Académique Documents
Professionnel Documents
Culture Documents
CHARTERED ACCOUNTANTS
OF PAKISTAN
The compliance with various standards, corporate regulations, and technical releases of
the Institute automatically assures the excellence in performance. The Institute, to assist
the review partners, managers, and field staff in these efforts, has evolved an Auditing
Practices Manual. Given the multi-variety of the corporate entities, any manual cannot be
prescriptive; this manual also is only descriptive. The working papers etc. are also only
sample forms and are not standards of the Institute as such. There might be a situation
where the members may need to supplement, amend, or add to this manual according to
the actual needs of the particular entity under audit by them.
In conclusion I would express my sincere appreciation for concerted efforts and long
hours put in for the preparation of this comprehensive Auditing Practices Manual by
members of the sub-committee, including Mr. Asad Ali Shah (Chairman), Mr. Ather Ali.
Mr. Hussain Lalani, Mr. Saad Kaliya, Mr. Shafiq Ahmed, Mr. Sharjeel Butt, Mr. Mazhar
H. Hameedi, Mr. Nadeem Yousuf Adil and last but not the least to Mr. Ahmed D. Patel,
Chairman Quality Control Review Committee, for his personal interest in completion of
this manual.
The Preface to the International Standards on Auditing (ISAs) issued by the IFAC states
that the objective of audit of financial statements is to enable the auditor to express an
opinion whether the financial statements are prepared, in all material respects, in
accordance with an identified reporting framework (which would mean accounting
standards applicable in Pakistan).
In order to arrive at a correct audit opinion in an efficient and effective manner, the audit
is to be conducted in accordance with the ISAs and related assurance services and
pronouncements issued by the Council of the Institute.
The manual does not envisage all possible corporate entities or circumstances, for
instance special purpose entities such as banks, airlines, insurance companies,
telecommunications and other utilities etc. may need substantial modifications, even
redesigning, to fully conform to the requisite requirements of ISAs etc.
The Quality Control Review Committee of the Institute hopes that the manual shall be of
great functional utility to its practicing members.
The committee expects the practicing members would follow the Manual in letter and
spirit.
The manual shall be updated to incorporate the latest requirements of the ISAs etc.
WORKING PAPERS
The working papers are not definitive but are only sample working papers that need to be
supplemented or amended or modified by the members in accordance with the
requirements of the entity under audit.
Chapter 1: Describes briefly the salient features of the audit process, including the
three phases of planning, execution and completion.
Chapter 2: Gives the contents of the Audit Planning File. Also included therein is
guidance on evaluation of accounting and internal control systems, the
internal control questionnaires including a guide on the evaluation of
general controls relating to Computerized Information Systems. Further,
model audit programs for a manufacturing entity, duly correlated with
possible audit assertions have also been included.
Volume 2
Chapter 3: Gives the contents of the Audit Execution File. This largely comprises of
the standard working paper schedules that are used to collect audit evidence
on the financial statement components, including lead schedules on such
components, referencing methodology and the possible wordings of the
conclusions.
Chapter 4: Gives the contents of the Completion and Reporting File. Also included
therein is a suggested completion checklist, the disclosure checklist based on
the requirements of the international accounting standards and the
requirements of the Companies Ordinance 1984 developed by the Institute,
the suggested formats of Management Representation letter, Letter to the
Board of Directors, Management Letter etc.
Chapter 1
Audit Process
1.1 Audit Process Chart 1-1
1.2 Overview of the Audit Process 1-2
Planning Phase 1-2
Execution Phase 1-3
Completion Phase 1-4
Chapter 2
Audit Planning File
2.1 Terms of Reference / Engagement 2-1
2.1.1 Suggested Engagement Letter 2-2
2.2 Overall Audit Plan
2.2.1 Client Profile 2-4
2.2.2 Understanding the Clients Business 2-5
Knowledge of Client Business 2-6
Significant Accounting Policies 2-8
Key Management Personnel 2-9
2.2.3 Factors that may Affect Clients Business 2-10
2.2.4 Critical Audit Areas/Significant Financial Statement Components 2-11
2.2.5 Risk Assessments, Accounting and Internal Control System 2-12
Documentation & Evaluation of Accounting and Internal Control
System 2-37
Internal Control Questionnaire 2-39
2.2.6 Audit Materiality 2-70
2.2.7 Review of Financial Performance of the Client 2-72
Suggested Format of Financial Performance Review 2-73
iii
2.3 Detailed Planning
2.3.1 Computer Information System (CIS) Checklist 2-75
2.3.2 Audit Programs 2-83
Sample Audit Programs 2-86
2.3.3 Analytical Review Procedures 2-145
Analytical Review of Balance Sheet and Profit & Loss Account 2-147
Ratio Analysis 2-155
2.4 Audit Administration & Other Matters
2.4.1 Staff Planning & Time Allocation 2-159
2.4.2 Daily Time Control/Staff Attendance Sheet 2-161
2.4.3 Job Costing/Recovery (based on minimum hourly charges
proposed by ICAP ATR 14) 2-162
2.4.4 Instructions from Client / Key Dates 2-163
2.4.5 List of Schedules Required from Client 2-164
2.4.6 Formats of Confirmation (Bank, Legal / Tax Advisor,
Debtor/Creditor etc) 2-168
Chapter 3
Audit Execution File
3.1 General Instructions for Documentation of Audit Execution File 3-1
3.2 Exceptions and Control Weaknesses 3-2
3.3 Audit Working Paper Guidelines 3-3
3.4 Significant Components of Balance Sheet and P & L Account
Lead Schedules with Conclusions 3-5
iv
Chapter 4
Audit Completion & Reporting File
4.1 Financial Statements 4-1
4.2 Workings of Cash Flow Statement 4-2
4.3 Audit Completion Checklist 4-3
4.4 Accounts Completion Checklist 4-5
4.5 Partners Review Notes & Queries 4-8
4.6 Summary Review Memorandum 4-9
4.7 Analytical Review of Balance Sheet and Profit & Loss Account 4-10
Ratio Analysis 4-18
4.8 Managers Review Notes & Queries 4-22
4.9 Management Representation Letter 4-23
Suggested Management Representation Letter 4-24
4.10 Sample Letter to the Board of Directors 4-27
4.11 Management Letter / Internal Control Memorandum 4-28
Suggested Format of Management Letter 4-29
4.12 Points Carried Forward to Next Year 4-30
4.13 Financial Statements Disclosure Checklist 4-31
4.14 Subsequent Events Review Checklist 4-32
4.15 Going Concern Review Checklist 4-34
Chapter 5
Permanent Audit File
5.1 Formation Information and Regulation 5-2
5.2 Minutes of Board Of Directors Meetings Containing Decisions of
Permanent Nature & Minutes of Annual General / Extraordinary Meetings 5-3
5.3 Loans & Other Long Term Agreements 5-4
5.4 Miscellaneous 5-5
v
Chapter 6
Summary of Some International Standards
on Auditing (ISAs)
vi
Audit Process
1-1
1.2 OVER VIEW OF THE AUDIT PROCESS
1. The Framework on the International Auditing Standards (ISAs) issued by the International
Federation of Accountants states that the objective of an audit of financial statements is to
enable the auditor to express an opinion whether the financial statements are prepared, in
all material respects, in accordance with an identified reporting framework (which would
mean applicable accounting standards in Pakistan). In order to arrive at a correct audit
opinion in an efficient and effective manner, the audit is to be conducted in accordance
with the ISAs.
2. The audit is designed to provide reasonable assurance that the financial statements taken as
whole are free from material misstatement. Reasonable assurance is a concept relating to
accumulation of sufficient and appropriate audit evidence on the basis of which the auditor
can conclude that there are no material misstatements in the financial statements.
3. The Audit Process, as described below, has been designed, based on the framework of
auditing suggested by the ISAs, with a view to assist an auditor to form an audit opinion in
the most efficient manner.
4. The audit process constitutes three phases of Planning, Execution and Review and
Completion. Each of these phases are briefly discussed below. These phases are also
described in tabular form at the end of this Chapter to provide a quick comprehension of
the process to the reader.
5. PLANNING PHASE
5.1 The ISA 300 requires that the audit should so plan his work so that the audit is performed
in an effective manner.
5.2 Efficient planning helps in ensuring that appropriate attention is devoted to the important
areas of the audit, potential problems are identified and the work is completed
expeditiously.
5.3 The extent of planning will vary according to the nature and size of the entity being
audited, the complexity of the audit and the auditors experience and knowledge of the
entitys business.
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5.5 OVERALL AUDIT PLAN
5.6 The overall Audit Plan is a summarized strategy for the audit engagement, which primarily
consists of strategic decisions of expected scope and conduct of the audit based on a
preliminary understanding of the entitys business, its management structure and
philosophy, accounting and internal control systems, audit risk and materiality and the
audit administration. The steps involved are described in the Flow Chart 2 below
5.8 Based on the audit approach developed in the Overall Audit Plan, the auditor should carry
out detailed audit planning leading to the development of the audit programs of each
component of the financial statements containing nature, timing and extent of audit
procedures to be applied to them.
5.9 These audit programs need to be reviewed at least by a qualified manager or partner to
ascertain whether the execution of selected audit procedures included therein shall lead to
obtaining sufficient and appropriate audit evidence for forming an audit opinion on the
financial statements.
5.10 An important aspect of detailed planning is the study and evaluation of the internal control
procedures to ascertain the extent to which the internal control systems can be relied upon
for the purposes of the audit. Where the accounting and internal control systems are
considered reasonably reliable (that means when the control risk is assessed as less than
high) and a decision is made to place reliance on such systems and internal control
questionnaires, flow charts or a combination thereof.
5.11 The internal control checklist prepared by the Institute of Chartered Accountants of
Pakistan; is included in Chapter 2, which can be used for documenting the important
features of the internal control. This checklist is not definitive and may need to be
supplemented, amended or modified according to the need of the audit requirements of the
entity.
5.12 The overall audit plan, audit programs, time budgets, planning checklist and other
documentation encompassing the planning phase of the audit is to be filed as part of the
Audit Planning File as shown in Chapter 2 of the Manual.
6.1 Information regarding audit administration (Chart-4) such as staff, planning, staff time
allocation, formats of confirmations, job/costing recovery etc., is included in Chapter 2.
7 EXECUTION PHASE
7.1 The auditor, before commencing audit, should review whether based on his knowledge of
the accounting systems and internal control procedures on the basis of which plans and
audit programs were made were valid or they need to be modified.
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7.2 The detailed steps involved in the execution phase are given in the Flow Chart 5 below.
The evidence accumulated in this is filed in the execution File.
8 COMPLETION PHASE
8.1 The final phase of the audit comprises of the review working papers and the financial
statements and evaluation of the conclusions that have been reached. The review should be
carried out by a qualified audit manager/partner. However, in the case of sole-
proprietorship concern, it must be ensured that the proprietor carries out a thorough review
of all the working papers.
8.2 Care is to be exercised to ensure that disclosure and completion checklist are prepared and
completed and issues such as subsequent events review, related party transactions and
going concern aspect etc. are considered before audit opinions of the financial statements is
issued.
8.3 Details of the steps involved in the completion phase are given in Flow Chart 6 and matters
to be considered and the documentation to be completed are clarified in Review and
Completion File in Chapter 4.
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2.1 TERMS OF REFERENCE / ENGAGEMENT
Auditors agree with the client, in writing, about the scope, terms and conditions of the audit
engagement. This written communication is referred to as an engagement letter (specimen letter
attached). The purpose of such a letter is to minimize any possible misunderstanding concerning
the scope and terms of the audit engagement.
The letter is sent to all new audit clients and where there has been a change in the terms of the
engagement or the auditor considers that management may not understand the existing terms of
the engagement, the letter is also be sent to continuing clients.
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2.1.1 Suggested Engagement Letter
Dear Sir
You have requested that we audit the balance sheet of as of , and the related
statements of income and cash flows for the year then ending. We are pleased to confirm our
acceptance and our understanding of this engagement by means of this letter. Our audit will be
made with the objective of our expressing an opinion on the financial statements.
We will conduct our audit in accordance with International Standards on Auditing. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatements. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
Because of the test nature and other inherent limitations of an audit, together with the inherent
limitations of any accounting and internal control system, there is an unavoidable risk that even
some material misstatements may remain undiscovered.
In addition to our report on the financial statements, we expect to provide you with a separate
letter concerning any material weaknesses in accounting and internal control systems which
come to our notice.
We remind you that the responsibility for the preparation of financial statements including
adequate disclosure is that of the management of the company. This includes the maintenance of
adequate accounting records and internal controls, the selection and application of accounting
policies, and the safeguarding of the assets of the company. As part of our audit process, we will
request from management written confirmation concerning representations made to us in
connection with the audit.
We look forward to full cooperation with your staff and we trust that they will make available to
us whatever records, documentation and other information are requested in connection with our
audit. Our fees, which will be billed as work progresses, are based on the time required by the
individuals assigned to the engagement plus out-of-pocket expenses. Individual hourly rates vary
according to the degree of responsibility involved and the experience and skill required.
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We wish to inform you that our working papers files for the audit of the financial statements of
your company would be subject to review by the Institute of Chartered Accountants of Pakistans
Quality Control Review Committee without any further reference to you.
This letter will be effective for future years unless it is terminated, amended or superseded.
Unless we hear from you to the contrary, we will assume your concurrence with the contents of
this letter.
Yours truly
FIRMS NAME
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2.2 OVERALL AUDIT PLAN
Other Information
o Banks
o Legal Advisor
o Tax Advisor etc.
2-4
2.2.2 UNDERSTANDING THE CLIENTS BUSINESS
A detailed knowledge of the client's business is required in all audit processes except
client acceptance/retention stage. Most of this knowledge should be acquired in the audit
planning stage and is required in order to determine the audit approach.
The knowledge may be acquired through the auditor performing such activities as
inspection, inquiry and analytical procedures such as ratio analysis, and Computer
Assisted Audit Techniques (CAAT), such as test data, programmed code analysis and
specialized audit software.
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Knowledge of Client Business
2-6
Major Customers
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
Major Suppliers
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
Major Competitors
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
2-7
Significant Accounting Policies
List down significant accounting policies (or change in accounting policy, if any) adopted
by the Company relating to:
________________________________________________________________________
2. Fixed assets
________________________________________________________________________
3. Revenue recognition
________________________________________________________________________
4. Taxation
________________________________________________________________________
________________________________________________________________________
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Key Management Personnel
Directors
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
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2.2.3 FACTORS THAT MAY AFFECT CLIENTS BUSINESS
Economic Factors:
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
Industry Conditions:
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
Technological Factors:
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
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2.2.4 CRITICAL AUDIT AREAS / SIGNIFICANT FINANCIAL
STATEMENT COMPONENTS
List down the critical audit areas and its impact on the financial statements relating to the
audit in consideration. It also includes consideration of previous years brought forward
issues.
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2.2.5 RISK ASSESSMENTS, ACCOUNTING AND INTERNAL
CONTROL SYSTEM
1. The International Standard on Auditing AS-6 on the captioned subject provides guidance
on obtaining an understanding of the accounting system and internal control systems and
on the audit risk and its components. The standard states that:
The auditor should obtain an understanding of the accounting and internal control
systems sufficient to plan the audit and develop an effective audit approach. The
auditor should use his professional judgment to assess audit risk and to design audit
procedures to ensure it is reduced to an acceptably low level.
2. The following paragraphs contain guidance on matters relating to risk assessment and
internal control to help members in understanding these concepts based on the guidance
contained in AS-6 and other related guidance to enable them in developing an efficient
and effective audit approach and in complying with the requirements of AS-6.
3. Definitions
3.1 Audit Risk means the risk that an auditor gives an inappropriate audit opinion when
the financial statements are materially misstated. Audit risk has three components:
inherent risk, control risk and detection risk.
3.2 Inherent risk is the susceptibility of an account balance or class of transactions to
misstatements that could be material, individually or when aggregated with
misstatements in other account balances or classes, assuming there are no related internal
controls.
3.3 Control risk is the risk that a misstatement that could occur in an account balance or
class of transactions and that could be material individually or when aggregated with
misstatements in other balances or classes, will not be prevented or detected and
corrected on a timely basis by the accounting and internal control systems.
3.4 Detection risk is the risk that an auditors substantive procedures will not detect a
misstatement that exists in an account balance or class of transactions that could be
material, individually or when aggregated with other balances and classes.
3.5 Accounting system means the series of tasks and records of an entity by which
transactions are processed as a means of maintaining financial records. Such systems
identify, assemble, analyze, calculate, classify, record, summarize and report transactions
and events.
3.6 Internal Control System means all the policies and procedures (internal controls)
adopted by the management of an entity to assist in achieving managements objective of
ensuring, as far as practicable, the orderly and efficient conduct of its business, including
adherence to management policies, the safeguarding of assets, the prevention and
detection of fraud and error, the accuracy and completeness of the accounting records,
and timely preparation of reliable financial information. The internal control system
extends beyond those matters which relate directly to the functions of the accounting
system and comprises of two components: a) the control environment and the control
procedures.
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3.7 Control environment means the overall attitude, awareness and actions of directors
and management regarding the internal control system and its importance in the entity.
The control environment has an effect on the effectiveness of the specific control
procedures. A strong control environment, for example, one with the tight budgetary
control and an effective internal audit function, can significantly complement specific
control procedures. However, a strong control environment does not, by itself, ensure the
effectiveness of the internal control system. Factors reflected in the control environment
include:
3.8 Control Procedures means those policies and procedures in addition to the control
environment which management has established to achieve the entitys specific
objectives. Specific Control objectives include:
4. In the audit of financial statements, we are only concerned with those policies and
procedures within the accounting and internal control systems that are relevant to the
financial statement assertions. The understanding of relevant aspects of the accounting
and internal control systems, together with inherent and control risk assessments will help
the auditor to:
a. Identify the type of potential material misstatements that could occur in the
financial statements;
b. Consider factors that affect the risk of material misstatements; and
c. Design appropriate audit procedures to minimize risk to an acceptable level.
5. Therefore, while developing the audit approach, we should consider the preliminary
assessment of control risk (in conjunction with the assessment of inherent risk) to
determine the appropriate detection risk to accept for the financial statement assertions.
Based on such assessment, we should decide on the timing, nature and extent of the
substantive procedures for the financial statement assertions.
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6. Inherent Risk
6.1 For developing the overall audit plan, we should assess inherent risk at the financial
statement level. For developing audit programs, we should relate such assessment to
material account balances and class of transactions at the assertion level, or assume that
the inherent risk is high.
6.2 The assessment of inherent risk requires the use of professional judgment considering the
following factors:
7. Following are the objectives of internal control which relate to the accounting system:
7.1 Transactions are executed in accordance with the managements general and specific
authorizations.
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7.2 All transactions and other events are promptly recorded in the correct amount, in the
appropriate accounts and in the proper accounting period so as to permit preparation of
reliable financial statements in accordance with acceptable accounting policies.
7.3 Access to assets and records is permitted only in accordance with managements
authorization.
7.4 Recorded assets are compared with the existing assets at reasonable intervals and
appropriate action is taken regarding any differences.
8.1 We are required by AS-6 to obtain an appropriate understanding of the accounting and
internal controls system to enable us to design our substantive audit procedures aimed at
minimizing the detection risk to an acceptable level.
8.2 The process of understanding involves obtaining knowledge of the design of the
accounting and internal control systems, and their operation. We usually perform a
Walk-through test that is, tracing a few transactions through the accounting system, for
understanding the accounting and internal control systems.
8.3 Previous periods audit experience, review of the previous years files containing
documentation of the accounting and internal control systems also enhances our
understanding of such systems.
8.4 The procedures, which may be used for obtaining such understanding include:
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determine the appropriateness of relying on controls for a portion of our overall audit
assurance.
11.1 After obtaining an understanding of the accounting and internal control systems, the
auditor is required to make a preliminary assessment of control risk, at the assertion level,
for each material account balance or class of transactions.
11.2 The control risk for some or all assertions is assessed at a high level when:
The entitys accounting and internal control systems are not effective; or
Evaluating the effectiveness of the entitys accounting and internal control system
would not be efficient.
11.3 The preliminary assessment of control risk for a financial statement assertion should be
high unless the auditor:
Is able to identify internal controls relevant to the assertion which are likely to
prevent or detect and correct a material statement; and
Plans to perform tests of control to support the assessment.
11.5 Different techniques may be used to document information relating to accounting and
internal control systems, such as narrative descriptions, questionnaires, checklists and
flow charts.
11.6 The Institute has developed an Internal Control Questionnaire (Annexed), given in this
Manual which may also be used for the purpose of such documentation.
12.1 We are required to obtain evidence through tests of control to support any assessment of
control risk which is less than high. The lower the assessment of control risk, higher will
be the reliance on such controls, the more support will be required to ensure that such
accounting and internal controls are suitably designed and operating effectively.
12.2 Objective of tests of controls is to obtain evidence about the effectiveness of:
The design of the accounting and internal control systems, that is, whether they are
suitably designed to prevent or detect and correct material misstatements; and
Operation of the internal controls through out the period under audit.
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12.3 Tests of controls may include:
12.4 Based on the results of the tests of controls, we should evaluate whether the internal
controls are designed and operating as contemplated in the preliminary assessment of
control risk. If the results of test of controls highlight deviations, the preliminary
assessment of control risk may need to be revised. In such cases, there will be a need to
modify the timing, nature and extent of planned substantive procedures.
12.5 Before the conclusion of the audit, based on the results of substantive procedures and
other audit evidence obtained, we should consider whether the assessment of control risk
is confirmed.
13.1 Management often reacts to inherent risks situations be designing accounting and internal
control systems to prevent or detect and correct misstatements and therefore, in many
cases, inherent risk and control risk are highly interrelated. In such situations, if the
auditor attempts to assess the inherent and control risks separately, there is a possibility
of inappropriate risk assessment. As a result, audit risk may be more appropriately
determined in such situations by making a combined assessment.
14.1 The level of detection risk relates to the substantive procedures. Our assessment of
control risk, together with the inherent risk assessment, will influence the nature, timing
and extent of substantive procedures to be performed to reduce the detection risk, and
therefore audit risk, to an acceptably low level. However, some detection risk would
always be present, even of an auditor were to examine 100% of the account balance or
class of transactions because, for example, most audit evidence is persuasive rather than
conclusive.
14.2 We should consider the assessed levels of inherent and control risks in determining the
timing, nature and extent of substantive procedures required reducing audit risk to an
acceptably low level. In this regard, we should consider:
The nature of substantive procedures, for example, using tests directed toward
independent parties outside the entity rather than the tests directed toward parties or
documentation within the entity, or using tests of details for particular audit objective
in addition to the analytical procedures;
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The timing of substantive procedures, for example, performing them at period end
rather than at an earlier date; and
The extent of substantive procedures, for example, using a larger sample size.
14.3 There is inverse relationship between detection risk and the combined level of inherent
and control risks. For example, when inherent and control risks are high, acceptable
detection risk needs to be low to reduce the audit risk to an acceptably low level. On the
other hand, when inherent and control risks are low, we can accept higher detection risk
and still reduce audit risk to an acceptably low level. This inverse relationship is
illustrated below. The shaded areas in the table relate to the detection risk.
14.4 The assessed levels of inherent and control risks cannot be sufficiently low to eliminate
the need for us to perform any substantive procedures. Regardless of the assessed levels
of inherent and control risks, there would invariably be a need to perform some
substantive procedures for material account balances and class of transactions.
14.5 The higher the assessment of inherent and control risk, the more audit evidence would be
required to be obtained from the performance of substantive procedures. When both
inherent and control risks are assessed as high, we need to consider whether substantive
procedures can provide sufficient appropriate audit evidence to reduce detection risk, and
therefore audit risk, to an acceptably low level. When it is determined that detection risk
regarding a financial statement assertion for a material account balance or class of
transactions cannot be reduced to acceptably low level, we should express a qualified
opinion or a disclaimer of opinion.
15.1 We need to obtain the same level of assurance in order to express an unqualified opinion
on the financial statements of both small and large entities. However, many internal
controls which would be relevant to large entities are not practical in the small
businesses. For example, in small business, accounting procedures may be performed by
few persons who may have both operating and custodial responsibilities, and therefore
segregation of duties may be missing or severely limited. Inadequate segregation of
duties may, in some cases, offset by a strong management control system in which
owner/manager supervisory controls exist because of direct personal knowledge of the
entity and involvement in transactions. In circumstances where segregation of duties is
limited and audit evidence of supervisory controls is lacking, the audit evidence
necessary to support the auditors opinion on the financial statements may have to be
obtained entirely through performance of substantive procedures.
15.2 The following paragraphs provide more guidance for a better understanding of the two
components of internal control system described above, i.e., control environment and
control procedures.
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16. Control Environment
16.2 The board of directors and management enhance an organization's control environment
when they establish and effectively communicate written policies and procedures, a code
of ethics, and standards of conduct. Moreover, the board and management enhance the
control environment when they behave in an ethical manner creating a positive "tone at
the top"--and when they require that same standard of conduct from everyone in the
organization.
16.3 Responsibility
16.3.1 Management is responsible for "setting the tone" for their organization. Management
should foster a control environment that encourages:
16.4.1 Effective human resource policies and procedures enhance an organization's control
environment. These policies and procedures should address hiring, orientation, training,
evaluations, counseling, promotions, compensation, and disciplinary actions. In the event
that an employee does not comply with an organization's policies and procedures or
behavioral standards, an organization must take appropriate disciplinary action to
maintain an effective control environment. The control environment is greatly
influenced by the extent to which individuals recognize that they will be held
accountable.
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16.4.2 Listed below are some tips to enhance an entitys control environment. This list is not
all-inclusive, nor will every item apply to every department; it can, however, serve as a
starting point.
Make sure that the following policies and procedures are available (hard copy or Internet
access):
o Administrative Procedures
o Employee Handbook
o Purchasing Manual
o Personnel Memorandum
Make sure that the entity has well-written departmental policies and procedures manual
which addresses its significant activities and unique issues. Employee responsibilities,
limits to authority, performance standards, control procedures, and reporting relationships
should be clear.
Make sure that employees are well acquainted with the organization's policies and
procedures that pertain to their job responsibilities.
Discuss ethical issues with employees. If employees need additional guidance, issue
departmental standards of conduct.
Make sure that job descriptions exist and correctly translate desired competence levels
into requisite knowledge, skills, and experience; make sure that hiring practices result in
hiring qualified individuals.
Make sure that the entity has an adequate training program for employees.
Make sure that employee performance evaluations are performed periodically. Good
performances should be valued highly and recognized in a positive manner.
Make sure that appropriate disciplinary action is taken when an employee does not
comply with policies and procedures or behavioral standards.
17.1 Control procedures means the policies and procedures in addition to the control
environment, which the management has established to achieve the entitys specific
control objectives.
17.2 Control procedures are actions supported by policies and procedures that, when carried
out properly in a timely manner, manage or reduce risks. The effectiveness of control
procedures improved considerably, when there is strong control environment, a formal
system of identification, assessment and management of major risks, an appropriate
system of information and communication (vertical and horizontal) and an effective
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system of monitoring by management. The concepts of risk assessment, information and
communication and monitoring are also described in the later part of this chapter.
17.3 Responsibility
17.3.1 The responsibility for establishing adequate controls to meet the requirements of the
business and the objectives of the internal control outlined above is that of the board of
directors and management. Their responsibility includes identifying the financial and
compliance risks for their operations, and designing, implementing and monitoring their
internal control system.
17.4.1 Controls can be either preventive or detective. The intent of these controls is different.
Preventive controls attempt to deter or prevent undesirable events from occurring. They
are proactive controls that help to prevent a loss. Examples of preventive controls are
separation of duties, proper authorization, adequate documentation, and physical control
over assets.
17.4.2 Detective controls, on the other hand, attempt to detect undesirable acts. They provide
evidence that a loss has occurred but do not prevent a loss from occurring. Examples of
detective controls are reviews, analyses, variance analyses, reconciliation, physical
inventories, and audits.
17.4.3 Both types of controls are essential to an effective internal control system. From a
quality standpoint, preventive controls are essential because they are proactive and
emphasize quality. However, detective controls play a critical role providing evidence
that the preventive controls are functioning and preventing losses.
17.5.1 Management authorizes employees to perform certain activities and to execute certain
transactions within limited parameters. In addition, management specifies those activities
or transactions that need supervisory approval before they are performed or executed by
employees. A supervisors approval (manual or electronic) implies that he or she has
verified and validated that the activity or transaction conforms to established policies and
procedures.
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17.6 Reconciliation (Detective).
17.6.1 An employee relates different sets of data to one another, identifies and investigates
differences, and takes corrective action, when necessary.
17.8.1 Access to equipment, inventories, securities, cash and other assets is restricted; assets are
periodically counted and compared to amounts shown on control records.
17.9.1 Duties are segregated among different people to reduce the risk of error or inappropriate
action. Normally, responsibilities for authorizing transactions, recording transactions
(accounting), and handling the related asset (custody) are divided.
17.10.1 Controls over information systems are grouped into two broad categories-general
controls and application controls. General controls commonly include controls over data
center operations, system software acquisition and maintenance, access security, and
application system development and maintenance. Application controls such as
computer matching and edit checks are programmed steps within application software;
they are designed to help ensure the completeness and accuracy of transaction
processing, authorization, and validity. General controls are needed to support the
functioning of application controls; both are needed to ensure complete and accurate
information processing.
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17.11 Control Procedures -Approvals (Preventive)
17.11.2 Approval authority may be linked to specific rupee levels. Transactions that
exceed the specified amounts would require approval at a higher level. Under no
circumstance should an approver tell someone that they could sign the approver's
name on behalf of the approver. Similarly, under no circumstance should an
approver with electronic approval authority share his password with another
person. To ensure proper segregation of duties, the person initiating a transaction
should not be the person who approves the transaction. A department's approval
levels should be specified in a departmental policies and procedures manual.
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comparing vacation and sick leave balances per departmental records to vacation
and sick leave balances per the payroll system.
17.14.1 Liquid assets, assets with alternative uses, dangerous assets, vital documents,
critical systems, and confidential information must be safeguarded against
unauthorized acquisition, use, or disposition. Typically, access controls are the
best way to safeguard these assets. Examples of access controls are as follows:
locked door, key pad systems, card key system, badge system, locked filing
cabinet, guard, terminal lock, computer password, menu protection, automatic
call-back for remote access, smart card, and data encryption.
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17.14.2 The organizations which have large value capital assets or significant inventories
should establish perpetual inventory control over these items by recording
purchases and issuances, Periodically, the items should be physically counted by a
person who is independent of the purchase authorization and asset custody
functions and the counts should be compared to balances per the perpetual
records. Missing items should be investigated, resolved, and analyzed for
possible control deficiencies; perpetual records should be adjusted to physical
counts if missing items are not located.
17.15.1 Segregation of duties is critical to effective internal control; it reduces the risk of
both erroneous and inappropriate actions. In general, the approval function, the
accounting/reconciling function, and the asset custody function should be
separated among employees. When these functions cannot be separated, a
detailed supervisory review of related activities is required as a compensating
control procedure. Segregation of duties is a deterrent to fraud because it requires
collusion with another person to perpetrate a fraudulent act.
The person who requisitions the purchase of goods or services should not be
the person who approves the purchase.
The person who approves the purchase of goods or services should not be the
person who reconciles the monthly financial reports.
The person who approves the purchase of goods or services should not be able
to obtain custody of checks.
The person who maintains and reconciles the accounting records should not
be able to obtain custody of checks.
The person who opens the mail and prepares a listing of checks received
should not be the person who makes the deposit.
The person who opens the mail and prepares a listing of checks received
should not be the person who maintains the accounts receivable records.
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17.16 Control Procedures-Separation of Duties Examples
17.16.1 The box below identifies some of the potential key (and high risk) transaction
types with guidelines for separating duties.
Purchase of Goods Issues Requisition Approves P.O./ Accounting Records Budget Report Receives Goods
Invoice
Person A Person B Person D Person C Person A or C
Purchase of Issues Requisition Approves Payment Accounting Records Budget Report Disburses Check
Services (1) & Verifies Receipt
of Services
Person A Person B Person D Person C Person A or C
Cash Receipts (2) Opens Mall, Lists Makes Deposit Accounting Records & Bank Account/ N/A
Checks, Restrictively Department Records Budget Report
Endorses & Deposits to
Checklist
Person A Person B Person D Person A or C
Payroll Employees Time Approves Time Accounting Records Budget Report Distributes Payroll
Report Report & Payroll Review Checks
Data Changes
Person A Person D Person B Person C
Inventory (3) Issues Requisition Approves P.O./ Accounting Records & Departmental Receives &
Invoice Department Records Records to Disburses Goods
(Issues & Receipts) Budget Reports
& Physical Counts
Person A Person B Person C Person B or C Person A
(1) If the same person authorizes and reconciles, additional monitoring is necessary.
(2) No receipts should be received directly by Person B
(3) Physical counts should not be under the control of persons responsible for custody or recording.
17.17.1 General Controls: these controls apply to entire information systems and to all
the applications that reside on the systems. These include:
17.17.2 General controls consist of practices designed to maintain the integrity and
availability of information processing functions, networks, and associated
application systems. These controls apply to business application processing in
computer centers by ensuring complete and accurate processing. These controls
ensure that correct data files are processed, processing diagnostics and errors are
noted and resolved, applications and functions are processed according to
established schedules, file backups are taken at appropriate intervals, recovery
procedures for processing failures are established, software development and
change control procedures are consistently applied, and actions of computer
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operators and system administrators are reviewed. Additionally, these controls
ensure that physical security and environmental measures are taken to reduce the
risk of sabotage, vandalism and destruction of networks and computer processing
centers.
17.17.3 Finally, these controls ensure the adoption of disaster planning to guide the
successful recovery and continuity of networks and computer processing in the
event of a disaster.
17.18.1 Applications are the computer programs and processes, including manual
processes, that enable us to conduct essential activities; buying products, paying
people, accounting for research costs, and forecasting and monitoring budgets.
17.18.2 Application controls apply to computer application systems and include input
controls (e.g., edit checks), processing controls (e.g., record counts), and output
controls (e.g., error listings), they are specific to individual applications.
Application Controls Include:
17.18.3 They consist of the mechanisms in place over each separate computer system that
ensures that authorized data is completely and accurately processed. They are
designed to prevent, detect, and correct errors and irregularities as transactions
flow through the business system. They ensure that the transactions and programs
are secured, the systems can resume processing after some business interruption,
all transactions are corrected and accounted for when errors occur, and the system
processes data in an efficient manner.
17.18.4 Electronic Data Interchange, Voice Response, and Expert Systems are types of
applications that may require certain controls in addition to general application
controls.
17.18.6 Input controls ensure the complete and accurate recording of authorized
transactions by only authorized users; identify rejected, suspended, and duplicate
items; and ensure resubmission of rejected and suspended items. Examples of
input controls are error listings, field checks, limit checks, self-checking digits,
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sequence checks, validity checks, key verification, matching, and completeness
checks.
17.18.7 Processing controls ensure the complete and accurate processing of authorized
transactions. Examples of processing controls are run-to-run control totals,
posting checks, end-of-file procedures, concurrency controls, control files, and
audit trails.
17.18.8 Output controls ensure that a complete and accurate audit trail of the results of
processing is reported to appropriate individuals for review. Examples of output
controls are listings of master file changes, error listings, distribution registers,
and reviews of output.
17.18.9 If an organization has applications that are critical to its success, then its
personnel must ensure that application controls reduce input, processing, and
output risks to reasonable levels.
17.18.10.1 Twenty years ago, an information system professional was needed to operate a
computer. Today many user departments personnel can obtain and use
information on the computer themselves. Some of the common applications used
by them are word processing, desktop publishing, spreadsheets, database
management systems, graphics programs, electronic mail, project management,
scheduling software, and mainframe-based query systems that are used to
generate reports. In addition to computer applications, the user departments use
other information systems applications such as voice mail and video
conferencing.
17.18.10.3 The end-user department becomes responsible for segregation of duties within the
department's information systems environment, backup and recovery procedures,
program development and documentation controls, hardware controls, and access
controls. If a department has end-user information systems that are critical to its
success, then department personnel must ensure that application & general
controls reduce information systems risks to reasonable levels.
18.1 Over the years the awareness and focus on internal control has been increasing for
achieving managements objectives of efficiency, effectiveness and economy. The
Committee of Sponsoring Organizations of the National Commission on
Fraudulent Financial Reporting (known as Treadway Commission) of USA
(comprising of five major sponsoring institutions of USA) undertook a study to
2-28
establish an integrated framework on internal controls. This study, which was
released in September 1992 generally known as COSO study, provides a
comprehensive framework, which organizations can use for review and enhancing
their internal control systems. This framework can also be used by external
auditors for the purpose of their study and evaluation of internal control systems
of their client organizations. 'Internal Control - Integrated Framework' defines
internal control as a method for achieving reasonable assurance that objectives in
areas related to the effectiveness and efficiency of operations, reliability of
financial reports, and compliance with laws and regulations are met. The report
also identifies the five interrelated components of internal controls: the control
environment, risk assessment, control activities, information and communication,
and monitoring.
19.1.1 The central theme of internal control is (1) to identify risks to the achievement of
an organization's objectives and (2) to do what is necessary to manage those risks.
Thus, setting goals and objectives is a precondition to internal controls. If an
organization does not have goals and objectives, there is no need for internal
control.
19.1.2 At the organization level, goals and objectives are usually presented in a strategic
plan that includes a mission statement and broadly defined strategic initiatives.
At the department level, goals and objectives must support the organization's
strategic plan. Goals and objectives are classified in the following categories:
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19.1.3 The following table illustrates these concepts:
Payroll
Processing-Compensation/ Withholding
Compensation rates and payroll deductions should be Operations
accurately and promptly entered into the payroll system. (O).
Processing-Authorizations
Personnel management should properly and accurately
maintain all compensation documentation. Compliance
(C)
19.1.5 There are certain activities which are significant to all departments: budgeting,
purchasing goods and services, hiring employees, evaluating employees,
accounting for vacation/sick leave, and safeguarding property and equipment.
Thus, all departments are expected to have appropriate goals and objectives,
policies and procedures, and internal controls for these activities.
19.2.1 Risk assessment is the identification and analysis of risks associated with the
achievement of operations, financial reporting, and compliance goals and
objectives. This, in turn, forms a basis for determining how those risks should be
managed.
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19.2.2 Responsibility: To properly manage their operations, managers need to
determine the level of operations, financial and compliance risk they are willing
to assume. Risk assessment is one of management's responsibilities and enables
management to act proactively in reducing unwanted surprises. Failure to
consciously manage these risks can result in a lack of confidence that operation,
financial and compliance goals will be achieved.
19.2.3 Risk Identification. A risk is anything that could jeopardize the achievement of
an objective. For each of the department's objectives, risks should be identified.
Management could ask the following questions to help to identify risks:
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19.2.5 The following table illustrates the concepts discussed above. Note that the
identified risks relate to the goals and objectives previously determined.
Payroll
Provide service and support to the
entitys employees.
Awards, incentives,
recognitions, etc., may not be
accurately reflected on the
master file.
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19.2.6 Below are some types of transactions that may pose higher risks:
19.2.7 These are transaction types that deserve a conscious risk review. In evaluating the
potential impact of risk, both quantitative and qualitative costs need to be
addressed.
Qualitative and Quantitative costs include the cost of property, equipment, inventory,
Quantitative cash loss, damage and repair costs, cost of defending a lawsuit, etc.
Costs Qualitative costs can have wide ranging implications to the entity.
These costs may include:
Loss of reputation due to supply of defective products
Loss of customers and markets
Violation of laws
Default on a project
Bad publicity
Decrease in turn over and business
19.3.1 After risks have been identified, a risk analysis should be performed to prioritize
those risks:
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19.4 Risk Assessment Tips
19.4.1 Listed below are tips to guide a department through its risk assessment:
Make sure the entity and all its major functions have a mission statement and
written goals and objectives.
Assess risks at the each financial statement component level.
Assess risks at the activity (or process) level.
Make sure that all risks identified at the component level are addressed in the
Business Controls Worksheet.
20.1 To achieve goals, management needs to effectively balance risks and controls. By
performing this balancing act "reasonable assurance can be attained. As it
relates to financial and compliance goals, being out of balance causes the
following problems:
20.2 In order to achieve a balance between risk and controls, internal controls should
be proactive, value-added, and cost-effective.
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21.3 When assessing internal control over a significant activity (or process), the key
questions to ask about information and communication are as follows:
Does the organization get the information it needs from internal and external
sources-in a form and timeframe that is useful?
Does the organization get information that alerts it to internal or external risks
(e.g., legislative, regulatory, and developments)?
Does the organization get information that measures its performance-
information that tells management whether it is achieving its operations,
financial reporting, and compliance objectives?
Does the organization identify, capture, process, and communicate the
information that others need (e.g., information used by our customers or other
departments)-in a form and timeframe that is useful?
Does our organization provide information to others that alerts them to
internal or external risks?
Does our organization communicate effectively--internally and externally?
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22. Monitoring
They understand the extent to which operations objectives are being achieved.
Published financial statements are being prepared reliably.
Applicable laws and regulations are being complied.
22.3 Just as control procedures help to ensure that actions to manage risks are carried
out, monitoring helps to ensure that control procedures and other planned actions
to effect internal control are carried out properly and in a timely manner and that
the end result is effective internal control. Ongoing monitoring activities include
various management and supervisory activities that evaluate and improve the
design, execution, and effectiveness of internal control. Separate evaluations, on
the other hand, such as self-assessments and internal audits, are periodic
evaluations of internal control components resulting in a formal report on internal
control. Department employees perform self-assessments; internal auditors who
provide an independent appraisal of internal control perform internal audits.
22.4 Management's role in the internal control system is critical to its effectiveness.
Managers, like auditors, don't have to look at every single piece of information to
determine that the controls are functioning and should focus their monitoring
activities in high-risk areas. The use of spot checks of transactions or basic
sampling techniques can provide a reasonable level of confidence that the controls
are functioning.
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DOCUMENTATION & EVALUATION OF ACCOUNTING
AND INTERNAL CONTROL SYSTEMS
INTERNAL CONTROL
Control Environment
Risk Assessment
Control Activities
o Performance Review
o Information Processing Controls
o Physical Controls
o Segregation Of Duties
Information And Communication
Monitoring Activities
2-37
OBTAINING AN UNDERSTANDING OF ACCOUNTING & INTERNAL CONTROL
SYSTEMS
Interviews
Review Of Company Documents
Observations
Transactions Walk- Through
Written Narrative
Flowcharts
Control Questionnaire
Decision Table
Combination Of Previous
Reportable Conditions:
2. Affecting the financial reporting or compliance with laws but risk covered through
substantive procedures Management Letter
3. Affecting financial reporting or compliance with laws & risk cannot be covered
through substantive tests Qualification in Auditors Report
2-38
INTERNAL CONTROL QUESTIONNAIRE
CONTENTS
PAGE NO.
I. CONTROL ENVIRONMENT
A. Management Philosophy and Operating Style 2-40
A. Investments 2-67
B. Equity Capital 2-68
2-39
I. CONTROL ENVIRONMENT
YES NO N/A
a. clearly written?
b. actively communicated throughout the entity?
c. actively monitored?
B. Organization structure
Objective
2-40
YES NO N/A
2-41
YES NO N/A
2-42
II. ACCOUNTING SYSTEM
YES NO N/A
A. General Accounting
Objectives
Objectives
2-44
III. REVENUE CYCLE
YES NO N/A
Objectives
Credit
Objective
Shipments
Objectives
2-46
YES NO N/A
a. Pre-numbering?
Objectives
2-47
YES NO N/A
a. Pre-numbered?
b. Accounted for to determine all invoices are
recorded?
c. Matched with properly approved sales orders?
d. Matched with shipping documents?
e. Traced to authorised current source information on
prices and terms (for example, price list, schedules,
catalogues, or computer stored master files?
f. Recorded promptly?
2-48
YES NO N/A
B. Cash Receipts
Processing Collections
Objectives
3. Are each days receipts (by mail and over the counter)
except for post-dated items deposited intact daily?
Recording Collections
Objectives
All cash receipts recorded are at the correct amount in the period
in which received and are properly classified and summarised.
2-50
IV. EXPENDITURE CYCLE
YES NO N/A
Objectives
2-51
YES NO N/A
Objectives
a. Only authorized goods, other assets and services received
are paid for.
b. Amounts payable for goods and services received are
accurately recorded at the- correct amount in the
appropriate period and are classified in the accounts
to:
(1) Permit preparation of reports and statements in
conformity with generally accepted accounting
principles or other criteria.
(2) Maintain accountability for costs incurred.
C. Access to purchasing, receiving and accounts payable
records is suitably controlled to prevent or detect within a
timely period duplicate or improper payments.
Questions-Control policies and Procedures
1 Are vendors invoices processed by designated employees
who are independent of the purchasing and receiving
functions?
2. Are duplicate invoices conspicuously stamped or
destroyed as a precaution against duplicate payment?
2-52
YES NO N/A
3. Are vendors invoices prior to payment compared in detail
to:
a. Receiving reports?
b. Evidence of direct shipment to customers? (For
example, copy of vendor's shipping document or
acknowledgment of receipt by the customer).
c. Debit memoranda'?
d. Evaluation reports on services rendered?
4. Are advances to suppliers made in accordance with
management's authorization?
5. Are vendors invoices, prior to payment, reviewed for
correctness of:
a. Clerical accuracy?
b. Adjustment of advances?
c. Freight charges?
d. Account distribution?
6. Are processed invoices and supporting documents
approved by designated employees before payment?
7. Are approved debit memos used to notify vendors of
goods returned and other adjustments of their accounts?
8. Are accumulation of processed invoice and follow-up of
unmatched purchase orders and receiving reports adequate
to result in a proper cut off for financial reporting
purposes?
9. Are vendors statements reviewed for overdue items and
reconciled with accounts payable detail
10. Are there adequate controls to ensure recognition of
liabilities for goods/services received but not invoiced?
11. Are employee expense accounts:
a. Prepared in accordance with criteria set by
management?
b. Submitted promptly?
c. Adequately supported?
d. Approved before payment?
2-53
YES NO N/A
B. Payroll
Objectives
a. Employees are hired and retained only at rates, benefits and
perquisites determined in accordance with management's
general or specific authorization.
b. Payroll deductions are based on evidence of appropriate
authorization.
c. Payroll include only those employees who worked during
the period.
Objectives
a. Compensation is made only to company employees at
authorized rates and for services rendered in accordance
with management's authorization.
b. Gross pay, deductions and net pay are correctly computed
based on authorized rates and services rendered and
properly authorized deductions.
c. Payroll costs and related liabilities are correctly
accumulated, classified, and summarized in the accounts in
the appropriate period.
Questions-Control Policies and Procedures
2-54
YES NO N/A
2. Is gross pay determined using authorized rates and:
Disbursement ( Payroll)
Objective
Objectives
C. Cash Disbursements
Assignment of Functions
Objective
2-56
YES NO N/A
Processing Disbursements
Objectives
2-57
YES NO N/A
12. Are all cheques promptly recorded when issued and listed
in detail?
Bank Reconciliations
Objective
2-58
V. PRODUCTION (CONVERSION) CYCLE
YES NO N/A
Objective
Objective
2-59
YES NO N/A
Objective
2-60
YES NO N/A
Objective
2-61
YES NO N/A
Objectives
Objective
2-62
YES NO N/A
2-63
YES NO N/A
2-64
YES NO N/A
B. Property and Equipment
Initiation and Execution of Property and Equipment
Transactions
Objective
Additions and related accumulation of depreciation or
amortization, retirements, and dispositions of property and
equipment (owned and leased) are made in accordance with
management's authorization.
2-65
YES NO N/A
Objective
2-66
VI. FINANCING (TREASURY) CYCLE
YES NO N/A
A. Investments
Objective
Objective
2-67
YES NO N/A
5. Are detailed investment records reconciled with the
general ledger control accounts, including related
income?
Objective
B. Equity Capital
Objective
2-68
YES NO N/A
Physical Safeguards and Custodial Procedures
Objectives
a. Access to records, agreements, and such negotiable
documents as share certificates concerning equity capital
is permitted only in accordance with management's
authorization
b. Records, agreements, and negotiable documents are
subjected to reasonably adequate physical safeguards and
custodial procedures.
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2.2.6 MATERIALITY
There are two aspects to materiality - Planning materiality, and Reporting materiality.
LEVEL OF
MATERIALITY LEVEL EVALUATION
AGGREGATION
Financial A misstatement of a financial statement Materiality at the financial
statement level item is material when the misstatement, statement level may be evaluated
aggregated with misstatements of other by reference to (i) reporting
financial statement items, is likely to materiality and (ii) the expected
equal or exceed the level of reporting nature, number and value of
materiality. financial statement items included
in the financial statements.
Account balance A misstatement of an account balance Materiality at the account balance
level underlying a financial statement item is level is evaluated by reference to
material when the misstatement, (i) materiality at the financial
aggregated with misstatements in other statement level and (ii) the
account balances underlying the expected nature, number and
financial statement item, is likely to value of account balances
result in a material misstatement of the underlying the financial statement
financial statement item. item.
Class of A misstatement of a transaction Materiality at the class of
transaction level underlying an account balance is transaction level is evaluated by
material when the misstatement, reference to (i) materiality at the
aggregated with misstatements in other account balance level and (ii) the
transactions underlying the account expected nature, volume and
balance, is likely to result in the material value of transactions underlying
misstatement of the account balance. the account balance.
Whereas planning materiality is primarily concerned with the judgments of the auditor, reporting
materiality is primarily concerned with the auditor's evaluation of the judgments of users of
financial statements.
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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.
Where an entity's results are expected to be "normal", then reporting materiality is based on after
tax income amounts. However, where the entity incurs losses, has potential going concern
problems or the results are in other ways unusual, materiality may be based on one or more of
the other factors referred to above. For example, if the entity is incurring losses, both before and
after tax, the auditor may use total assets or total revenue, whichever is the greater. The final
assessment of reporting materiality is subjective and depends on the auditor's perception of, for
example, what information is relevant, who the users of the financial statements are, what
decisions the users may make and what would influence those decisions.
Note that financial statements may be materially misstated as a result of either a quantitative
misstatement (in relation to its monetary value) or a qualitative misstatement (in relation to its
accuracy of presentation, disclosure, description).
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2.2.7 REVIEW OF FINANCIAL PERFORMANCE OF THE CLIENT
Summarize results of financial performance review and discuss its impact on audit (see attachment).
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
2-72
Suggested Format of Financial Performance Review
B. PROFITABILITY OF OPERATIONS
GROSS MARGIN PERCENTAGE
OPERATING INCOME PERCENTAGE
EFFECTIVE TAX RATE
NET INCOME PERCENTAGE
EPS
C. FINANCIAL LEVERAGE
DEBT TO EQUITY RATIO
2-73
D. ASSET TURNOVER
RATIO REVENUE TO TOTAL ASSETS
RECEIVABLES TURNOVER RATIO
INVENTORY TURNOVER RATIO
E. LIQUIDITY
WORKING CAPITAL
OPERATING CASH FLOW
CURRENT RATIO
QUICK RATIO
INTEREST AND DIVIDEND COVERAGE
2-74
2.3 DETAILED PLANNING
A CIS environment exist when a computer of any type or size is involved in the processing by the
entity of financial information of significance to the audit, whether that computer is operated by
the entity or by a third party.
The auditor should consider how a CIS environment affects the audit.
The overall objective and scope of the audit does not change in a CIS environment. However, the
use of computer changes the processing, storage and communication of financial information and
may affect the accounting and internal system employed by the entity. Accordingly a CIS
environment may affect:
The procedures followed by the auditor in obtaining a sufficient understanding of the
accounting and internal control system.
The consideration of inherent risk and control risk through which the auditor arrives at
the risk assessment.
The auditors design and performance of tests of control and substantive procedures
appropriate to meet the audit objective.
This checklist prepared using the guidance provided in the Auditing Standards. It is designed as a
source of reference to assist audit teams in:
understanding the design and operations of the CIS environment and
planning and executing an audit approach that is responsive to the audit risk present in
CIS.
In the preparation of this checklist, no assumptions have been made regarding the degree of
sophistication or complexity of client systems. Therefore, in evaluating the overall CIS
environment of diversified client portfolio, this checklist may be tailored to the requirements of
their particular CIS environment. For this purpose guidance may also be sought from the
following statements on auditing
CIS Environments Stand Alone Micro computers (refer IAPS - 1)
CIS Environments On Line Computer Systems (refer IAPS - 2)
CIS Environments Database Systems (refer IAPS - 3)
This checklist must also be considered in the context of the professional and technical
requirements of the individual assignment in which an auditor is reporting. To satisfy such
requirements, it may be necessary to refer to additional technical guidance and need for an expert
may arise. This checklist is not intended to be used in an all-inclusive context.
2-75
CLIENT: ________________________________________________
YEAR ENDED: ___________________________________________
Are the CIS department risks reduced to a potentially acceptable level for audit purposes?
Yes / RISK
No. ADDRESSED
HIGH MEDIUM LOW
CONCLUSION:
We have reviewed the computer information system of the company and conclude that the risk
involved is low/medium/high. Overall system is functioning satisfactorily, with the exception of
matters noted on summary of weaknesses identified.
2-76
Yes / RISK
No. ADDRESSED
HIGH MEDIUM LOW
2-77
Yes / RISK
No. ADDRESSED
HIGH MEDIUM LOW
2-78
Yes / RISK
No. ADDRESSED
HIGH MEDIUM LOW
2-79
Yes / RISK
No. ADDRESSED
HIGH MEDIUM LOW
2. Application Controls
2.1 Controls over input
2-81
Yes / RISK
No. ADDRESSED
HIGH MEDIUM LOW
3. CIS RISK
3.1 Other Control
3.1.1 Is edit list extracted and approved before processing the
transactions?
3.1.2 Is there control over duplicate number of JV & receipt &
payment voucher ?
3.1.3 Does the computer generate the voucher numbers?
3.1.4 In case the computer generates number, make sure they
cannot be changed, otherwise ensure report of missing
numbers.
3.1.5 Are there proper controls in practice regarding use of
third party software such as:
- review application software prior to purchasing,
including functions capacity and controls
- adequate testing of the software and the
modification to it prior to use
- ongoing assessment of the software to meet
user requirements
3.1.6 Are there any provision for offsite processing in the
event of disaster.
3.1.7 Whether account codes not in use are deleted from the
programmes after proper approval ?
3.2 CONTINGENCY PLANNING
3.2.1 Are there procedures to ensure continued operation
should a prolonged system failure occur
Ensure:
- backup hardware arranged and tested;
- written emergency and business recovery
procedures are available and tested;
- backup of important data and program files
maintained and for a sufficient period of time;
- copies of files kept in remote storage;
- emergency power supplies available (e.g. UPS)
- regular preventive maintenance; and
- adequate insurance coverage.
2-82
2.3.2 AUDIT PROGRAMS
An audit program describes what and how much evidence is required to be gathered and
evaluated, and how, when and by whom it is to be gathered and evaluated. In other words, it
describes the nature, timing and extent of planned audit procedures.
An audit program is required in respect of evidence gathered and evaluated in each of the control
testing, substantive testing and opinion formulation stages. It is prepared, or revised, as part of
the detailed planning activities of those three audit stages. For example, refer to:
1. The auditor should obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the audit opinion.
2. Sufficiency and appropriateness are interrelated and apply to audit evidence obtained
from both tests of control and substantive procedures. Sufficiency is the measure of the
quantity of audit evidence; appropriateness is the measure of the quality of audit evidence
and its relevance to a particular assertion and its reliability. Ordinarily, the auditor finds it
necessary to rely on audit evidence that is persuasive rather than conclusive and will
often seek audit evidence from different sources or of a different nature to support the
same assertion.
b) Rights and obligation: an asset or a liability pertains to the entity at a given date;
c) Occurrence: a transaction or event took place which pertains to the entity during
the period;
4. Tests of control means tests performed to obtain audit evidence about the suitability of
design and effective operation of the accounting and internal control systems.
2-83
5. The aspects of the accounting and internal control systems about which the auditor would
obtain audit evidence are:
Design: the accounting and internal control systems are suitably designed to
prevent and/or detect and correct material misstatements; and
a) Operation: the systems exist and have operated effectively throughout the
Relevant period.
6. Substantive procedures means tests preformed to obtain audit evidence to detect
material misstatements in the financial statements, and are of two types:
The auditor obtains audit evidence by one or more of the following procedures:
inspection, observation, inquiry and confirmation, computation and analytical procedures.
The timing of such procedures will be dependent, in part, upon the periods of time during
which the audit evidence sought is available.
Inspection
inspection of tangible assets provides reliable audit evidence with respect to their
existence but not necessarily as to their ownership or value.
Observation
2-84
Confirmation consists of the response to an inquiry to corroborate information contained
in the accounting records. For example, the auditor ordinarily seeks direct confirmation
of receivables by communication with debtors.
Computation
Analytical Procedures
Analytical procedures consist of the analysis of significant ratios and trends including the
resulting investigation of fluctuations and relationships that are inconsistent with other
relevant information or deviate from predicted amounts.
8. Cut-Off test
A cut-off test is a type of evidence gathering activity, in particular, the cut-off test gathers
evidence that transactions are recorded in the period to which they refer.
- economic events occurring in the financial period being audited are recorded in
the related account balance in the subsequent accounting period (a misstatement
relating to completeness).
- economic events occurring in the period following the period being audited are
recorded in the related account balance in the period being audited (a
misstatement relating to validity).
If the auditor needs evidence as to the completeness of accounts receivable and related
sales transactions, then subsequent to balance sheet date the auditor will trace the details
on the last delivery advice issued for the year to the relevant sales invoice and then to the
accounts receivable records to ensure that the sale has been included in the accounting
records before year end. In addition, the auditor selects a sample of sales invoices posted
to accounts receivable in the first few days of the month following balance sheet date. All
of the invoices selected should refer to delivery advices having a reference number after
the number noted on balance date.
If the auditor needs evidence as to the validity of accounts receivable the auditor selects a
sample of invoices that have been included in accounts receivable in the last few days of
the financial year. All of the invoices selected should refer to delivery advices having a
reference number before (or including) the number noted on balance sheet date.
2-85
Sample Audit Programs
(The enclosed list contains possible suggested audit procedures for different financial statement
components (mostly for the manufacturing concern). Only some of these procedures will usually
be selected to minimize the detection risk to an acceptably low level).
Index
Balance Sheet Equities & Liabilities
2-86
6. Long Term Investments/ Investments income K- AP 2-114
2-87
Client Name
File No. Reference: AA/AP
Audit Program Share Capital Prepared By: Date:
Accounting Reviewed By: Date:
Period
2-88
Client Name
File No. Reference: BB/AP
Audit Program Reserves Prepared By: Date:
Accounting Reviewed By: Date:
Period
2-89
Client Name
File No. Reference: CC/AP
Audit Program Surplus on Prepared By: Date:
revaluation of
fixed assets
Accounting Reviewed By: Date:
Period
2-90
Client Name
File No. Reference: DD-EE-MM/AP
Audit Program Long term loans/ Prepared By: Date:
current maturity.
Accounting Reviewed By: Date:
Period
2-91
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
2-92
Client Name
File No. Reference: FF/AP
Audit Program Liabilities against Prepared By: Date:
assets subject to
finance lease.
Accounting Reviewed By: Date:
Period
2-93
Client Name
File No. Reference: GG/AP
Audit Program Deferred liabilities Prepared By: Date:
Accounting Reviewed By: Date:
Period
2-94
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
2-95
Client Name
File No. Reference: HH/AP
Audit Program Long term Prepared By: Date:
deposits
Accounting Reviewed By: Date:
Period
2-96
Client Name
File No. Reference: JJ/AP
Audit Program Short Term Prepared By: Date:
Borrowings
Accounting Reviewed By: Date:
Period
2-97
6 Review minutes, agreements and Presentation &
bank and other confirmations Disclosure
replies for evidence of the
existence of short-term lines of
credit or similar obligations.
2-98
Client Name
File No. Reference: NN/AP
Audit Program Creditors, Prepared By: Date:
accrued and
other liabilities
Accounting Reviewed By: Date:
Period
CREDITORS
2-99
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
2-100
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
2-101
Client Name
File No. Reference: PP/AP
Audit Program Taxation / Prepared By: Date:
provision for
taxation
Accounting Reviewed By: Date:
Period
2-102
Client Name
File No. Reference: RR/AP
Audit Program Dividend payable Prepared By: Date:
Accounting Reviewed By: Date:
Period
2-103
Client Name
File No. Reference: SS/AP
Audit Program Contingencies Prepared By: Date:
and
Commitments
Accounting Reviewed By: Date:
Period
2- 104
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
Inquire of and discuss with Rights &
management the clients policies and Obligation
procedures for identifying,
evaluating, and accounting for
commitments.
2- 105
Examine returned standard bank Existence
confirmations forms and any other
returned confirmations of bank
credit arrangements for contingent
liabilities, letters of credit, and
compensating balance arrangements.
2- 106
Client Name
File No. Reference: A/AP
Audit Program Tangible fixed Prepared By: Date:
assets
Accounting Reviewed By: Date:
Period
2-107
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
2-108
Client Name
File No. Reference: B/AP
Audit Program Audit Program for Prepared By: Date:
assets subject to
finance lease
(Steps in addition to
those of owned assets)
Accounting Reviewed By: Date:
Period
2-109
Client Name
File No. Reference: C/AP
Audit Program Capital work in Prepared By: Date:
progress
Accounting Reviewed By: Date:
Period
2-110
Client Name
File No. Reference: E/AP
Audit Program Intangible assets Prepared By: Date:
Accounting Reviewed By: Date:
Period
2-111
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
8 Calculate on a test basis, amortization charge Valuation
for the year and ensure proper amount has Measurement
been charged to Profit & Loss account.
2-112
Client Name
File No. Reference: H/AP
Audit Program Un-allocated pre - Prepared By: Date:
production
expenditure
Accounting Reviewed By: Date:
Period
2-113
Client Name
File No. Reference: K/AP
Audit Program Long Term Prepared By: Date:
Investments
Accounting Reviewed By: Date:
Period
2-114
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
5. Test the casting and cross - casting of Valuation
the schedule.
2-115
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
Investment Income
2-116
Client Name
File No. Reference: L/AP
Audit Program Long term loans Prepared By: Date:
and advances.
Accounting Reviewed By: Date:
Period
2-117
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
2-118
Client Name
File No. Reference: M/AP
Audit Program Deferred cost Prepared By: Date:
Accounting Reviewed By: Date:
Period
2-119
Client Name
File No. Reference: N-R/AP
Audit Program Store spares & Prepared By: Date:
loose tools and
stock in trade
Accounting Reviewed By: Date:
Period
2-120
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
2-121
Client Name
File No. Reference: S/AP
Audit Program Trade debts Prepared By: Date:
Accounting Reviewed By: Date:
Period
2-122
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
8 Select transactions from sales invoices and Completeness
customer returns notes pertaining to some days Occurrence
prior to and after year-end and ensure that they
have been recorded in the correct period.
2-123
Client Name
File No. Reference: V/AP
Audit Program Trade deposits, short- Prepared By: Date:
term prepayments,
loans, advances and
other receivables.
Accounting Reviewed By: Date:
Period
2-124
Client Name
File No. Reference: W/AP
Audit Program Short Term Prepared By: Date:
Investments
Accounting Reviewed By: Date:
Period
2-125
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
Liens, pledges or other security
interests in marketable
securities.
- Determining if decline in
market value relates to
cyclical patterns of the
issuers industry or is
- When marketable
2-126
Audit Procedures
S. No. Audit Performed Reference
Assertion by
Addressed
2-127
Client Name
File No. Reference: X/AP
Audit Program Cash and bank Prepared By: Date:
Accounting Reviewed By: Date:
Period
2-128
Client Name
File No. Reference: TC-1
Audit Program Sales/Receivables Prepared By: Date:
Accounting Reviewed By: Date:
Period
2-129
6. Credit notes and adjustments to Agree summary information
accounts receivable are from the clients actual reports
accurately calculated and (e. g. details of all credits to
recorded. accounts receivable for one
month) to the general ledger
and trace information (e.g.
customer name, credit amount
and reason thereof) from
underlying records (e.g. credit
memos) into the clients
reports to ensure that relevant
information is properly
reported. Review documents
evidencing that the
management monitored the
nature, volume and amount of
recorded credit notes, write-
offs and other readjustments to
accounts receivable.
7. All goods shipped are invoiced Ensure that the goods shipped
at, before, or after the end of
an accounting period are
scrutinized and reconciled to
ensure complete and consistent
recording in the appropriate
accounting period including
raising and recording of the
related invoices.
2-130
9. All invoices and credit notes Make a selection of
issued are recorded. sequentially numbered
invoices and credit notes and
obtain source document for
each selection alongwith the
document before and after
each selection. Trace selected
items to clients reports and
determine their proper
inclusion or exclusion. Inquire
about any missing or duplicate
invoices and credit notes.
2-131
Client Name
File No. Reference: TC-2
Audit Program Purchases/Inventory / Prepared By: Date:
Accounts Payable
Accounting Reviewed By: Date:
Period
2-132
3. All raw materials received are a) Obtain goods receipt
recorded vouchers and ensure that
they are sequentially pre-
numbered. For selected
vouchers, obtain source
documents alongwith the
document before and after
each selection to verify the
integrity of sequence around
each selection. Trace
selected items to client
reports and determine their
proper inclusion or
exclusion.
b) Invoices not matched to
goods receipt notes should
be investigated. Ensure that
payments of such invoices
have been specifically
approved by the
management.
2-133
6. All transfers of raw materials to Make a selection of transfers of
production are recorded raw materials to production.
accurately and in the appropriate Examine documents evidencing
period. that received inventories were
properly counted and inventory
product numbers, quantities and
receipt dates were compared to
receipt or transfer
documentation that was used to
support the recording of the
inventory receipt in the
accounting records.
2-134
10. All shipments are recorded. Ensure that:
a) All delivery notes are
sequentially numbered and
the sequence of delivery
notes processed is
accounted for.
b) Orders are sequentially
numbered. The sequence of
orders processed is
accounted for, including
following up on order
status (e. g. shipped,
invoiced).
2-135
b) Examine documents
evidencing that all
incoming and outgoing
vehicles are monitored by
security personnel to
ensure that all goods
leaving the premises are
accompanied by duly
completed documentation
(e. g. delivery note or
goods returned note).
2-136
Client Name
File No. Reference: PL 1/AP
Audit Program Sales Prepared By: Date:
Accounting Reviewed By: Date:
Period
2-137
S. No. Audit Procedures Audit Performed Reference
Assertion by
Addressed
2-138
Client Name
File No. Reference: PL 2/AP
Audit Program Cost of sales Prepared By: Date:
Accounting Reviewed By: Date:
Period
2-139
Client Name
File No. Reference: PL 3 & 4 /AP
Audit Program General and Prepared By: Date:
admin expenses /
selling and
distribution
expenses.
Accounting Reviewed By: Date:
Period
2-140
Client Name
File No. Reference: PL 5/AP
Audit Program Financial charges Prepared By: Date:
Accounting Reviewed By: Date:
Period
2-141
Client Name
File No. Reference: PL 6/AP
Audit Program Other Charges Prepared By: Date:
Accounting Reviewed By: Date:
Period
2-142
Client Name
File No. Reference: PL 7/AP
Audit Program Other Income Prepared By: Date:
Accounting Reviewed By: Date:
Period
2-143
Identify and examine items that may Presentation &
require separate disclosure in the Disclosure
financial statements, including the
notes thereto (e.g., extraordinary
items, discontinued operations,
segment information, gains or losses
on foreign currency transactions).
2-144
2.3.3 ANALYTICAL REVIEW PROCEDURES
scanning. An auditor may scan account balances, listings of transactions etc., 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:
Once again, the objective of this analytical procedure is to detect any unusual or
unexpected value for the ratio.
2-145
common size analysis is a type of cross-sectional analysis used for comparing the
percentage components of balance sheets and income statements of one entity, or a
division of an entity, with comparable data from one or more other entities/ divisions.
This analysis may be used for either (i) the comparison of a (prospective) client's data
with the industry average and/or an industry competitor or (ii) for the comparison of
income statements of different divisions of the same entity.
When analytical procedures are used as a substantive procedure (or substantive test), and
the application of the procedures does not identify any unusual or unexpected differences,
then, by inference, the results provide evidence in support of management's assertions.
Analytical procedures generally provide less reliable substantive evidence than the other
category of substantive procedures/tests, (tests of detail). The substantive evidence
gathered using analytical procedures is thus generally used to corroborate other
substantive evidence gathered, rather than used as a sole source of evidence.
2-146
Client File No.
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Authorized capital
General Reserves
Capital Reserves
Redeemable Capital
Deferred Liabilities
Current Liabilities
Proposed Dividend
Total Liabilities
2-147
Client File No.
Name Initial Date
Analytical Review-Balance Sheet
Assets Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Capital-work-in-progress
Intangible Assets
Current Assets
Stock-in-trade
Trade Debts
Total Assets
2-148
Client File No.
Name Initial Date
Analytical Review - Sales
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Export
Local
Less :
- Commission
- Excise Duty
- Sales Tax
2-149
Client File No.
Name Initial Date
Analytical Review - Cost of Goods Sold
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Insurance
Depreciation
Work in process :
Opening stock
Closing stock
Finished Goods:
Opening stock
Closing stock
2-150
Client File No.
Name Initial Date
Analytical Review - Administrative
Expenses Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Directors' remmuneration
Insurance
Utilities
Entertainment
Auditors' remmuneration
Advertisement
Depreciation
Other
2-151
Client File No.
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Travelling
Others :
Market Survey
Bank Charges
Insurance
2-152
Client File No.
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Markup / interest on :
- Redeemable Capital
- Debenture
- Lease Finance
2-153
Client File No.
Name Initial Date
Analytical Review - Other Income
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Rental Income
Scrap sales
Others
Unusual income
2-154
ANALYTICAL REVIEW RATIO ANALYSIS
FORMULA
Y1 Y2 Y3 Y4
A. PERFORMANCE ANALYSIS
1. Installed Capacity
2. Capacity utilized
3. Production in units i.e. Kgs. metres etc.
4. Production after convers ion, if any.
5. Gross Sale in % - Local Local Gross Sales
Gross Total Sales
8. Average raw material purchase price per unit. Total Purchase Price of Raw material
total units purchased
10. Conversion cost without depreciation per unit Conversion Cost without depreciation
units produced
12. Store and spares consumption per unit of Store & Spares consumption in
production. rupees
units produced
14. Packing material cost per unit of production Packing material cost
units produced
2-155
FORMULA
Y1 Y2 Y3 Y4
18. Net Profit / (Loss) per unit sold Net Profit / (Loss)
unit sold
20. Production in %
In case of Textile
B. PROFITABILITY RATIOS
_________________________________________________________________________________
_________________________________________________________________________________
2-156
FORMULA
Y1 Y2 Y3 Y4
4. Earning yield Earning per Share
Market value per share
C. ACTIVITY RATIOS
1. Inventory Turnover
2-157
FORMULA
Y1 Y2 Y3 Y4
D. LIQUIDITY RATIOS
_________________________________________________________________________________
_________________________________________________________________________________
2-158
2.4 AUDIT ADMINISTRATION & OTHER MATTERS
CLIENT :
PERIOD OF ACCOUNT : Staff :
DETAILED TIME BUDGET
Prepared by Reviewed by Approved by
Budget
Travelling
Supervision
Reports/Memoranda
Review Memorandum
Standard Schedule for Audit Summary file
General
Conferences with client
TYPING
COMPARING
GRAND TOTAL (hours)
Rate per unit
Valuation
COST
FEE
OVER (UNDER) RECOVERY
2-160
2.4.2 DAILY TIME CONTROL / STAFF ATTENDANCE SHEET
NAME OF CLIENT NATURE OF JOB Period DAYS NORMAL OVER TIME TOTAL HOURS
DD MM YY 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 HOURS
Tue Wed Thu Fri Sat Sun Mon Tue Wed Thu Fri Sat Sun Mon Tue Wed Thu Fri Sat Sun Mon Tue Wed Thu Fri Sat Sun Mon Tue
-
TOTAL
OVERTIME HOURS
2-161
2.4.3 MINIMUM HOURLY CHARGE OUT RATES FOR AUDIT WORK
BY PRACTICING MEMBERS
ATR 14 (Revised)
The Council in its meeting held on 29 January 2000 reconsidered the minimum hourly charge out rates
for audit work by practicing members and decided to suitably increase the same. The Council has
authorized the following minimum hourly rates, which it considers reasonable under the present
conditions, as an indication, of the range of professional charges for audit work presenting no
exceptional characteristics. These are exclusive of traveling, hotel expenses, out of pocket expenses
and other disbursements:
The actual fees charged in individual cases will be a matter of agreement between the member and the
client.
This ATR supersedes ATR 14 (revised) issued pursuant to the Council's decision of I6 July 1997.
2-162
2.4.4 INSTRUCTIONS FROM CLIENT/ KEY DATES
SCHEDULED REMARKS
DATE
2-163
2.4.5 LIST OF SCHEDULE REQUIRED FROM CLIENT
(Date)
Dear Sir
In order to commence the annual audit for the year ended______, we shall be grateful if you could provide the
following as earlie st:
Trial balance
(If financial statements are available on soft copy, please provide the same)
Please have available for our inspection the title deeds in respect of any freehold property.
The latest financial statements of investee companies (if any) should be made available for our review.
2-164
Inventories
- detailed listing for each category of inventory, showing
reference
description
quantity
unit (ie. kilogram, metre, etc.)
unit price
valuation
Affiliates balances
Please arrange for all affiliates, including the parent company/head office to confirm their balances with
the company at the balance sheet date direct to ourselves.
2-165
Bank balances/overdrafts
- Please complete the attached letter in respect of each bank with which the company has had
dealings during the year, and return it to us, once signed, for us to forward to the banks
concerned.
Please obtain confirmations of balances held by holders of all cash floats and petty cash funds at
different locations (if any).
Loans payable. For all medium and long term loans outstanding, show
Source of loan
Purpose of loan
Original amount
Period of loan
Balance outstanding
Interest rate
Repayment arrangements
Security given
2-166
Contingent liabilities
- Please list all claims against the company and any current litigation. Please send the attached
letter to your legal advisors.
- List of all letters of guarantee given by banks on behalf of the company, noting the purpose
and amount of each.
Profit & Loss account details of classification of each income and expense item including the tax
status summary supported by the last assessment order, tax return, summary of taxes paid and details of
appeals if any.
Minutes
The minutes of all board and general meetings held during the year should be made available for our
inspection.
If you have any queries regarding the information requested above or any other questions in connection with
our forthcoming audit, please do not hesitate to contact us as soon as possible.
Yours faithfully
-sd/ -
Chartered Accountants
Note: The above list is guidance purposes only, the same can be tailored with the requirements/nature of the
client industry
2-167
2.4.6 FORMATS OF CONFIRMATIONS
2. Lawyers Confirmation
5. Loan/Lease Confirmation
2-168
BANK LETTER
Dear Sir,
CLIENTS NAME
In accordance with your above-named customer's authorization given below, please provide to us, as
auditors of your customer, information relating to its affairs as at the close of business on
on the white copy of the attached form which should be returned to us direct. The
yellow copy of the form is for your records. With respect to items 3,5 and 11 on the form the information
requested should cover the period from to .
Please state under each item in the space provided any factors which may limit the completion of your
reply; if there is nothing to report, state "NONE". Where the space provided is insufficient please use
additional sheets appropriately referenced and stamped and signed by the bank. If you find it necessary to
provide the information in a different format, please return the white copy of the attached form with your
reply.
It is understood that any replies given are in strict confidence, for the purposes of audit.
Yours truly
For and on behalf of
Firm name
DISCLOSURE AUTHORISED
For and on behalf of
2-169
Page 1 of 4
Dear Sirs
We refer to your letter dated and now return the form appropriately completed showing balances and other
information as at and in the case of items 3,5 and 11, during the period since . Where we have nothing
to report, appropriate notation is given under the relevant item(s).
Yours truly
INFORMATION REQUESTED
Please give full titles of ALL accounts whether in rupees or in any other currency together with the account numbers
and balances therein, including NIL balances:
(a) where your customer's name is the sole name in the title;
(b) where your customer's name is joined with that of other parties;
(c) where the account is in a trade name.
FULL TITLE OF ACCOUNT TYPE OF ACCOUNT ACCOUNT NUMBER CURRENCY DR/ BALANCE
CR IN FIGURES IN WORDS
ACCOUNT AGREED OVERDRAFT LIMIT TYPE OF CHARGE DESCRIPTION OF SECURITY DATE ON WHICH CHARGE
NOTES: (i) Where the account is subject to any restriction (e.g. a garnishee order or arrestment),
or exchange control considerations (e.g. "Blocked account") this information
should be stated:
(ii) Where the authority upon which you are providing this information does not cover any accounts
held jointly with other parties, please refer to your customer in order to obtain the requisite
authority of the other parties. If this authority is not forthcoming please indicate
2-170
Page 2 of 4
(2) In respect of running and term finances under mark up arrangement please give the following
particulars:
ACCOUNT DATE OF SALE PURCHASE PAYMENT RATE OF PURCHASE PRICE AND NUMBER OF
GROSS NET
(3) Full titles and dates of closure of all accounts closed during the period:
(4) Details of amounts accrued but not charged or credited at the above date; e.g. bank charges,
commitment fees, interest etc:
(5) The amount of interest charged during the period if not specified separately in the bank
statements:
(6) Particulars ( i.e. date, type of document and accounts covered ) of any written
acknowledgment of set-off, either by specific letter of set-off, or incorporated in some other
document or security.
2-171
Page 3 of 4
(7) Details of loans, cash credit and other facilities ( other than overdrafts mentioned in item 1
above), specifying agreed limits and in case of term loans, date for repayment or renewal:
Please give:
(i) details of any security (other than those mentioned under item 1 and 6 above)
formally charged to the bank, including the date and type of charge (e.g. pledge,
hypothecation etc.):
Please give full details of investments, bills of exchange, documents of title, deed boxes and
any other assets of the customer held but not charged:
2-172
Page 4 of 4
(a) aggregate amounts of bills discounted for your customer, with recourse:
(b) details of any guarantees, bonds or indemnities given to you by the customer in
favour of third parties
(c) details of any guarantees, bonds or indemnities given by you, on your customer's
behalf, stating where there is a recourse to your customer and/or to its holding,
parent or any other company within the group
A list of other banks, or branches of your bank, where you are aware that a customer/banker
relationship has been established during the period:
2-173
SAMPLE OF LAWYERS CONFIRMATION
Dear Sirs
CLIENTS NAME
We will shortly be expressing our opinion as to the fairness with which the financial statements
present the financial position of the company on ________ and the results of its operations for
the year then ended. In this connection, we shall be grateful if you would please inform us
directly of any litigation, existing or anticipated, as at the above mentioned date or arising
subsequent thereto, involving the company and your opinion as to the losses that are likely to
arise therefrom.
Yours truly
FIRMS NAME
Authorised by
2-174
SAMPLE OF TAX CONSULTANTS CONFIRMATION
Dear Sirs
We are shortly going to express an opinion on the companys accounts for the year ended _______________
and shall be grateful if you will please directly advise us the position of the companys open ended tax
assessments giving a detailed breakdown of the amounts payable or refundable and likely impact of disputed
disallowances of such assessments.
Yours truly
For and on behalf of
Disclosure authorised by
2-175
SAMPLE OF DEBTORS/CREDITORS CONFIRMATION
Please compare the above balance with your records as of the date indicated above and
mention the details of exceptions (if any) or endorse the correctness of the balance, in the
space provided below, then please sign this letter and return it DIRECTLY to our auditors:
_________________________
_________________________
_________________________
Yours faithfully
(________________)
COMPANY: ________________________
SIGNATURE: ________________________
DATE ________________________
2-176
SAMPLE OF FORMAT OF LOAN/LEASE CONFIRMATION
Dear Sirs
In accordance with your above-named customers authorisation given below, please provide to us directly as auditors of
your customer, the information relating to its affairs as at the close of business on _________________and for the period
from _____________________ to ___________________.
1. Details of all accounts whether in rupees or in any other currency as at _________________stating full title,
account numbers and balance therein including NIL balances.
2. Details of loans and credit facilities, specifying agreed limits and in case of term loans, dated for repayment or
renewals.
3. Amounts of interest, commitment fees, service charges etc., charged during the period.
4. Details of amounts accrued but not charged or cre dited at the above date: e.g., interest, commitment fees, service
charged etc.
5. Details of any security formally charged to you, including the date and type of charge (e.g. pledge, hypothecation
etc.). If a security is limited to any borrowing or if there is a prior, equal or subordinate charge, please indicate.
6. Details of customers assets held as security (other then those mentioned in your response to 5 above) or for other
purposes.
7. Details of any guarantees, bonds or indemnities given to or by you, stating where there is a recourse to your
customer and/or to its holding, parent or any other company within the group.
8. Any other information that you consider appropriate for the purposes of the audit.
Please state in respect of each item any factors, wh ich may limit the completion of your reply. If there is nothing to
report state, NONE.
It is understood that any replies given are in strict confidence for the purpose of audit.
Yours truly
DISCLOSUR E AUTHORISED
For and on behalf of
2-177
2.4.7 LIST OF AUTHORISED SIGNATORIES
Note : Information shall be used in performing audit procedures (e.g. Test of Controls &
Substantive Testing). If there are no significant changes since previous audit, this
may be transferred to the permanent file.
2-178
2.4.8 NOTES OF MEETING WITH CLIENT
CLIENT NAME
DATE
VENUE
TIME
CONCLUDING
REMARKS
Sign off
Prepared by Reviewed by
Date Date
2-179
AGENDA FOR MEETING
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
2-180
Involvement of internal audit
a. No. of staff
b. Name of department head
c. Reporting authority
d. Type of reports issued
e. Frequency of reports
Changes in economic
conditions
Significant Changes in
Business since Last year
Changes in management /
Stake holders / Owners
2-181
Changes in market strategies
Changes in information
systems and technology in use
Changes in significant
accounting processes
Effects of outcomes of
litigation since last year
2-182
Effect of any new tax rules /
legislation
Acquisitions / disposals of
associates or any anticipation
thereof
Significant changes in
accounting policies
2-183
Effect of new accounting
pronouncements
Miscellaneous
2-184
Client:_____________________________ Prepared by:____________ Date:______________
Accounting Period:___________________ Reviewed by:___________ Date:______________
Letter Addressed
Dated To From Particulars
Note: Only document those significant matters, which needs to be communicated to the audit staff except
for those matters documented in Instruction from client.
2-185
4.12 POINTS FORWARD TO NEXT YEAR
Schedule
S.No. Description of issue Service Improvement Plan
Reference
Note: This schedule would be carried forward to the next year Audit Planning File as Points
Brought Forward From Previous Year.
2-186
CLIENT:
PERIOD OF ACCOUNT:
This checklist should be completed and initialed prior to the partners approval of the audit plan.
2-187
2. In preparing the plan, has due consideration been given
to changes in:
2-188
5. Has materiality level been determined and used in
the sampling procedures to verify the significant
transactions?
2-189
Planning File, Overall audit plan, Detailed audit Plan
and planning checklist reviewed and approved by
2-190
3.1 GENERAL INSTRUCTIONS FOR DOCUMENTATION OF AUDIT
EXECUTION FILE
1. Planning file must be completed, reviewed and signed by at least a senior audit staff
before commencement of field work.
2. The job incharge should ensure that following has been done / completed before
presenting the file for review:
2.1 Total of the lead schedules for each head agrees with the accounts.
2.2 Lead schedules must be supported by the audit evidence gathered during the
course of the audit
2.3 There should be a conclusion preferably on the lead schedule on each financial
statement component, signed by the person who has executed the work as well as
the reviewer.
2.4 Lead schedules and sub-schedules are initialled and dated by auditor who has
prepared the schedule and carried out the work.
2.5 List of final outstanding points and exceptions with their disposals should be
stated in un-ambiguous terms and cross-referenced to working paper files.
2.6 Audit symbols used must explain the work performed and ensure that percentage
of work completed must be stated for each financial statement component, which
is not fully verified. If sampling procedures used by the auditor, ensure that steps
are properly correlated with the materiality threshold determined at the planning
stage
2.7 All audit program steps should be cross-referenced with the schedules containing
work done.
2.8 A copy of the relevant audit program is to be filed with each significant financial
statement component
3. Auditor must ensure that observations relating to internal control weaknesses (revealed
during test of controls / cut off procedures) are properly addressed in draft management
letter or internal control memorandum.
3-1
3.2 EXCEPTIONS AND CONTROL WEAKNESSES
CLIENT: _________________________________________________________
_________________________________________ ___________________________________________
_________________________________________ ___________________________________________
_________________________________________ ___________________________________________
_________________________________________ ___________________________________________
RISK ADDRESSED
__________________________________ ____________________________________
__________________________________ ____________________________________
__________________________________ ____________________________________
__________________________________ ____________________________________
RECOMMENDATION
__________________________________ ____________________________________
__________________________________ ____________________________________
__________________________________ ____________________________________
__________________________________ ____________________________________
3-2
3.3 AUDIT WORKING PAPERS GUIDELINES
1. Introduction.
The objective of an audit of financial statement is to enable the auditor to express an opinion
whether the financial statements are prepared, in all material respects, in accordance with an
identified financial reporting framework. In order to express the opinion, the auditor follows
certain procedures, performs tests, and obtains information and reaches conclusion after
examining the financial statements.
The auditor should document matters that are important in providing evidence to support the
audit opinion. This documentation of working papers may be in the form of data stored on paper,
film, electronic media or other media,
2. Purpose.
The need of audit working papers is to show that the audit engagement is adequately planned,
executed, the work of the assistants has been properly supervised and that the working papers
support the contents of the opinion.
4. Standardization.
The quantity, type, content and form of working papers will vary with the policy of the firm and
circumstances, depending on the type of audit. A standard form or group of forms cannot be
devised to cover all situations. The auditor must have the capability to devise new or modify
forms to meet situations as they arise. Factors affecting our judgment about the working papers
prepared and their content include:
3-3
5. General consideration.
Working papers are designed and organized to meet the circumstances and our needs for each
individual audit. The use of standardized working papers (for example, checklists, specimen
letters, and standard organization of working papers) improve the efficiency with which such
working papers are prepared and reviewed. They facilitate the delegation of work while
providing a means to control its quality.
To improve audit efficiency, we may utilize schedules, analyses and other documentation
prepared by the client. In such circumstances, we need to be satisfied that those materials have
been properly prepared.
3-4
3.4 SIGNIFICANT COMPONENTS OF BALANCE SHEET
AND P & L ACCOUNT
MAIN INDEX
Year end________________________________________
Page No.
CAPITAL AND LIABILITIES
PP TAXATION 3-30
RR DIVIDENDS 3-33
3-5
MAIN INDEX
Year end________________________________________
ASSETS
Page No.
3-6
MAIN INDEX
PL 1 SALES 3-67
PL 8 APPROPRIATIONS 3-82
3-7
Index
File No. Reference AA
Client: Prepared by Date
Lead Schedule: Share Capital Reviewed by Date
Accounting
Period
SHARE CAPITAL AA
3-8
File No. Reference AA/LS
Client: Prepared by Date
Lead Schedule: Share Capital Reviewed by Date
Accounting
Period
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
3-10
Reference BB/LS
Client: Date
Lead Schedule: Reserves and Date
accumulated profit
Total
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matter to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
SURPLUS ON REVALUATION OF CC
FIXED ASSETS
3-12
File No. Reference CC/LS
Client: Prepared by Date
Lead Schedule: Surplus on revaluation of Reviewed by Date
Fixed assets Accounting
Period
Opening Balance
* Data of Revaluation
- Ban's of Revaluation
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
REDEEMABLE CAPITAL DD
3-14
File No. REFERENCE DD/LS
Client Name Initial Date
Prepared by
Lead Schedule : REDEEMABLE CAPITAL Checked by Job Incharge
Year End : Reviewed by Manager / Partner
Account Ref. P. T. C. Musharika T. F. C. Long term Current Period Previous Period
No. arrangement running finance
under markup Rupees Rupees
arrangement
Participatory / Non - Participatory
Secured / Unsecured
Opening balance
Redeemed during the year < > < > < > < > < > < > < > < > < > < >
Instalment due
Principal amount
Marked up price
Markup
Instalment amount
Number of Instalments
CONCLUSION
1. The audit has been completed in accordance with Audit Program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and notes of unusual matters to enable us to from and opinion on financial statements.
4. In my opinion _________________ of Rs. ______________________ are fairly stated and on a consistent basis with the previous period.
3-16
File No. Reference EE/LS
Client Name Date
Prepared by
Lead Schedule : LONG TERM LOANS Checked by Job Incharge
Year End : Reviewed by Manager / Partner
Account Ref. Banking From From directors Others Current Period Previous Period
No. Companies subsidiaries (including
and other controlled firm Chief Executives) Rupees Rupees
financial managed
institution modarabas and
other associated
undertakings
Secured / Unsecured
Opening balance
Instalment due
Amount of Instalments
Foreign Currency
Sub Note :
(Securities, priority in payment,
Conversion features, recognition
of exchange differences and other
material terms)
CONCLUSION
1. The audit has been completed in accordance with Audit Program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and notes of unusual matters to enable us to from and opinion on financial statements.
4. In my opinion _________________ of Rs. ______________________ are fairly stated and on a consistent basis with the previous period.
Job Supervisor : ____________________________
________________________ Date : __________________ 3-17
Index
File No. Reference FF
Client: Prepared by Date
Lead Schedule: Liabilities against assets Reviewed by Date
subject to finance lease. Accounting
Period
3-18
File No. REFERENCE G
Client Name Initial Date
Prepared by
Lead Schedule :: LIABILITIES AGAINST ASSETS SUBJECT TO FINANCE LEASE Checked by Job Incharge
Year End : Reviewed by Manager / Partner
Account Ref. Current Period Previous Period
No.
Rupees Rupees
Opening Balance
Paid during the period < > < > < > < > < > < > < > < > < > < >
Instalment due
< > < > < > < > < > < > < > < > < > < >
Principal amount
Deposit amount
Instalment amount
Instalment payment rest
Number of Instalment
Applicable rate of finance %
Sub note :
Purchase option, executory cost born
by lessor/ lessee, residual value of
assets, financing restriction
Year Ending
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
DEFERRED LIABILITIES GG
3-20
File No. Reference GG/LS
Client: Prepared by Date
Lead Schedule: Deferred liabilities Reviewed by Date
Accounting
Period
Deferred Taxation
- On account of :- GG-1
Accelerated Depreciation
Gratuity/Retirement Funds
Others
- Others GG2-19
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
3-22
File No. Reference HH/LS
Client: Prepared by Date
Lead Schedule: Long-term Deposits Reviewed by Date
Accounting
Period
- Customers HH-1
- Employees HH-2
- Nature
- Repayment Period
- Rate of interest
- Other Material Term
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
3-24
File No. Reference JJ/LS
Client: Prepared by Date
Lead Schedule: Short-term loans and Reviewed by Date
Financial arrangements Accounting
Period
- Others JJ7-19
* Sub-note
- Rate of interest
- Nature of security
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
3-26
File No. Reference MM/LS
Client: Prepared by Date
Lead Schedule: Current portion of Long Reviewed by Date
Term liabilities Accounting
Period
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
3-28
File No. Reference NN/LS
Client: Prepared by Date
Lead Schedule: Creditors,Accrued and Reviewed by Date
Other liabilities Accounting
Period
Current Period Previous Period Increase/ Reason for Remarks For the purpose of disclosure
Reference Decrease variation in the accounts, amounts due to associated
Rupees Rupees % undertakings at the period end be
enter below
- CREDITORS NN-1 Rs ---------- (19... Rs...)
- ACCRUED LIABILITIES NN-2
- BILLS PAYABLE NN-3
- ADVANCE PAYMENTS, UNEXPIRED
DISCOUNTS AND DEFERRED INCOME NN-4
- MARK UP ACCRUED ON SECURED LOANS NN-5 Statistics amount%
- MARK UP ON EACH CLASS OF REDEEMABLE
CAPITAL - vouched
- MARK UP ACCRUED ON UNSECURED LOANS NN-6 - confirmed
- PROFIT, RETURN OR MARKUP ACCRUED NN-7 - subsequently
- WORKERS' PROFIT PARTICIPATION FUND NN-8 cleared
- WORKERS' WELFARE FUND NN-9
- PAYABLE TO DEBTOR
- OTHER LIABILITIES NN-10
- OTHER DEPOSITS NN-11
- TRADE CREDITORS NN-12
- ADVANCES FROM CUSTOMERS NN-13
- CUSTOM EXCISE DUTY PAYABLE NN-14
- CONTRACTORS EARNEST/PETENTION MONEY NN-15
- SALES TAX PAYABLE NN-16
- MARK UP ON RUNNING FINANCES NN-17
- MARK UP ON TERM FINANCES NN-18
- DISTRIBUTORS SECURITY DEPOSITS PAYABLE NN-19
ON TERMINATION OF DEALERSHIP NN-20
- OTHERS NN-20-25
B/S B/S
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
TAXATION PP
3-30
File No. Reference PP / LS
Client: Prepared by Date
Lead Schedule: Taxation Reviewed by Date
Accounting
Period
Opening balance
Total
PAYMENTS - CUMULATIVE
Opening balance
Total
Balance
Represented by:
Tax liability
Tax refundable
Advance payment of tax
B/S B/S
CONCLUSION
3-32
Index
File No. Reference RR
Client: Prepared by Date
Lead Schedule: Dividends Reviewed by Date
Accounting
Period
DIVIDENDS RR
3-33
File No. Reference RR/LS
Client: Prepared by Date
Lead Schedule: Dividends Reviewed by Date
Accounting
Period from
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matter to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
3-35
File No. Reference SS/LS
Client: Prepared by Date
Lead Schedule: Contingencies and Reviewed by Date
Commitments Accounting
Period
- Contingencies SS-1
- Nature of contingencies SS-2
SS-3
SS-4
SS-5
SS-6
SS-7
Note Note
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
OPERATING ASSETS A
3-37
Index
File No. Reference B
Client: Prepared by Date
Lead Schedule: Assets subject to finance Reviewed by Date
Lease Accounting
Period
3-38
File No. Reference A-B/LS
Client Name Initial Date
Prepared by
Lead Schedule : FIXED ASSETS Reviewed by Manager / Partner
Year End :
Account Ref. Depreciation
No. Cost at Addition/ Disposal/ Capitalization Cost at Accumulated Adjustment Depreciation Accumulated Written down Rate
the Begening Transfer during Transfer during of unallocated the end of the Depreciation Disposal / for the year Depreciation at value %
of the Year the period the period capital expenditure Year at the Transfer the end of
Begening the year
of year
Land - freehold
Land - leasehold
Office Equipment
Vehicle
Under lease :
Equipment
Vehicle
Preceding Period
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
Account Cost Accumulated Written down Sale proceed Gain/ Particulars of Mode of
No. Discription of assets Depreciation Value (Loss) Buyers Disposal
3-40
Index
File No. Reference C
Client: Prepared by Date
Lead Schedule: Capital work in progress Reviewed by Date
Accounting
Period
3-41
File No. Reference C / LS
Client: Prepared by Date
Lead Schedule: Capital work in progress Reviewed by Date
Accounting
Period
- Others C-3
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
Audit program D - AP
Lists D1-19
Discussion paper for Capitalization of D-21
these Stores
3-43
File No. Reference D / LS
Client: Prepared by Date
Lead Schedule: Stores and spares held for Reviewed by Date
Capital Expenditure Accounting
Period
Stores D-1
Spares D-2
Others D4-19
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
INTANGIBLE ASSETS E
3-45
File No. Reference E / LS
Client: Prepared by Date
Lead Schedule: Intangible Assets Reviewed by Date
Accounting
Period
Goodwill E-1
Others E3-19
Copy rights
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
UNALLOCATED PRE-PRODUCTION H
EXPENDITURE
3-47
File No. Reference H / LS
Client: Prepared by Date
Lead Schedule: Unallocated Pre- Reviewed by Date
Production Expenditure Accounting
Period
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
3-49
File No. Reference K/LS
Client: Prepared by Date
Lead Schedule: Long-Term Investments Reviewed by Date
Accounting
Period from
- Modarba
- Modarba
- Others K-11
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matter to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
3-51
File No. Reference L / LS
Client: Prepared by Date
Lead Schedule: Long Term Loans and Reviewed by Date
Advances Accounting
Period
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
3-53
File No. Reference M / LS
Prepared by Date
Lead Schedule: Long Term Deposits, Reviewed by Date
Prepayments and Accounting
Deferred costs Period
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
3-55
File No. Reference N / LS
Client: Prepared by Date
Lead Schedule: Stores,Spares and Loose Reviewed by Date
Tools Accounting
Period
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
STOCK - IN - TRADE R
Cut-offs R-24
3-57
File No. Reference R / LS
Client: Prepared by Date
Lead Schedule: Stock-in Trade Reviewed by Date
Accounting
Period
Notes:
- Raw Material and component R-1 (i) Provision , if any, should be disclosed separately
against each items
- Packing Material R-2 (2) Disclosure to be made
(a) fixed production overhead excluded as cost compound
- Work in Process R-3 (b) FIFO or weighted average cost which is not used
(c) LIFO or base stock formula used (IAS-2)
- Finished Goods R-4 (3) Inventories to be valued at base of cost and net valuable value
(4) Disclosure to be made of stocks valued at NRV (IAS-2 para 34)
- Waste stock R-5 (5) Stock held by third parties to be disclosed by way of note
(IAS-2 para 34
- Stock-in-Bond R-6 (6) Amount and circumstances related to reversals of write-down
recognised as income in the period
- Stock-in-transit R-7
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
TRADE DEBTS S
Confirmations S-20
3-59
File No. Reference: S/LS
Client: Prepared by Date
Lead Schedule: Trade Debts Reviewed by Date
Accounting
Period
Considered Doubtful
3- Disclosure to be made of
amount not expected to
be realised within one year (IAS-13)
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
Confirmations V-20
3-61
File No. Reference V/LS
Client: Prepared by Date
Lead Schedule: Trade Deposits,Short-Term Reviewed by Date
Prepayments/ Loans,Advances and Accounting
Other Receivables Period from
Deposits V-1
Prepayments V-2
Loans V-3
Staff
Executives
Chief Executive
Considered good and bad
Advances V-4
Considered good and bad
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matter to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
B/S B/S
3-63
File No. Reference W / LS
Client: Prepared by Date
Lead Schedule: Marketable Securities/Short-term Reviewed by Date
Investments Accounting
Period
- Others W-12
- Provision regarding 6(D) relating, to provision
(3(B), 3(C), 3(D), 3(E) and 3(F) in the 4th
schedule is regimed
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
3-65
File No. Reference X/LS
Client: Prepared by Date
Lead Schedule: Cash and Bank Balances Reviewed by Date
Accounting
Period
Balances in hand
(i) Cash
(ii) Cheques
Balances in transit
Total
B/S B/S
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
SALES
Monthly analysis
Related information
Quantitative reconciliation
3-67
File No. Reference PL1/LS
Client: Prepared by Date
Lead Schedule: Sales Reviewed by Date
Accounting
Period
Sales
(1) The working result of each line
- Exports of business to be separately given provided
the turnover of each line exceed
- Local 20% of the total turnover of the
company.
- Export Quota (2) Value of items exported during the financial
year to be disclosed provided such
- Waste value exceeds 20% of the
total turnover of the company.
Net sales
Statistics Amount %
P/L P/L
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
COST OF SALES
Related Information
3-69
File No. Reference PL2/LS1
Client: Prepared by Date
Lead Schedule: Cost of Sales Reviewed by Date
Accounting
Period
- Work in Process
Opening
Closing R-3
- Finished Goods
Opening
Closing R-4
- Excise Duty
P/L P/L
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
3-71
Index
File No. Reference PL3
Client: Prepared by Date
Lead Schedule: General and Administrative Reviewed by Date
Accounting
Expenses Period
Significant Payments/accruals
Compliance tests
3-72
File No. Reference PL3/LS
Client: Prepared by Date
Lead Schedule: General and Administrative Reviewed by Date
Accounting
Expenses Period from
- Directors Remuneration
- Salaries pages and Benefits In case of donations where any director
- Rent, Rates, and Taxes or his spouse has interest in the donees
- Vehicle Running and Maintenance the names of such directors their interest
- Printing and Stationery to the donee and the name and addresses of
- Telephone, Telex and Postage all donees shall be disclosed.
- Fees and Subscriptions
- Travelling and Conveyance & entertainment
- Legal and Professional Statistics %
- Auditors' Remuneration
Audit Fee Vouched _______
Other Services globally _______
Out of Pocket Expenses verified _______
- Advertisement & Sales promotions
- Entertainment
- Charities and Donations names and addresses of the Auditor's remunerations:
donees and of directors including their spouses and
children interested is required IF (--) of 4th schedule Audit fee
tax advisory
- Depreciation method of Depreciation services special
- Others report certs,
- Insurance sundry advisory
- Repairs & maintenance services other
- Bad debts written off - trade out of pocket
- others
- Provision for doubtful debts
- trade
- others
- Research & development cost included in bad debts
due by:
- Directors chief executive, managing agent & executive
- Associative undertakings
P/L P/L
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
Monthly Analysis
Significant Payments/Accrual
3-74
File No. Reference PL4/LS
Client: Prepared by Date
Lead Schedule: Selling and Distribution Reviewed by Date
Expenses Accounting
Period from
- Ocean Freight
- Forwarding Expenses
- Bank Charges
- Others
P/L P/L
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
FINANCIAL CHARGES
Compliance tests
Significant Payments/Accruals
Monthly analysis
3-76
File No. Reference PL5 / LS
Client: Prepared by Date
Lead Schedule: Financial Charges Reviewed by Date
Accounting
Period
- On Redeemable Capital DD
- On Finance Leases FF
Mark-up on
- Term finance
- Running finance
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
OTHER CHARGES
3-78
File No. Reference PL6/LS
Client: Prepared by Date
Lead Schedule: Other Charges Reviewed by Date
Accounting
Period
Exchange loss
Others (specify)
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
OTHER INCOME
3-80
File No. Reference PL7/LS
Client: Prepared by Date
Lead Schedule: Other Income Reviewed by Date
Accounting
Period
Interest Income
Scrap sale
Miscellaneous W
Income from investments in association undertakings/
others (I(A) (ii) in 4th schedule
Income from unusual items
P/L P/L
CONCLUSION
Current
Deferred
3-82
File No. Reference PL8/LS
Client: Prepared by Date
Lead Schedule: Provision for Taxation Reviewed by Date
Accounting
Period
Current Year PP
Prior Period PP
Deferred GG-1
CONCLUSION
1. The audit has been completed in accordance with Audit program.
2. The working papers demonstrate that adequate work has been undertaken.
3. The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4. In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
4-1
4.2 WORKINGS OF CASH FLOW STATEMENT
Document the workings of current and previous years cash flow statement and properly
refer each item with the final draft / initialled financial statements.
4-2
4.3 AUDIT COMPLETION CHECKLIST
CLIENT: YEAR ENDED:
Each section of this checklist should be completed by the supervising senior/manager at the end of each phase of the
audit, prior to partners review.
1. Has all the work been planned before the start of detailed audit
procedures and properly documented in the planning file?
3. Is all the audit work executed & documented in the Execution File,
including:
4. Has the work of each audit staff been reviewed in detail by the
supervisory staff?
4-3
YES/NO/N.A INITIAL / DATE
11. Has final draft / initialled accounts been referenced to the working
papers and documented in the Completion & Reporting File?
12. Have the workings of cash flow statement been documented and
properly referenced with final accounts?
13. Has accounts completion checklist been filled out before issuing
initialled accounts to the client?
14. Has partner review notes & queries been properly disposed off?
15. Have all significant matters relating to audit and other areas of
assignment been documented in the summary review memorandum?
18. Has letter to the board of directors been issued to the management
including areas, which needs to be communicated to/approved by the
board of directors?
19. Has matters of important nature that needs to be considered in the next
audit are properly documented in the points carried forward to next
year?
21. Have subsequent event review checklist been filled out covering
evaluation of all possible post balance sheet event up to the date of the
auditors report?
22. Has going concern checklist been filled out to ensure that going
concern assumption is appropriate?
23. Have all adjustments been entered into the books of account to make
them agree with the draft financial statements?
24. Has review by the second partner been carried out (in case of large
clients or as per firms policy) and proper evidence of the same is
documented in the completion and reporting file?
25. Have all related party transactions (e.g., transactions with directors and
associated undertaking) been identified and effect of these transactions
has considered?
4-4
4.4 ACCOUNTS COMPLETION CHECKLIST
Name of client: ____________________ Year ended _______________
Prepared by: ____________________ Date _______________
Reviewed by ____________________ Date _______________
AUDITORS'REPORT:
S-No. DESCRIPTION FINAL DRAFT
3 Para (b)(i):
If there is any change in accounting policy (ies) Para should be
amended by stating except for the changes as stated in note (s)
_____ with which we concur.
4-5
FINANCIAL STATEMENTS:
S. No. DESCRIPTION FINAL DRAFT
8 Ensure that last year's figures appearing in the accounts are traced
from last years signed accounts except where they have been
rearranged.
10 Ensure that the statement i.e 'The annexed notes form an integral
part of these accounts." appears in the balance sheet and profit and
loss account
11 Ensure that all the carry forwards and brought forwards are in
agreement Ensure no rounding errors exist between brought
forwards and carry forwards.
4-6
12 Ensure that if the company is subject to any other ordinance or
regulations disclosures required by these have also been made.
Examples of such disclosures are Investment Advisers Rules, 1971
or SBP's prudential regulations.
14 Check casting of all the totals and sub totals. Check all spellings and
grammar.
4-7
4.5 Partner Review Notes & Queries
Observations/Notes Disposal
4-8
4.6 SUMMARY REVIEW MEMORANDUM
Following are the examples of items that may be reported in the Summary Review Memorandum
for the review of the partner:
Provisions
4-9
Client File No.
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Authorized capital
General Reserves
Capital Reserves
Redeemable Capital
Deferred Liabilities
Current Liabilities
Proposed Dividend
Total Liabilities
4-10
Client File No.
Name Initial Date
Analytical Review-Balance Sheet
Assets Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Capital-work-in-progress
Intangible Assets
Current Assets
Stock-in-trade
Trade Debts
Total Assets
4-11
Client File No.
Name Initial Date
Analytical Review - Sales
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Export
Local
Less :
- Commission
- Excise Duty
- Sales Tax
4-12
Client File No.
Name Initial Date
Analytical Review - Cost of Goods Sold
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Insurance
Depreciation
Work in process :
Opening stock
Closing stock
Finished Goods:
Opening stock
Closing stock
4-13
Client File No.
Name Initial Date
Analytical Review - Administrative
Expenses Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Directors' remmuneration
Insurance
Utilities
Entertainment
Auditors' remmuneration
Advertisement
Depreciation
Other
4-14
Client File No.
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Travelling
Others :
Market Survey
Bank Charges
Insurance
4-15
Client File No.
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Markup / interest on :
- Redeemable Capital
- Debenture
- Lease Finance
4-16
Client File No.
Name Initial Date
Analytical Review - Other Income
Prepared by
Checked by
Year End : Job Incharge
Reviewed by Manager/Partner
Account Ref. Current Period Previous Period Increase/Decrease Increase/ Reason for
Code Decrease Increase and Decrease
Rupees Rupees Rupees %
Rental Income
Scrap sales
Others
Unusual income
4-17
ANALYTICAL REVIEW RATIO ANALYSIS
FORMULA
Y1 Y2 Y3 Y4
A. PERFORMANCE ANALYSIS
1. Installed Capacity
2. Capacity utilized
3. Production in units i.e. Kgs. metres etc.
4. Production after convers ion, if any.
5. Gross Sale in % - Local Local Gross Sales
Gross Total Sales
8. Average raw material purchase price per unit. Total Purchase Price of Raw material
total units purchased
10. Conversion cost without depreciation per unit Conversion Cost without depreciation
units produced
12. Store and spares consumption per unit of Store & Spares consumption in
production. rupees
units produced
14. Packing material cost per unit of production Packing material cost
units produced
4-18
FORMULA
Y1 Y2 Y3 Y4
18. Net Profit / (Loss) per unit sold Net Profit / (Loss)
unit sold
20. Production in %
In case of Textile
B. PROFITABILITY RATIOS
_________________________________________________________________________________
4-19
FORMULA
Y1 Y2 Y3 Y4
4. Earning yield Earning per Share
Market value per share
C. ACTIVITY RATIOS
1. Inventory Turnover
4-20
FORMULA
Y1 Y2 Y3 Y4
D. LIQUIDITY RATIOS
_________________________________________________________________________________
_________________________________________________________________________________
4-21
4.8 MANAGER REVIEW NOTES & QUERIES
Observations/Notes Disposal
4-22
4.9 MANAGEMENT REPRESENTATION LETTER
A management representation letter (format enclosed) is a letter addressed to the auditor that has
been drafted by the auditor and given to the client to sign. The purpose of such a letter includes:
the minimization of misunderstandings between the client and the auditor.
the commitment to writing of representations previously made verbally by management
to the auditor.
the provision of corroborative evidence.
Note that where other evidence is available, the auditor does not rely solely on evidence obtained
through management representations. Where other evidence is not available, evidence gathered
solely by way of a management representation letter is not normally considered to be particularly
reliable.
4-23
SUGGESTED MANAGEMENT REPRESENTATION LETTER
Dear Sirs
We confirm to the best of our knowledge and belief, the following representation made to you
during your examination of the financial statements of (clients name) for the (period of
examination).
2. All minutes of the meetings of shareholders, directors and committees of directors and all
financial and accounting records and related data have been made available to you. We
are not aware of any accounts, transactions or material agreements not fairly described
and properly recorded in the financial and accounting records, underlying the financial
statements.
4-24
4. All cash and bank accounts and all other properties and assets of the company of which
we are aware are included in the financial statements at (balance sheet date). The
company has satisfactory title to all owned assets (state here exceptions, if any) and all
liens, encumbrances or security interests of any important consequence on any asset of
the company are disclosed in the statements or notes thereto.
6. Inventories at (balance sheet date) in the aggregate amount of Rs ___________ are stated
at the lower of cost or market, cost being determined on the basis of (LIFO, first-in-first-
out, or other basis) and consistently with the prior year, and due provision was made to
reduce all slow-moving, obsolete, or unusable inventories to their estimated useful or
scrap values. Inventory quantities at were determined from the companys
inventory records, which have been adjusted on the basis of physical inventories taken by
competent employees at (date of physical inventory count or various times during the
year). Liability, if unpaid, for all items included in inventories is recorded at (balance
sheet date) and all quantities billed to customers at that date are excluded from the
inventory balances. Inventories comprise the whole of the companys stocks, wherever
situated and that stocks held on behalf of other parties have been excluded.
7. All liabilities of the company which we are aware are included in the financial statements
at (balance sheet date). There are no other material liabilities or gain or loss contingencies
that are required to be accrued or disclosed and no unasserted claims or assessments
which must be disclosed.
8. Commitments for future purchases are for quantities not in excess of the anticipated
requirements and at prices which will not result in loss. Provision has been made for any
material loss to be sustained in the fulfillment of, or from inability to fulfill, any sales
commitments.
9. The financial statements and appended notes include all disclosures necessary for a fair
presentation of the financial position and results of operations of the company in
accordance with prescribed accounting practices, and disclosures otherwise required to be
included therein by the laws and regulations to which the company is subject. The
following have been properly recorded or disclosed in the financial statements (if none,
include under a separate caption having the introduction there are no .):
4-25
b) Share capital repurchase options or agreements or share capital reserved for
options, warrants, conversions, or other requirements.
c) Arrangements with financial institutions involving compensations balances or
other arrangement involving restrictions on cash balances and line of credit or
similar arrangements.
10. No matters or occurrences have come to our attention up to the present time which would
materially affect the financial statements and related disclosures for the year ended
(balance sheet date) or, although not affecting such financial statements or disclosures,
have caused or are likely to cause any material change, adverse or otherwise, in the
financial position or results of operations of the company. We have no plans or
intentions that may materially affect the carrying value of classification of assets and
liabilities.
Yours truly
..
(Senior Executive Officer)
Date:..
Note: Representation letter must be dated same as the date of audit report. (AS 22 Para 13)
4-26
4.10 SUGGESTED LETTER TO THE BOARD OF DIRECTORS
(BOD)
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:
All additions to assets (including investments) (over the limits in Companies Ordinance)
All disposals of assets
Bonuses
Level of provisions
Transfers
Items of management estimates and judgement
Deferral or Capitalisation of expenditure
Revaluation of assets
4-27
4.11 MANAGEMENT LETTER
Recommendations regarding internal control are a byproduct of the financial statements audit, not a
primary objective, but nonetheless should be of value to a client. The auditor needs to make
management aware, on a timely basis, of material weaknesses in the design or operation of the
accounting and internal control systems, which have come to auditors attention.
When an auditor prepares a written communication on internal control matters, it is suggested that the
communication:
Not include the language that has the effect of being in conflict with the opinion expressed in the
audit report;
State that the accounting and internal control systems were considered only to the extent
necessary to determine the auditing procedures to report on the financial statements and not to
determine the adequacy of internal control for management purposes or to provide assurance on
the accounting and internal control systems;
State that it discusses only weaknesses in internal control which have come to the auditors
attention as a result of the audit and that other weaknesses in internal control may exist;
The significance of findings relating to the accounting and internal control systems may change with the
passage of time. Suggestions from previous years audits which have not been adopted, if any, should
normally be repeated or referred to.
[For other guidance please refer International Auditing Practice Statement (IAPS 7)]
4-28
SUGGESTED FORMAT OF MANAGEMENT LETTER
The following letter is not intended to be a standard letter. Points for inclusion in the management letter
will vary from one entity to another and from one period to the next.
(Auditor Letterhead)
(Date)
This management letter is provided in connection with our audit of your financial statements of for the
year ended _____________. The letter highlights those weaknesses in the accounting and internal
control systems, which have come to our notice during the course of the audit.
Because of the test nature and other inherent limitations of an audit, together with the inherent limitations
of an accounting and internal control system, there is an unavoidable risk that even some material
weaknesses or misstatements may remain undiscovered.
Issues Arising
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Consequences/Risk
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Recommendation
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Management Response
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Schedule
S.No. Description of issue Service Improvement Plan
Reference
Note: This schedule would be carried forward to the next year Audit Planning File as Points
Brought Forward From Previous Year.
4-30
4.13 FINANCIAL STATEMENTS DISCLOSURE CHECKLIST
Due to significant changes in the International Accounting Standards (IASs), financial statements
disclosure checklist has become outdated, the same is in the process of finalization.
4-31
CLIENT:- Initial
Date
YEAR END:- COMPLETED BY :
REVIEWED BY :
4.14 SUBSEQUENT EVENTS REVIEWCHECKLIST
Yes / No /
N.A.
(Any note on
separate
sheets)
EVENTS DISCOVERED UPTO SIGNING OF AUDIT REPORT
1. Adjustable Events:
A. Have under given possible events (alongwith checking procedures) which may be
adjusted been identified clearly, discussed with clients officials and adjusted in
accounts?
4-32
2. Non-adjustable events: (Only disclose if material)
B. Have under noted possible events been discussed with clients officials and
disclosed in accounts in compliance with IAS-10?
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.
Note:
Apart from above, also consider above events upto the signing of audit report but
before its issuance and events discovered after financial statement are issued or
when there is any change in financial statements after it is issued.
4-33
CLIENT:- Initial Date
YEAR END:- COMPLETED BY :
REVIEWED BY :
4.15 GOING CONCERN REVIEW CHECKLIST
1. Have the following points been discussed with client and observed during Yes/ No/ N.A.
the course of audit? Yes=Alarming Point
(Write brief note in
separate sheet)
- Under capitalization.
B.i. Indications for company about the continuation of business & lead
inability of paying debts (Internal Problems):
4-34
- Work stoppage and other labour difficulties
- Uneconomic commitments.
- Political risk.
- Pending legal proceedings against the entity that may, if successful result
in judgments that could not be met.
2. Have the sufficient evidences been obtained for above said points?
4-35
PERMANENT AUDIT FILE
CLIENT_________________________________________________________________
INDEX
4. Miscellaneous
5-1
FILE DESCRIPTION DATE
REF.
5.1.4 Prospectus
5.1.5 Other
5-2
FILE DESCRIPTION DATE
REF.
5.2. Minutes
5.2.3 Other
5-3
FILE DESCRIPTION DATE
REF.
5.3.2 Other
5-4
FILE DESCRIPTION DATE
REF.
5.4. Miscellaneous
5-5
SUMMARY OF SOME INTERNATIONAL STANDARDS ON
AUDITING (ISAs)
Contents Page
7. AS 9 Documentation 6-15
The objective of an audit of financial statements is to enable the auditor to express an a opinion
whether the financial statements are prepared, in all material respects, in accordance with an
identified financial reporting framework.
The auditor should comply with the Code of Ethics for Professional Accountants issued by the
International Federation of Accountants.
The auditor should conduct an audit in accordance with ISAs. These contain basic principles and
essential procedures together with related guidance in the form of explanatory and other material.
The term of Scope of an audit refers to the audit procedures deemed necessary in the
circumstances to achieve the objective of the audit. The procedures required to conduct an audit
in accordance with ISAs should be determined by the auditor having regard to the requirements
of ISAs, relevant professional bodies, legislation, regulations and, where appropriate, the terms
of the audit engagement and reporting requirements.
An audit in accordance with ISAs is designed to provide reasonable assurance that the financial
statements taken as a whole are free from material misstatement. Reasonable assurance is a
concept relating to the accumulation of the audit evidence necessary for the auditor to conclude
that there are no material misstatements in the financial statements taken as a whole. Reasonable
assurance relates the whole audit process.
However, there are inherent limitations in an audit that affect the auditors ability to detect
material misstatement. These limitations result from factors such as:
While the auditor responsible for forming and expressing an opinion on the financial statements,
the responsibility for preparing and presenting the financial statements is that of the management
of the entity. The audit of the financial statements does not relieve management of its
responsibilities.
6-2
AS-2 - Terms of Audit Engagements
The auditor and the client should agree on the terms of engagement.
It is in the interest of both client and auditor that the auditor sends an engagement letter,
preferably before the commencement of the engagement, to help in avoiding misunderstanding
with respect to the engagement.
The engagement letter documents and confirms the auditors acceptance of the appointment, the
objective and scope of the audit, the extent of auditors responsibilities to the client and the form
of any reports.
The agreed terms should be recorded in an audit engagement letter or other suitable
form of contract.
The engagement letter should be sent before the commencement of the engagement,
the purpose being to document and confirm the auditors acceptance of the
appointment, the objective and scope of the audit, the extent of the auditors
responsibilities to the client and the form of any reports.
Consideration should be given to a situation where revised terms of engagement are
required.
Where the terms of engagement are changed the auditor and the client should agree
on the new terms.
The letter would generally include the following:
- Objective of the audit of financial statements
- Managements responsibility for the financial statements
- Scope of the audit
- Explanation that because of the test nature and other limitations of an
audit, together with the inherent limitations of an accounting and internal
control system, there is an unavoidable risk that even some material
misstatements may remain undetected
- Form of any report
- Unrestricted access to whatever records and other information requested in
connection with the audit
On recurring audits, the auditor should consider whether circumstances require the
terms of the engagements to b revised and whether there is a need to remind the
client of the existing terns of the engagements.
An auditor who, before the completion of the engagement, is requested to change the
engagement to one which provides a lower level of assurance, should consider the
appropriateness of doing so.
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AS-4 - Audit Planning
The auditor should plan the audit work so that the audit will be performed in an effective
manner.
Planning means developing a general strategy and a detail approach for the
expected nature, timing and extent of the audit.
Adequate planning ensures that appropriate attention is devoted to important areas
of the audit, potential problems are identified and the work is completed
expeditiously, planning also assists in proper assignment of work to assistants and
in coordination of work done by other auditors and experts.
The extent of planning will depend on the size of the entity, the complexity of the
audit and the auditors experience with the entity. However some form of
planning should be prepared for all assignments.
An overall audit plan describing the scope and conduct of the audit should be
developed and documented, after considering the following:
- Economic factors and industry conditions affecting business
- Changes, if any, since the prior audit
- Level of competence of management
- Accounting policies adopted by entity and changes in policies
- Effect of new accounting or auditing pronouncements
- Number of locations
- Involvement of experts
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- The terms of the engagement and statutory responsibilities.
The senior manager or partner in charge should approve the audit plan.
The overall audit plan and audit program should be revised as necessary during
the course of the audit.
Audit Program
An audit program setting out the nature, timing and extent of planned audit procedures to be
implemented should be developed and documented. It is a means to control and record the proper
execution of the work. A standard audit program may be developed by the firm to form the basis,
but it should be modified according to the requirements of a specific audit engagement.
The following points may be taken into account while preparing an audit program:
- It should contain the audit objectives for each area covered by the audit.
The person performing the procedures and the person reviewing the work should
sign the audit program.
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AS-6 - Risk Assessments and Internal Control
The auditor should obtain an understanding of the accounting and internal control systems,
sufficient to plan the audit and develop an effective audit approach. The auditor should use
professional judgement to assess audit risk and to design audit procedures to ensure it is reduced
to an acceptably low level.
The auditor performs a walk-through test, that is, tracing a few transactions
through the accounting system to confirm their understanding of the accounting
and internal control system.
Audit Risk has three components: Inherent risk, Control risk and Detection risk.
Inherent Risk
When developing the audit plan, the inherent risk should be assessed at the
financial statements level. When developing the audit program, the auditor
should relate such assessment to material account balances and classes of
transactions.
- Integrity of management
- Management experience and knowledge and changes in management during
the period
- Unusual pressures on management such as lack of capital or industry slump
- Nature of business potential for obsolescence of products, complexity of
capital structure, significance of related parties and number of locations of
production facilities
- Economic and competitive conditions of the industry
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Control Risk
The preliminary assessment of control risk is the process of evaluating the
effectiveness of an entitys accounting and internal control systems in preventing
or detecting and correcting material misstatements.
The auditor should document in the working papers the understanding obtained of
the entitys accounting and internal control systems and the assessment of control
risk.
Based on the results of the tests of control, the auditor should evaluate whether
the internal controls are designed and operating as contemplated in the
preliminary assessment of control risk.
The auditor should consider whether the internal controls were in throughout the
period.
Detection Risk
The level of detection risk relates directly to the auditors substantive procedures.
The higher the assessment of inherent and control risk, the more audit evidence
the auditor should obtain from the performance of substantive procedures.
When the auditor determines that detection risk regarding a financial statement
assertion for a material account balance or class of transactions cannot be reduced
to an acceptable level, the auditor should express a qualified opinion or a
disclaimer of opinion.
Regardless of the assessed levels of inherent and control list the auditor should
perform some substantive procedures for material account balances or classes of
transaction.
The higher the assessment of inherent and control risk, the more audit evidence
the auditor should obtain from the performance of substantive procedures.
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Significant accounting records, supporting documents and accounts in the
financial statements; and
The accounting and financial reporting process, from the initiation of
significant transactions and other events to their inclusion in the financial
statements
Many internal controls, which would be relevant to large entities, are not practical
in small businesses. For example, segregation of duties may be missing or
limited. In this instance if audit evidence of supervisory controls is lacking, the
audit evidence necessary to support the auditors opinion on the financial
statements may have to be obtained entirely through the performance of
substantive procedures.
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AS-7 - Quality Control for Audit Work
The audit firm should implement quality control policies and procedures designed to ensure that
all audits are conducted in accordance with ISAs. The objectives of quality control policies will
incorporate the following: -
Professional Requirements
Skills and Competence
Assignment
Delegation
Consultation
Acceptance & Retention of clients
Monitoring
The firms general quality control policies and procedures should be communicated to its
personnel in a manner that provides reasonable assurance that the policies and procedures are
understood and implemented.
Professional Requirements
Personnel in the firm should adhere to the principles of independence, integrity, objectivity,
confidentiality and professional behaviour.
The firm is to be staffed by personnel who have attained and maintain the technical standards
and professional competence required to enable them to fulfill their responsibilities with due
care.
Conduct an orientation program relating to the firm and the profession for newly
employed personnel.
Outline the requirements for continuing professional education and communicate
them to personnel.
Review periodically the performance of the personnel and discuss with them their
progress within the firm.
Conduct firm programs to develop and maintain expertise in specialised areas and
industries.
Assignment
Audit work is to be assigned to personnel who have the degree of technical training and
proficiency required in the circumstances.
Prepare time budgets for audits to determine manpower requirements and to schedule
audit work.
Give appropriate consideration to both continuity and rotation when deploying staff
to assignments.
Consider the experience and training of the audit personnel in relation to the
complexity or other requirements of the audit.
Delegation
There is to be sufficient direction, supervision and review of work at all levels to provide
reasonable assurance that the work performed meets the appropriate standards of quality.
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Consider current economic conditions affecting the client or its industry and their
potential effect on the conduct of the audit.
Provide on-the-job training during performance of audits discuss with assistants the
relationship of the work they are performing to the audit as a whole
Consultation
Whenever necessary, consultation within or outside the firm is to occur with those who have
appropriate expertise.
Maintain consultation arrangements with other firms and individuals where necessary
to supplement firms resources.
Maintain subject files containing the result of consultation for reference and research
purposes.
Inquire of third parties as to any information regarding the prospective client. The
inquiries may be directed to legal advisors, bankers and others.
Communicate with the predecessor auditor and make inquiries regarding the integrity
of management, accounting policies, audit procedures and other significant matters.
Consider circumstances, which would cause the firm to regard the engagement as one
requiring special attention or presenting unusual risks.
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Determine that the acceptance of the client would not violate codes of professional
ethics.
Inform appropriate personnel of the firms policies and procedures for accepting and
retaining clients.
Evaluate clients upon the occurrence of specified events to determine whether the
relationships ought to be continued.
Such events may include a change in one or more of the following:
- Management
- Directors
- Ownership
- Legal Advisers
- Financial condition
- Scope of the engagement
- Nature of clients business
Monitoring
The continued adequacy and operational effectiveness of quality control policies and procedures
are to be monitored.
Determine objectives and prepare instructions and review programs for use in
conducting monitoring activities.
Provide guidelines for the extent of work and criteria for selection of engagements for
review.
Establish the frequency and timing of monitoring activities.
Review and test compliance with firms general quality control policies and
procedures.
Provide for reporting findings to appropriate management levels, for monitoring
actions taken or planned and for overall review of the firms quality control system.
Determine need for modification of quality control policies and procedures in view of
results of monitoring activities and other relevant matters.
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AS-8 - Audit Evidence
The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion.
Audit evidence is the information obtained by the auditor in arriving at the
conclusions on which the audit opinion is based.
Sufficient appropriate audit evidence depends on:
- Nature and level of inherent risk
- Nature of accounting and internal control systems
- Materiality of item examined
- Experienced gained during previous audits
- Source and reliability of information available
- Results of audit procedures including fraud or error which may have been
found
Reliability of audit evidence can be assessed as follows:
- External audit evidence is more reliable than that generated internally
- Internal audit evidence is more reliable when the accounting and internal
control systems are effective
- Audit evidence obtained directly by the auditor is more reliable than that
obtained from the company
- Audit evidence in the form of documents and written representations is more
reliable than oral representations
If the auditor is unable to obtain sufficient appropriate audit evidence in the case of a
material item, a qualified opinion or disclaimer of opinion should be expressed.
The auditor obtains audit evidence by one or more of the following methods:
- Inspection: Examining records, documents or tangible assets
- Observation: Looking at a process or procedure being performed by others
- Inquiry and Confirmation: Inquiring consists of seeking information from
knowledgeable persons inside or outside the entity. Conformation consist of
the response to an enquiry to corroborate information contained in the
accounting records
- Computation: Checking the arithmetical accuracy of source documents or
performing independent calculations
- Analytical procedures: analysis of significant ratios and trends
Audit Evidence - Specific Items
Attendance at Physical Inventory Counting
When inventory is material to the financial statements, the auditor should obtain
sufficient appropriate audit evidence regarding its existence and condition by
attendance at physical inventory counting unless impracticable.
If unable to attend the physical inventory count on the date planned due to unforeseen
circumstances, the auditor should take or observe some physical counts on an
alternative date and, when necessary, perform tests of intervening transactions.
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To obtain assurance that managements procedures are adequately implemented; the
auditor would observe employees procedures and perform test counts. When
performing counts, the auditor would test both the completeness and accuracy of the
count records by tracing items selected from those records to the physical inventory
and items selected from the physical inventory to the count records.
The auditor would also consider cut off procedures including details of the movement
of inventory just prior to, during and after the count so that the accounting for such
movements can be checked at a later date.
Where inventory is under the custody and control of a third party, the auditor would
ordinarily obtain direct confirmation from the third party as to the quantities and
condition of inventory held on behalf of the entity.
Confirmation of Accounts Receivable
When the accounts receivable are material to the financial statements and when it is
reasonable to expect debtors to respond, the auditor should plan to obtain direct
confirmation of accounts receivable or individual entries in an account balance.
Direct confirmation provides reliable audit evidence as to the existence of debtors and
the accuracy of their recorded balances. However, it does not ordinarily provide
evidence as to the collectibility of balances or as to the existence of unrecorded
receivable balances.
When it is expected that debtors will not respond, the auditor should plan to perform
alternative procedures, for example, subsequent receipts.
Inquiry regarding litigation and claims
The auditor should carry out procedures in order to become aware of any litigation
and claims involving the entity which may have a material effect on the financial
statements.
Such procedures include:
- Make appropriate inquiries of management including obtaining representations
- Review board minutes and correspondence with the lawyers
- Examine legal expense accounts
When litigation or claims have been identified or when the auditor believes they may
exist, the auditor should seek direct communication with the entitys lawyers. The
reply should be sent directly to the auditor.
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AS- 9 - Documentation
The auditor should document matters, which are important in providing evidence to support the
audit opinion, and evidence that the audit was carried out in accordance with ISAs.
Documentation means the working papers prepared by and for, or obtained and
retained by the auditor in connection with the performance of the audit. The auditor
should prepare working papers, which are sufficiently complete and detailed to
provide an overall understanding of the audit.
- Record the audit evidence resulting from the audit work performed to support the
auditors opinion.
Working papers should include the auditors reasoning on all significant matters,
which require the exercise of judgment, together with the auditors conclusion
thereon.
The use of standardised working papers, for example, checklists, specimen letters,
may improve the efficiency with which such working papers are prepared and
reviewed. They facilitate the delegation of work while providing a means to control
its quality.
To improve efficiency, the auditor may utilise schedules, analyses and other
documentation prepared by the company. In such cases the auditor would need to be
satisfied that those working papers have been properly prepared.
The working papers should include indications of the work undertaken for particular
sections.
- Engagement letter.
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- Evidence of the auditors consideration of the work of internal auditing and
conclusions reached.
- Record of nature, timing and extent of the audit procedures performed and the
results thereof.
- Evidence that the work performed by assistants was supervised and reviewed.
- An indication as to who performed the audit procedures and when they were
performed.
- Management letter.
- Representation letter.
In the case of recurring audits, there could be two types of audit files. One is the
permanent audit file that is updated with new information of continuing importance,
and the other is the current audit file which contains information relating primarily to
the audit of a single period.
The auditor should adopt appropriate procedures for maintaining the confidentiality
and safe custody of the working papers.
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AS 12 Analytical Procedures
The auditor should apply analytical procedures at the planning and overall review stages of the
audit.
Analytical procedures means the analysis of significant ratios and trends including the
resulting investigation of fluctuations and relationships that are inconsistent with
other relevant information or deviate from predicted amounts.
Examples of analytical procedures include:
- Reviewing comparable information for prior periods
- Anticipating budgets and forecasts
- Reviewing comparable information for other entities in industry
Analytical procedures can be applied to financial information, e.g. gross margin
percentages and non financial information such as comparing payroll costs to the
number of employees
The objectives of performing analytical procedures are as follows:
- To assist the auditor in planning the nature, timing and extent of other audit
procedures, understanding the business and identifying areas of potential risk.
- Used as substantive procedures when their use is more effective or efficient than
tests of details in reducing detection risk for specific financial statement
assertions.
- Used for overall review of the financial statements in the final review stage of the
audit, to conclude whether the financial statements as a whole are consistent with
the auditors knowledge of the business.
The auditor should apply analytical procedures at the planning stage to assist in
understanding the business and in identifying areas of potential risk.
The extent of reliance that the auditor places on the results of analytical procedures
depends on the following factors:
- Materiality of the items involved.
- Other audit procedures directed towards the same audit objectives.
- Accuracy with which the expected results of analytical procedures can be
predicted.
- Assessment of inherent and control risks. If controls are effective, greater reliance
could be placed on the reliability of the information.
It may be efficient to use analytical data prepared by the company, provided that the
auditor is satisfied that such data is properly prepared.
When analytical procedures identify significant fluctuations or relationships that are
inconsistent with other relevant information, the auditor should investigate and obtain
adequate explanations and appropriate corroborative evidence.
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AS 13 Auditors Report on Financial Statements
The auditor should review and assess the conclusions drawn from the audit evidence obtained as
the basis for the expression of an opinion on the financial statements.
The auditors report should contain a clear written expression of opinion on the
financial statements taken as a whole
The auditors report should state clearly the auditors opinion as to whether the
financial statements give a true and fair view or are presented fairly, in all material
respects in accordance with the financial reporting framework and, where appropriate,
whether the financial statements comply with statutory requirements.
A qualified opinion should be expressed when the auditor concludes that an
unqualified opinion cannot be expressed but that the effect of any disagreement with
management, or limitation on scope is not so material and pervasive as to require an
adverse opinion or a disclaimer of opinion. A qualified opinion should be expressed
as being except for the effects of the matter to which the qualification relates.
A disclaimer of opinion should be expressed when the possible effect of a limitation
on scope is so material and pervasive that the auditor has not been able to obtain
sufficient appropriate audit evidence and accordingly is unable to express an opinion
on the financial statements.
An adverse opinion should be expressed when the effect of a disagreement is so
material and pervasive to the financial statements that the auditor concludes that a
qualification of the report is not adequate to disclose the misleading or incomplete
nature of the financial statements.
Whenever the auditor expresses an opinion that is other than unqualified, a clear
description of all the substantive reasons should be included in the report and, unless
impracticable, a quantification of the possible effects on the financial statements.
Where there is a limitation on the scope of the auditors work that requires expression
of a qualified opinion or a disclaimer of opinion, the auditors report should describe
the limitation and indicate the possible adjustments to the financial statements that
might have been determined to be necessary had the limitation not existed.
The auditor may disagree with management about matters such as the acceptability of
accounting policies selected, the method of their application, or the adequacy of
disclosures in the financial statements. If such disagreements are material to the
financial statements, the auditor should express a qualified or an adverse opinion.
In certain circumstances, an auditors report may be modified by adding an emphasis
of matter paragraph to highlight the matter affecting the financial statements, which is
included in a note to the financial statements that discusses the matter more
extensively. The addition of such an emphasis of matter paragraph does not affect the
auditors opinion.
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AS- 17- Related Parties
The auditor should perform audit procedures designed to obtain sufficient appropriate audit
evidence regarding the identification and disclosure by management of related party transactions
that are material to the financial statements.
The auditor should review information provided by the directors and management
identifying the names of all known related parties and should perform the following
procedures in respect of the completeness of this information:
- Review prior years working papers for names of known related parties
- Review the entitys procedures for identification of related parties
- Inquire as to the affiliation of directors and officers with other entities
- Review shareholder records to determine the names of principal shareholders or,
if appropriate, obtain a listing of principal shareholders from the share register
- Review minutes of the meetings of shareholders and the board of directors and
other relevant statutory records such as the register of directors interests
- Inquire of other auditors currently involved in the audit, or predecessor auditors,
as to their knowledge of additional related parties
When obtaining an understanding of the accounting and internal control systems and
making a preliminary assessment of control risk, the auditor should consider the
adequacy of control procedures over the authorisation and recording of related party
transactions.
During the course of the audit, the auditor needs to be alert for transactions that
appear unusual in the circumstances and may indicate the existence of previously
unidentified related parties.
Examples include:
- Transactions which have abnormal terms of trade, such as unusual prices, interest
rates, guarantees and repayment terms
- Transactions in which substance differs from form
- Transactions which lack an apparent logical business reason for their occurrence
- Transactions processed in an unusual manner
- High volume or significant transactions with certain customers or suppliers as
compared with others
- Unrecorded transactions such as the receipt or provision of management services
at no charge
The auditor should obtain a written representation from management concerning:
- The completeness of information provided regarding the identification of related
parties; and
- The adequacy of related party disclosures in the financial statements
If the auditor is unable to obtain sufficient appropriate audit evidence concerning related
parties and transactions with such parties or concludes that their disclosure in the
financial statements is not adequate, the auditor should modify the audit report
accordingly.
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AS-19 - Audit Sampling and Other Selective Testing Procedures
When designing audit procedures, the auditor should determine appropriate means for selecting
items for testing so as to gather audit evidence to meet the objectives of audit test.
Audit sampling (Sampling) involves the application of audit procedures to less than 100% of
items within an account balance or class of transactions such that all sampling units have a
chance of selection. This will enable the auditor to obtain and evaluate audit evidence about
some characteristic of the items selected in order to form or assist in forming a conclusion
concerning the population from which the sample is drawn. Audit sampling can use either a
statistical or non-statistical approach.
When performing substantive test of details, audit sampling and other means of selecting items
for testing and gathering audit evidence may be used to verify one or more assertions about a
financial statement amount (for example, the existence of accounts receivable), or to make an
independent estimate of some amount (for example, the value of obsolete inventories).
When designing audit procedures, the auditor should determine appropriate means of selecting
items for testing. The means available to the auditor are:
The auditor may decide that it will be most appropriate to examine the entire population
of items that make up an account balance or class of transactions. 100% examination is in
unlikely in the case of test of control; however, it is more common for substantive
procedures. For example 100% examination may be appropriate when population
constitutes a small number of large value items, when both inherent and control risks are
high and other means do not provide sufficient appropriate audit evidence, or when the
repetitive nature of a calculation or other process performed by a computer information
system makes a 100% examination cost effective.
The auditor may decide to select specific items from a population based on such factor as
knowledge of the client business, preliminary assessment of inherent and control risk, and
the characteristics of the population being tested. The judgmental selection of specific
items is subject to non-sampling risk.
3. Audit Sampling
The auditor may decide to apply audit sampling to an account balance or class of
transactions. Audit sampling can be applied using either non-statistical or statistical
sampling methods.
The auditor should select items for the sample with the expectation that all sampling units in the
population have a chance of selection.
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The principal methods for selecting samples are the use of random number tables or computer
programs, systematic selection and haphazard selection.
The auditor should perform audit procedures appropriate to the particular test objective on each
item selected.
The auditor should consider the sample results, the nature and cause of any errors identified, and
their possible effect on the particular test objective and on other areas of the audit.
For substantive procedures, the auditor should project monetary errors found in the sample to the
population, and should consider the effect of the projected error on the particular test objective
and on other areas of the audit.
The auditor should evaluate the sample results to determine whether the preliminary assessment
of the relevant characteristic of the population is confirmed or needs to be revised.
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AS- 21- Subsequent Events
The auditor should consider the effect of subsequent events on the financial statements and on
the auditors report.
The auditor should perform procedures designed to obtain sufficient evidence that all
events up to the date of the auditors report that may require adjustment of, or disclosure
in, the financial statements have been identified.
The procedures to identify events that may require adjustment, should be performed as
near as practicable to the date of the audit report, include:
- Reading minutes of the meetings of shareholders and the board of directors held after
the balance sheet date
- Reading the companys latest available financial statements, including budgets, cash
flows and other related reports
The current status of items that were accounted for on the basis of preliminary or
inconclusive data
Whether the issue of new shares or an agreement to merge or liquidate has been made or
is planned
Whether there have been any developments regarding risk areas and contingencies
When the auditor becomes aware of events which materially affect the financial
statements, the auditor should consider whether such events are properly accounted for
and adequately disclosed in the financial statements
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AS- 22- Management Representations
The auditor should obtain evidence that management acknowledges its responsibility for
the fair presentation of the financial statements and has approved the financial statements.
Evidence may be in the form of minutes of meetings of the board of directors, written
representation from management or a signed copy of the financial statements.
The auditor should obtain written representations from management on matters material
to the financial statements when other audit evidence does not exist.
Representations by management cannot be a substitute for other audit evidence that the
auditor could reasonably expect to be available. If the auditor is unable to obtain
sufficient audit evidence regarding a material matter and such evidence is expected to be
available, this will constitute a limitation in scope of the audit, even if a representation
from management has been received.
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AS- 23- Going Concern
When planning and performing audit procedures and in evaluating the results thereof, the auditor
should consider the appropriateness of the going concern assumption underlying the preparation
of the financial statements.
The entitys continuance as a going concern for the foreseeable future, generally a period
not to exceed one year after period end, is assumed in the preparation of financial
statements in the absence of information to the contrary.
The auditor should consider the risk that the going concern assumption may no longer be
appropriate
Indications of the same include:
- net liability or net current liability position
- fixed term borrowings approaching maturity without prospects of renewal or
repayment or excessive reliance on short term borrowings to finance long term assets
- adverse key financial ratios
- substantial operating losses
- inability to pay creditors on due dates
- loss of key management without replacement
- loss of a major market or principal supplier
- pending legal proceedings which could result in large payments
The auditor should carry out procedures to resolve doubt over the companys ability to
continue in operation for the foreseeable future.
- analyse and discuss cash flow, profit and other relevant forecasts
- review events after the period end
- analyse and discuss the latest interim financial statements
- review terms of loan agreements and ensure none have been breached
- refer to minutes of directors and shareholders meetings
- inquire of the entitys lawyer regarding litigation and claims
- confirm the existence, legality and enforceability of arrangements to provide or
maintain financial support with related and third parties and assess the financial
ability of such parties to provide additional funds
If in the auditors judgement, the going concern assumption is appropriate because of
mitigating factors, the auditor should consider whether such plans need to be disclosed in
the financial statements. If adequate disclosure is not made, the auditor should express a
qualified or adverse opinion.
If, in the auditors judgement, the going concern question is not satisfactorily resolved,
the auditor would consider whether appropriate disclosure of such has been made. If
adequate disclosure is made, the auditor should express an unqualified opinion and
modify the auditors report by adding an emphasis of matter paragraph that highlights the
going concern problem by drawing attention to the note in the financial statements.
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If the results of the inappropriate assumptions used in the preparation of the financial
statements is so material & pervasive as to make the financial statements misleading, the
auditor should express an adverse opinion.
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AS- 25- Audit Materiality
The auditor should consider materiality and its relationship with audit risk when conducting an
audit.
At the planning stage the auditor establishes an acceptable materiality level so as to detect
quantitatively material misstatements. However, qualitative misstatements need to be
considered as well, for example, failure to disclose an accounting policy.
The auditor needs to consider the possibility of misstatements of relatively small amounts
that, cumulatively, could have a material effect on the financial statements.
The higher the materiality level the lower the audit risk audit procedures are determined
on this basis.
In evaluating the fair presentation of the financial statements the auditor should assess
whether the aggregate of uncorrected misstatements that have been identified during the
audit is material.
If management refuses to adjust the financial statements and the results of extended audit
procedures do not enable the auditor to conclude that the aggregate of uncorrected
misstatements is not material, the auditor should consider the appropriate modification to
the auditors report.
If the auditor concludes that the misstatements may be material, the auditor needs to
consider reducing audit risk by extending audit procedures or requesting management to
adjust the financial statements.
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AS- 28- Initial Engagements Opening Balances
For initial audit engagements, the auditor should obtain sufficient appropriate audit evidence
that:
The opening balances do not contain misstatements that materially affect the current
periods financial statements
The prior periods closing balances have been correctly brought forward to the
current period
Appropriate accounting policies are consistently applied
The auditor may be able to obtain sufficient evidence regarding the opening balances by
reviewing the predecessor auditors working papers.
If the prior periods financial statements were not audited, other procedures must be
adopted:
- Fixed assets: investments, long term debts: examining the records underlying the
opening balances.
- Debtors/Creditors: receipts and payments during the period will verify the existence
of the opening balance
If after performing procedures, the auditor is unable to obtain sufficient appropriate audit
evidence concerning opening balances, the auditors report should include qualified
opinion or disclaimer of opinion as appropriate.
If the effect of the misstatement is not properly accounted for and adequately disclosed,
the auditor should express a qualified or an adverse opinion, as appropriate.
If the current periods accounting policies have not been consistently appliedin relation to
opening balances and if the changes has not been properly accounted for and adequately
disclosed, the auditor should express a qualified opinion or an adverse opinion, as
appropriate.
However, if a modification regarding the prior periods financial statements, the auditor
should modify the current auditors report accordingly.
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AS- 30- Knowledge of the Business
In performing an audit of financial statements, the auditor should obtain knowledge of the
clients business sufficient to understand the events, transactions and the practices that, in the
auditors judgement, may have a significant effect on the financial statements or audit report.
Prior to accepting an engagement, the auditor would obtain a preliminary knowledge of
the industry and of the ownership, management and operations of the entity to be audited.
Following acceptance of the engagement, further and more detailed information would be
obtained.
For continuing engagements, the auditor would update and re-evaluate information
gathered previously, including information in the prior years working papers.
Knowledge about the clients business could be obtained from the following sources:
- Publications related to the industry.
- Visiting clients premises and plant facilities.
- Previous experience with the entity and its industry.
- Discussion with clients management.
- Discussion with the internal audit department.
- Financial statements and other reports produced by the industry.
- Manual of accounting and internal control.
Understanding the business and using this information assists the auditor in:
- Assessing inherent and control risk.
- Developing the overall audit plan and the audit program.
- Determining a materiality level.
- Assessing audit evidence to establish its appropriateness and the validity of the
related financial statement assertions.
- Evaluating accounting estimates and management representations.
- Recognising unusual circumstances.
- Considering the appropriateness of accounting policies.
The auditor should ensure that assistants assigned to an audit engagement obtain
sufficient knowledge of the business to enable them to carry out the audit work delegated
to them.
To make effective use of knowledge about the business, the auditor should consider how
it affects the financial statements taken as a whole and whether the assertions in the
financial statements are consistent with the auditors knowledge of the business.
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QUALITY CONTROL REVIEW COMMITTEE:
Chairman:
Members:
Members: