are
included in the year end balance consider whether
reclassification is appropriate.

E. Evaluate results of the tests.

2. TEST VALUATION AND PRESENTATION OF


PAYABLES

A. Determine that the following balances, if any, are


properly classified:

1. Debit balances in payables.

2. Non-current or non-trade payables.

B. Determine that the following balances, if any, are


properly valued, classified, and/or disclosed, as
appropriate:

1. Old, disputed, or questionable payables.

2. Payables to related parties.

3. Purchase commitments.

Audit Practice Manual – Revised 258


Execution Phase –
Sample Audit Programs
Liabilities – Payables

S. No. Audit Procedures Done by W. P. Ref.

3. TEST EARLY CUT-OFF OF PURCHASES

A. Make a selection of purchase invoices recorded in the


___-day period after year end. Trace the selected
invoices to receiving records. Determine that the
payables were recorded in the correct period. Evaluate
results of the tests.

B. Make a selection of initial records of receipts of goods


or services that occurred in the ___-day period prior to
year end. Trace receiving records to purchase invoices.
Determine that the payables were recorded in the correct
period. Evaluate results of the tests.

4. TEST LATE CUT-OFF OF DEBIT NOTES

A. Inquire into purchase returns in the ___-day period after


year end. Determine that the debit notes were recorded
in the correct period.

B. Make a selection of debit notes recorded in the ___-day


period prior to year end. Trace the debit notes to
shipping records and determine that they were recorded
in the correct period.

C. Identify miscellaneous debits to payables recorded in the


___-day period prior to year end. Trace the debits to
supporting documents and determine that they were
recorded in the correct period.

D. Evaluate results of the tests.

5. ROLLFORWARD TEST FOR PAYABLES TESTED


PRIOR TO YEAR END

A. Inquire into any significant disputed balances since the


date at which payables were tested under Procedure 1
(or 4, if performed). Investigate disputed balances as
necessary.

Audit Practice Manual – Revised 259


Execution Phase –
Sample Audit Programs
Liabilities – Payables

S. No. Audit Procedures Done by W. P. Ref.

B. Review the trial balance of payables as of year end. For


individual supplier accounts that have decreased
significantly since the interim testing date, either review
subsequent cash disbursement records for indications of
unrecorded liabilities to such suppliers or obtain
statements or unpaid invoices received by the client
from such suppliers. Determine that any liabilities to
such suppliers that existed at year end were recorded at
year end. Evaluate results of the tests.

C. Perform analytical procedures to test the payables


balance at year end:

1. Consider using the following data, as applicable, to


develop an expectation of the payables balance at
year end: prior period balances, monthly amounts
of purchases, disbursements, and purchase returns
in the intervening period from the interim testing
date to the balance-sheet date compared to such
monthly amounts in prior years and in the current
year prior to the interim testing date.

2. Determine the threshold needed to identify a


significant difference between the expectation and
the recorded year end payables balance.

3. Compare the expectation to the recorded balance.


If the difference is more than the threshold, obtain
and corroborate explanations for the difference
(e.g., by examining supporting documents).

4. Evaluate results of the tests.

D. Test transactions during the intervening period between


the interim testing date and year end:

1. Obtain a reconciliation of the interim payables


balance to the year-end balance:

1.1 Agree purchases totals to purchases journals.

1.2 Agree disbursements totals to cash


disbursements journals.

Audit Practice Manual – Revised 260


Execution Phase –
Sample Audit Programs
Liabilities – Payables

S. No. Audit Procedures Done by W. P. Ref.

1.3 Examine supporting documents to verify other


significant entries.

2. Make a selection of entries to purchases journals in


the intervening period between the interim testing
date and year end:

2.1 Trace the selected entries to supplier invoices


and receiving records.

2.2 Verify additions and extensions on the


invoices.

2.3 Determine that the purchases were recorded in


the correct period.

3. Make a selection of entries in cash disbursements


journals in the intervening period between the
interim testing date and year end:

3.1 Trace the selected entries to supplier invoices


and receiving records.

3.2 Determine that the disbursements were


recorded in the correct period.

3.3 Agree totals in disbursements journals to


credits in cash accounts.

4. Evaluate results of the tests.

6. TEST PAYABLES OWED TO SELECTED SUPPLIERS

A. Make a selection of significant suppliers to which


amounts may be payable as of the date of the payables
trial balance. Such suppliers may be identified through
inquiry and/or review of prior cash disbursements
records. (Perform B, if practicable, or else C)

B. Obtain statements or purchase invoices received by the


client from selected suppliers.

Audit Practice Manual – Revised 261


Execution Phase –
Sample Audit Programs
Liabilities – Payables

S. No. Audit Procedures Done by W. P. Ref.

C. If statements from selected suppliers are not available,


prepare, or have the client prepare, confirmation
requests for the amounts owed to the suppliers and
perform the following:

1. Mail the requests under our control.

2. Send second requests for non-replies.

3. Compare replies to requests.

4. For non-replies, examine subsequent cash


disbursements to the suppliers and/or unpaid
supplier invoices, and receiving records.
Determine that any items representing liabilities as
of the trial balance date are recorded at that date.

D. Obtain and prepare reconciliations of statements,


invoices, or confirmations obtained in Steps B and C
above to the amounts recorded in the payables trial
balance. Trace reconciling items to shipping/receiving
records, purchase invoices, debit notes, and other
supporting documents, as applicable.

E. Evaluate results of the tests.

7. TEST PRESENTATION OF RELATED-PARTY


PAYABLES

A. Inquire and consider other available evidence, if any, to


identify all related parties from which purchases were
made during the year. Obtain a schedule of related-
party payables and determine that all identified related
parties to which payables are owed at year end are
included in the schedule. Trace the amounts in the
schedule to the payables trial balance.

B. Determine that the economic substance of the related-


party payables supports their recording.

C. Evaluate the reasonableness of presentation and/or


footnote disclosures of related-party payables.

Audit Practice Manual – Revised 262


Execution Phase –
Sample Audit Programs
Liabilities – Payables

S. No. Audit Procedures Done by W. P. Ref.

D. Consider requesting positive confirmation of material


balances with related parties.

8. TEST VALUATION OF FOREIGN CURRENCY


PAYABLES

A. Inquire and consider other available evidence, if any, to


identify foreign suppliers from which purchases were
transacted in foreign currencies. Identify payables to
such suppliers. Identify applicable exchange rates and
agree them to an independent source. Re-compute
foreign currency payable amounts in local currency.

B. Determine the impact of foreign currency hedging


contracts, if any, on the recorded balance of foreign
currency payables.

C. Trace currency translation adjustments to the general


ledger.

9. TEST ACCOUNTING ESTIMATES FOR BIAS

A. Perform a retrospective review of significant accounting


estimates reflected in the financial statements of the
prior year to determine whether management judgments
and assumptions relating to the estimates indicate a
possible bias on the part of management.

1. The significant accounting estimates selected for


testing should include those that are based on
highly sensitive assumptions or are otherwise
significantly affected by judgments made by
management.

2. Consider the results of this retrospective review in


evaluating the current-year estimates. If we
identify a possible bias on the part of management
in making prior-year accounting estimates, we
should evaluate whether circumstances producing
such a bias represent a risk of a material
misstatement due to fraud.

Audit Practice Manual – Revised 263


Execution Phase –
Sample Audit Programs
Liabilities – Payables

S. No. Audit Procedures Done by W. P. Ref.

B. Consider whether differences between estimates best


supported by the audit evidence and the estimates
included in the financial statements, even if they are
individually reasonable, indicate a possible bias on the
part of the entity's management. If so, reconsider
estimates taken as a whole.

10. TEST UNUSUAL ENTRIES RECORDED TO THE


GENERAL LEDGER

A. Investigate journal entries from sources that are typically


not associated with this account.

1. When selecting items to be tested, consider (a) our


assessment of the risk of material misstatement due
to fraud, (b) the effectiveness of controls over the
preparation and posting of journal entries, (c) the
entity's financial reporting process and the nature of
the evidence that can be examined, (d) the nature
and complexity of the accounts, and (e) the amount
and number of such entries. Because fraudulent
journal entries often are made at the end of a
reporting period, our testing ordinarily should focus
on the journal entries and other adjustments made
at that time. In addition, because material
misstatements in financial statements due to fraud
can occur throughout the period and may involve
extensive efforts to conceal entries at the end of the
reporting period, we should consider whether there
also is a need to extend the testing of journal entries
to other periods within the period under audit.

B. Examine related accounting records and determine


whether the selected debit/credit is valid, appropriate,
and authorized. Determine whether the selected entry
was properly recorded in the correct period and consider
the possible implications of such journal entries on
internal control.

Audit Practice Manual – Revised 264


Execution Phase –
Sample Audit Programs
Liabilities – Payables

S. No. Audit Procedures Done by W. P. Ref.

C. Determine whether the entries exhibit characteristics of


inappropriate or unauthorized journal entries such as (a)
entries made to unrelated, unusual, or seldom-used
accounts or business segments, (b) entries recorded at
the end of the period or as post-closing entries that have
little or no explanation or description, (c) entries made
either before or during the preparation of the financial
statements that do not have account numbers, and (d)
entries that contain round numbers or a consistent
ending number.

D. Evaluate the reasonableness of other adjustments (e.g.,


entries posted directly to financial statement drafts,
consolidating adjustments, report combinations, and
reclassifications) made in the preparation of the financial
statements.

11. VALUATE BUSINESS RATIONALE FOR


SIGNIFICANT UNUSUAL TRANSACTIONS

A. If we become aware of significant transactions that are


outside the normal course of business or that otherwise
appear to be unusual given our understanding of the
entity and its environment, perform the following
procedures:

1. Gain an understanding of the business rationale for


such significant unusual transaction.

2. Consider whether the transactions involve


previously unidentified related parties or parties
that do not have the substance or the financial
strength to support the transaction without
assistance from the entity we are auditing.

3. Determine whether that rationale (or the lack


thereof) suggests that the transactions may have
been entered into to engage in fraudulent financial
reporting.

Audit Practice Manual – Revised 265


Execution Phase –
Sample Audit Programs
Liabilities – Short Term Borrowings

Audit Program WP Ref.:


Prepared by:
Date:
(k) Short Term Borrowings
Reviewed by
Date
Client:
Period:
Subject: Short Term Borrowings

Amount in Rs.
Account balances:
Short term borrowings

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

All short term borrowings on the


balance sheet represent valid claims by Existence, Rights
banks or other third parties. & Obligations

To ensure that all short term borrowings


have been accounted for in the books of
the company on a timely basis. Completeness

To ensure that liability is recorded at the


correct amount. Valuation

Audit Practice Manual – Revised 266


Execution Phase –
Sample Audit Programs
Liabilities – Short Term Borrowings

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

To ensure that short term borrowings


have been presented, classified and
disclosed in the financial statements in
accordance with the requirements of
applicable financial reporting
framework i.e. Companies Ordinance,
1984 and applicable International Presentation &
Financial Reporting Standards. Disclosure

Audit Practice Manual – Revised 267


Execution Phase –
Sample Audit Programs
Liabilities – Short Term Borrowings

S. No. Audit Procedures Done by W. P. Ref.

Analytical Procedures

1. Compare current year balances with prior year and ensure


reasonableness of changes during the year.

2. Enquire into and obtain explanations for any unexpected


changes.

Test of Details

1. CONFIRM DEBT

A. Obtain a schedule of short term borrowing (including


debt outstanding at the end of the prior year, as well as
any new debt or renewal of debt) showing beginning and
ending balances and borrowings and repayments during
the year, and perform the following:

1. To obtain assurance about the completeness of the


schedule:

1.1 Make inquiries of knowledgeable


management.

1.2 Consider any evidence of additional debt


obtained through examination of minutes of
the board, significant contracts,
confirmations of bank accounts, support for
subsequent cash disbursements (when
testing payables), and other documents.

2. Test the summarization and trace the ending


balances to the general ledger.

B. For each lender (or, in some circumstances, selected


lenders) with which the client had debt outstanding at
the prior year end or during the current year, prepare, or
have the client prepare, a confirmation request for the
amount(s) owed to the lender, and perform the
following:

Audit Practice Manual – Revised 268


Execution Phase –
Sample Audit Programs
Liabilities – Short Term Borrowings

S. No. Audit Procedures Done by W. P. Ref.

1. Ascertain that the confirmation asks for all


information likely to be relevant to our tests of
debt and related interest balances (e.g., applicable
interest rates, due dates, the date to which interest
has been paid, collateral and security interests).

2. Mail the requests under our control to a person


within the lending institution who would be
expected to be knowledgeable about the client's
obligations, including any contingent liabilities,
guarantees, letters of credit, security agreements,
or similar matters with which the lender may be
involved.

3. Send second requests for non-replies.

4. Compare replies to requests. Prepare, or have the


client prepare, reconciliations of exceptions.
Trace reconciling items to supporting documents.

C. Evaluate results of the tests.

2. TEST ACCRUED INTEREST

A. Obtain a schedule of accrued interest expense (which


may be prepared in connection with the schedule of debt
in Procedure 1 above). Test the summarization and
trace the total or the individual amounts, as applicable,
to the general ledger.

B. Make a selection of debt instruments tested in Procedure


1 and, for each item selected, perform the following:

1. Based on the information in the confirmation


concerning the date through which interest was
paid and the applicable interest rate, re-compute
the amount of accrued interest.

2. If the information needed to re-compute the


amount was not confirmed:

2.1 Examine the debt agreement evidencing the


interest rate.

Audit Practice Manual – Revised 269


Execution Phase –
Sample Audit Programs
Liabilities – Short Term Borrowings

S. No. Audit Procedures Done by W. P. Ref.

2.2 Obtain and examine cash disbursement


records (usually the paid check) evidencing
the most recent payment of interest.

2.3 Re-compute the amount of accrued interest.

C. Evaluate results of the tests.

3. TEST INTEREST EXPENSE

A. Calculate overall interest expense on loans for the year,


and compare with recorded interest expense.

4. TEST VALUATION AND PRESENTATION OF DEBT


AND INTEREST ACCOUNTS

A. Determine that the following items, if any, are properly


recorded, classified, and/or disclosed, as appropriate:

1. Debt owed to related parties.

2. Debt callable by the creditor (e.g., due to loan


covenant violations).

3. Short-term obligations expected to be refinanced.

4. Imputed interest (e.g., when there is no stated


interest rate).

5. Discounts or premiums and related amortization.

6. Unconditional purchase obligations.

B. Read the provisions in loan and debt agreements (and


update descriptions thereof contained in our permanent
files, if applicable) and perform the following:

1. Test that the client is in compliance with loan


covenants and other significant provisions of the
agreements.

Audit Practice Manual – Revised 270


Execution Phase –
Sample Audit Programs
Liabilities – Short Term Borrowings

S. No. Audit Procedures Done by W. P. Ref.

2. If there are any provisions with which the client is


not in compliance, determine whether the debt
should be classified as current. If enforcement of
the provisions has been waived by the lender,
obtain confirmation of the waiver from the lender.

C. Determine that the accounting policies and methods of


recording debt are appropriate and applied consistently.

5. ROLLFORWARD TEST FOR DEBT TESTED PRIOR


TO YEAR END

A. Inquire, and consider any other evidence that comes to


our attention (e.g., in reading the minutes of the board),
as to the existence of any new debt agreements, or
modifications to existing agreements, in the intervening
period from the interim testing date to the balance-sheet
date. Test any new debt (and related accrued interest) as
in Procedures 1 through 4 of this Program.

1. Evaluate results of the tests.

B. Inquire, and consider any other evidence that comes to


our attention (e.g., in reading the minutes of the Board),
as to the existence of any new debt agreements, or
modifications to existing agreements, in the intervening
period from the interim testing date to the balance-sheet
date. Test any new debt (and related accrued interest) as
in Procedures 1 through 4 of this Program.

1. Agree borrowings to cash receipts journals or to


entries in cash accounts.

1.1 Agree payments to cash disbursements


journals or to entries in cash accounts.

1.2 Examine supporting documents to verify


other significant entries.

2. Make a selection of entries in cash disbursement


journals (or those entries recorded directly in cash
accounts that represent debt payments):

Audit Practice Manual – Revised 271


Execution Phase –
Sample Audit Programs
Liabilities – Short Term Borrowings

S. No. Audit Procedures Done by W. P. Ref.

2.1 Determine that the amounts of the payments


are in accordance with the terms of the debt
agreements (e.g., by re-computing the
payments).

2.2 Examine related paid checks or bank


advices (for wire transfers) for evidence of
receipt and deposit by the authorized payee
(i.e. the lender).

3. Evaluate results of the tests.

6. CLIENT SERVICE CONSIDERATIONS

Consider whether we can make useful recommendations to


the client with respect to any of the following:

A. When debt is retired, the client ensures that a discharge


is received on assets securing the debt.

7. TEST BALANCES DENOMINATED IN FOREIGN


CURRENCIES

A. Agree the closing exchange rate(s) used to published


records and test the translation calculations.

8. TEST PRESENTATION OF RELATED-PARTY


BALANCES

A. Inquire and consider available evidence, if any, to


identify all related parties. Obtain a schedule of related-
party balances and determine that all identified related
parties with balances at year end are included in the
schedule. Trace the amounts in the schedule to the trial
balance.

B. Determine that the economic substance of the related-


party balances supports their recording.

C. Evaluate the reasonableness of presentation and/or


footnote disclosures of related-party balances.

D. Consider requesting positive confirmation of material


balances with related parties.

Audit Practice Manual – Revised 272


Execution Phase –
Sample Audit Programs
Liabilities – Short Term Borrowings

S. No. Audit Procedures Done by W. P. Ref.

9. TEST UNUSUAL ENTRIES RECORDED TO THE


GENERAL LEDGER

A. Investigate journal entries from sources that are typically


not associated with this account.

1. When selecting items to be tested, consider (a) our


assessment of the risk of material misstatement
due to fraud, (b) the effectiveness of controls over
the preparation and posting of journal entries, (c)
the entity's financial reporting process and the
nature of the evidence that can be examined, (d)
the nature and complexity of the accounts, and (e)
the amount and number of such entries. Because
fraudulent journal entries often are made at the
end of a reporting period, our testing ordinarily
should focus on the journal entries and other
adjustments made at that time. In addition,
because material misstatements in financial
statements due to fraud can occur throughout the
period and may involve extensive efforts to
conceal entries at the end of the reporting period,
we should consider whether there also is a need to
extend the testing of journal entries to other
periods within the period under audit.

B. Examine related accounting records and determine


whether the selected debit/credit is valid, appropriate,
and authorized. Determine whether the selected entry
was properly recorded in the correct period and consider
the possible implications of such journal entries on
internal control.

C. Determine whether the entries exhibit characteristics of


inappropriate or unauthorized journal entries such as (a)
entries made to unrelated, unusual, or seldom-used
accounts or business segments, (b) entries recorded at
the end of the period or as post-closing entries that have
little or no explanation or description, (c) entries made
either before or during the preparation of the financial
statements that do not have account numbers, and (d)
entries that contain round numbers or a consistent
ending number.

Audit Practice Manual – Revised 273


Execution Phase –
Sample Audit Programs
Liabilities – Short Term Borrowings

S. No. Audit Procedures Done by W. P. Ref.

D. Evaluate the reasonableness of other adjustments (e.g.,


entries posted directly to financial statement drafts,
consolidating adjustments, report combinations, and
reclassifications) made in the preparation of the financial
statements.

10. EVALUATE BUSINESS RATIONALE FOR


SIGNIFICANT UNUSUAL TRANSACTIONS

A. If we become aware of significant transactions that are


outside the normal course of business or that otherwise
appear to be unusual given our understanding of the
entity and its environment, perform the following
procedures:

1. Gain an understanding of the business rationale


for such significant unusual transaction.

2. Consider whether the transactions involve


previously unidentified related parties or parties
that do not have the substance or the financial
strength to support the transaction without
assistance from the entity we are auditing.

3. Determine whether that rationale (or the lack


thereof) suggests that the transactions may have
been entered into to engage in fraudulent financial
reporting.

Audit Practice Manual – Revised 274


Execution Phase –
Sample Audit Programs
Liabilities – Surplus on Revaluation

Audit Program WP Ref.:


Prepared by:
Date:
(l) Surplus on Revaluation
Reviewed by
Date
Client:
Period:
Subject: Surplus on Revaluation

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

Surplus on revaluation represents valid Existence, Rights


gains on revaluation of fixed assets. & Obligations

To ensure that all transfers to and from


the account have been made in
accordance with the requirements of
applicable financial reporting
framework, i.e. Companies Ordinance,
1984 and applicable International
Financial Reporting Framework. Completeness

To ensure that the surplus has been


stated on the balance sheet at an
appropriate amount. Valuation

Audit Practice Manual – Revised 275


Execution Phase –
Sample Audit Programs
Liabilities – Surplus on Revaluation

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM

To ensure that Surplus on Revaluation


has been presented, classified and
disclosed in the financial statements in
accordance with the requirements of
applicable financial reporting
framework i.e. Companies Ordinance,
1984 and applicable International Presentation &
Financial Reporting Standards. Disclosure

Audit Practice Manual – Revised 276


Execution Phase –
Sample Audit Programs
Liabilities – Surplus on Revaluation

S. No. Audit Procedures Done by W. P. Ref.

Analytical Procedures

1. Compare current year balances with prior year and ensure


reasonableness of changes during the year.

2. Enquire into and obtain explanations for any unusual changes


during the year.

Test of Details

1. TEST SURPLUS BALANCE

A. Obtain a schedule of Revaluation of fixed assets


showing assets wise detail, cost of the assets, revalued
amount, name of valuer.

1. Test the summarization of the schedule.

2. Trace totals to the general ledger.

3. Examine the valuer’s report to ensure the


correctness of revalued amount of the fixed assets
and ensure independence of the valuer and
checked appropriateness of assumptions used by
valuer.

4. Check the increase in value of the assets has been


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

5. Check that the surplus on revaluation of the fixed


assets has been applied:

a) Only to the extent actually realized on


disposal of revalued assets.

b) On setting –off any deficit arising from the


revaluation of any other fixed assets of the
company.

6. Check incremental depreciation transferred from


surplus to unappropriated profit / accumulated
loss.

Audit Practice Manual – Revised 277


Execution Phase –
Sample Audit Programs
Liabilities – Surplus on Revaluation

S. No. Audit Procedures Done by W. P. Ref.

7. Check compliance with the requirement of IFRS


12 “Income Taxes (Revised)” in respect of
deferred Tax on surplus on revaluation of fixed
assets.

2. TEST PRESENTATION OF SURPLUS ON


REVALUATION OF FIXED ASSETS

A. Determine that disclosures have been made in


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

Audit Practice Manual – Revised 278


Execution Phase –
Audit Programs
Profit & Loss

III Profit & Loss


S. No. Financial Statement Caption Reference No. Page No.

1. Sales

2. Cost of Sales

3. Admin Expense

4. Financial Charges

5. Other Income

Audit Practice Manual – Revised 279


Execution Phase –
Audit Programs
Profit & Loss - Sales

Audit Program WP Ref.:


Prepared by:
(a) Sales
Date:
Reviewed by
Date
Client:
Period:
Subject: Sales

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Procedures Audit Assertion Done by W. P. Ref.


Addressed

TEST OF CONTROLS

1 Make a selection of sales transactions Occurrence


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

2 Test the completeness of source records Completeness


by ensuring their numerical sequences.

Audit Practice Manual – Revised 280


Execution Phase –
Audit Programs
Profit & Loss - Sales

S. No. Audit Procedures Audit Assertion Done by W. P. Ref.


Addressed

3 For each item selected above: Completeness

(a) Trace it to sales invoice

(b) Agree sales invoice prices to a price


list / agreements.

(c) Determine that the sales was


recorded in the correct period.

(d) Trace sales invoice amount to a


sales journal

(e) Trace sales journal total to the


general ledger

4 Make a selection of recorded sales Completeness


returns and each selected item: -

(a) Trace it to credit notes.

(b) Trace credit notes to goods


receiving documents and original
sales invoices.

(c) Determine that credit notes were


recorded in the correct period.

5 Check that sales data is input only once


and is subject to validation.

6 Access to sales system is restricted by


user ID and password.

7. Check that prices charged in accordance


with the approved price list.

8. Check that the quantity discount are in


accordance with the approved limits.

Audit Practice Manual – Revised 281


Execution Phase –
Audit Programs
Profit & Loss - Sales

S. No. Audit Procedures Audit Assertion Done by W. P. Ref.


Addressed

ANALYTICAL PROCEDURES

1 Perform analytical procedures on sales Occurrence


by developing an expected amount of
sales based on prior years figures or Completeness
current period economic conditions and
then comparing it with actual amount
any significant differences should be
enquired into and corroborated.

TEST OF DETAILS

1. Make a selection of transactions from Completeness


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

2 Consider reasonableness of revenue by


multiplying the number of units with
the average selling price

3. Determine that the accounting policies Valuation


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

4. Determine that disclosures have been Presentation /


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

5. Conclude on the result of the work


performed.

Audit Practice Manual – Revised 282


Execution Phase –
Audit Programs
Profit & Loss - Cost of Sales

Audit Program WP Ref.:


Prepared by:
Date:
(b) Cost of Sales
Reviewed by
Date
Client:
Period:
Subject: Cost of Sales

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Procedures Audit Assertion Done by W. P. Ref.


Addressed

TEST OF CONTROLS

1. Select a sample of transactions from


each of the cost of sales transactions
and check the following:

n Expenses are approved in


accordance with the company’s
policy

n Expenses are supported by


documentation.

n Tax is deducted at source in


accordance with the Income Tax
Ordinance, 2001.

Audit Practice Manual – Revised 283


Execution Phase –
Audit Programs
Profit & Loss - Cost of Sales

S. No. Audit Procedures Audit Assertion Done by W. P. Ref.


Addressed

n Payments are made only through


crossed cheques other than those
allowed by Income Tax
Ordinance.

n Expenses are posted in the


correct account code.

ANALYTICAL PROCEDURES

1. Perform analytical review of cost of Completeness


sales and inquire and corroborate
significant variations from prior Occurrence
period and budgeted amounts.

2. 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.

TEST OF DETAILS

1. 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.

Audit Practice Manual – Revised 284


Execution Phase –
Audit Programs
Profit & Loss - Cost of Sales

S. No. Audit Procedures Audit Assertion Done by W. P. Ref.


Addressed

(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.
Completeness
c) Ensure proper cut-off of
purchases. Occurrence

2. Determine that disclosures have been Presentation/


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

3. Conclude on the results of work


performed.

Audit Practice Manual – Revised 285


Execution Phase –
Audit Programs
Profit & Loss – Admin Expense

Audit Program WP Ref.: PL3


Prepared by:
Date:
(c) Admin Expense
Reviewed by
Date
Client:
Period:
Subject: Admin Expense

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Procedures Audit Assertion Performed Reference


Addressed by

TEST OF CONTROLS

1. For salaries and other benefits


perform the test of details stated in the
salaries work programme

2. Select a sample of transactions and


check the following:

n Expenses are approved in


accordance with the company’s
policy

n Expenses are supported by


documentation.

Audit Practice Manual – Revised 286


Execution Phase –
Audit Programs
Profit & Loss – Admin Expense

S. No. Audit Procedures Audit Assertion Performed Reference


Addressed by

n Tax is deducted at source in


accordance with the Income Tax
Ordinance, 2001.

n Payments are made only through


crossed cheques other than those
allowed by Income Tax
Ordinance.

n Expenses are posted in the


correct account code.

ANALYTICAL PROCEDURES

1. Perform analytical procedures to Completeness


evaluate administration / selling /
marketing expenses:

a) Develop expectations of
significant expenses.

b) Compare the expected amounts


with actual recorded amounts.

c) Inquire and document reasons for


major variations.

TEST OF DETAILS

1. Select a sample of recorded expenses Occurrence


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

2. Scan general ledger of expenses and Completeness


investigate large and unusual items
and expenses were incurred for the
purposes of the business.

Audit Practice Manual – Revised 287


Execution Phase –
Audit Programs
Profit & Loss – Admin Expense

S. No. Audit Procedures Audit Assertion Performed Reference


Addressed by

3. Determine that disclosures have been Presentation/


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

4. Conclude on the result of the work


performed.

Audit Practice Manual – Revised 288


Execution Phase –
Audit Programs
Profit & Loss – Financial Charges

Audit Program WP Ref.: PL 5


Prepared by:
Date:
(d) Financial Charges
Reviewed by
Date
Client:
Period:
Subject: Financial charges

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Procedures Audit Assertion Done by W. P. Ref.


Addressed

TEST OF CONTROLS

1 Check that the company itself


recalculates the financial charges
levied by the bank. Check that such
calculation is reviewed by an
authroised personnel.

2. Check that before obtaining financing


rates of financing are obtained from
different banks and financing is
obtained on most economical and
other terms.

Audit Practice Manual – Revised 289


Execution Phase –
Audit Programs
Profit & Loss – Financial Charges

S. No. Audit Procedures Audit Assertion Done by W. P. Ref.


Addressed

3. Carry out company’s search at


registrars office to ensure that all
financings and their related finance
charges are appearing in the books of
accounts for which charge has been
registered.

ANALYTICAL PROCEDURES

Compare current year with prior year


and budgeted amounts to anyalyse the
variation in the expenses. Inquire and
document the reasons for variation

TEST OF DETAILS

1 Select a sample of recorded financial


charges and perform the following: Occurrence

a) Examine supporting documents to Measurement


verify rates of financial charges.

b) Re-calculate amount of financial Completeness


charges on the basis of amounts,
number of days and rates of
financial charges.

2 Ensure that charge on WPPF, WWF Valuation


and CRF are calculated as per the
rules of WPPF. Check that the
payments of prior year was made
within the stipulated time.

3 Determine that all loans, borrowings, Completeness


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

Audit Practice Manual – Revised 290


Execution Phase –
Audit Programs
Profit & Loss – Financial Charges

S. No. Audit Procedures Audit Assertion Done by W. P. Ref.


Addressed

4 Determine that disclosures are in Presentation/


accordance with the requirements of
Companies Ordinance, 1984 and Disclosure
relevant accounting pronouncements
and no netting of is performed of
income and expenses.

5 Conclude on the result of the


performed.

Audit Practice Manual – Revised 291


Execution Phase –
Audit Programs
Profit & Loss – Other Income

Audit Program WP Ref.: PL 7


Prepared by:
Date:
(e) Other Income
Reviewed by
Date
Client:
Period:
Subject: Other Income

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Procedures Audit Assertion Done by W. P. Ref.


Addressed

TEST OF CONTROLS

1 Obtain a sample of investments made


by the company and check that the:

n Investments made are authorised


and in accordance with the
company’s objects.

n Check that the income on the


investments is checked and
accrued on a timely basis

2. For scrap sales check that the sales


are made on the most economic
terms.

Audit Practice Manual – Revised 292


Execution Phase –
Audit Programs
Profit & Loss – Other Income

S. No. Audit Procedures Audit Assertion Done by W. P. Ref.


Addressed

3. Check that procedures are in place to


ensure that good material is not
transferred to scrap yard.

ANALYTICAL PROCEDURES

Compare current year with prior year


and budgeted amounts to anyalyse the
variation in the expenses. Inquire and
document the reasons for variation

TEST OF DETAILS

1 Review the marketable securities and Existence


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

2 Test accrued interest and interest Valuation and


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

3 Verify interest and dividend income Valuation &


on marketable securities, investments, Measurement
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.

4 Verify computations of gains and Measurement


losses from sales of marketable
securities and investments.

Audit Practice Manual – Revised 293


Execution Phase –
Audit Programs
Profit & Loss – Other Income

S. No. Audit Procedures Audit Assertion Done by W. P. Ref.


Addressed

5 Select a sample of assets retired Existence


during the period and check:

n Authorisation;

n Computation of gain or loss on


disposal of fixed assets

n Timely deletion from fixed


assets records.

6 Select a sample of scrap sales, and Measurement


check for:

n Authorisation;

n Proper recording of gain; and

n Receipt of scrap proceeds.

7 Check that all material items have Presentation &


been presented and disclosed in Disclosure
accordance with the requirements of
Companies Ordinance, 1984 and
IASs.

8 Conclude on the results of work


performed.

Audit Practice Manual – Revised 294


Execution Phase –
Audit Programs
Others

IV Others
S. No. Caption Reference No. Page No.

1. WWF

2. Laws and Regulations

Audit Practice Manual – Revised 295


Execution Phase –
Audit Programs
Others - WWF / WPPF

Audit Program WP Ref.:


Prepared by:
Date:
(a) WWF / WPPF
Reviewed by
Date
Client:
Period:
Subject: WWF / WPPF

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Procedures Audit Assertion Performed Reference


Addressed by

TEST OF CONTROLS

ANALYTICAL PROCEDURES

1. Compare current year with prior year Measurement


and budgeted amounts to anyalyse the
variation in the expenses. Inquire and
document the reasons for variation

TEST OF DETAILS

1. Obtain computation of WWF charge Measurement


and check its appropriateness.

Audit Practice Manual – Revised 296


Execution Phase –
Audit Programs
Others - WWF / WPPF

S. No. Audit Procedures Audit Assertion Performed Reference


Addressed by

2. Obtain computation of WPPF and check Measurement


its appropriateness.

3. Check that all material items have been Presentation &


presented and disclosed in accordance Disclosure
with the requirements of Companies
Ordinance, 1984 and IASs.

4. Conclude on the results of work


performed.

Audit Practice Manual – Revised 297


Execution Phase –
Audit Programs
Others – Laws and Regulations

Audit Program WP Ref.:


Prepared by:
Date:
(b) Laws and Regulations
Reviewed by
Date
Client:
Period:
Subject: Laws and Regulations

Purpose

The purpose of this Audit Programme is to facilitate adherence to International Standard on


Auditing regarding laws and regulations. It is to be completed throughout the audit.
Professional judgement and discretion are to be utilised in preparing the Audit Programme. The
Audit Programme is to be tailored to the specific circumstances of the entity to include specific
procedures to be performed, as determined by the engagement team.

The purpose of this document is to obtain an understanding of the entity’s legal and regulatory
framework and obtain sufficient and appropriate audit evidence regarding non-compliance by the
entity with laws and regulations that may materially affect the financial statements. It is
recognised that some laws and regulations may have a fundamental effect on the operations of
the entity. Non-compliance with certain laws and regulations may cause the entity to cease
operations, or calls into question the entity's continuance as a going concern. The laws and
regulations that affect the determination of material amounts and disclosures in the financial
statements may relate to, for example:
n the form and content of financial statements
n industry specific requirements

n accounting for transactions under government contracts

n the accrual or recognition of expenses for income taxes

n the accrual or recognition of expenses for pension costs.

The Audit Programme - Laws and Regulations includes the following sections:

I Summary of Business Understanding

II Audit Procedures

Audit Practice Manual – Revised 298


Execution Phase –
Audit Programs
Others – Laws and Regulations

I Summary of Business Understanding

If applicable, summarise the business understanding and those instances of non-


compliance identified at initial planning stage below to assist in focusing the procedures to
be performed in this Audit Programme on the appropriate audit objectives. Obtain
understanding of the laws and regulations applicable to the client by discussing the
management about the procedures for ensuring compliance with applicable laws and
regulations.

List of applicable laws

n Companies Ordinance, 1984

n Income Tax Ordinance, 2001

n International Accounting Standards

n The Workmen's Compensation Act, 1923

n The Factories Act, 1934

n The Payment of Wages Act, 1936

n The Minimum Wages Ordinance, 1961

n The Provincial Employees' Social Security Ordinance, 1965

n The West Pakistan Industrial and Commercial Employment (Standing Orders)


Ordinance, 1968

n The Industrial Relation Ordinance, 1969

n The West Pakistan Shop Establishment Ordinance, 1969

n The Employees' Old Age Benefit Act, 1976

n Workers Profit Participation Fund,

n Workers' Welfare Fund,

n (Others laws relevant to specific business e.g. Insurance Ordinance etc.)

Audit Practice Manual – Revised 299


Execution Phase –
Audit Programs
Others – Laws and Regulations

Instances of non-compliance with laws and regulations

Audit Practice Manual – Revised 300


Execution Phase –
Audit Programs
Others – Laws and Regulations

II Audit Procedures

S. No. Nature and extent of audit procedures Done by W/P ref


and date

1. Obtain a general understanding of the legal and


regulatory framework applicable to the entity and the
industry and how the entity complies with that
framework.

2. Identify instances of non-compliance with laws and


regulations where non-compliance may be considered
when preparing financial statements.

n Enquire of management as to whether the entity is


in compliance with such laws and regulations.

n Inspect correspondence with relevant licensing or


regulatory authorities.

n Remain alert for instances of non-compliance


while applying all audit procedures.

3. Set out any other procedures relating to identifying


instances of non-compliance. List planned procedures
below:

3.1

3.2

3.3

4 When there is an awareness of information concerning


a possible instance of non-compliance, perform the
following procedures:

n obtain an understanding of the nature of the act


and the circumstances in which it has occurred

n set out any other procedures necessary to obtain


sufficient other information to evaluate the
possible effect on the financial statements.

List planned procedures below:

4.1

Audit Practice Manual – Revised 301


Execution Phase –
Audit Programs
Others – Laws and Regulations

S. No. Nature and extent of audit procedures Done by W/P ref


and date

4.2

4.3

5. When it is believed that there may be non-compliance,


perform the following procedures:

n document the findings

n discuss the findings with management

n consider the effects of non-compliance in relation


to other aspects of the audit, particularly the
reliability of management representations

n as soon as practicable, either communicate with


the audit committee, the board of directors and
senior management or obtain evidence that they
are appropriately informed.

6. Obtain a written representation from management that


they have disclosed to us all known actual or possible
non-compliance with laws and regulations whose
effects may be considered when preparing financial
statements.

7. Other steps as decided by the engagement team.

Audit Practice Manual – Revised 302


Execution Phase –
Leads

Leads
n Long Term Loans

n Fixed Assets

n Redeemable Capital

n Disposal of Fixed Assets

Audit Practice Manual – Revised 303


Execution Phase –
Leads Schedules

Leads Schedule
n Stock in Trade

Audit Practice Manual – Revised 304


Execution Phase –
Format of Confirmations
Bank Confirmation

Format of Confirmation
I Bank Confirmation

The Manager
Bank's Name and Branch
Address

Date: _________

Dear Sir,

Name of Client

In accordance with your above named customer’s instructions given hereon, please send
DIRECT to us at the above address, as auditors of your customer, the following information
relating to their affairs at your branch as at the close of business on (Year end date) and, in the
case of items 2, 4 and 9, during the period since (Year start date).

Please state against each item any factors which may limit the completeness of your reply; if
there is nothing to report, state ‘NONE’.

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

BANK ACCOUNTS

(1) Full titles of all accounts together with the account numbers and balances thereon,
including NIL balances:

(a) where your customer’s name is the sole name in the title;

(b) where your customer’s name is joint with that of other parties;

(c) where the account is in a trade name.

NOTES

(i) Where the amount is subject to any restriction (e.g. garnishee order or arrestment) or
exchange control consideration (e.g. ‘blocked account’) information regarding
nature and extent of restriction should be stated.

(ii) Where the authority upon which you are providing this information does not cover
any amounts held jointly with other parties, please refer to your customer in order to
obtain the requisite authority of the other parties with a copy to us.

Audit Practice Manual – Revised 305


Execution Phase –
Format of Confirmations
Bank Confirmation

(2) Full titles and dates of closure of all accounts closed during the period.

(3) The separate amount accrued but not charged or credited as at the above date, of

(a) Mark-up/interest and

(b) Provisional charges (including commitment fees)

(4) The amount of mark-up/interest charged during the period, if not specified separately in
the customer’s statement of account.

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

FACILITIES

(6) Details of leasing facilities, loans, overdrafts, cash credit facilities (including standby
facilities), and associated gurantees/ indemnities, specifying agreed limits, unused
facilities, markup/ interest terms, overdue rentals/ installments and in case of term loans,
date for repayment or review.

(7) SECURITY

(a) In respect of facilities, contingent liabilities and derivatives and commodity trading.
Please give

(i) details of any security formally charged in favor of the bank, including the
date and type of charge, (e.g. pledge, hypothecation, etc.)

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


If a security is limited to any borrowing, or if there is a prior pari passu or
subordinate charge, please indicate.

(iii) Whether the security supports facilities granted by the bank to the customer or
to another party.

(iv) For any arrangements for setoff of balances or compensating balances e.g.
back to back loans, give particulars of any acknowledgement of set off (i.e.
date, type of document and account covered)

(b) CUSTODIES: - Investments, bills of exchange, documents of title, or other assets


held but not charged. Please give details.

Audit Practice Manual – Revised 306


Execution Phase –
Format of Confirmations
Bank Confirmation

CONTINGENT LIABILITIES

(8) Nature, currency, amount and extent of facilities limits and details of period of availability
of agreed facility of all contingent liabilities, viz:

(a) Total of bills discounted with resource to the customer or any subsidiary or related
party of the customer;

(b) Details of any guarantees, comforts, letter of undertakings, bonds, endorsement or


indemnities given to you by the customer in favour of third parties (separately
specifying any such items in favour of any subsidiary or related party of the
customer);

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

(d) Total of acceptances;

(e) Total of outstanding liabilities under documentary credits;

(g) Others (please give details.)

ASSETS

(9) Details of specifying the nature, amount, and maturity date of the assets covered under
Islamic mode of finance (e.g. morabaha, musharika, modarba etc.) or any other mode of
finance including leasing:-

(a) Assets repurchase agreement;

(b) Assets resale agreement;

(c) Options outstanding at the relevant date.

DERIVATIVES AND COMMODITY TRADING

(10) Details of all outstanding contracts specifying the number, deal date, maturity or value
date, price at which the deal was transacted and currency of the contract bought and sold
for: -

(a) Total of foreign exchange contracts;

(b) Bullions;

Audit Practice Manual – Revised 307


Execution Phase –
Format of Confirmations
Bank Confirmation

(c) Securities;

(d) Others

(11) Information in respect of any letter of comfort obtained by the bank from the parent or any
other associated concern of the company.

ADDITIONAL BANKING RELATIONSHIP

(12) A list of other banks, or branches of your bank, where you are aware that a relationship
has been established during the period.

(13) OTHER INFORMATION.

Yours faithfully,

AUTHORISED SIGNATORY
(Client’s Signature)

Audit Practice Manual – Revised 308


Execution Phase –
Format of Confirmations
Debtor / Creditor Confirmations

Format of Confirmation
II Debtors / Creditor Confirmation

Name of debtor/ creditor


Address

Date:

Dear Sir(s)

Our records show a debit / credit balance of Rs.____________ at the close of business on (year
end date).

To ensure an independent verification of this balance, we shall appreciate if you will kindly
check this balance with your records and send your confirmation DIRECT to our auditors,
Messrs. __________, Chartered Accountants, by completing the form below for which an
addressed postage paid envelope is enclosed.

Your prompt response to this request will be appreciated.

Yours faithfully,

M/s ________________ Name and address of the debtor/ creditor

Chartered Accountants

Address

Confirmation of balance

I/We confirm that the debit/credit balance of Rs. _________________ as at ________________,


in the name of ________________________________________ is/are not in agreement with
my/our books. The details of difference are as follows:

Yours faithfully,

Audit Practice Manual – Revised 309


Execution Phase –
Format of Confirmations
Lease Confirmation

Format of Confirmation
III Lease Confirmation

Name and address of Leasing company / bank

Date_____________

Dear Sir(s)

Our auditors Messrs. _____________., Chartered Accountants are performing their usual
examination of our financial statements. Please furnish DIRECT to our auditors the following
information relating to the lease arrangements with you as at (year end date).

Lease Description Lease Lease Cost of Security Rental Amount in arrears


No. of leased start Expiry leased deposit amount & (including
asset(s) Dare Date assets frequency contingent
payment due)

Please send your confirmation direct to our auditors, Messrs. ________________, Chartered
Accountants, (address of the audit firm). A self addressed postage paid envelope is enclosed
for your convenience.

Your prompt response to this request will be appreciated.

Yours faithfully,

Audit Practice Manual – Revised 310


Execution Phase –
Format of Confirmations
Legal Confirmation

Format of Confirmation
IV Legal Confirmation

Name and Address of the Lawyer


___________________
___________________
___________________

Date___________

Dear Sirs,

Our auditors M/s ____________________, Chartered Accountants are performing their


usual examination of our financial statements. Please furnish DIRECT to our auditors
the information requested below involving matters as to which you have been engaged
and to which you have devoted substantive attention on behalf of the Company in the
form of legal consultation or representation. Please provide the information requested
below, taking into consideration matters that existed at (balance sheet date) and for the
period from that date to the effective date of your response if it is other than date of
reply.

Pending or Threatened Litigation

1. The nature of the litigation.

2. The progress of the case to date.

3. How management is responding or intends to respond the litigation; for example to


contest the case vigorously or to seek out of court settlement, and

4. Evaluation of the likelihood of an unfavourable outcome and an estimate, if one can


be made, of the amount or the range of potential loss.

Your response should be sent to our auditors. An addressed envelope is enclosed for
your convenience.

Also, please identify any pending or threatened litigation with respect to which you have
not yet devoted substantive attention.

Yours faithfully,

(Authorized signatory of the company)


Audit Practice Manual – Revised 311
Execution Phase –
Format of Confirmations
Loan Confirmation

Format of Confirmation
V Loan Confirmation

Name and address of Leasing company / bank

Date_____________

Dear Sir(s)

Our auditors Messrs. _____________, Chartered Accountants are performing their usual
examination of our financial statements. Please furnish DIRECT to our auditors the following
information relating to the lease arrangements with you as at (year end date).

1 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 and renewals.

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

4 Details of amounts accrued but not charged or credited 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, hypothcation etc.). If a security is limited to any borrowing or if there is a prior,
equal or subordinate charge, please indicate.

6 Details of customer's assets held as security (other than 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 purpose of the audit.

Please send your confirmation direct to our auditors, Messrs. ________________, Chartered
Accountants, (address of the audit firm). A self addressed postage paid envelope is enclosed
for your convenience.

Your prompt response to this request will be appreciated.

Yours faithfully,
Audit Practice Manual – Revised 312
Planning Phase –
Using the Work of Another Auditor

Format of Confirmation
VI Tax Confirmation

Name and address of tax adviser


________________________
________________________

Date: __________

Dear Sir

Our auditors M/s. ______________ Chartered Accountants are performing their usual
examination of our financial statements. Please furnish DIRECT to our auditors the information
requested below involving tax matters for which you have been engaged. Please provide the
information requested below, taking into consideration matters that existed at (balance sheet
date) and for the period from that date to the effective date of your response. Please specify the
effective date of your response if it is other than the date of reply. Your response should be sent
to our auditors. An addressed postage paid envelope is enclosed for your convenience.

1 Current status of tax assessment completed.

2 Details of appeals filed either by the company or by the department indicating details of
significant issues and quantum of amount involved.

3 An evaluation of the likelihood of an unfavourable outcome and an estimate, if one can be


made, of the amount or range of potential liability.

4 An other matter which you feel that the auditor should be aware of.

Yours faithfully,

Audit Practice Manual – Revised 313


Execution Phase –
Compliance of Various Laws
Audit Program on Laws and Regulations

Inventory Count Attendance Programe


I Guidelines for observation of physical inventories
1. The attendance at the client’s physical inventory is now regarded as s compulsory audit
procedure. It is from the physical inventory that a client establishes that quantities in
inventory which are valued to give the inventory amount in the balance sheet. It is clearly
pointless for the auditor to verify the valuation of inventories if he has not satisfied himself
as to the accuracy of the quantities held.

2. The purpose of observing the physical inventory is to determine that the client’s
procedure result in an accurate count. It should be remembered that while the auditor will
himself carry out test counts and extract certain cut-off information he is primarily there to
observe that the client’s procedure are satisfactory.

3. Where the client has an efficient system for inventory records, the physical inventory
may be carried out on a continuous basis as opposed to counting everything in one go at
the year-end. In the case of a client using the continuous basis, the auditor will still be
required to observe a part of this continuous inventory counting.

4. The work of the auditor will normally cover three stages – before, during and after the
physical inventory.

5. The following tasks should be carried out before the physical inventory begins:

(a) Obtain a copy of the client’s inventory instructions

(b) Review adequacy of instructions using the preprinted checklist and discuss
any weaknesses in instruction with the client.

(c) Arrange for letters to be sent to third parties holding inventories on behalf of
client, requesting confirmation of these inventories to be sent direct to the auditors
with a copy to the client.

6. The main task during the count to see that the client’s employees are carrying out their
instructions properly.

The physical inventory preprinted checklist should be completed and supporting schedules
will be prepared to cover the following:

Notes of inventory movement during the count.

Audit Practice Manual – Revised 314


Execution Phase –
Compliance of Various Laws
Audit Program on Laws and Regulations

Details of last number prior to physical inventory in respect of:

n Goods received

n Goods despatched

n Internal movement of goods

Details of numbering of inventory sheets used and destroyed and of control of their issue
to and return by those carrying out the physical inventory.

Schedules of items counted by the auditor showing their valuation (this valuation may
have to be completed at final visit).

Details of any old, obsolete, damaged or excess inventories noted during the attendance.

Comments on adequacy of custody.

7. The working paper should be prepared in such a manner that the information can be
easily followed up at the final audit visit. Test counts for example should have been traced
to the stock sheets to confirm that they are a proper record of the results of the physical
inventory.

8. The auditor should be aware of the approximate value of the various inventory items as
he may wish to cover high value items in his test count. The valuation of the items counted
by the auditors should be recorded during the count or, if not possible, at the final audit
visit.

9. Where it is considered that physical inventory has been unsatisfactory in any major
respect that matter should be reported immediately to the manager or partner concerned so
that the necessity for a second physical inventory can be considered and discussed with the
client.

10. At the final audit the information obtained at the physical inventory will be followed up.
The work to be carried out will include:

(1) An overall review of the working papers to assess the effectiveness of the physical
count and whether the final audit programme work should be altered as a result.

(2) A check of the cut-off using the information obtained or the last goods received and
despatched note numbers.

(3) A check of the auditor’s test count items to the final inventory sheets.

(4) A test that the final inventory sheets include only the inventories counted by
reference to the details of numbering of inventory sheets obtained during the observation.

Audit Practice Manual – Revised 315


Execution Phase –
Compliance of Various Laws
Audit Program on Laws and Regulations

(5) A follow up of all outstanding queries including obsolete etc items noted at the
attendance of the physical inventory.

(6) A test to ensure that inventory records have been adjusted to agree with the physical
inventory.

(7) A discussion with management of any weakness which arose, and if appropriate
include points in the internal control memorandum.

Audit Practice Manual – Revised 316


Execution Phase –
Compliance of Various Laws
Audit Program on Laws and Regulations

Client ___________________________

Date of count _____________________

II Production Costs and Inventories


(a) Observation of Physical Inventory Count Checklist
Notes

An inventory count has three stages:

n Organisation

n Conduct

n Follow-up

Such counts are carried out by business either:

1. To corroborate information contained in their books and records which is the product of
a continuous accounting and control system, or

2. To provide an inventory figure for inclusion in financial statement and to use in


calculating profit where there is no system of continuous inventory accounting.

Attendance at inventory counts by the auditor is a standard verification test which serves
to confirm the physical existence of inventories, to corroborate the method of
quantification and to ascertain their physical condition.

The staff member is required to:

(1) Observe procedures and complete the following checklist.

(2) Carry out test counts as specified by the scope decisions sheet and record the results
on the sheets attached to the checklist.

Audit Practice Manual – Revised 317


Execution Phase –
Compliance of Various Laws
Audit Program on Laws and Regulations

Checklist

Question Yes No Alternative procedure

Organisation

(1) Were written instruction prepared, issued in


advance of the count and used.

(2) Was there adequate physical preparation for the


count including:

n Tidying up

n Stopping work or production

n Sorting gods out

n Identifying and marking goods

(3) Were stock sheets prepared before the count.

(4) Was cut-off proper organized by:

n Closing receiving and despatch

n Recording the last numbers of


documents controlling the flow of
goods prior to the count

n Segregating goods in receiving and


despatch areas.

Conduct

(1) Was the count carried out by personnel:

n Not usually involved in the custody of


inventories.

n Able to identify the inventories being


counted.

Audit Practice Manual – Revised 318


Execution Phase –
Compliance of Various Laws
Audit Program on Laws and Regulations

Question Yes No Alternative procedure

(2) Was a system of double check carried out by


accounts or supervisory personnel.

(3) Were inventories marked as counted to avoid


omission or duplication in the count.

(4) Were damaged or obsolete items specifically


noted.

(5) Were the contents of sealed packages checked


by opening and weighed to see that contents
conformed to labels.

(6) Was there an adequate procedure to identify


goods not belonging to the company.

(7) Where amendments to inventory sheets were


made were these initialled by a supervisor.

Follow-up

(1) Were all the inventory sheets accounted for.

(2) Were rough inventory sheet retained.

(3) Is there a proper procedure for authorised


amendment of inventory record to agree to the
results of the count.

(4) To assist in testing cut-off, try to establish and


note down the last goods received and issued
prior to the physical inventory, and the last
transfer between categories of inventory.

Audit Practice Manual – Revised 319


Execution Phase –
Compliance of Various Laws
Audit Program on Laws and Regulations

(b) Conclusions
Give below your overall conclusions on the count referring specifically to:

(1) The adequacy of procedures laid down.

(2) Whether these procedures were complied with, and

(3) Whether the results of the counts can be relied upon the properly reflect quantities on hand
as of that date and to form the basis of the valuation of inventories.

Audit Practice Manual – Revised 320


Execution Phase –
Compliance of Various Laws
Audit Program on Laws and Regulations

Client ___________________________

Date of count _____________________

Production Costs and Inventories

RECORD OF TEST COUNTS

Selection items in both directions (full and false inclusion)

Reference (stock Description of item Quantity Condition (i.e. note any


sheet number etc) counted damage or
obsolescence)

Audit Practice Manual – Revised 321


Planning Phase –
Guidelines for observation of physical inventories

Going Concern Assessment

Going Concern Assessment

Client: Audit Date


Prepared by: Date:
Reviewed By: Date

1. a) Evaluating Management’s Assessment. Does management’s assessment of the


entity’s ability to continue as a going concern indicate any events or conditions that
would indicate a risk exists that the going-concern assumption may be questionable
during the twelve month period after the balance sheet?

Yes Describe

No

Examples of conditions and events can be traced from paragraphs 8 of ISA 570

1. b) Evaluating Management’s Assessment (paragraph 17 of ISA 570) – . Based on


our inquiries of management and our review of their assessment, were any events or
conditions noted that may occur shortly beyond the twelve month period after the
balance sheet date that were so significant that they may cast doubt on the entity’s
ability to continue as a going concern?

Yes Describe

No

IF THE AUDIT TEAM ANSWERS “NO” TO QUESTIONS 1a and 1b ABOVE, STOP HERE AND
DISCARD THE REMAINDER OF THE FORM. HOWEVER, IF THE AUDIT TEAM ANSWERS “YES” TO
QUESTIONS 1a and 1 b ABOVE, THEY SHOULD COMPLETE THE ASSESSMENT IN STEPS 2 & 3
BELOW.

2. Mitigating Conditions. Were any recent conditions or events noted (other than considering
management's future plans) that have mitigated the risk events or conditions identified in
step 1.?

Yes Describe

Audit Practice Manual – Revised 322


Planning Phase –
Guidelines for observation of physical inventories

3. Assessment. Without considering management’s future plans, is there substantial doubt


about the appropriateness of the going-concern assumption?

Yes Describe

No

Audit Practice Manual – Revised 323


Planning Phase –
Guidelines for observation of physical inventories

Going Concern
Consideration of Management's Plans

At this stage of the going concern assessment, there is a rebuttable presumption that the
engagement team will conclude that a substantial doubt exists about the entity’s ability to
continue as a going concern resulting in modification of our report. This presumption can only
be overcome with persuasive evidence in support of the adequacy and achievement of
management’s plans.

The following procedures should be performed, as applicable:

1. Stated plans. Obtain and discuss with management its plans to deal with the identified risks.
Indicate the individuals interviewed. (See Appendix A for background information.)

Done by: Date:

Interviewed: Date:

2. Supporting evidence overcoming substantial doubt. Indicate below the elements of


management's plans that are particularly significant to overcoming the substantial doubt
about the entity’s ability to continue as a going concern. Examine and describe evidence
that supports those elements (examples of such evidence are described in Appendix A).

n Third-party guarantee (Step 3 below)

n Debt restructuring or new borrowings (Firm policy contains a rebuttable


presumption that only an irrevocable, legally binding commitment letter constitutes
sufficient evidential matter to overcome a going concern consideration.)

n Liquidation of assets

n Reduction or delay of expenditures

n Increase in revenues

n Increase in equity

n Other (describe)

Audit Practice Manual – Revised 324


Planning Phase –
Guidelines for observation of physical inventories

3. Third party guarantees and other financial restructuring agreements. If there are
significant guarantees of financial support from a third party (such as the entity’s parent
company, another shareholder, an affiliate or a general partner of a limited partnership):

a. Describe the nature of the guarantee from the list provided below (and, if the guarantee
is limited, describe its amount and duration). In addition, discuss the nature and
extent of the audit work performed in this area. See Appendix B for a listing of
suggested steps.

n Subordination agreement to allow deferral of payment of amounts owed to the


parent company and affiliates.

n Agreement of third party to serve as guarantor of the entity’s future


borrowings from a lender.

n Line of credit or provision of funds directly to the entity.

n Other (describe):

Are all of the following points true?

n There is a written agreement signed by the guarantor (not just a


representation by management of the entity).

n It is reasonable to assume that the guarantee can be realized, if


necessary. (Consider the enforceability of the guarantee, the liquidity of
the guarantor, its past record of honoring similar commitments and its
risk of losing credibility with the public if it fails to honor its
commitment.)

n Should the entity default, it is reasonable to expect, from a


business viewpoint, that creditors would seek recovery from the
guarantor.

n The entity will disclose the existence of the guarantee agreement.

Yes

No Little, if any, reliance should be placed on the guarantee.

N/A A guarantee is not part of management's plans.

Done By: Date:

Audit Practice Manual – Revised 325


Planning Phase –
Guidelines for observation of physical inventories

4. Prospective financial information. Normally, we expect management to have prospective


financial information for at least one year from the balance sheet date (budgets,
projections, cash flow forecasts, etc.) available to demonstrate the intended outcome of its
plans. Although this information is not as persuasive as evidence provided by third parties,
we usually consider it as necessary to support management's plans.

a. Consider the reliability of the system for generating the prospective


information.

b. Read the information and the underlying assumptions to determine whether it


is consistent with other plans or evidence.

c. Compare similarly prepared budget information prepared in prior periods


with the actual results achieved in those periods. Compare the prospective
information for the current period with results achieved to date.

d. Consider the adequacy of the support for significant underlying assumptions,


based on knowledge of the entity, its business and its management. (We should be
skeptical of assumptions that appear to be based on wishful thinking and do not
reflect the conditions and course of action that entity management truly anticipates.)
Give particular attention to assumptions that are:

n Material to the prospective financial information.

n Especially sensitive or susceptible to change.

n Inconsistent with historical trends.

n Inconsistent with management's stated plans.

e. If it appears that important factors are not reflected in the prospective


information, discuss their effects with management. If necessary, request that the
prospective information be revised (Note: The inability or refusal to make requested
revisions ordinarily will prevent us from resolving our going-concern doubt.) In
addition, if management’s assessment of the entity’s ability to continue as a going
concern covers less than twelve months from the balance sheet date, the auditor
should ask management to extend its assessment period to at least twelve months
from the balance sheet date.

f. Consider whether it would be appropriate to perform other procedures such as


those performed in an examination of a forecast NOTE: No report should be issued
because the work is solely for our use in assessing management's plans.

Audit Practice Manual – Revised 326


Planning Phase –
Guidelines for observation of physical inventories

Can the Firm place any reliance on the prospective information noted above, adjusted as
necessary, given the history and specific facts and circumstances of this entity?

Yes

No Little, if any, reliance should be placed on the prospective information.

Performed By: Date:

5. Overall assessment of management's plans. Does the evidence indicate that all of the
following are true?

n Management's plans are feasible.

n They are likely to be implemented.

n They are likely to allow the entity to operate for at least a year beyond the date of
the financial statements.

Yes The going-concern question has been satisfactorily resolved.

No WE HAVE CONCLUDED THAT THERE REMAINS SUBSTANTIAL DOUBT ABOUT THE ABILITY OF THE
ENTITY TO CONTINUE AS A GOING CONCERN.

6. Management's representation. Obtain written representation (in the general representation


letter) regarding management's plans and conclusion about the appropriateness of the
going concern assumption and the reasonableness of related disclosures in the financial
statements.

Done By: Date:

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Planning Phase –
Guidelines for observation of physical inventories

7. Consultation. The engagement team should consult with the partner in all of the following
situations related to making an assessment of an entity’s ability to continue as a going
concern:

n When the engagement team has identified risks and any related mitigating
circumstances and is evaluating whether those circumstances mitigate the risks or
whether there is a need to consider management’s plans;

n When the engagement team has completed assessing management’s plans and is
assessing whether a report modification is necessary.

n A going-concern problem is expected to arise shortly after the twelve-month


"cutoff" period beyond the date of the financial statements.

n Report modifications

n Engagement retention/resignation. The following should be considered:

n The quality of the entity’s accounting policies and procedures.

n Prospects for continuation of business for the next two to three years.

n Quality of management (e.g., ability to control risk)

n The Firm's vulnerability (litigation risk, risk of damaging reputation, and fee
recoverability).

Performed By: Date:

Documented at:

8. Approved:

Manager Date:

Partner Date:

Audit Practice Manual – Revised 328


Reporting and Finalization Phase –
Related Party Transactions Checklist

Related Party Transactions Checklist


Client:
Period:

Introduction

Related party – parties are considered to be related if one party has the ability to Control the
other party or exercise significant influence over the other party in making financial and
operating decisions.

W/P Initial
Ref

System Evaluation

1 Determine and evaluate the client’s procedures, if any, for


authorising identifying and properly accounting for related
party transactions. Document our assessment as to whether or
not significant RPTs would be identified by the procedures.

2 Determine and evaluate the client’s procedures, if any for


prohibiting individual directors or other members of
management from exercising significant influence over
transactions in which that person is a related party.

Related Parties

3a Obtain from management personnel (or prepare) a list of all


related parties and compare with the previous year’s list and
the shareholder’s records. Distribute the list of relate parties to
all staff assigned to the engagement for their consideration
while performing various audit tests, and attach copy to this
checklist.

3b If a coordinating office, distribute the list of RPTs to other


offices / firms of auditors participating in the engagement.

4a If secondary auditors, consider obtaining representation from


parent company management as to the existence of related
parties.

4b Consider enquiring of predecessor auditors, or other firms


involved in the audit, as to their knowledge of RPTs.

5 Document any affiliations directors or senior management

Audit Practice Manual – Revised 329


Reporting and Finalization Phase –
Related Party Transactions Checklist

have with other entities.

Audit Practice Manual – Revised 330


Reporting and Finalization Phase –
Related Party Transactions Checklist

W/P Initial
Ref

Related Party Transactions

6 Inquire of appropriate management personnel whether there


were any transactions with related parties (including
significant transactions that occurred but were not given
accounting recognition).

7 Perform procedures to identify additional related parties and


significant (over ____), unusual, or nonrecurring transactions
or balances involving related parties. Such procedures could
include:

(a) identifying major customers, suppliers, borrowers, and


lenders, and significant changes to these relationships.

(c) review of lawyer billings

(d) review of bank guarantees

(e) review of contract awards

(f) review of overdue receivables or payables

(g) review of investment transactions

(h) transactions at, or near, the year end (refer audit manual
para 5.8.1)

(i) review of transactions with unusual terms of trade

(j) consider where RPTs may have occurred but not


changed

8 Where RPTs have been identified prepare (or obtain) a


schedule, or a summary where appropriate of thee and obtain
an understanding of the business purpose of the transaction(s).

(a) examine invoices, agreements etc.

(b) examine approval for the transaction both by


management and local shareholders

Audit Practice Manual – Revised 331


Reporting and Finalization Phase –
Related Party Transactions Checklist

W/P Initial
Ref

(c) obtain confirmation of any outstanding balances

(d) obtain information as to the financial standing of the


related parties regarding out

(e) indicate whether disclosure is required or not

(f) agree with management

9. Where it is uncertain if the transaction is a RPT or not


consider:

(a) obtaining confirmation of significant information


directly from third parties

(b) obtaining further information and references on supplies


or customers that appearing

Signed Date:

Partner / Manager Date:

Audit Practice Manual – Revised 332


Execution Phase –
Compliance of Various Laws
Audit Program on Laws and Regulations

Client:
Period:
Subject: Culmination Audit Meeting Agenda And Minutes

Meeting Held on

Attended by:

Name Designation Auditor / Client

Point 1

Minutes

Resolution action

Responsible

Point 2

Minutes

Resolution action

Responsible

Note: Add more points as desired.

Audit Practice Manual – Revised 333


Execution Phase –
Compliance of Various Laws
Companies Ordinance Compliance Checklist

Companies Ordinance Compliance Checklist WP Ref.:


Prepared by:
Date
Reviewed by
Date:
Client:
Period:

Answer YES or NO, where the answer requires any further details, please give that separately,
(where not applicable mark N/A).

I. Secretarial Formalities Answer

A. Are the following statutory books maintained by the company,


whereby applicable, under the Companies Ordinance, 1984 and are
these kept at the registered office of the company.

(a) Register of transfer of shares (Section 76)

(b) Register of mortgages (Section 135)

(c) Register of members and Index of members. Index required if


more than fifty members (Section 147)

(d) Register of debentures and Index of debentures. Index required


if more than fifty members (Section 149)

(e) Minute books for proceedings of general meetings and


meetings of Directors / Committee of Directors A copy of the
minutes of meeting of the board of directors shall be
furnished to every director within fourteen days of the
date of meeting. (Section 173)

(f) Register of Directors, Officers including Chief Executive,


Managing Agent, Secretary, Chief Accountant, Auditors and
Legal Adviser containing with respect to each of them such
particulars as maybe prescribed.(Section 205)

Audit Practice Manual – Revised 334


Execution Phase –
Compliance of Various Laws
Companies Ordinance Compliance Checklist

Answer

(g) Register for shares and securities not held in the name of
company (Section 209)

(h) Register containing particulars of contracts / arrangements or


appointments i.e. contracts in which directors and officers
interested, contracts for appointment of chief executive, whole
time directors, secretary, etc. (Section 219)

(i) Register in respect of director, chief executive, chief


accountant, secretary, managing agent or auditor of company
and every other person holding not less than 10 percent
beneficial interest in shares and debentures of company, etc.
(Applicable to listed companies), (Section 220)

(j) Register of Pakistani members, debenture holders, directors,


officers, etc. (Applicable to foreign companies and register to
be kept at principal place or business), (Section 454)

B. Have the following forms, etc., wherever applicable, been filed with
the Registrar or other relevant authorities under the Companies
Ordinance, 1984.

(a) Return of allotments (Section 73)

(b) Notice of increase in share capital beyond the registered


capital (Section 92 & Section 94)

(c) Particulars of mortgages, charges etc. (Section 121/129 &


Section 463

(d) Particulars of mortgage or charge subject to which property


has been acquired (Section 122 and Section 463)

(e) Registration of entire series of participation term certificates /


term finance certificates / debentures (Section 123/124 &
Section)

Audit Practice Manual – Revised 335


Execution Phase –
Compliance of Various Laws
Companies Ordinance Compliance Checklist

Answer

(f) Particulars of an issue of participation term certificates / term


finance certificates / debentures in a series when more than
one in the series is made. (Proviso to Section 123 / 463)

(g) Particular of modification of mortgage, charge, etc. (Section


129 & Section 463)

(h) Memorandum of complete satisfaction of mortgage (Section


132 & Section 463)

(i) Notice of situation of registered office or of any change therein


(Section 142)

(j) Declaration of compliance with conditions of Section 146 of


the Ordinance before commencing business in case of a
company issuing prospectus (Section 146)

(k) Declaration before commencing business in case of a company


filing statement in lieu of prospectus (Section 146)

(l) Notice of modification of register of members (Section 154)

(m) Annual return of company having share capital (Section 156)

(n) Statutory report (Section 157)

(o) Special resolution (Section 172)

(p) Consent to act as Director / Chief Executive to be filed within


14 days (Section 184)

(q) Particulars of directors and officers including the chief


executive, managing agent, secretary, chief accountant,
auditors and legal adviser or of any change therein and such
particulars as may be prescribed (Section 205)

(r) Resolution passed by members pursuant to Section 208 of the


Ordinance (relating to investments in associated companies
and undertakings) (Section 208)

Audit Practice Manual – Revised 336


Execution Phase –
Compliance of Various Laws
Companies Ordinance Compliance Checklist

Answer

(s) Return containing particulars of beneficial ownership of listed


securities (Section 222)

(t) Return of change of beneficial ownership of listed securities


and making of gains (Section 222 & Section 224)

(u) Notice of address at which books of accounts are maintained


(Section 230 & Section 464)

(v) Application for extension in period for payment of dividend


(Section 251)

Following applicable only in case of foreign companies

(w) Documents (Charter / Statute / Memorandum and Articles,


etc.) delivered for registration by a foreign company (Section
451)

(x) Return showing address of registered office or principal office


of a foreign company or any change therein (Section 451 &
Section 452)

(y) Return showing particulars of directors, chief executive and


secretary (if any) of a foreign company or of any alteration
therein (Section 451 & Section 452)

(z) Return showing particulars of principal officer of a foreign


company in Pakistan or of any change therein (Section 451 &
section 452)

(aa) Return showing particulars of persons resident in Pakistan


authorised to accept service on behalf of a foreign company or
of any alteration therein (Section 451 & Section 452)

(bb) Return showing address of the principal place of business in


Pakistan of a foreign company or any change therein (Section
451 & Section 452)

Audit Practice Manual – Revised 337


Execution Phase –
Compliance of Various Laws
Companies Ordinance Compliance Checklist

Answer

(cc) Return of alternation in charter, etc. of a foreign company


(Section 452)

(dd) Notice by a foreign company on ceasing to have any place of


business in Pakistan (Section 458)

II. Disclosure and Other Requirements Under The Companies


Ordinance, 1984
A. The financial statements of listed companies have to comply with the
requirements of the Fourth Schedule to the Companies Ordinance,
1984, (Section 234).

B. The financial statements of non-listed companies have to comply


with the requirements of the Fifth Schedule to the Companies
Ordinance, 1984 (Section 234).

C. The following provisions of the Companies Ordinance, 1984 could


have a bearing on the financial statements and should be considered
during the audit to ensure that the provisions have been complied
with, wherever applicable.

(a) Prohibition of purchase or grant of financial assistance by a


company for purchase of its own shares or the shares of its
holding company except under the conditions provided under
section 95A (Section 95)

(b) Restriction on directors’ remuneration for attending meetings


and for extra services which may be determined in accordance
with provisions of Articles i.e. by directors or company in
general meeting (Section 191)

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Answer

(c) Loans to directors

(Section not to apply to private company unless subsidiary of


public company, banking company, loan or guarantee and
security for loan by holding company for its subsidiary)
(Section 195)

(d) Certain matters specified in Section have to be approved by


means of resolution passed at the meeting of the Board of
Directors (Section 196)

(e) Terms of appointment of Chief executive to be determined in


accordance with provision in Company’s Articles i.e. either by
directors or company in general meeting (Section 200)

(f) Investments in associated companies and undertakings.


(Section not to apply to banking company, financial institution
approved by Federal government and private company which
is not a subsidiary of public company, accompany whose
principal business is the acquisition of shares, stocks,
debentures and other securities (Section 208)

(g) Investments of company to be held in its own name (Section


209)

(h) Disclosure of interest by director in contract / arrangement


entered by or on behalf of the company (Section 214)

(i) Disclosure of interest by officers in contract / arrangement


other than in Section 214 of Ordinance (Section 215)

(j) Securities and deposits, etc. to be kept in special account with


scheduled bank etc. (Section 226)

(k) Provisions obtaining to employees’ provident funds and


securities including requirement of keeping amounts in special
accounts and payment of contributions within specified time
(Section 227)

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Answer

(l) Proper books of accounts to be kept by company (Section 230)

(m) Financial statements of listed companies to comply with


requirements of Fourth Schedule and the International
Accounting Standards (IAS’s) as specified by SECP in the
Gazette. (Section 234)

(n) Assets may be revalued, however incremental depreciation is


to be charged to surplus on revaluation (Section 235)

(o) Directors’ report and its contents prescribed including separate


requirements for public company or a private company which
is a subsidiary of a public company. In case of holding
company the directors are required to prepare and attach
consolidated financial statements, group affairs and all the
applicable sub sections of this section (Section 236)

(p) Balance sheet of holding company to include certain


particulars as to its subsidiaries and to comply with all
requirements of this section (Section 237)

(q) Restriction on declaration of dividends. Dividends to be paid


only out of profits; dividends not to be paid except to
registered shareholders or to their order or to their bankers and
dividend to be paid within prescribed period (Section 248 &
Section 251)

D. Compliance with International Accounting Standards (Refer separate


check list)

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Income Tax Provision Checklist

Name of Client:

Income Year Ended: Tax Year:

Type of Person: Tax Status:

Industry Segment: Current Year Previous Year

Income Period Ended on:

Total Income:

Tax liability / Provision - Total

Current Year

Prior Year

Prior Year

For Tax Return For Provision for Tax

Name Initial Name Initial

Prepared by Audit In charge

Reviewed by Audit Manger

Approved by Tax Manager

Tax Partner

Note:

This checklist does not apply to insurance companies and businesses involved in production
of oil & natural gas and exploration & extraction of other mineral deposits.

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CLIENT:

PERIOD/YEAR
:

SUBJECT: TAXATION CONCLUSION STATEMENT

Objectives

Within the overall objective of ensuring that the financial statements present a fair view of the
client's financial position, the objectives regarding taxation are to ensure that:

1. adequate disclosure has been made in the financial statements in respect of company tax
liabilities and have been dealt with properly.

2. any amounts shown in the appropriation account and notes are properly computed and
disclosed.

3. adequate provision has been made for any withholding taxes on non-resident third party
payments being borne by the company.

Work done

The previous year's tax computation, annual returns, assessment orders, appeals statements and
subsequent letters have been reviewed together with the estimates for the current period to achieve
the above objective. The file contains a copy of the previous year's return and a memorandum
signed by a tax manager/partner of work done in the tax review.

Conclusion

It is my opinion that subject to the matters listed on the list of outstanding items.

1. Adequate provision has been for company tax and withholding taxes liabilities.

2. Appropriate disclosures have been made of the overall taxation position on a basis
consistent with the previous period.

Signed ........................…........................... Date ......................................

Partner/Manager (Tax)............................... Date ......................................

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Legal requirement Section Yes No N/A

1 General

1.1 Audited accounts for the period are available or 118


working of provision for tax is based on latest
updated draft of the accounts.

1.2 Where a person’s tax year is other than “normal 74 (5)


tax year” i.e. ending on 30 June, it has
Commissioner’s / CBR’s approval for that
purpose.

1.3 Details of income and expenditure classified and 11


apportioned under each of the following heads of
income

I. Income from Business

II. Income from property

III. Income under the head capital gains

IV. Income from other sources

1.4 Details of income and expenditure have been 67


further classified and apportioned between
Pakistan source income and foreign source
income

1.5 In case of a company, income from business has 32 (2)


been accounted for on accrual basis. Cash or
hybrid basis is not allowed to companies except
where prescribed by CBR.

1.6 In case of long term contracts percentage of 36


completion method has been used. Long term
contract is a contract for manufacture,
installation or construction etc. which is not
completed within tax year and is for a period of
more than six months.

1.7 Liabilities which were charged against the profits 34(5)


in earlier years and remained outstanding at the
end of the year under consideration have been
offered for tax. .

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1.8 Liabilities which were added to the income under 34 (6)


section 34(5) of the Ordinance in any of the
preceding years and were discharged during the
year have been claimed as deduction.

1.9 Provisions made for gratuity / pension etc. have


been added to income and amounts of gratuity /
pension paid during the year have been claimed
as admissible deduction..

1.10 Provision for bad debts made during the year has 29
been offered for tax.

1.11 Bad debts written off against provisions 29


disallowed during preceding years have been
claimed as admissible deduction.

1.12 Recoveries against provisions for bad debts not 29


allowed during the preceding years have been
claimed as a deduction.

1.13 Any other provisions made during the year have 29


been offered for tax.

1.14 Payments made against any other provision taxed


in earlier years have been claimed as admissible
deduction. .

1.15 Where the transactions between associates are 108


not at arm’s length, these have been adjusted to
arm’s length value.

1.16 The impact of the provisions of the Ordinance in 109


respect of re-characterization of income and
deductions has been considered in the following
cases:

a) Tax avoidance schemes;

b) Transactions not having substantial


economic effect; or

c) Transaction, where the form of the


transaction does not reflect the substance.

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Legal requirement Section Yes No N/A

1.17 Where a foreign controlled resident company 106


(other than financial institution or a banking
company) has a foreign debt-to-foreign equity
ratio in excess of 3:1 at any time during a tax
year, deduction in respect of profit on debts has
not been claimed on the part of the debt which
exceeds 3:1 ratio.

1.18 All exemption from tax, reduction in the rate of 54


tax, reduction in tax liability or exemption from
any provision of this Ordinance claimed are
either provided in the Income Tax Ordinance,
2001 or were introduced in the relevant law prior
to 01 July 2002.

1.19 Where the assessee is a resident person, both 11(5)


Pakistan source income and foreign source
income have been offered for tax.

1.20 Where expenditure relates to: 67

a) the derivation of more than one


head of income; or

b) derivation of income
comprising of taxable income and any class
of income which falls under the
presumptive tax regime (PTR); or

c) derivation of income
chargeable to tax under a head of income
and to some other purpose (e.g. exempt
income)

the expenditure has been apportioned on any


reasonable basis taking account of the relative
nature and size of the activities to which the
amount relates or as per rules specified by the
CBR.

For this purpose details of income need to be


further classified and apportioned between
Pakistan source income and foreign source
income.

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1.21 All transactions relating to property, rent, asset, 68


service, benefit or perquisites are at fair market
value i.e. the value in the open market at that
time.

1.22 Where a person has been allowed deduction in 70


respect of an expenditure or loss and
subsequently receives any amount in respect of
such expenditure or loss, the amount so received
has been offered for tax.

1.23 Where any amount is received during the year 72


from a source of income which has been ceased
in the preceding years, such amount has been
offered for tax during the year

1.24 All currency conversions are at SBP rate 71


prevailing on the date the amount is taken into
account.

1.25 Application of a business asset to the personal 75


use has been treated as disposal of the asset.

1.26 Application of a personal asset to business use 75


has been treated as acquisition of the asset.

1.27 Where an asset has been acquired by a person 76


with a foreign currency loan, any exchange gain
or loss and interest on the loan has been adjusted
against the cost of the asset.

1.28 Where acquisition of an asset is the derivation of 76


an amount chargeable to tax or exempt from tax,
the cost of the asset has been calculated to be the
amount so charged or exempted plus any amount
paid by such person.

1.29 The cost of asset does not include the amount of 76


any grant, subsidy, rebate, commission or any
other assistance, other than a loan payable with
or without profit.

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1.30 Where an asset has been disposed off under a 78


non-arm’s length transaction, the fair market
value of the asset at the time of disposal has been
treated as its sale price of the seller and cost for
the purchaser.

1.31 No gain or loss has been considered on the 79


disposal of an asset by:

a) transmission of an asset on death of a person;

b) a gift of the asset;

c) Compulsory acquisition of asset under the


law, where the consideration received by
the recipient is reinvested in an asset of a
like kind within one year of the disposal;

d) A company to its shareholders on its


liquidation;

e) An AOP on its dissolution where the assets


are distributed to members in accordance
with its interest in the capital of AOP.

1.32 In case of a resident company the tax payable, 113


where for any reason whatsoever, tax payable is
less than 0.5 % of the turnover, the tax liability
has been increased to the level of 0.5% of the
turnover in view of the provisions of minimum
tax.

1.33 Head Office expenditure admissible under law 105(2)


have been claimed.

1.34 Zakat paid under the Zakat and Ushr Ordinance 60


1980, if any, has been claimed as admissible
deduction.

1.35 Tax credit in respect of donations made during 61


the year to non-profit organisations specified
under Section 2(36) of the Income Tax
Ordinance, 2001 has been claimed.

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1.36 Tax credit in respect of investment in new listed 62


shares has been claimed.

1.37 Assessed business loss and unabsorbed 57 (2) &


depreciation has been brought forward from (4)
preceding years.

1.38 Where there is a change of fifty percent or more 98


in the underlying ownership of an entity, any loss
incurred before the change has not been claimed
as deduction after the change unless the entity:

a) Continues to conduct the same business after


the change until the loss has been fully
setoff; and

b) Does not engage in any other business or


investment until the loss has been fully set
off.

1.39 Foreign losses are set off and carried forward 104
separately from Pakistan source losses and are
not set off against Pakistan source income.

1.40 In case of non-resident assessee, the provisions 107


of Agreement for Avoidance of Double
Taxation, if applicable, have been considered.

1.41 Credit for advance tax paid under Section 147 147 to
and taxes deducted/paid at source has been 156 &
claimed on tax year basis and not on financial 233
year basis.

1.42 Credit for any amounts refundable from 170


preceding years has been taken.

1.43 Credit for taxes paid outside Pakistan, if any, in 103


respect of any income chargeable to tax in
Pakistan has been claimed.

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Legal requirement Section Yes No N/A

2 Income from Business

2.1 Any profit on debt derived where the business of 18 (2)


the assessee is to derive such income has been
offered for tax as “Income from Business” and
not under the head “Income from Other
Sources”.

2.2 Where a person carries 19


on a speculation
business:

(a) that business has been treated as distinct


and separate from any other business
carried on by the person;

(b) section 67 (apportionment of expenses) has


been applied as if the profits and gains
arising from a speculation business were a
separate head of income;

(c) any profits and gains arising from the


speculation business for a tax year have
been included in the person’s income
chargeable to tax under the head “Income
from Business” for that year; and

(d) any loss of the person arising from the


speculation business sustained for a tax has
been carried forward separately from
“business loss”.

2.3 Admissible deductions against business income

Whether or not the following expenses have been


claimed.

2.3.1 All expenditure incurred for the purpose of 20


deriving income from business chargeable to tax
under the Ordinance have been claimed as an
admissible expenditure.

2.3.2 Expenditure incurred by an amalgamated 20(3)


company on legal and financial advisory services
and other administrative cost relating to planning

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Legal requirement Section Yes No N/A

and implementation of amalgamation.

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Legal requirement Section Yes No N/A

2.3.2 Depreciation (on the basis of number of months 22


used).

2.3.3 Initial allowance on eligible assets used for the 23


first time in Pakistan.

2.3.4 Has normal depreciation allowance been 22(5)


calculated on WDV arrived at after deducting the
initial allowance as per section 23.

2.3.5 Intangibles 24

2.3.6 Pre-commencement expenditure 25

2.3.7 Scientific research expenditure (research in 26


Pakistan).

2.3.8 Employee training and facilities 27

2.3.9 Profit on debt, financial costs, lease payments 28


and securitisation cost.

2.3.10 Bad debts in respect of debts written off. 29

2.3.11 Reserve for bad debts (3%) in respect of 29A


consumer loans

2.3.12 Profit on non-performing debts of a bank or DFI. 30

2.3.13 Transfer to participatory reserve as per section 31


120 of the Companies Ordinance, 1984.

2.4 Inadmissible deductions against business 21


income

Whether the following expenses have NOT been


claimed

2.4.1 Any cess, rate or tax paid or payable that is 21(a)


levied on the profits or gains of the business or
assessed as a percentage or otherwise on the
basis of such profits or gains.

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2.4.2 Any amount of tax deducted at source under the 21(b)


provisions of this Ordinance.

2.4.3 Any salary, rent, brokerage or commission, profit 21(c)


on debt, payment to non-resident, payment for
services or fee from which tax required to be
deducted at source has not been deducted.

2.4.4 Any entertainment expenditure in excess of 21(d)


prescribed limits.

2.4.5 Any contribution made to a fund that is not a 21(e)


recognised provident fund, an approved
superannuation fund, or an approved gratuity
fund;

2.4.6 Any contribution made to any provident or other 21(f)


fund established for the benefit of employees of
the person, where the person has not made
effective arrangements to secure that tax is
deducted under section 149 from any payments
made by the fund in respect of which the
recipient is chargeable to tax under the head
"Salary";

2.4.7 Any fine or penalty paid or payable for the 21(g)


violation of any law, rule or regulation;

2.4.8 Any personal expenditure incurred. 21(h)

2.4.9 Any amount carried to a reserve fund or 21(i)


capitalised in any way;

2.4.10 Any profit on debt, brokerage, commission, 21(k)


salary or other remuneration paid by an
association of persons to a member of the
association.

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Legal requirement Section Yes No N/A

2.4.11 Any expenditure paid or payable by an employer 21(k)


on the provision of perquisites and allowances to
an employee where the sum of the value of the
perquisites computed under section 13 and the
amount of the allowances exceeds fifty per cent
of the employee’s salary for a tax year
(excluding the value of the perquisites or amount
of the allowances).

2.4.12 Any expenditure paid or payable under a single 21(l)


account head which, in aggregate, exceeds fifty
thousand rupees paid other than by a crossed
bank cheque or crossed bank draft except:

n expenditures not exceeding five thousand


rupees, or

n on account of freight charges, travel fare,


postage, utilities or payment of taxes,
duties, fees, fines or any other statutory
obligation

2.4.13 Any salary paid or payable exceeding five 21(m)


thousand rupees per month paid other than by a
crossed cheque or direct transfer of funds to the
employee’s bank account.

2.4.14 Except as provided in 2.1 above, any expenditure 21(n)


of a capital nature.

2.4.15 Amounts charged to profit and loss accounts as


finance charge.

3 Income from Property

3.1 “Rent” includes any forfeited deposit paid under 15(2)


a contract for the sale of land or a building.
Whether such deposit has been included in Rent.

3.2 Any rent received or receivable in respect of the 15(3)


lease of a building together with plant and
machinery has been offered for tax under the
head “Income from Other Sources”.

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Legal requirement Section Yes No N/A

3.3 Where the property has owned by two or more 66


persons and their respective shares are definite
and ascertainable;

a) the persons shall not be assessed as an


association of persons in respect of
property; and

b) share of each person in the income from


property shall be included in his income.

3.4 Non-adjustable amounts like pugree etc. received 16


in relation to buildings have been treated as rent
chargeable to tax under the head ‘income from
property’ in the tax year in which it was received
and the following nine tax years in equal
proportion.

3.5 Where any irrecoverable rent is subsequently 17(2)


recovered, the amount recovered has been
included in the income.

3.6 Where any deduction has been claimed in respect 17(3)


of income from house property and the liability
in respect of such deduction is not paid within
three years of the deduction, it shall be added to
the income.

3.7 Any deduction claimed in respect of income 17(5)


from property has not been claimed against
income from any other source.

3.8 Whether or not following deductions /


expenditure against property income have been
claimed.

3.8.1 In respect of repairs to the building an allowance 17(a)


equal to 1/5 of the rent chargeable to tax in
respect of the building.

3.8.2 The amount of any insurance premium paid to 17(b)


cover the risk of damage or destruction to the
property.

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3.8.3 The amount of any local rate, tax, charge or cess 17 (c)
(being owners burden) in respect of property or
income from property other than any tax payable
under the Income Tax Ordinance, 2001.

3.8.4 Any ground rent paid 17(d)

3.8.5 Where the property has been acquired, 17(e) &


constructed, renovated or reconstructed with (f)
borrowed capital, the amount of any interest paid
on such capital;

3.8.6 Where the property is subject to mortgage or 17


other capital charge, the amount of interest /
profit paid on such mortgage or charge;

3.8.7 Where the property has been acquired, 17(f)


constructed, renovated, extended, or
reconstructed by the person with capital
contributed by the House Building Finance
Corporation or a scheduled bank under a scheme
of investment in property on the basis of sharing
the rent made by the Corporation or bank, the
share in rent and share towards appreciation in
the value of property (excluding the return of
capital, if any) from the property paid or payable
by the person to the said Corporation or the bank
in the year under that scheme;

3.8.8 Any expenditure (not exceeding six percent of 17(g)


the rent chargeable to tax in respect of the
property for the year computed before any
deduction allowed) incurred for the purpose of
collecting the rent of the property;

3.8.9 Any legal expense incurred to defend title of the 17(h)


property or any suit connected therewith in a
court of law;

3.8.10 Any unpaid rent which is considered 17(i)


irrecoverable

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Legal requirement Section Yes No N/A

4 Income under the head Capital Gain

4.1 Gain arising on the disposal of a capital asset by 37(1)


a person in a tax year, other than a gain that is
exempt from tax, has been offered for tax under
the head “Capital Gains”.

4.2 Gain from sale of following assets of “personal” 37(5)


nature has been offered for tax under the head
“Capital Gains”

n a painting, sculpture, drawing, or other


work of art;

n jewelry;

n a rare manuscript;

n a postage stamp or first day cover;

n a coin or medallion

n an antique.

4.3 The cost of acquisition of the capital asset and 37(2)


any expenditure incurred wholly and exclusively
for acquiring such asset have been claimed as
deduction against income under the head capital
gains.

4.4 Where the capital asset has been held for more 37(3)
than one year, only 75% of the capital gains has
been offered for tax.

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Legal requirement Section Yes No N/A

5 Income from other sources

5.1 Income of every kind received by a person in a 39


tax year, if it is not included in any other head,
other than income exempt from tax, or has not
been offered on PTR basis, has been offered for
tax in that year under the head “Income from
Other Sources”, including the following namely:

(a) dividend;

(b) profit on debt;

(c) ground rent;

(d) rent from the sub-lease of land or a


building;

(e) income from the lease of any building


together with plant or machinery;

(f) any annuity or pension;

(fa) any amount received by the owner of


a property in respect of provision of
amenities, utilities and any other
services in respect of that property.

(g) any prize bond, or winnings from a raffle,


lottery or crossword puzzle;

(h) any other amount received as consideration


for the provision, use or exploitation of
property, including from the grant of a
right to explore for, or exploit, natural
resources;

(i) the fair market value of any benefit,


whether convertible to money or not,
received in connection with the provision,
use or exploitation of property; and

(j) any amount received by a person as


consideration for vacating the possession
of a building or part thereof, reduced by
any amount paid by the person to acquire
possession of such building or part thereof.

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Legal requirement Section Yes No N/A

5.2 Where a person receives an amount referred to in 39(2)


5.1 (j) above, the amount has been offered for tax
under the head “Income from Other Sources” in
the tax year in which it was received and the
following nine tax years in equal proportion.

5.3 Any amount received as a loan, advance, deposit 39(3)


or gift by a person in a tax year from another
person (not being a banking company or
financial institution) otherwise than by a crossed
cheque drawn on a bank or through a banking
channel from a person holding a National Tax
Number Card has been treated as income
chargeable to tax under the head “Income from
Other Sources” for the tax year in which it was
received. This clause does not apply to an
advance payment for the sale of goods or supply
of services.

5.4 Deduction has been claimed in respect of 40


expenditure (not being in the nature of capital
expenditure) laid out or expended wholly and
exclusively for the purpose of deriving income
chargeable to tax under the head ‘income from
other sources’.

6 Income falling under Presumptive Tax


Regime

Whether or not following income have been


offered for tax under Presumptive Tax Regime.

6.1 Dividend 5

6.2 Royalty 6

6.3 Fee for technical services received by a non- 6


resident

6.4 Shipping and air transport income of a non- 7


resident

6.5 Income of the importer arising from the imports 148 (7)
except in the case of an industrial undertaking
importing goods as raw materials for its own use.

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Legal requirement Section Yes No N/A

6.6 Income of a resident person arising from the sale 153(6)


of goods and on the execution of a contract, other
than a contract for the supply of goods or the
rendering of services.

6.7 The tax deducted under section 153 shall be a 153(7)


final tax on the income of a non-resident person
arising from

(i) a turnkey contract;

(ii) a contract or sub-contract for the design,


construction or supply of plant and
equipment under a power project;

(iii) a contract or sub-contract under a


construction, assembly or installation
project in Pakistan, including a contract for
the sale of supervisory activities in relation
to such project; or

(iv) any other contract for construction or


services rendered, other than a contract to
which section 152 (Royalty and fee for
technical services) applies,

6.8 Realisation of foreign exchange proceeds on 154(1)


account of the export of goods by an exporter.

6.9 Proceeds on account of a sale of goods to an 154(3)


exporter under an inland back-to-back letter of
credit.

6.10 Prize on a prize bond, or cash and non-cash (in 156


kind) winnings from a raffle, lottery, or cross-
word puzzle

6.11 Prize on winning a quiz or prize for promotion of 156


sale offered by companies.

6.12 Tax collected from any person being the owner 234
of goods transport vehicle shall be the final tax
on the income of such person from plying or
hiring out of such vehicles.

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Legal requirement Section Yes No N/A

6.13 Where all the income derived by a person in a 115(4)


tax year is subject to final taxation under
Presumptive Tax Regime, a return of income
under section 114 for the year has not been filed
instead a statement under section 115(4) has been
filed.

6.13 Where the presumptive tax regime applies – 169(2)

(a) the income has not be charged to tax under


any head of income in computing the
taxable income of the person;

(b) no deduction has been claimed for any


expenditure incurred in deriving the
income;

(c) the amount of the income has not be


reduced by

(i) any deductible allowance under Part IX of


Chapter III, i.e. zakat

(ii) the set off of any loss;

(d) the tax deducted has not been reduced by


any tax credit allowed under this
Ordinance; and

(e) no refund has been claimed in respect of


tax collected or deducted unless the tax so
collected or deducted is in excess of the
amount for which the taxpayer is
chargeable,

Audit Practice Manual – Revised 360


Execution Phase –
Workings of Cash Flow Statement

Labour Laws Compliance Checklist

Index

1. Gratuity

2. Workers’ Profit Participation Fund

Audit Practice Manual – Revised 361


Execution Phase –
Workings of Cash Flow Statement

I Gratuity

S. No. YES NO N/A

Scope of the Scheme

1. Does the status of the employer come under the definition of


commercial or industrial establishment as defined in West
Pakistan Industrial and Commercial Employment (Standing
Orders) Ordinance, 1968 (the Ordinance)?

2. If the answer to 1 above is ‘Yes’, does it satisfy the


following conditions:

2.1 The number of workmen employed is 20 or more in case


of commercial establishment; or

2.2 The number of workmen employed is 50 or more in


case of industrial establishment.

3. If the answer to 1 and 2 above are ‘Yes’ does the employer


pay gratuity to workman on his retirement, resignation or
termination of service due to any reason other than
misconduct?

4. Is gratuity payable only to a person who is a workman as


defined in the Ordinance?

5. Is gratuity payable in addition to any other benefit which the


worker may be entitled in accordance with the terms of his
employment or any custom, usage settlement or award?

[Note that, no gratuity is payable during the period an


employer has established a provident fund in his
establishment with equal contribution by the employer and
workman, and both these contribution being payable to the
workman even if he dismissed from service due to any
reason including misconduct.]

6. Is the rate of gratuity 30 days wages for every completed


year of service or for any period in excess of six months in
the same establishment?

Audit Practice Manual – Revised 362


Execution Phase –
Workings of Cash Flow Statement

S. No. YES NO N/A

7. If answer to 6 above is ‘Yes’ is gratuity calculated in the


following manner:

7.1 Wages admissible to workman in the last month of


service in case of fixed rated workman and highest pay
drawn during the last twelve months in case of piece
rated workman.

7.2 Wages include basic wage plus cost of living allowance


and any other allowance being part of wages under the
relevant law.

8. Does the employer maintain funded gratuity?

9. If answer to the above is ‘Yes’, is it an approved gratuity


fund as defined under section 2(3) of the Income Tax
Ordinance, 2001 (ITO).

10. If answers to 8 to 9 are ‘Yes’, has the employer established a


fund under an irrevocable trust?

11. Does the gratuity fund satisfy the following conditions:

a) not less than ninety percent employees of the Company


are employed in Pakistan;

b) the beneficiaries belong to the class of persons


qualified in terms of sub-clause (b) of clause 2 of Part
III of the sixth schedule of the Income Tax Ordinance,
2001;

c) the employer contributes to the fund; and

d) all benefits granted by the fund are payable only in


Pakistan.

12. Is the annual contribution by the employer in respect of any


particular employee made on a reasonable definite basis as
approved by the Commissioner of Income Tax?

13. Has the employer furnished returns, statements, etc., as


required by notice from Commissioner of Income Tax under
rule 7 of part III of the Sixth Schedule of ITO?

Audit Practice Manual – Revised 363


Execution Phase –
Workings of Cash Flow Statement

S. No. YES NO N/A

14. Are all moneys contributed to the fund and interest / return
on the accumulated balances of such contribution invested
as per Rule 102 of the Income Tax Rules, 2002 (ITR)
together with section 227 of the Companies Ordinance,
1984?

15. Has the prior approval of the Commissioner of Income Tax


been obtained to make a special contribution to the fund to
meet the deficit?

16. Has effective arrangement been made to deduct tax at source


from any payments made from gratuity which is chargeable
to tax?

17. Have the rules of gratuity fund formulated by the trustees


been complied with?

Note that if there is a repugnance between any rule of an


approved gratuity fund and any provision of part III of Sixth
Schedule of the Income Tax Ordinance, 2001, the said rule
shall, to the extent of repugnance, be of no effect and the
Commissioner of Income Tax, at any time require that, such
repugnance shall be removed from the rules of the fund.

18. Does the employer cause to carry out actuarial valuation to


determine cost and liability on account of retirement
benefit?

19. Has the company made full provision in the financial


statements in accordance with IAS-19.

20. If answer to 19 is No (a) has it been disclosed in the notes to


the accounts any shortfall or reason etc? (b) have been made
reference in the auditors’ report?

21. In case of outstanding balance of an eligible employee who


is retired, has the company / fund shown the balance payable
to him in current liability under outgoing members?

22. In case of unfunded gratuity. Is the liability to existing


employees shown as deferred liability in the financial
statements of the company?

Audit Practice Manual – Revised 364


Execution Phase –
Workings of Cash Flow Statement

II Workers’ Profit Participation Fund

S. No. YES NO N/A

Applicability

1. Is the status of the client a “Company” and engaged in


“Industrial undertaking”.

2. If yes, does the company satisfy any one of the following


three conditions:

a) the number of workers employed by the Company at any


time during a year is 50 or more; or

b) the paid-up capital of the Company as on the last day of


its accounting year is Rs. 2 million or more; or

c) the cost of the fixed assets of Company as on the last day


of the accounting year is Rs. 4.00 million or more.

3. Establishment of the Fund

Has the company to which the Act becomes applicable,


established WPPF within nine months of the close of the
year in respect of which the Act became so applicable.

4. Does the Company pay 5% of its ‘profits’, as defined in the


Act, for the year to the Fund within 9 months after close of
the year.

5. Investment of Fund

Is the amount allocated or accruing to the fund:

a) made available to the Company; or

b) invested at the request of the Company by the Board.

Audit Practice Manual – Revised 365


Execution Phase –
Workings of Cash Flow Statement

S. No. YES NO N/A

6. If the amount is invested by the Board, has the investment


been made in the following certificates / securities only:

a) I.C.P Mutual Fund Certificates

b) NIT (Unit) Certificates

c) Allowable Government Securities; and

d) any other securities approved for the purpose by the


Federal Government.

7. If the amount allocated, was made available to the


Company, does Company pay interest thereon to the Fund
starting from the first day of the next succeeding year to the
date of payment to workers at higher of (i) 2.5% plus bank
rate; and (ii) 75% of dividend declared on its ordinary
shares.

8. Has the computation and allocation of interest:

n correctly done;

n properly allocated to workers;

n fully provided in the accounts; and

n where applicable properly segregated as between WPPF


and WWF except in those cases where company has
filed petition with High Court in respect thereof.

9. Distribution of Benefits to Workers

Have you ensured eligibility of the workers to the Fund


benefits by considering that the list of workers prepared by
the Secretary (Rule 4 (A)(b)) is complete and does not
include workers:

a) whose employment period is less than 6 months except


in case of retired / deceased employees; or

b) whose average monthly wages exceed Rs. 5,000/-.

Audit Practice Manual – Revised 366


Execution Phase –
Workings of Cash Flow Statement

S. No. YES NO N/A

10. a) Have you ensured that no worker gets more than


Rs.6,000/- as his annual share out of the Fund (All
categories inclusive)?

b) Ensure that units are properly allocated to employees as


per their respective category – Refer para 4 of annexed
note on page 10.

11. Have you ensured that the “average monthly wages” do not
include any overtime allowance or bonus or cost of living
allowance or any other part of compensation not covered by
the definition of “wages” as defined in the Act.

12. Has the Fund transferred any left out amount out of the
annual allocation to the WWF, within 15 days after the
allocation.

13. Disbursement of Benefits

Has every worker been distributed the annual income of


Fund including capital gains, if any, realized in prorata to
his units of entitlements. After entitlements he holds as at
the commencement of such year in line with example B in
annexure II of mode procedure for the maintenance of
accounts of the fund.

14. In case a worker leaves his employment or his service is


terminated, have you ensured that he has received 100% of
the net asset value of the units standing in his name as on
that date.

15. Management of the Fund

Have you obtained a list of Trustees.

16. Have you ensured that the appointment of Chairman to the


Board is for one year and alternatively from workers and
management.

Audit Practice Manual – Revised 367


Execution Phase –
Workings of Cash Flow Statement

S. No. YES NO N/A

17. Have you obtained copies of:

n special Audit Report (by Federal Government);

n board minutes; if any

n regulations for governing the fund;

n audited accounts with auditors report thereon of the


fund (if not done by FRSH); and

n contract for management of the fund with ICP, NIT or


NBP, if any.

18. Have you ensured that the secretary to the fund is the
management trustee from the accounts department.

19. Is office of the Board located at the factory premises?

20. Miscellaneous

Allocations to the fund by Companies is treated as allowable


deduction to arrive at the taxable income of the Company.

21. All the income of the fund including capital gains are
exempt from income tax.

22. All the sums paid by the fund to workers are exempt from
income tax in the hands of the workers.

23. All expenses of the Board including the cost of maintaining


accounts shall be borne by the Company.

24. The Trustees shall not take any remuneration for their
services except the reasonable cost of their travel for
attending Board meeting.

25. Ensure that the Trustees of Fund have opened the bank
account of Fund.

26. Ensure that no income tax was deducted at source on the


income of the Fund. If it is deducted at source, inform the
trustees through covering letter addressed to them for
sending the initialled financial statements.

Audit Practice Manual – Revised 368


Execution Phase –
Workings of Cash Flow Statement

S. No. YES NO N/A

27. Obtain the copy of the audited financial statements of the


company to confirm the amount of the allocation of the
fund.

28. Obtain the copy of challan showing the left over amount
deposited into bank.

29. Obtain the schedule of details of interest accrued on total


allocated Workers’ Profit Participation Fund and copy of the
statement for its distribution amongst workers and the left
over amount as per Annexure-IIIA required to be submitted
to Section Officer of Ministry of Labour, Manpower and
Overseas Pakistanis – Federal Government of Pakistan.

30. Examine on test basis name-wise payment vouchers / sheets


as per Annexure-III and Annexure-IIIA required to be
submitted to Section Officer of Ministry of Labour,
Manpower and Overseas Pakistanis – Federal Government
of Pakistan.

31. Note that any difference arising between the board and
company relating to the administration of the scheme has
been referred to the Federal Government because the
decision of the Federal Government would be final on any
matter referred to the Federal Government. Obtain the copy
of the decision.

Audit Practice Manual – Revised 369


Execution Phase –
Compliance of Various Laws
Labour Laws Compliance Checklist

Tax Position
n Provision For Taxation - Year Wise Position

Audit Practice Manual – Revised 370


Execution Phase –
Proposed Adjusting and Reclassification Entries

Adjusting Entries
Client: Prepared by Reviewed by

Subject:

Period / Year:

No. Date Name Account Reference Debit Credit


No. (Rupees) (Rupees)

Audit Practice Manual – Revised 371


Execution Phase –
Proposed Adjusting and Reclassification Entries

REPORTING PHASE
Financial Statements

DOCUMENT THE FOLLOWING FINANCIAL STATEMENTS:

n FINAL DRAFT ACCOUNTS SIGNED BY THE SENIOR FINANCIAL


OFFICER

n INITIALLED / SIGNED ACCOUNTS (CROSS REFERENCED TO


WORKING PAPERS)

n PUBLISHED FINANCIAL STATEMENTS (CURRENT & PREVIOUS


YEAR)

Audit Practice Manual – Revised 372


Execution Phase –
Proposed Adjusting and Reclassification Entries

Working of Cash Flow Statement

File the working of current year’s cash flow statement with previous year’s comparative
figures and properly refer each item with the final draft / initialed financial statements.

Audit Practice Manual – Revised 373


Execution Phase –
Proposed Adjusting and Reclassification Entries

Final Analytical Review Procedures


The term "analytical procedures" refers to a collection of activities performed by auditors to
gather evidence.

Analytical procedures be performed in the audit planning stage to identify possible problem
areas and in the substantive testing stage as a means of gathering substantive evidence in relation
to one or more account balances or classes of transactions (i.e. as a substantive procedure, or
substantive test); and in the opinion formulation stage (overall review stage), as a means of
gathering evidence as to the consistency of the financial statements with the auditor's knowledge
of the business of the entity.

All analytical procedures involve a comparison of the value of the actual (ratio/trend/account
balance / transaction etc.) with the value of the expected (ratio/trend/ account balance/
transaction etc.) with the objective of identifying any unusual or unexpected values. The
procedure requires the investigation of the reason for any unexpected or unusual value.

Analytical procedures include:

reasonableness tests: In a reasonableness test, the expected value is determined by


reference to data partly or wholly independent of the accounting information system, and for that
reason, evidence obtained through the application of such a test may be more reliable than
evidence gathered using other analytical procedures. e.g. the reasonableness of the total annual
revenue of a freight company may be estimated by calculating the product of the total tonnes
carried during the year and the average freight rate per tonne.

scanning. An auditor may scan account balances, listings of transactions etc., with the object of
detecting any unusual or unexpected balances or transactions.

review. An auditor may review reconciliation, compilations and aggregations of transactions


and/or account balances, again with the object of detecting any unusual or unexpected balances
or transactions.

ratio analysis. The computation and comparison of the actual value of a ratio with the expected
value. The expected value may be based, for example, on:

n prior period values.


n values in other divisions of the entity.
n industry averages.
n forecast values.

Once again, the objective of this analytical procedure is to detect any unusual or unexpected
value for the ratio.

common size analysis is a type of cross-sectional analysis used for comparing the percentage
components of balance sheets and income statements of one entity, or a division of an entity,
with comparable data from one or more other entities/ divisions. This analysis may be used for
either (i) the comparison of a (prospective) client's data with the industry average and/or an
Audit Practice Manual – Revised 374
Execution Phase –
Proposed Adjusting and Reclassification Entries

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.

Audit Practice Manual – Revised 375


Execution Phase –
Proposed Adjusting and Reclassification Entries

Reclassification Entries
Client: Prepared by Approved by

Subject:

Period / Year:

No. Date Name Account Reference Debit Credit


No. (Rupees) (Rupees)

Audit Practice Manual – Revised 376


Execution Phase –
Manager / Partner Review Notes and Queries

Manager Review Notes & Queries

Name of client: Year ended


Prepared by: Date
Reviewed by: Date

Observations / Notes Disposal

Audit Practice Manual – Revised 377


Execution Phase –
Manager / Partner Review Notes and Queries

Partner Review Notes & Queries

Observations/Notes Disposal

Audit Practice Manual – Revised 378


Execution Phase –
Audit Issues Control Documents

Audit Issues Control Document


Name of client: Period
Subject

Issue

Reported to:

n Concerned Personnel

n CFO

n CEO

n Board of Directors

Client approach to mitigate the issue

Performed By
n

Audit approach

W/P Ref Performed by


n

Audit Practice Manual – Revised 379


Execution Phase –
Audit Issues Control Documents

Result of work done

CONCLUSION:

n Resolved

n Adjustment

n ML

n CL

n Report

Point Identified By Senior Manager Partner

Audit Practice Manual – Revised 380


Reporting and Finalization Phase –
Points for Next Year

Points for Next Year


Client: Prepared By Approved By
Period:
Subject:

Ref. Business betterment/ Discussed with Disposition process


financial improvement Ideas Audit Staff

Audit Practice Manual – Revised 381


Reporting and Finalization Phase –
Points for Next Year

Assess Client Satisfaction and Team Debriefing

Audit Practice Manual – Revised 382


Execution Phase –
Summary Review Memorandum

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

Audit Practice Manual – Revised 383


Execution Phase –
Summary Review Memorandum

Provisions

Acquisition of Long Term Loan/Leases

Major Contingencies/litigations including Tax etc.

Audit Practice Manual – Revised 384


Reporting and Finalization Phase –
Audit Completion and Reporting

Audit Completion and Reporting

Ref. Description W.P Reference

1. Financial statements signed

2. Final called over financial statements cross referred to lead


schedule

3. Final audit meeting agenda and minutes

4. Taxation final conclusion statement

5. Audit issue control document

6. Audit completion checklist

7. Manager review notes

8. Partner review notes

9. Management representation letter

10. Covering letter to the Board

11. Management letter to the board

12. Financial statement disclosure checklist (IAS) ICAP

13. Financial statement disclosure checklist (Local Laws) ICAP

14. Adjusting Journal Entries

15. Reclassifying journal entries

16. Proposed Journal entries

17. Cash flow working

18. Points forwarded to next year

19. Director’s report and Chairman’s review

20. Company Law compliance Checklist

Audit Practice Manual – Revised 385


Reporting and Finalization Phase –
Audit Completion and Reporting

Ref. Description W.P Reference

21. Checklist for the Code of Corporate Governance ICAP

22. Labour law checklist

23. Going concern checklist

24. Related party checklist

25. Audit compliance review ICAP

Audit Practice Manual – Revised 386


Reporting and Finalization Phase –
Audit Completion Checklist

Audit Completion Checklist – Part I WP Ref.:


Date
Client:
Period:

Purpose

The purpose of this checklist is to document adherence to International Standard on Auditing.


This document requires, at a minimum, review and sign-off by the partner.

The working paper is divided into the following sections:

I Engagement Partner Sign-off

II Computer Information System Specialist Sign-off

III Considerations and Procedures

The engagement partner signs and date the Audit Completion Checklist sections I throughout
each phase of the audit workflow and prior to issuance of the report.

Section III provides a list of policies and professional standards to be considered by the audit
team throughout each phase of the audit workflow. Its primary purpose is to serve as a memory
jogger for the audit team and is reviewed prior to engagement partner sign-off. Additional
considerations may be added to the list based on specific circumstances of each engagement. In
addition, some procedures in the list may not be applicable to every engagement (e.g., use of
internal audit or service organisation auditors).

Audit Practice Manual – Revised 387


Reporting and Finalization Phase –
Audit Completion Checklist

I Engagement Partner Sign-off


Procedures Sign-off Date

Engagement Management

I have:

n reviewed the suitability of accepting the audit engagement


or continuing with the audit engagement and have
performed formal re-evaluation procedures as appropriate

n obtained an engagement letter, as appropriate

n identified a US-SEC filing review partner, approved for


foreign filing reviews, in instances where required.

n I have identified the entities, its affiliates, securities, and/or


funds that should be considered restricted for
independence purposes.

I have determined materiality for planning purposes for use in


planning our audit procedures and documented this
determination.

I have reviewed the following documents and am satisfied that


our understanding of the business and strategic business risks
and the basis on which we have formed our decisions have
been adequately and appropriately documented in the:

n Strategy and Planning Document

n Control Overview and Risk Assessment Document

n Fraud Risk Assessment Document

n Documentation of analytical procedures

I am satisfied that:

n working papers related to critical audit objectives have


been reviewed by the engagement partner

n working papers that do not relate to critical audit objectives


have been reviewed by someone other than the preparer

Audit Practice Manual – Revised 388


Reporting and Finalization Phase –
Audit Completion Checklist

Procedures Sign-off Date

n review points have been cleared and the review notes


discarded

n the audit team has performed its work in compliance with


International Standards on Auditing and the working
papers demonstrate this compliance

n all adjusting entries have been reviewed

n final Trial Balance has been obtained from client


containing all adjusting entries, reclassifications etc.

n the audit team has obtained sufficient appropriate audit


evidence, including consideration of going concern, so as
to form an audit opinion

n the engagement deliverables are consistent with the


deliverables specified in the engagement letter or any
variation to it, and are supported by the work performed
during the engagement

n the financial statement presentations and disclosures are


adequate and conform with the audit team’s
understanding of the business as well as the Companied
Ordinance, 1984 and International Accounting Standards

n in my opinion, based on the audit procedures performed,


the financial statements are free of material misstatement
when an unqualified opinion is expressed

I agree with the opinion reached such that the audit report may
be released.

Audit Practice Manual – Revised 389


Reporting and Finalization Phase –
Audit Completion Checklist

II Computer Information System (CIS) Specialist Sign-off


Procedures Sign-off Date

IT related business risks have been considered, assessed and


dealt with appropriately and nature, extent and timing of CIS
Specialist involvement has been considered and documented in
the Strategy and Planning Document.

Audit Practice Manual – Revised 390


Reporting and Finalization Phase –
Audit Completion Checklist

III Considerations and Procedures


This section provides a list of policies and professional standards to be considered by the
audit team throughout each phase of the audit workflow. Its primary purpose is to serve as
a memory jogger for the audit team. It is to be reviewed throughout the audit prior to
partner sign-off. Additional considerations may be added to the list based on specific
circumstances of each engagement.

The note column provides an opportunity to indicate consideration of each step as either
applicable () or not applicable (N). In addition, audit teams may choose to make
additional references in the notes column as considered appropriate.

Procedures Notes

Engagement management

We have reviewed the suitability of accepting the audit and have accepted
the appointment as auditor

We have reviewed the suitability of continuing with the audit engagement


and have performed formal re-evaluation procedures as appropriate

We have followed the appropriate procedures to determine the independence


of partners, managers and professional staff with respect to the entity on
whose financial statements we express an opinion

We have set the terms of the engagement and obtained an engagement letter

We have considered materiality in the audit and determined and used


materiality for planning purposes in planning our audit procedures

Working papers

We have appropriately managed the working papers including preparing


them, utilising current and continuing use working papers, reviewing
working papers, restricting access to working papers and retaining working
papers including:

n Points raised during the review of the working papers have been cleared
and where appropriate the working papers have been revised. Review
notes have not been retained.

n The engagement partner has reviewed audit working papers related to


critical audit objectives and determined that all audit working papers
meet requirements of International Auditing Standards.

n Someone other than the preparer has reviewed each working paper.

Audit Practice Manual – Revised 391


Reporting and Finalization Phase –
Audit Completion Checklist

Procedures Notes

n Upon completion of the audit, we have determined that the working


papers and other documents are in proper order and complete.
Working papers and other documents are properly filed and carefully
maintained so they can be readily located. Specifically working papers
and other documents on electronic media, finalised working papers and
other documents on disk drives maintained by the audit team,
including support staff, have been moved to either the appropriate file
server or to disks for storage with the working paper files. Additional
electronic copies of entity-related information have not been retained,
except as set forth in this paragraph. The professional staff assigned a
re in possession of no audit-specific information, whether on their
personal computers, on their support staff's computers or otherwise.

n We have and will only make working papers available to third parties
(excluding joint auditors and principal auditors) after consultation with
the engagement partner.

Workflow activities

We have obtained and / or updated our understanding of the entity’s


environment, including:

n preparing a Strategy and Planning Document

n performing and documenting analytical procedures in planning the audit,


including follow-up actions for variances where appropriate.

We have determined and documented materiality for planning purposes.

We have obtained an understanding of the strategic business risks and


significant classes of transactions, identified the potential financial statement
effects and documented our analysis in Control Overview and Risk
Assessment Document

We have considered all issues raised during the planning phase, summarised
those considered significant and appropriately identified planned audit
procedures in Strategy and Planning Document.

Audit Practice Manual – Revised 392


Reporting and Finalization Phase –
Audit Completion Checklist

Procedures Notes

Fraud and error

In planning the audit, we have assessed the risk that fraud or error may cause
the financial statements to contain material misstatements, and have
enquired of management regarding their understanding of the risk of fraud in
the entity, their knowledge of fraud or suspected fraud that the entity is
investigating or whether they have discovered material errors. We have also
enquired of management regarding the accounting and internal control
systems put in place to address fraud risk and prevent and detect error. We
have documented our understanding of management’s fraud risk assessment,
the accounting and internal control systems in place, and known fraud and
material error in the Fraud Risk Assessment Document

We have documented fraud risk factors that have been identified as being
present in the Fraud Risk Document

Communications to management and those charged with governance

We have communicated with management to confirm our understanding of


the entity’s business and to discuss other issues as appropriate

We have considered with whom in governance to communicate. We have


also considered audit matters of governance interest arising from the audit of
financial statements and communicated them with those charged with
governance on a timely basis

We have obtained an understanding of the financial statement risks and


financial statement controls and made a preliminary assessment of the risk of
significant misstatement as documented in the appropriate Audit
Programmes

We have performed appropriate audit procedures to obtain sufficient audit


evidence to support, and planned appropriate audit procedures to respond to,
our assessment of the risk of significant misstatement for each audit
objective as documented in the Audit Programmes. We have also addressed
the fraud risk factors, as documented in the Fraud Risk Assessment
Document, in designing these audit procedures

We have obtained an understanding of the accounting system sufficient to


identify and understand the accounting and financial reporting process from
the initiation of significant transactions and other events to their inclusion in
the financial statements, including how journal entries are prepared,
processed and approved

Audit Practice Manual – Revised 393


Reporting and Finalization Phase –
Audit Completion Checklist

Procedures Notes

We have identified, documented and considered the significant issues and


updated planned procedures and findings as appropriate

Substantive Procedures, Evaluation and Reporting

Workflow activities

We have performed substantive audit procedures as planned and documented


them in the Audit Programme including substantive analytical procedures,
and / or tests of details as appropriate.

We have identified and investigated audit differences and have:

n prepared a Summary of Unadjusted Audit Differences

n considered materiality in evaluating the effect of audit differences

n considered the aggregate of unadjusted audit differences in evaluating


the fair presentation of the financial statements.

We have discussed identified audit differences with management during the


audit and considered their nature and cause. In instances where management
refused to adjust the financial statements and the results of extended audit
procedures did not enable us to conclude that the aggregate of unadjusted
audit differences was not material, we considered the appropriate
modification to our report in accordance with ISA 700 the Auditor’s Report
on Financial Statements. We have also informed those charged with
governance of unadjusted audit differences aggregated by us during the audit
that were determined by management to be immaterial, both individually and
in the aggregate, to the financial statements taken as a whole.

We have evaluated our findings, including performing analytical procedures


at the overall review stage of the audit

We have reviewed the reconciliation of amounts audited in the working


papers to the amounts reported in the financial statements and have
documented in the working papers that we have performed this review.

We have checked all adjusting entries that have been made

We have obtained final Trial Balance from client and ensured that it is
updated for all adjusting entries, reclassifications etc.

We have obtained sufficient audit evidence to form our audit opinion and
have reported our findings

Audit Practice Manual – Revised 394


Reporting and Finalization Phase –
Audit Completion Checklist

Procedures Notes

We have obtained written management representations. At a minimum these


representation include those specified by the ISAs.

Fraud and error

For circumstances encountered that may indicate that there is a material


misstatement in the financial statements resulting from fraud or error, we
have performed procedures to determine whether the financial statements are
materially misstated. We have documented the circumstances identified
together with the audit procedures performed in the Fraud Risk Assessment
Document.

For audit differences identified, we have considered whether such audit


differences may be indicative of fraud and if there is such an indication, we
have considered the implications in relation to other aspects of the audit,
particularly the reliability of management representation.

Communications to management and those charged with governance

We have included in engagement deliverables caveats, disclaimers and


restrictions relevant to the circumstances, and also restricted reliance on
engagement deliverables to clients or any other party specifically identified
in the engagement letter.

We have communicated to management, if applicable, fraud or error, non-


compliance with laws and regulations and material weaknesses that have
come to our attention.

If we suspect that members of senior management, including members of the


board of directors, are involved in non-compliance, we have reported the
matter to the next higher level of authority at the entity, if it exists, such as
an audit committee or a supervisory board.

If a material weakness in the design or operation of the accounting and


internal control systems has come to our attention, we have made
management aware of the weakness as soon as practical and at an
appropriate level of responsibility.

If a material weakness in internal control related to the prevention and


detection of fraud and error has come to our attention, we have
communicated it to management in writing. We are satisfied that those
charged with governance have been informed of these weaknesses that have
been brought to our attention by management, or that have been identified by
us during the audit.

Audit Practice Manual – Revised 395


Reporting and Finalization Phase –
Audit Completion Checklist

Procedures Notes

We have considered with whom in governance to communicate and


appropriately communicated audit matters of governance interest arising
from the audit of the financial statements

We have also informed those charged with governance of uncorrected


misstatements aggregated by us during the audit that were determined by
management to be immaterial, both individually and in the aggregate, to the
financial statements taken as a whole.

Need of Specialists

We have determined the need for a specialist (such as CIS Specialist and tax
specialists etc.) and defined the role and responsibility of the specialist.

We have obtained feedback from the specialists on issues arising from their
work and appropriately considered the results of their work in the audit

We have obtained feedback from the specialists on issues arising from their
work and appropriately considered the results of their work in the audit.

Other independent auditor

When the work of another independent auditor has been used, we have:

n considered our participation in the audit (as principal auditor or other


auditor)

n determined how the work of the other auditor will affect the audit

n considered the professional competence and independence of the other


auditor in the context of the specific assignment

n shared information with the other auditor

When the work of another independent auditor has been used we have:

n obtained sufficient appropriate audit evidence that the work of the other
independent auditor is adequate for our purpose, in the context of the
specific assignment

n considered significant findings from the other independent auditor and


other matters affecting the financial information of the component and
appropriately addressed the findings

Audit Practice Manual – Revised 396


Reporting and Finalization Phase –
Audit Completion Checklist

Procedures Notes

We have considered the significant findings of the other independent auditor


and other matters affecting the financial information of the component and
determined whether the work of the other auditor can be used.

We have obtained written representation from the other independent auditor


regarding their compliance with the independence, accounting, auditing and
reporting requirements.

If it was concluded that the work of the other auditor cannot be used and we
have not been able to perform sufficient additional audit procedures
regarding the financial information of the component audited by the other
auditors we have expressed a qualified opinion or disclaimer of opinion
because there is a limitation in the scope of the audit.

If our audit opinion on the financial statements as a whole is based solely on


the audit report of another auditor regarding the audit of one or more
components, we have stated in our report that fact clearly and have indicated
the magnitude of the portion of financial statements audited by the other
auditor.

External expert

We have considered the need for use of an external expert, assessed the
professional competence and objectivity of the expert, documented our
decision to rely on the work of the expert and obtained audit evidence
regarding the scope of the expert’s work.

We have obtained sufficient appropriate audit evidence that the work of the
external expert was adequate for our purpose, in the context of the specific
assignment. If the results of the expert’s work did not provide sufficient
appropriate audit evidence or if the results were not consistent with other
audit evidence, we have resolved the matter.

We have made appropriate reference to the work of an expert based on


whether the report is modified.

Audit Practice Manual – Revised 397


Reporting and Finalization Phase –
Audit Completion Checklist

Procedures Notes

Internal audit

We have obtained an understanding of the activities of internal audit and


performed a preliminary assessment of the internal audit function sufficient
to identify those activities that are relevant to planning our audit. Where
relevant, we have documented our decision to rely on the work of the
internal auditors, including a discussion of our assessment of the competence
and objectivity of the internal audit department and the planned use of
internal audit and considered use of the ‘Internal Audit Function Evaluation’
working paper..

If the work of internal audit has been used, we have obtained sufficient
appropriate audit evidence that their work is adequate for our purpose, in the
context of the specific assignment and we have completed the ‘Internal
Audit Function Evaluation’ working paper.

When we used the specific work of internal audit, we evaluated and tested
that work to confirm its adequacy for our purposes and completed the
‘Internal Audit Function Evaluation’ working paper.

Specific topics

Consideration has been given to other specific topics. Such topics include:

n long -term investments

n segment information

n comparative financial statements

n corresponding figures

n opening balances

n attendance at physical inventory counting

n environmental matters

n derivative financial instruments

Audit Practice Manual – Revised 398


Reporting and Finalization Phase –
Audit Completion Checklist

Procedures Notes

Consideration has been given to other specific topics and procedures


appropriate for the process analysis performed.

Consideration has been given to other specific topics and procedures


appropriate for substantive procedures, evaluation and reporting performed
and appropriate conclusions reached.

Other Information

We have read the other information to identify material inconsistencies with


the audited financial statements.

Audit Practice Manual – Revised 399


Reporting and Finalization Phase –
Audit Completion Checklist

Audit Completion Checklist – Part II


Client:

Period covered by examination:

Check in
S. No. DESCRIPTION Appropriate Column
Yes No N/A

1. Ensure that final Trial Balance has been prepared by the client
after incorporating all Adjusting Journal Entries, Reclassifying
Journal Entries (if any) by himself or advised by the auditors.

2. Ensure that closing and opening entries have been passed into the
books of account of the Company by the client.

3. Ensure that all requirements of the firm's covering letter have been
met and marked as "Received" on the covering letter by the Job
Incharge.

4. Ensure that the copy of covering letter is cross referenced with the
documents received in respect of the requirements of covering
letter. Ensure that we have obtained the representation letter on
financial statements matters

5. After receiving all requirements as stated in the covering letter,


ensure that the required number of copies of financial statements
have been signed and despatched to the client.

6. Management letter has been sent to the client. (CCG compliance


for all listed compnaies and prefereably for unlisted companies)

7. Willingness letter" has been sent to the client preferably in


response to client's letter.

8. Fee bills have been prepared and sent to the client.

9. Fee revision letter, if required this year, is sent.

10. Ensure that the auditors’ report is dated before presenting for
signature to the Partner. This date should not be earlier than the
date financial statements were approved by the Board.

Audit Practice Manual – Revised 400


Reporting and Finalization Phase –
Audit Completion Checklist

Check in
S. No. DESCRIPTION Appropriate Column
Yes No N/A

The above steps are common for both public and private companies.

In addition to the above the following steps are exclusive for public companies:

11. After receiving dummy financial statements from client, it should


be carefully compared with the initialled accounts and other
information (i.e., directors' report, ratio analysis etc.).

12. Ensure that Notice of Annual General Meeting (AGM) has been
received and noted for attendance.

13. Ensure that all formalities of Code of Corporate Governance have


been complied with and the checklist for Code of Corporate
Governance compliance has been filled and reviewed by
Engagement Manager and Engagement Partner.

Date Engagement Manager

Date Engagement Manager

Audit Practice Manual – Revised 401


Reporting and Finalization Phase –
Culmination Audit Meeting Agenda and Minutes

Subsequent Events Review Checklist

Client: Initial Date

Completed By:

Year end: Reviewed By:

Yes / No / N.A. (Any


note on separate
sheets)
Events Discovered upto Signing of Audit Report

1. Adjustable Events:

A. Have under given possible events (alongwith checking


procedures) which may be adjusted been identified clearly,
discussed with client’s 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.

n 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.

Audit Practice Manual – Revised 402


Reporting and Finalization Phase –
Culmination Audit Meeting Agenda and Minutes

Yes / No / N.A. (Any


note on separate
sheets)

2. Non-adjustable events: (Only disclose if material)

B. Have under noted possible events been discussed with


client’s 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.

Audit Practice Manual – Revised 403


Reporting and Finalization Phase –
Culmination Audit Meeting Agenda and Minutes

Yes / No / N.A. (Any


note on separate
sheets)

q. Financial arrangements made but disbursements where


not made.

C. Have evidences of such above events been documented and


enclosed?

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.

Audit Practice Manual – Revised 404


Reporting and Finalization Phase –
Representation Letter

Format of Representation Letter


[To be typed on client letterhead]
[Date of approval of accounts by the Board]

(Firm's Name)

Chartered Accountants

(Firm's Address)

Dear Sirs,

Audit for the year ended ______________________

This representation letter is provided in connection with your audit of the balance sheet of [name
of Company] (the Company), as of [date], and the related profit and loss account, statements of
cash flows and changes in equity for the year then ended for the purpose of expressing an
opinion as to whether these financial statements give a true and fair view of the financial
position of the company and of the results of its operations and its cash flows in accordance with
the approved accounting standards as applicable in Pakistan and the requirements of the
Companies Ordinance, 1984.

We acknowledge our responsibility for the fair presentation of the financial statements in
conformity with approved accounting standards and the requirements of the Companies
Ordinance, 1984 and we approve the financial statements.

Certain representations in this letter are described as being limited to matters that are material.
We understand that items are considered material if they involve an omission or misstatement of
accounting information that could influence the economic decisions of users taken on the basis
of the financial statements. Materiality depends on the size of the item or error judged in the
particular circumstances of its omission or misstatement.

We have made appropriate inquiries of directors and officers of the Company with the relevant
knowledge and experience. Accordingly, we confirm, to the best of our knowledge and belief,
the following representations:

1. The financial statements referred to above are presented fairly, in all material respects, in
accordance with approved accounting standards as applicable in Pakistan and the
requirements of the Companies Ordinance, 1984.

2. The accounting policies, which are material or critical in determining the results for the
year or state of affairs are set out in the accounts and are consistent with those adopted in
the preparation of the accounts for the previous accounting period.

Audit Practice Manual – Revised 405


Reporting and Finalization Phase –
Representation Letter

3. We have made available to you all books of account and supporting documentation and all
minutes of meetings of shareholders and the Board of Directors, and summaries of actions
of meetings held after period end for which minutes have not yet been prepared.

4. We confirm that all transactions entered during the year have been approved at appropriate
level according to materiality levels approved by the Board of Directors.

5. There has been no known actual or possible non-compliance with laws and regulations that
could have a material effect on the financial statements in the event of non-compliance.

6. We confirm that:

(a) We understand that the term “fraud” includes misstatements resulting from
fraudulent financial reporting and misstatements resulting from misappropriation of
assets. Misstatements resulting from fraudulent financial reporting involve
intentional misstatements or omissions of amounts or disclosures in financial
statements to deceive financial statement users. Misstatements resulting from
misappropriation of assets involve the theft of an entity’s assets, often accompanied
by false or misleading records or documents in order to conceal the fact that the
assets are missing.

(b) We acknowledge responsibility for the implementation and operation of accounting


and internal control systems designed to prevent and detect fraud and error.

(c) We have disclosed to you the results of our assessment of the risks that the financial
statements may be materially misstated as a result of fraud.

(d) We have disclosed to you all significant facts relating to any known frauds or
suspected frauds that may have affected the Company [or There have been no
instances of frauds or suspected frauds that may have affected the Company].

7. We believe the effects of uncorrected financial statement misstatements (summarized in


the accompanying schedule) are immaterial, both individually and in the aggregate, to the
financial statements taken as a whole. [Summary of uncorrected financial statement
misstatements should be attached.]

8. We confirm the completeness of the information provided to you regarding the


identification of related parties and regarding transactions with such parties that are
material to the financial statements. The identity of, and balances and transactions with,
related parties have been properly recorded and when appropriate, adequately disclosed in
the financial statements. The records required by listing regulations in respect of related
party transactions have been adequately maintained and the prices have been determined
in accordance with the guidelines provided therein. We understand that, as defined in
International Accounting Standard 24, Related Party Disclosures, parties are considered to
be related if one party has the ability to control the other party or exercise significant
influence over the other party in making financial and operating decisions. Related party
transactions are transfers of resources or obligations between related parties, regardless of
whether a price is charged.

Audit Practice Manual – Revised 406


Reporting and Finalization Phase –
Representation Letter

9. All sales transactions are final and there are no side agreements with customers or other
terms that allow for the return of merchandise, except for conditions covered by the usual
and customary warranties.

10. Receivables reported in the financial statements represent valid claims against debtors for
sales or other charges arising on or before the balance sheet date and appropriate
provisions have been made for losses that may be sustained on un-collectible receivables.

11. We have no plans or intentions that may materially alter the carrying value or
classification of assets and liabilities reflected in the financial statements. We believe that
the carrying amounts of all material assets will be recoverable.

12. We have no plans to abandon lines of product or other plans or intentions on behalf of the
Company that will result in any excess or obsolete inventory, and no inventory is stated at
an amount in excess of net realizable value.

13. We confirm that we have reviewed all financial assets and liabilities outstanding as of
[balance sheet date] and have correctly classified them as either:

n financial assets or liabilities held for trading;

n held-to maturity investments;

n loans and receivables originated by the Company;

n available for sale financial assets; or

n other financial liabilities in accordance with the requirements of IAS 39, Financial
Instruments: Recognition and Measurement, and that they are appropriately
recorded at their fair value, amortized cost or cost based on their classification.

14. We have accounted for derivatives and hedging activities in accordance with International
Financial Reporting Standards and complied with the applicable hedge accounting,
designation, documentation and effectiveness assessment requirements of these standards.

[Depending on the volume and complexity of derivative activities, representations about


derivative financial instruments may also include representations about:

n management’s objectives with respect to derivative financial instruments, for


example, whether derivatives are used for hedging or speculative purposes;

n the financial statement assertions concerning derivative financial instruments, for


example:

n the records reflect all derivative transactions;

n all embedded derivative instruments have been identified;

Audit Practice Manual – Revised 407


Reporting and Finalization Phase –
Representation Letter

n the assumptions and methodologies used in the derivative valuation models


are reasonable;

n whether all transactions have been conducted at arm’s length and at fair
market value;

n the terms of derivative transactions;

n whether there are any side agreements associated with any derivative
instruments;

n whether the entity has entered into any written options; and

n whether the entity complies with the documentation requirements of the


financial reporting framework for derivatives that are conditions precedent to
specified hedge accounting treatments.]

15. Information regarding financial risks exposure and our financial risk management
objectives and policies has been adequately disclosed in the financial statements, as
required by IAS 32, Financial Instruments: Disclosure and Presentation.

16. Presentation and disclosure of the fair value measurements of material assets, liabilities
and components of equity are in accordance with International Financial Reporting
Standards. The amounts disclosed represent our best estimate of fair value of assets and
liabilities required to be disclosed by these standards. The measurement methods and
significant assumptions used in determining fair value have been applied on a consistent
basis, are reasonable and they appropriately reflect our intent and ability to carry out
specific courses of action on behalf of the Company where relevant to the fair value
measurements or disclosures.

[In addition to the general representation, other situations may exist where more specific
representations may be considered for inclusion. For example, the engagement team may
wish to obtain representations specific to an asset or liability requiring fair value
measurements depending on its nature, materiality and complexity.

Depending on the nature, materiality and complexity of fair values, management


representations about fair value measurements and disclosures contained in the financial
statements also may include representations about:

n specific assets or liabilities requiring fair value measurements;

n the basis used by management to overcome the presumption relating to the use of
fair value set forth under the entity’s financial reporting framework;

n the completeness and appropriateness of disclosures related to fair values under the
entity’s financial reporting framework;

n whether subsequent events require adjustment to the fair value measurements and
disclosures included in the financial statements.]

Audit Practice Manual – Revised 408


Reporting and Finalization Phase –
Representation Letter

17. The Company has satisfactory title to all assets and there are no liens or encumbrances on
the company’s assets, except for those that are disclosed in Note(s) ___ to the financial
statements. Fixed assets are depreciated at appropriate rates to reduce the assets to their
estimated residual value at the end of their expected useful lives. Addition to fixed assets
during the year represent actual capital expenditure and no expenditure of a capital nature
was charged to the operations of the company during the year. Fixed assets sold during the
year were properly accounted for in the books of the company.

18. The following have been properly recorded and when appropriate, adequately disclosed in
the financial statements:

n losses arising from sale and purchase commitments;

n agreements and options to buy back assets previously sold;

n assets pledged as collateral;

n off-balance sheet activities, including transactions with special purpose entities, non-
consolidation and revenue recognition;

n significant common ownership or management control relationships;

n changes in accounting principles affecting consistency;

19. We have recorded or disclosed, as appropriate, all liabilities, both actual and contingent,
and have disclosed in Note _____ to the financial statements all guarantees that we have
given to third parties.

20. The estimated financial effect of pending or threatened litigation and claims against the
Company has been properly recorded or disclosed in the financial statements. Except as
disclosed, we are not aware of any additional claims that have been or are expected to be
received.

21. Except as disclosed in the financial statements or footnotes to the financial statements,
there are no:

n other gain or loss contingencies or other liabilities that are required to be recognized
or disclosed in the financial statements, including liabilities or contingencies arising
from environmental matters resulting from illegal or possibly illegal acts, or possible
violations of human rights legislation;

n material transactions that have not been properly recorded in the accounting records
underlying the financial statements;

22. The Company has complied with all aspects of contractual agreements that could have a
material effect on the financial statements in the event of non-compliance.

Audit Practice Manual – Revised 409


Reporting and Finalization Phase –
Representation Letter

23. There are no formal or informal compensating balance arrangements with any of our cash
and investment accounts. We have no line of credit arrangements other than those
disclosed in Note ___ to the financial statements.

25. There are no significant matters that have arisen that would require a restatement of the
corresponding figures.

[This representation would be relevant only when comparatives are provided as


corresponding figures.]

26. We confirm that all the details /assessment orders etc. have been given to you. We also
confirm that adequate provisions have been made including for assessment years where
assessments have not yet been finalized.

27. We have reviewed all estimates and basis used for recording transactions (including staff
benefits), and confirm that the same are reasonable, relevant and consistently applied in
assessing assets and liabilities

28. There have been no events subsequent to the balance sheet date which require adjustment
of or disclosure in the financial statements or Notes thereto, except as disclosed in the
Note ____ to the financial statements. Should any of such events occur between the date of
this letter and the date of AGM we shall let you know.

[Additional representations to address specific circumstances of the client

The engagement team would consider asking management to provide representations with
respect to material matters including matters impacted by:

n significant assumptions made by management;

n management intent;

n information that is only known to management.

The purpose of obtaining representations from management with respect to these


types of matters is to confirm that:

n the engagement team has an understanding of management’s intent and the relevant
assumptions made with respect to these matters; and

n management has provided the engagement team with all relevant information in
relation to these matters, i.e., that there are no undisclosed issues such as side
agreements that may impact the engagement team’s conclusions about the matters]

Yours faithfully,

Chief Executive Finance Director/Manager

Audit Practice Manual – Revised 410


Reporting and Finalization Phase –
Exceptions and Control Weaknesses

Exceptions and Control Weaknesses

Client:

Year end:

Prepared By: Reviewed By:

Exceptions / Control Weaknesses Noted Manager / Partners Comments


Or Disposals

Risk Addressed

Audit Practice Manual – Revised 411


Reporting and Finalization Phase –
Exceptions and Control Weaknesses

Exceptions / Control Weaknesses Noted Manager / Partners Comments


Or Disposals

Recommendation

Audit Practice Manual – Revised 412


Reporting and Finalization Phase –
Exceptions and Control Weaknesses

Client: Prepared by Approved by

Subject: Notes for Management Letter Comments

Period / Year:

Description of Issue (include specific examples):

How was issue noted (reference to working papers, if applicable):

Audit Practice Manual – Revised 413


Reporting and Finalization Phase –
Exceptions and Control Weaknesses

Suggestion for improvement:

Client’s comments:

Comment included in letter: Yes No

Audit Practice Manual – Revised 414


Reporting and Finalization Phase –
Exceptions and Control Weaknesses

If no state reasons:

Audit Practice Manual – Revised 415


Reporting and Finalization Phase –
Letter to the Board of Directors

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:

n All additions to assets (including investments) (over the limits in Companies


Ordinance)
n All disposals of assets
n Bonuses
n Level of provisions
n Transfers
n Items of management estimates and judgement
n Deferral or Capitalisation of expenditure
n 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/-

Audit Practice Manual – Revised 416


Reporting and Finalization Phase –
Format of Audit Report to the Members

Auditors’ Report To The Members - Form 35A


THE COMPANIES ORDINANCE, 1984
[See section 255(3) and rule 17A]

AUDITORS’ REPORT TO THE MEMBERS

We have audited the annexed balance sheet of ____________________________________ as at


_________________ and the related *1profit and loss account, cash flow statement and
statement of changes in equity together with the notes forming part thereof, for the year then
ended and we state that we have obtained all the information and explanations which, to the best
of our knowledge and belief, were necessary for the purposes of our audit.

It is the responsibility of the company’s management to establish and maintain a system of


internal control, and prepare and present the above said statements in conformity with the
approved accounting standards and the requirements of the Companies Ordinance, 1984. Our
responsibility is to express an opinion on these statements based on our audit.

We conduct our audit in accordance with the auditing standards as applicable in Pakistan. These
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the above said statements are free of any material misstatement. An audit includes
examining on a test basis, evidence supporting the amounts and disclosures in the above said
statements. An audit also include assessing the accounting policies and significant estimates
made by management, as well as, evaluating the overall presentation of the above said
statements. We believe that our audit provides a reasonable basis for our opinion and, after due
verification, we report that—

(a) In our opinion, proper books of accounts have been kept by the company as required by
the Companies Ordinance, 1984;

(b) in our opinion—

(i) the balance sheet and profit and loss account together with the notes thereon have
been drawn up in conformity with the Companies Ordinance, 1984, and are in
agreement with the books of accounts and are further in accordance with accounting
policies consistently applied *2 except for the changes as stated in note(s) with
which we concur;

(ii) the expenditure incurred during the year was for the purpose of the company’s
business; and

(iii) the business conducted, investments made and the expenditure incurred during the
year were in accordance with the objects of the company;

Audit Practice Manual – Revised 417


Reporting and Finalization Phase –
Format of Audit Report to the Members

(c) in our opinion and to the best of our information and according to the explanations given
to us, the balance sheet, *1 profits and loss account, cash flow statement and statement of
changes in equity together with the notes forming part thereof conform with approved
accounting standards as applicable in Pakistan, and, give the information required by the
Companies Ordinance, 1984, in the manner so required and respectively give a true and
fair view of the state of the company’s affairs as at ___________________ and of the *3
profit/loss, its cash flows and changes in equity for the year then ended; and

(d) in our opinion *4 Zakat deductible at source under the Zakat and Ushr Ordinance, 1980
(XVIII of 1980), was deducted by the company and deposited in the Central Zakat Fund
established under section 7 of that Ordinance.

Date Signature
[Name(s) of Auditors]
Place

NOTES

Where applicable—

*1. Substitute “income and expenditure account” in case of association not for profit.

*2. Where there is no change in the accounting policy(ies) the portion “except for the changes
as stated in note(s) with which we concur” may be omitted.

*3. Substitute “surplus or deficit” in case of association not for profit.

*4. Where no Zakat is deductible, substitute “no Zakat was deductible at source under the
Zakat and Ushr Ordinance, 1980”.

Where any of the matter referred to in the Auditors’ Report is answered in the negative or
with a qualification, the report shall state the reason for such answers alongwith the factual
position to the best of the auditors’ information.

In the case of a non-listed company reference to “cash flow statement or source and
application of funds and statement of changes in equity and opinion thereon may be
omitted”.

Audit Practice Manual – Revised 418


Reporting and Finalization Phase –
Format of Audit Report to the Members

Auditors’ Report To The Members or Directors in Case of


Branches of Foreign Banks - Form 35B
THE COMPANIES ORDINANCE, 1984
[See section 255(3) and rule 17B]

AUDITORS’ REPORT TO THE MEMBERS OR DIRECTORS


IN CASE OF BRANCHES OF FOREIGN BANKS

We have audited the annexed balance sheet of ____________________ Bank as at the 31st
December __________, and the related profit and loss account, cash flow statement and
statement of changes in equity together with the notes forming part thereof (here in after referred
to as the ‘financial statements’) for the year then ended, in which are incorporated the unaudited
certified returns from the branches except for________ branches which have been audited by us
and we state that we have obtained all the information and explanations which, to the best of our
knowledge and belief were necessary for the purposes of our audit.

It is the responsibility of the Bank’s Board of Directors/Management to establish and maintain a


system of internal control, and prepare and present the financial statements in conformity with
approved accounting standards and the requirements of the Banking Companies Ordinance, 1962
(LVII of 1962), and the Companies Ordinance, 1984 (XLVII of 1984). Our responsibility is to
express an opinion on these statements based on our audit.

We conducted our audit in accordance with the International Standards on Auditing as applicable
in Pakistan. These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of any material misstatement. An audit
includes examining, on a test basis, evidence supporting amounts and disclosures in the financial
statements. An audit also includes assessing accounting policies and significant estimates made
by management, as well as, evaluating the overall presentation of the financial statements. We
believe that our audit provides a reasonable basis for our opinion and after due verification,
which in case of loans and advances covered more than sixty per cent of the total loans and
advances of the bank, we report that:—

(a) in our opinion, proper books of accounts have been kept by the _______________
Bank/branches as required by the Companies Ordinance, 1984 (XLVII of 1984), and the
returns referred to above received from the branches have been found adequate for the
purposes of our audit;

(b) in our opinion—

(i) the balance sheet and profit and loss account together with the notes thereon have
been drawn up in conformity with the Banking Companies Ordinance, 1962 (LVII
of 1962), and the Companies Ordinance, 1984 (XLVII of 1984), and are in
agreement with the books of account and are further in accordance with accounting
policies consistently applied *1 (except for the changes as stated in note(s) with
which we concur);

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(ii) the expenditure incurred during the year was for the purpose of the Bank’s/branches’
business; and

(iii) the business conducted, investments made and the expenditure incurred during the
year were in accordance with the objects of the Bank/branches and the transactions
of the Bank/branches which have come to our notice have been within the powers of
the Bank/branches;

(c) in our opinion and to the best of our information and according to the explanations given
to us the balance sheet, profit and loss account, cash flow statement and statement of
changes in equity together with the notes forming part thereof conform with approved
accounting standards as applicable in Pakistan, and give the information required by the
Banking Companies Ordinance, 1962 (LVII of 1962), and the Companies Ordinance, 1984
(XLVII of 1984), in the manner so required and give a true and fair view of the state of the
Bank’s/branches’ affairs as at the 31st December, and its true balance of the profit or loss,
its cash flows and changes in equity for the year then ended; and

(d) in our opinion *2 Zakat deductible at source under the Zakat and Ushr Ordinance, 1980
(XVIII of 1980), was deducted by the Bank/branches and deposited in the Central Zakat
Fund established under section 7 of that Ordinance.

Signature
[Name(s) of Auditors]

Date

Place

Notes

Where applicable—

*1. Where there is no change in the accounting policy or policies the portion “except for
changes as stated in note(s)--- with which we concur” may be deleted.

*2. Where no Zakat is deductible, substitute “no Zakat was deductible at source under the
Zakat and Ushr Ordinance, 1980 (XVIII of 1980)”.

*3. Any other matter which the auditor considers should be brought to the notice of the
Members or Directors in case of foreign banks, should also be stated in the report.

Where any of the matters referred to in the Auditor’s Report is answered in the negative or
with a qualification, the report shall state the reason for such answers alongwith the factual
position to the best of auditors’ information.

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Reporting and Finalization Phase –
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Auditors’ Report To The Members of


a Non-Life Insurance Company

We have audited the annexed financial statements comprising of: -

(i) balance sheet;

(ii) profit and loss account;

(iii) statement of changes in equity;

(iv) cash flow statement;

(v) revenue account;

(vi) statement of premium;

(vii) statement of claims;

(viii) statement of expenses;

(ix) statement of investment income;

(x) statement of claims analysis; and

(xi) statement of exposures

of ___________________ as at ___________________ together with the notes forming part


thereof, for the year then ended.

It is the responsibility of the Company’s Board of Directors/Management to establish and


maintain a system of internal control, and prepare and present the financial statements in
conformity with the International Accounting Standards as applicable in Pakistan and the
requirements of the Insurance Ordinance, 2000 (XXXIX of 2000) and the Companies Ordinance,
1984 (XLVII of 1984). Our responsibility is to express an opinion on these statements based on
our audit.

We conducted our audit in accordance with the International Standards on Auditing. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting policies used and significant estimates made by
management, as well as, evaluating the overall financial statements presentation. We believe that
our audit provides a reasonable basis for our opinion.

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In our opinion -----

(a) proper books of accounts have been kept by the Company as required by the Insurance
Ordinance, 2000;

(b) the financial statements together with the notes thereon have been drawn up in conformity
with the Insurance Ordinance, 2000 and the Companies Ordinance,1984, and accurately
reflect the books and records of the Company;

(c) The financial statements together with the notes thereon present fairly, in all material
respects, the state of the Company’s affairs as at _________________ in accordance with
International Accounting Standards as applicable in Pakistan, and the information required
to be disclosed by the Insurance Ordinance, 2000 and the Companies Ordinance, 1984;
and

(d) Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980),
was deducted by the company and deposited in the Central Zakat Fund established under
Section 7 of that Ordinance.

Date ___________________ Signature

Place ___________________ [Name(s) of Auditors]

Notes

1. Where no Zakat is deductible, substitute “ no Zakat was deductible at source under the
Zakat and Ushr Ordinance, 1980”.

2. Where any of the matter referred to in the Auditors’ Report is answered in the negative or
with a qualification, the report shall state the reason for such answers along with the
factual position to the best of the auditors’ information.

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Auditors’ Report To The Members of


a Life Insurance Company
We have audited the annexed financial statements comprising of: -

(i) balance sheet;

(ii) profit and loss account;

(iii) statement of changes in equity;

(iv) cash flow statement;

(v) revenue account;

(vi) statement of premium;

(vii) statement of claims;

(viii) statement of expenses; and

(ix) statement of investment income

of ___________________ as at ___________________ together with the notes forming part


thereof, for the year then ended.

It is the responsibility of the Company’s Board of Directors/Management to establish and


maintain a system of internal control, and prepare and present the financial statements in
conformity with the International Accounting Standards as applicable in Pakistan and the
requirements of the Insurance Ordinance, 2000 (XXXIX of 2000) and the Companies Ordinance,
1984 (XLVII of 1984). Our responsibility is to express an opinion on these statements based on
our audit.

We conducted our audit in accordance with the International Standards on Auditing. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting policies used and significant estimates made by
management, as well as, evaluating the overall financial statements presentation. We believe that
our audit provides a reasonable basis for our opinion.

In our opinion -----

(a) proper books of accounts have been kept by the Company as required by the Insurance
Ordinance, 2000;

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(b) the financial statements together with the notes thereon have been drawn up in conformity
with the Insurance Ordinance, 2000 and the Companies Ordinance,1984, and accurately
reflect the books and records of the Company;

(c) The financial statements together with the notes thereon present fairly, in all material
respects, the state of the Company’s affairs as at _________________ in accordance with
International Accounting Standards as applicable in Pakistan, and the information required
to be disclosed by the Insurance Ordinance, 2000 and the Companies Ordinance, 1984;

(d) The apportionment of assets, liabilities, revenue and expenses between two or more funds
has been performed in accordance with the advice of the appointed actuary;

(e) Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980),
was deducted by the company and deposited in the Central Zakat Fund established under
Section 7 of that Ordinance.

Date ___________________ Signature

Place ___________________ [Name(s) of Auditors]

Notes

1. Where no Zakat is deductible, substitute “ no Zakat was deductible at source under the
Zakat and Ushr Ordinance, 1980”.

2. Where any of the matter referred to in the Auditors’ Report is answered in the negative or
with a qualification, the report shall state the reason for such answers along with the
factual position to the best of the auditors’ information.

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Reporting and Finalization Phase –
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Auditors’ Report To The Certificate Holders - Form No. XI


[See rule 9 (3) of Modaraba Companies and Modaraba Rules, 1981]

AUDITORS’ REPORT TO THE CERTIFICATE HOLDERS

We have audited the annexed balance sheet of ___________________ modaraba as at


___________________ and the related profit and loss account, cash flow statement and
statement of changes in equity together with the notes forming part thereof (hereinafter referred
to as the financial statements), for the year then ended and we state that we have obtained all the
information and explanations which, to the best of our knowledge and belief, were necessary for
the purposes of our audit.

These financial statements are the modaraba company’s (name of the modaraba company to be
indicated) responsibility who is also responsible to establish and maintain a system of internal
control, and prepare and present the above said statements in conformity with the approved
accounting standards as applicable in Pakistan and the requirements of the Modaraba Companies
and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980), and the Modaraba
Companies and Modaraba Rules, 1981. Our responsibility is to express an opinion on these
statements based on our audit.

We conducted our audit in accordance with the auditing standards as applicable in Pakistan.
These standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of any material misstatement. An audit includes
examining on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting policies and significant estimates
made by the modaraba company, as well as, evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our opinion and, after due
verification, we report that -

(a) in our opinion, proper books of accounts have been kept by the modaraba company in
respect of …………… modaraba as required by the Modaraba Companies and Modaraba
(Floatation and Control) Ordinance, 1980 (XXXI of 1980), and the Modaraba Companies
and Modaraba Rules, 1981;

(b) in our opinion:

(i) the balance sheet and profit and loss account together with the notes thereon have
been drawn up in conformity with the Modaraba Companies and Modaraba
(Floatation and Control) Ordinance, 1980 (XXXI of 1980) and the Modaraba
Companies and Modaraba Rules, 1981, and are in agreement with the books of
accounts and are further in agreement with accounting policies consistently applied
*1 except for the changes as stated in note(s) ……. with which we concur;

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(ii) the expenditure incurred during the year was for the purpose of the modaraba’s
business; and

(iii) the business conducted, investments made and the expenditure incurred during the
year were in accordance with the objects, terms and conditions of the modaraba;

(c) in our opinion and to the best of our information and according to the explanations given
to us, the balance sheet, profit and loss account, cash flow statement and statement of
changes in equity together with the notes forming part thereof conform with approved
accounting standards as applicable in Pakistan, and, give the information required by the
Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of
1980), and the Modaraba Companies and Modaraba Rules, 1981, in the manner so
required and respectively give a true and fair view of the state of the modaraba company’s
affairs as at ……………. and of the profit or loss, its cash flows and changes in equity for
the year then ended; and

(d) in our opinion, *2 Zakat deductible at source under the Zakat and Ushr Ordinance, 1980
(XVIII of 1980), was deducted by the modaraba company and deposited in the Central
Zakat Fund established under section 7 of that Ordinance.

Signature

(Name(s) of Auditors)

Date ___________________

Place ___________________

Notes

Where applicable –

*1. Where there is no change in the accounting policy (ies) the portion “except for the changes
as stated in note(s) ……. with which we concur” m ay be omitted.

*2. Where no Zakat is deductible, substitute “no Zakat was deductible at source under the
Zakat and Ushr Ordinance, 1980”.

Where any of the matter referred to in the auditors’ report is answered in the negative or
with a qualification, the report shall state the reason for such answers along with the
factual position to the best of the auditor’s information.”

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Auditors’ Report To The 1Trustees / Board of Governors /


Management Committee
(ACCRUAL BASIS OF ACCOUNTING)

[ICAP-ATR – 17 (Revised-2004)]

We have audited the annexed balance sheet of the ___________________ as at


___________________ and the related income and expenditure account and cash flow statement
together with the notes forming part thereof (here-in-after referred to as the financial statements
for the year then ended).

It is the responsibility of the trustees / board of governors / management committee to establish


and maintain a system of internal control, and prepare and present the financial statements in
conformity with the approved accounting standards as applicable in Pakistan. Our responsibility
is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting policies used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We
believe that our audit provides a reasonable basis for our opinion.

In our opinion the financial statements present fairly in all material respects the financial
position of the ___________________ as at ___________________ and of its surplus/deficit
and cash flow for the year then ended in accordance with the approved accounting standards as
applicable in Pakistan.

Date ___________________ Signature


[Name(s) of Auditors]

Place ___________________

Note: 1. Select wherever is appropriate.

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Auditors’ Report To The 1Trustees / Board of Governors /


Management Committee
(OTHER THAN ACCRUAL BASIS OF ACCOUNTING)

[ICAP-ATR – 17 (Revised-2004)]

We have audited the annexed receipt and disbursement account / receipt and expenditure account
of the ___________________as at ___________________together with the notes forming
part thereof (here-in-after referred to as the statement(s) for the year then ended).

It is the responsibility of the trustees / board of governors / management committee to establish


and maintain a system of internal control, and prepare and present the statement(s) in conformity
with the cash receipt and disbursement / cash receipt and expenditure incurred basis as described
in Note. X to the accounts. Our responsibility is to express an opinion on these statements based
on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the statements are free of material misstatement. An audit includes examining on a test
basis, evidence supporting the amounts and disclosures in the statements. An audit also includes
assessing the accounting policies used and significant estimates made by management, as well as
evaluating the overall presentation of the statements. We believe that our audit provides a
reasonable basis for our opinion.

As described in Note X, the statement(s) have been prepared on the (cash receipts and
disbursements basis / cash receipt and expenditure basis, etc.) of accounting, which is a
comprehensive basis of accounting other than generally accepted accounting principles.

In our opinion the statement(s) present(s) fairly, in all material respect(s), the cash receipt and
disbursement or cash receipt and expenditure, etc. of the ___________________for the year ended
___________________on the basis of accounting described in Note X to the statement.

Date ___________________ Signature


[Name(s) of Auditors]

Place ___________________

Note: 1. Select wherever is appropriate.

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Auditors’ Report on Consolidated Financial Statements -


Form 35C
[See rule 17C]

THE COMPANIES ORDINANCE, 1984

AUDITORS’ REPORT ON CONSOLIDATED FINANCIAL STATEMENTS

We have audited the annexed consolidated financial statements comprising consolidated


Balance Sheet of ___________________and its subsidiary companies as at ______________
and the related consolidated Profit and Loss Account, consolidated Cash Flow Statement and
consolidated Statement of Changes in Equity together with the notes forming part thereof, for the
year then ended. We have also expressed separate opinions on the financial statements of
___________ and its subsidiary companies except for ________ and _______ which were
audited by other firm(s) of auditors whose report(s) has/have been furnished to us and our
opinion, in so far as it relates to the amounts included for such company(ies), is based solely on
the report(s) of such other auditors. These financial statements are the responsibility of the
Holding Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audit.

Our audit was conducted in accordance with the International Standards on Auditing and
accordingly included such tests of accounting records and such other auditing procedures as we
considered necessary in the circumstances.

In our opinion, the consolidated financial statements present fairly the financial position of
__________ and its subsidiary companies as at __________ and the results of their operations
for the year then ended.

Signature

(Name(s) of Auditors)

Date ____________

Place ____________

Note: Where any of the matter referred to in the Auditors’ Report is answered in the negative or
with a qualification, the report shall state the reason for such answers alongwith the
factual position to the best of the auditor’s information.

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Permanent Audit File –
Permanent Audit Working Papers File

PERMANENT AUDIT WORKING PAPERS FILE

Client

INDEX

Section No. Description

1. Formation Information and Regulation

2. Minutes of the Board of Directors, 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

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Permanent Audit Working Papers File

File ref. Description Date

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

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Permanent Audit Working Papers File

File ref. Description Date

5.1.5 Prospectus

Other

5.2 Minutes

5.2.1 Extracts of Important Minutes of Board of Directors Containing


decisions of Permanent nature.

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File ref. Description Date

5.2.2 Extracts of Important Minutes of Shareholder’s Meetings (e.g. AGM)

5.2.3 Other

5.3 Loans & Other Long Term Agreements.

5.3.1 Loans and Other Agreements of Permanent nature (e.g. long term loans
& lease agreements)

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Permanent Audit Working Papers File

File ref. Description Date

5.3.2 Other

5.4 Miscellaneous

Audit Practice Manual – Revised 434


Permanent Audit File –
Permanent File Update Form

Client:

Period:

Subject: Permanent File Update Form

I have reviewed the permanent audit file and updated the following as necessary:

Yes / No

General information about the client

Minutes, rules and regulations

Accounting policies and procedural information

Material relevant to the formation of the company

Taxation information

Other information likely to be of audit use for the next 2 years


(please specify)

Permanent file should include the following:

1 Copy of memorandum and articles of association, or excerpts thereon.

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2 Information about the clients ownership, organisation and personnel


practices, monitoring procedures and internal audit activities.

3 Information about the client’s business and industry.

4 List of related parties including owners, affiliates, directors and


management.

5 Copies of significant current agreements (e.g. loans, leases and other


contracts) with notes or highlights of sections relevant to the financial
statements.

6 Extracts of minutes of meetings of directors, shareholders or committees


which relate to matters of continuing significance (eg authorisations for
continuing or future actions).

7 Relevant copies or extracts from special reports or correspondence with


regulatory agencies.

8 Management letters (previous years).

9 Documentation of each significant accounting application.

10 Data relating to employee benefit plans (eg bonus, pension or share


option plans).

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Permanent File Update Form

11 Data relating to tax matters of continuing significance.

12 Chart of Accounts.

17 Engagement Letter.

18 Restrictions under loan agreements.

Carry Forward Statement

The following documents have been carried forward to next years audit file.

These documents remain up to date and relevant to the audit.

Signed ______________________

Date ________________________

Manager______________________

Date _________________________

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