THE INSTITUTE OF

CHARTERED ACCOUNTANTS
OF PAKISTAN

AUDIT PRACTICES MANUAL

FEBRUARY 2001

QUALITY CONTROL REVIEW COMMITTEE

FOREWORD
Comprehensiveness in performance and self-regulation are the hallmark of a chartered
accountant. It is because of these distinguishing characteristics that the public has looked up to
the profession for validating and assuring that the information in the published financial
statements is a true and fair view of the state of the affairs of the entity.
The compliance with various standards, corporate regulations, and technical releases of the
Institute automatically assures the excellence in performance. The Institute, to assist the
review partners, managers, and field staff in these efforts, has evolved an Auditing Practices
Manual. Given the multi-variety of the corporate entities, any manual cannot be prescriptive;
this manual also is only descriptive. The working papers etc. are also only sample forms and
are not standards of the Institute as such. There might be a situation where the members may
need to supplement, amend, or add to this manual according to the actual needs of the
particular entity under audit by them.

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

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

Pir Mohammad A. Kaliya, FCA President 17 January 2001

PREFACE
The Institute of Chartered Accountants of Pakistan as member of the International Federation
of Accountants (IFAC) has a professional obligation to implement the standards issued by the
Federation of the International Accounting Standards Committee (IASC).
The Preface to the International Standards on Auditing (ISAs) issued by the IFAC states that
the objective of audit of financial statements is to enable the auditor to express an opinion
whether the financial statements are prepared, in all material respects, in accordance with an
identified reporting framework (which would mean accounting standards applicable in
Pakistan).
In order to arrive at a correct audit opinion in an efficient and effective manner, the audit is to
be conducted in accordance with the ISAs and related assurance services and pronouncements
issued by the Council of the Institute.
The manual does not envisage all possible corporate entities or circumstances, for instance
special purpose entities such as banks, airlines, insurance companies, telecommunications and
other utilities etc. may need substantial modifications, even redesigning, to fully conform to
the requisite requirements of ISAs etc.
The Quality Control Review Committee of the Institute hopes that the manual shall be of great
functional utility to its practicing members.
The committee expects the practicing members would follow the Manual in letter and spirit.
The manual shall be updated to incorporate the latest requirements of the ISAs etc.
WORKING PAPERS

The working papers are not definitive but are only sample working papers that need to be
supplemented or amended or modified by the members in accordance with the requirements of
the entity under audit.
ORGANIZATION OF THE MANUAL
Two volumes of the Manual are organized as follows:
Volume 1
Chapter 1:

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

Chapter 2: Gives the contents of the Audit Planning File. Also included therein is
guidance on evaluation of accounting and internal control systems, the
internal control questionnaires including a guide on the evaluation of general
controls relating to Computerized Information Systems. Further, model audit
programs for a manufacturing entity, duly correlated with possible audit
assertions have also been included.
Volume 2
Chapter 3: Gives the contents of the Audit Execution File. This largely comprises of
the standard working paper schedules that are used to collect audit evidence
on the financial statement components, including lead schedules on such
components, referencing methodology and the possible wordings of the
conclusions.
Chapter 4: Gives the contents of the Completion and Reporting File. Also included
therein is a suggested completion checklist, the disclosure checklist based on
the requirements of the international accounting standards and the
requirements of the Companies Ordinance 1984 developed by the Institute,
the suggested formats of Management Representation letter, Letter to the
Board of Directors, Management Letter etc.
Chapter 5: Gives the contents of the Permanent Audit File.
Chapter 6: Covers Summary of Some ISAs.

CONTENTS
Chapter 1
Audit Process

1.1

Audit Process Chart 1-1

Overview of the Audit Process 1-2 Planning Phase 1-2 Execution Phase

1.2

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 26 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

Audit Materiality 2-70
Review of Financial Performance of the Client 2-72 Suggested Format of
Financial Performance Review 2-73
Detailed Planning
2.2.6
2.2.7

2.3

2.3.1

Computer Information System (CIS) Checklist 2-75

Audit Programs 2-83 Sample Audit Programs 2-86

Analytical Review Procedures 2-145 Analytical Review of Balance Sheet
and Profit & Loss Account 2-147 Ratio Analysis 2-155
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
2.3.2
2.3.3

2.4

2.4.6

Formats of Confirmation (Bank, Legal / Tax Advisor, Debtor/Creditor etc) 2-

168
2.4.7 List of Authorized Signatories 2-178
2.4.8 Notes of Meeting with Client 2-179
2.4.9 Notes of Review of Correspondence File (if Separately Maintained) 2-185
2.4.10 Points Forward From Previous Year (Refer Points Carried Forward to Next
Year) 2-186

2.5

Audit Planning Checklist 2-187

3.1
3.2
3.3
3.4

Chapter 3
Audit Execution File
General Instructions for Documentation of Audit Execution File 3-1
Exceptions and Control Weaknesses 3-2
Audit Working Paper Guidelines 3-3
Significant Components of Balance Sheet and P & L Account Lead Schedules with
Conclusions 3-5
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
4.7

4.12
4.13
4.14

Summary Review Memorandum 4-9

Analytical Review of Balance Sheet and Profit & Loss Account 4-10 Ratio
Analysis 4-18
Managers Review Notes & Queries 4-22
Management Representation Letter 4-23 Suggested Management
Representation Letter 4-24
Sample Letter to the Board of Directors 4-27
Management Letter / Internal Control Memorandum 4-28 Suggested Format
of Management Letter 4-29
Points Carried Forward to Next Year 4-30
Financial Statements Disclosure Checklist 4-31
Subsequent Events Review Checklist 4-32

4.15

Going Concern Review Checklist 4-34

4.8
4.9
4.10
4.11

5.1
5.2
5.3
5.4

Chapter 5
Permanent Audit File
Formation Information and Regulation 5-2
Minutes of Board Of Directors Meetings Containing Decisions of Permanent Nature
& Minutes of Annual General / Extraordinary Meetings 5-3
Loans & Other Long Term Agreements 5-4
Miscellaneous 5-5
Chapter 6
Summary

of

Some

International

Standards on Auditing (ISAs)

6.1 Summary of Some ISAs

Audit Phase
Documentation

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

3
4

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.
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.
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.
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.
PLANNING PHASE

5.1

The ISA 300 requires that the audit should so plan his work so that the audit is
performed in an effective manner.

5.2

Efficient planning helps in ensuring that appropriate attention is devoted to the

important areas of the audit, potential problems are identified and the work is completed
expeditiously.

5.3

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

5.4

The planning phase comprises of the following activities:

Developing an Overall Audit Plan
Detailed Audit Planning Leading to Development of Audit Program
Documentation in the Form of an Audit Planning File

5.5
5.6

Audit Administration & Other Matters.

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

5.7

DETAILED AUDIT PLANNING

5.8

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

5.9

These audit programs need to be reviewed at least by a qualified manager or partner to

ascertain whether the execution of selected audit procedures included therein shall lead
to obtaining sufficient and appropriate audit evidence for forming an audit opinion on
the financial statements.

5.10 An important aspect of detailed planning is the study and evaluation of the internal
control procedures to ascertain the extent to which the internal control systems can be
relied upon for the purposes of the audit. Where the accounting and internal control
systems are considered reasonably reliable (that means when the control risk is assessed
as less than high) and a decision is made to place reliance on such systems and internal
control questionnaires, flow charts or a combination thereof.
5.11 The internal control checklist prepared by the Institute of Chartered
Accountants of
Pakistan; is included in Chapter 2, which can be used for documenting the important
features of the internal control. This checklist is not definitive and may need to be
supplemented, amended or modified according to the need of the audit requirements of
the entity.
5.12 The
overall audit plan, audit programs, time budgets, planning checklist and other
documentation encompassing the planning phase of the audit is to be filed as part of the
Audit Planning File as shown in Chapter 2 of the Manual.
6

AUDIT ADMINISTRATIVE & OTHER MATTERS

6.1

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

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.
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.

7.2
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.

2.1 TERMS OF REFERENCE / ENGAGEMENT

Auditors agree with the client, in writing, about the scope, terms and conditions of the audit
engagement. This written communication is referred to as an engagement letter (specimen
letter attached). The purpose of such a letter is to minimize any possible misunderstanding
concerning the scope and terms of the audit engagement.
The letter is sent to all new audit clients and where there has been a change in the terms of the
engagement or the auditor considers that management may not understand the existing terms
of the engagement, the letter is also be sent to continuing clients.

2.1.1 Suggested Engagement Letter

Clients Name And Address Date

Dear Sir
You have requested that we audit the balance sheet of as of , and the related
statements of income and cash flows for the year then ending. We are pleased to confirm our
acceptance and our understanding of this engagement by means of this letter. Our audit will be
made with the objective of our expressing an opinion on the financial statements.
We will conduct our audit in accordance with International Standards on Auditing. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation.

Because of the test nature and other inherent limitations of an audit, together with the inherent
limitations of any accounting and internal control system, there is an unavoidable risk that
even some material misstatements may remain undiscovered.
In addition to our report on the financial statements, we expect to provide you with a separate
letter concerning any material weaknesses in accounting and internal control systems which
come to our notice.
We remind you that the responsibility for the preparation of financial statements including
adequate disclosure is that of the management of the company. This includes the maintenance
of adequate accounting records and internal controls, the selection and application of
accounting policies, and the safeguarding of the assets of the company. As part of our audit
process, we will request from management written confirmation concerning representations
made to us in connection with the audit.
We look forward to full cooperation with your staff and we trust that they will make available
to us whatever records, documentation and other information are requested in connection with
our audit. Our fees, which will be billed as work progresses, are based on the time required by
the individuals assigned to the engagement plus out-of-pocket expenses. Individual hourly
rates vary according to the degree of responsibility involved and the experience and skill
required.
We wish to inform you that our working papers files for the audit of the financial statements
of your company would be subject to review by the Institute of Chartered Accountants of
Pakistans Quality Control Review Committee without any further reference to you.
This letter will be effective for future years unless it is terminated, amended or superseded.
Unless we hear from you to the contrary, we will assume your concurrence with the contents
of this letter.

Yours truly
FIRMS
NAME

2.2 OVERALL AUDIT PLAN

2.2.1 CLIENT PROFILE

Name

of

client

_____________________________________________________ Nature of
Client Business ____________________________________________

Major

Locations:

___________________________________________________

Other Information
1
2
3

o Banks
o Legal Advisor
o Tax Advisor etc.

2.2.2 UNDERSTANDING THE CLIENTS BUSINESS

Preliminary knowledge of client's business
A preliminary knowledge of the client's business is required in the client
acceptance/retention stage in order to determine whether to accept or reject a new
entity as a client or to retain or relinquish an existing client.
This knowledge is obtained through the performance of activities such as observation,
inspection, inquiry and analytical procedures such as ratio analysis and common size
analysis.

Detailed knowledge of client's business

A detailed knowledge of the client's business is required in all audit processes except

client acceptance/retention stage. Most of this knowledge should be acquired in the

audit planning stage and is required in order to determine the audit approach.
The knowledge may be acquired through the auditor performing such activities as
inspection, inquiry and analytical procedures such as ratio analysis, and Computer
Assisted Audit Techniques (CAAT), such as test data, programmed code analysis and
specialized audit software.
Knowledge of Client Business Core

Business Activities

Major Products / Services

Substitute of Clients Products / Services Major Customers

Major Suppliers

Major Competitors

Related Parties (if any)

Significant Accounting Policies

List down significant accounting policies (or change in accounting policy, if any) adopted by
the Company relating to:
1
2
3
4
5

Staff retirement benefits

Fixed assets
Revenue recognition
Taxation
Foreign currency transaction

Key Management Personnel

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

Other Management Staff

2.2.3 FACTORS THAT MAY AFFECT CLIENTS BUSINESS

Economic Factors:

Industry Conditions:

Social /Environmental Factors:

Technological Factors:

2.2.4 CRITICAL AUDIT

AREAS

SIGNIFICANT

FINANCIAL

STATEMENT COMPONENTS
List down the critical audit areas and its impact on the financial statements relating to

the audit in consideration. It also includes consideration of previous years brought

forward issues.
Major areas include:
New borrowings with extra-ordinary terms and conditions

Discontinuation of major suppliers

Acquisition of a significant asset

Discontinuation of a major customer

Loss of a significant market share

Major claims and litigation against the client, etc.

2.2.5

RISK ASSESSMENTS, ACCOUNTING

INTERNAL CONTROL SYSTEM
1.

AND

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.
1

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.
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

3.7

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.
Control environment means the overall attitude, awareness and actions of directors

and management regarding the internal control system and its importance in the entity.
The control environment has an effect on the effectiveness of the specific control
procedures. A strong control environment, for example, one with the tight budgetary
control and an effective internal audit function, can significantly complement specific
control procedures. However, a strong control environment does not, by itself, ensure
the effectiveness of the internal control system. Factors reflected in the control
environment include:
The function of the board of directors and its committees. Managements
philosophy and operating style. The entitys organizational structure and methods of
assigning authority and
responsibility. Managements control
system including the internal audit function,
personnel policies and procedures and
segregation of duties.
3.8

Control Procedures means those policies and procedures in addition to the control
environment which management has established to achieve the entitys specific
objectives. Specific Control objectives include:
Reporting, reviewing and approving reconciliation. Checking the arithmetical
accuracy of records. Controlling applications and environment of computer
information systems, for
example, by establishing controls over: Changes to computer programs.
Access to data files.
Maintaining and reviewing control accounts and trial balances. Approving and
controlling of documents. Comparing internal data with external sources of
information. Comparing the results of cash, security and inventory counts with
accounting records. Limiting direct physical access to assets and records.
Comparing and analyzing the financial results with budgeted amounts.

4.

In the audit of financial statements, we are only concerned with those policies and
procedures within the accounting and internal control systems that are relevant to the
financial statement assertions. The understanding of relevant aspects of the accounting
and internal control systems, together with inherent and control risk assessments will
help the auditor to:
1
2
3

5.

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.
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

6.

extent of the substantive procedures for the financial statement assertions.

Inherent Risk

6.1

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

6.2

The assessment of inherent risk requires the use of professional judgment

considering the following factors:

6.2.1

At the financial statement level

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

6.2.2

At the Account Balance and Class of Transactions Level

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

7.

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

7.1

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

7.2

7.3

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

authorization.
1
2

Recorded assets are compared with the existing assets at reasonable intervals and
appropriate action is taken regarding any differences.
Understanding the accounting and internal control systems

8.1

We are required by AS-6 to obtain an appropriate understanding of the accounting and

internal controls system to enable us to design our substantive audit procedures aimed
at minimizing the detection risk to an acceptable level.

8.2

The process of understanding involves obtaining knowledge of the design of the

accounting and internal control systems, and their operation. We usually perform a
Walk-through test that is, tracing a few transactions through the accounting system,
for understanding the accounting and internal control systems.

8.3

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

8.4

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

9.

Inquiries of appropriate management, supervisory and other

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

We are required to obtain a level of understanding of the accounting

system that is sufficient to identification and understanding of:
1
2
3

a.
Major classes of transactions in the entitys operations;
b.
How such transactions are initiated;
c.
Significant accounting records, supporting documents and accounts in the
financial statements; and

d.
The accounting and financial reporting process, from the initiation of
significant transactions and events to their inclusion in the financial statements.

10.

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

sufficient to assess directors and managements attitudes, awareness and actions
regarding internal controls and their importance to the entity. This
understanding will enable us to determine the appropriateness of relying on controls
for a portion of our overall audit assurance.

11.

Control Risk

11.1

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

11.2

The control risk for some or all assertions is assessed at a high level when:
The entitys accounting and internal control systems are not effective; or
Evaluating the effectiveness of the entitys accounting and internal
control system would not be efficient.

11.3

The preliminary assessment of control risk for a financial statement assertion should
be high unless the auditor:
Is able to identify internal controls relevant to the assertion
which are likely to prevent or detect and correct a material
statement; and Plans to perform tests of control to support
the assessment.

11.4

We should document:
our understanding of the accounting and internal control system; and
when the control risk is assessed as less than high, the basis for the
conclusions.

11.5

1
2
12.1

Different techniques may be used to document information relating to accounting and

internal control systems, such as narrative descriptions, questionnaires, checklists and
flow charts.
The Institute has developed an Internal Control Questionnaire (Annexed), given in
this Manual which may also be used for the purpose of such documentation.
Testing of Controls
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:

12.3

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

12.4

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

12.5

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

13

Relationship between the assessment of Inherent and Control Risks

1

2
14.1

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

14.3

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

Our assessment of
Inherent Risk
14.4

2
15.1

High
Medium
Low

Our Assessment of Control Risk

High
Medium
Lowest
Lower
Lower
Medium
Medium
Higher

Low
Medium
Higher
Highest

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.
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.
Audit Risk in the Small Business
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
16.

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.
Control Environment

16.1

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

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

16.2

The board of directors and management enhance an organization's control environment

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

16.3

Responsibility

16.3.1 Management is responsible for "setting the tone" for their organization. Management
should foster a control environment that encourages:
The highest levels of integrity and personal and professional standards,
A leadership philosophy and operating style which promote internal control
throughout the organization, and,
An assignment of authority and responsibility.
16.4

Control Environment Tips

16.4.1 Effective human resource policies and procedures enhance an organization's control
environment. These policies and procedures should address hiring, orientation,

training, evaluations, counseling, promotions, compensation, and disciplinary actions.

In the event that an employee does not comply with an organization's policies and
procedures or behavioral standards, an organization must take appropriate disciplinary
action to maintain an effective control environment. The control environment is
greatly influenced by the extent to which individuals recognize that they will be
held accountable.
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):
a
b
c
d

o
o
o
o

Administrative Procedures
Employee Handbook
Purchasing Manual
Personnel Memorandum

Make sure that the entity has well-written departmental policies and procedures manual
which addresses its significant activities and unique issues. Employee responsibilities,
limits to authority, performance standards, control procedures, and reporting
relationships should be clear.
Make sure that employees are well acquainted with the organization's policies and
procedures that pertain to their job responsibilities.
Discuss ethical issues with employees. If employees need additional guidance, issue
departmental standards of conduct.
Ask employees to disclose potential conflicts of interest (e.g., ownership interest in
companies doing business or proposing to do business with the department).
Make sure that job descriptions exist and correctly translate desired competence levels
into requisite knowledge, skills, and experience; make sure that hiring practices result
in hiring qualified individuals.
Make sure that the entity has an adequate training program for employees.
Make sure that employee performance evaluations are performed periodically. Good
performances should be valued highly and recognized in a positive manner.
Make sure that appropriate disciplinary action is taken when an employee does not
comply with policies and procedures or behavioral standards.
17.

Control Procedures

17.1

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

17.2

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

17.3

Responsibility

17.3.1 The responsibility for establishing adequate controls to meet the requirements of the
business and the objectives of the internal control outlined above is that of the board of
directors and management. Their responsibility includes identifying the financial and
compliance risks for their operations, and designing, implementing and monitoring
their internal control system.
17.4

Preventive & Detective Controls.

17.4.1 Controls can be either preventive or detective. The intent of these controls is different.
Preventive controls attempt to deter or prevent undesirable events from occurring.
They are proactive controls that help to prevent a loss. Examples of preventive
controls are separation of duties, proper authorization, adequate documentation, and
physical control over assets.
17.4.2 Detective controls, on the other hand, attempt to detect undesirable acts. They provide
evidence that a loss has occurred but do not prevent a loss from occurring. Examples
of detective controls are reviews, analyses, variance analyses, reconciliation, physical
inventories, and audits.
17.4.3 Both types of controls are essential to an effective internal control system. From a
quality standpoint, preventive controls are essential because they are proactive and
emphasize quality. However, detective controls play a critical role providing evidence
that the preventive controls are functioning and preventing losses.
17.4.4 Control activities include approvals, authorizations, verifications, reconciliation,
reviews of performance, security of assets, segregation of duties, and controls over
information systems and are further explained as follows:
17.5

Approvals, Authorizations, and Verifications (Preventive).

17.5.1 Management authorizes employees to perform certain activities and to execute certain

17.6

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.
Reconciliation (Detective).

17.6.1 An employee relates different sets of data to one another, identifies and investigates
differences, and takes corrective action, when necessary.
17.7

Reviews of Performance (Detective).

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

prior periods, competitors, or other benchmarks to measure the extent to which goals
and objectives are being achieved and to identify unexpected results or unusual
conditions that require follow-up.
17.8

Security of Assets (Preventive and Detective).

17.8.1 Access to equipment, inventories, securities, cash and other assets is restricted;
assets are periodically counted and compared to amounts shown on control
records.
17.9

Segregation of Duties (Preventive).

17.9.1 Duties are segregated among different people to reduce the risk of error or
inappropriate action. Normally, responsibilities for authorizing transactions, recording
transactions (accounting), and handling the related asset (custody) are divided.
17.10 Controls over Information Systems (Preventive and Detective).
17.10.1 Controls over information systems are grouped into two broad categories-general
controls and application controls. General controls commonly include controls over
data center operations, system software acquisition and maintenance, access security,
and application system development and maintenance. Application controls such as
computer matching and edit checks are programmed steps within application
software; they are designed to help ensure the completeness and accuracy of
transaction processing, authorization, and validity. General controls are needed to
support the functioning of application controls; both are needed to ensure complete
and accurate information processing.
17.10.2 Control procedures must be implemented thoughtfully, conscientiously, and
consistently; a procedure will not be useful if performed mechanically without a sharp
continuing focus on conditions to which the policy is directed. Further, it is essential
that unusual conditions identified as a result of performing control procedures are
investigated and appropriate corrective action be taken.

17.11 Control Procedures -Approvals (Preventive)

Written policies and procedures Limits to authority Supporting
documentation Question unusual items No rubber stamps No blank
signed forms
17.11.1An important control procedure is authorization/approval. Authorization is the
delegation of authority; it may be general or specific. Giving a department
permission to expend funds from an approved budget is an example of general
authorization. Specific authorization relates to individual transactions; it
requires the signature or electronic approval of a transaction by a person with
approval authority. Approval of a transaction means that the approver has
reviewed the supporting documentation and is satisfied that the transaction is
appropriate, accurate and complies with applicable laws, regulations, policies,
and procedures. Approvers should review supporting documentation,
question unusual items, and make sure that necessary information is
present to justify the transaction-before they sign it. Signing blank forms
should not be done.
17.11.2

Approval authority may be linked to specific rupee levels. Transactions that

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

17.12 Control Procedures -Reconciliations (Detective)

Reconciliation is a comparison of different sets of data to one another,
identifying and investigating differences, AND taking corrective action,
when necessary.
For example, vouching charges in the statement of accounts to file copies of
approved vouchers.
17.12.1

Broadly defined, a reconciliation is a comparison of different sets of data

to one another, identifying and investigating differences, and taking
corrective action, when necessary, to resolve differences. Reconciling
monthly financial reports from the Accounting Department (e.g.,
Statement of Accounts, Ledger Sheets, etc.) to file copies of supporting
documentation or departmental accounting records is an example of
reconciling one set of data to another. This control procedure helps to
ensure the accuracy and completeness of transactions that have been

charged to a department's accounts. To ensure proper segregation of

duties, the person who approves transactions or handles cash receipts
should not be the person who performs the reconciliation. Another
example of reconciliation is comparing vacation and sick leave balances per
departmental records to vacation and sick leave balances per the payroll
system.
17.12.2

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

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

17.13 Control Procedures -Reviews (Detective)

Budget to actual comparison Current to prior period comparison
Performance indicators Follow-up on unexpected results or unusual items
17.13.1

Reviewing reports, statements, reconciliation, and other information by

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

17.14 Control Procedures-Asset Security (Preventive And Detective)

Security of physical and intellectual assets Physical safeguards
Perpetual records are maintained Periodic counts/physical inventories
Compare counts to perpetual records Investigate/correct differences
17.14.1

17.14.2

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.
The organizations which have large value capital assets or significant

inventories should establish perpetual inventory control over these items by

recording purchases and issuances, Periodically, the items should be physically
counted by a person who is independent of the purchase authorization and asset
custody functions and the counts should be compared to balances per the
perpetual records. Missing items should be investigated, resolved, and analyzed
for possible control deficiencies; perpetual records should be adjusted to
physical counts if missing items are not located.
17.15

Control Procedures-Segregation Of Duties (Preventive and Detective)

No one person should... Initiate transaction Approve transaction Record
transaction Reconcile balances Handle assets Review
reports
At least two sets of eyes

17.15.1

Segregation of duties is critical to effective internal control; it reduces the risk

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

17.15.2

Specific examples of segregation of duties are as follows:

17.16

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.
Control Procedures-Separation of Duties Examples

17.16.1

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

TRANSACTION
TYPE

WHO INITIATES

WHO
AUTHORIZES

WHO RECORDS

WHO
RECONCILES

CONTROLS
(CUSTODY)

Purchase of Goods Issues Requisition

Person A

Approves P.O./
Invoice Person B

Accounting Records
Person D

Budget Report
Person C

Receives Goods
Person A or C

Purchase of Services Issues Requisition

(1)
Person A

Approves Payment & Accounting Records

Verifies Receipt of Person D
Services Person B

Budget Report
Person C

Disburses Check
Person A or C

Cash Receipts (2)

Opens Mall, Lists

Makes Deposit
Checks, Restrictively Person B
Endorses Person A

Payroll

Employees Time
Report

Inventory (3)

Issues Requisition
Person A

1
2
3

Accounting Records &

Department Records
Person D

Approves Time
Accounting Records
Report & Payroll
Person D
Data Changes Person
A
Approves P.O./
Accounting Records &
Invoice Person B
Department Records
(Issues & Receipts)
Person C

Bank Account/
N/A
Budget Report &
Deposits to Checklist
Person A or C
Budget Report
Review Person B

Distributes Payroll
Checks Person C

Departmental
Receives &
Records to Budget Disburses Goods
Reports & Physical Person A
Counts Person B or C

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

17.17 Control Procedures -Information Systems

17.17.1

General Controls: these controls apply to entire information systems and to all
the applications that reside on the systems. These include:
Access Security, Data & Program Security, Physical Security Software
Development & Program Change Controls Data Center Operations
Disaster Recovery

17.17.2

General controls consist of practices designed to maintain the integrity

and availability of information processing functions, networks, and
associated application systems. These controls apply to business
application processing in computer centers by ensuring complete and
accurate processing. These controls ensure that correct data files are
processed, processing diagnostics and errors are noted and resolved,
applications and functions are processed according to established
schedules, file backups are taken at appropriate intervals, recovery
procedures for processing failures are established, software development
and change control procedures are consistently applied, and actions of
computer operators and system administrators are reviewed. Additionally,
these controls ensure that physical security and environmental measures are
taken to reduce the risk of sabotage, vandalism and destruction of networks and

computer processing centers.

17.17.3

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

17.18

Control Procedures-Application Controls (Preventive And Detective)

17.18.1

Applications are the computer programs and processes, including manual

processes, that enable us to conduct essential activities; buying products,
paying people, accounting for research costs, and forecasting and monitoring
budgets.

17.18.2

Application controls apply to computer application systems and include input

controls (e.g., edit checks), processing controls (e.g., record counts), and output
controls (e.g., error listings), they are specific to individual applications.
Application Controls Include:
Programmed Procedures Within Application Software
oInput Controls (Data Entry) Authorization Validation Error Notification
and Correction
o Processing Controls
o Output Controls

a
b
c
17.18.3

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

17.18.4

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

17.18.5

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

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

17.18.6

Input controls ensure the complete and accurate recording of authorized

transactions by only authorized users; identify rejected, suspended, and
duplicate items; and ensure resubmission of rejected and suspended items.
Examples of input controls are error listings, field checks, limit checks,
self-checking digits, sequence checks, validity checks, key verification,
matching, and completeness checks.

17.18.7

Processing controls ensure the complete and accurate processing of authorized

transactions. Examples of processing controls are run-to-run control totals,
posting checks, end-of-file procedures, concurrency controls, control files, and
audit trails.

17.18.8

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

17.18.9

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

17.18.10

Application Controls: End User Computing

17.18.10.1

Twenty years ago, an information system professional was needed to operate a

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

17.18.10.2

Advancing technology enables user departments to purchase or develop

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

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.
Internal Control- integrated framework
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 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.
1

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

19.1 Determine Goals and Objectives

19.1.1

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

19.1.2

At the organization level, goals and objectives are usually presented in a

strategic plan that includes a mission statement and broadly defined strategic
initiatives. At the department level, goals and objectives must support the
organization's strategic plan. Goals and objectives are classified in the
following categories:
Operations objectives. These objectives pertain to the achievement of the
basic mission(s) of a department and the effectiveness and efficiency of its
operations, including performance standards and safeguarding resources
against loss.
Financial reporting objectives. These objectives pertain to the preparation
of reliable financial reports, including the prevention of fraudulent public
financial reporting.
Compliance objectives. These objectives pertain to adherence to applicable
laws and regulations.
19.1.3 The following table illustrates these concepts:

Goals and Objectives Business Objective Classification

Payroll
Processing-Compensation/ Withholding
Compensation rates and payroll deductions should be
Operations

accurately

and promptly entered into the payroll system.

(O).
Each accounting period, prepare journal entries for payroll, payroll
deductions, and related adjustments.
Financial (F)
Processing-Authorizations
Personnel management should properly and accurately maintain all
compensation documentation.
Compliance
(C)
An employee master file that is accurate and complete should be maintained.
O, F, C
19.1.4

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

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

19.1.5

Department
Goals and
Objectives

Activities to
Achieve Goals
and Objectives

Activity Level
Goals and
Objectives

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

19.2 Identify Risks After Defining Goals

19.2.1

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

19.2.2

19.2.3

be managed.
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.
Risk Identification. A risk is anything that could jeopardize the achievement
of an objective. For each of the department's objectives, risks should be
identified. Management could ask the following questions to help to identify
risks:
What could go wrong? How could we fail? What must go right for us
to succeed? Where are we vulnerable? What assets do we need to protect?
Do we have liquid assets or assets with alternative uses? How could
someone steal from the department? How could someone disrupt our
operations? How do we know whether we are achieving our objectives?
On what information do we most rely? On what do we spend the most
money? How do we bill and collect our revenue? What decisions require
the most judgment? What activities are most complex? What activities are
regulated? What is our greatest legal exposure?

19.2.4

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

level, department level and at the activity or process level-for operations,
financial reporting, and compliance objectives-considering both external and
internal risk factors. Usually, several risks can be identified for each objective.
19.2.5 The following table illustrates the concepts discussed above. Note that the identified
risks relate to the goals and objectives previously determined.

Goals and Objectives

Business
Objective
Classification

Risks

Payroll Provide service and support

to the entitys employees.
Processing-Compensation/
Withholding Compensation rates
and payroll deductions should be
accurately and promptly entered
into the payroll system. Each
accounting period, prepare journal
entries for payroll, payroll
deductions, and related
adjustments. ProcessingAuthorizations Personnel
management should properly and
accurately maintain all
compensation documentation
including filing of periodic returns
to the income tax departments. An
employee master file that is
accurate and complete should be
maintained.

Operations (O).
Financial (F)
Compliance (C)
O, F, C

Transactions may not be processed

or processed incorrectly. Financial
statements may be misstated due
to entry omissions, incorrect
coding, duplicate journal entries,
or improper cutoffs.
Employment/tax laws and
regulations may be violated
resulting in fines, penalties, or
litigation. Incorrect data in the
master file could result in incorrect
wage payments. Payroll
withholdings may be incorrect.
Awards, incentives, recognitions,
etc., may not be accurately
reflected on the master file.
19.2.6 Below are some types of transactions that may pose higher risks:

High Risk
Large cash payments (not routed through bank)
Transaction
Major acquisitions
Types
Unusually large transactions Accounting transactions that require
subjective assessment Software Licensing Issues Intellectual Property
Estimation of provisions against inventory or other assets
19.2.7

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

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

19.3 Risk Analysis.

19.3.1

After risks have been identified, a risk analysis should be performed to prioritize those
risks:
Assess the likelihood (or frequency) of the risk occurring. Estimate the potential
impact if the risk were to occur; consider both quantitative and qualitative costs.
Determine how the risk should be managed; decide what actions are necessary.

19.3.2 Prioritizing helps focus managements attention on managing significant (i.e., risks risks
with reasonable likelihood of occurrence and large potential impacts).
19.4

Risk Assessment Tips

19.4.1

Listed below are tips to guide a department through its risk assessment:
Make sure the entity and all its major functions have a mission statement and
written goals and objectives. Assess risks at the each financial statement
component level. Assess risks at the activity (or process) level. Make sure that
all risks identified at the component level are addressed in the Business Controls
Worksheet.

20.

Balancing Risks and Controls

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

Excessive Controls

Loss of AssetsPoor Business

Decisions Noncompliance
with laws Increased
Regulations Public Scandals

Increased Bureaucracy Reduced Productivity

Increased Complexity Increased Cycle Time Increase
of No-Value Activities

20.2

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

21.

Information & Communication

21.1

Information and communication are essential to effecting control; information

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

21.2

Information and communication systems can be formal or informal. Formal

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

22.

Information and communication are simple concepts.

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

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

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

Applicable laws and regulations are being complied.

22.2

While internal control is a process, its effectiveness is an

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

22.3

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

22.4

Management's role in the internal control system is critical to its effectiveness.

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

DOCUMENTATION & EVALUATION OF ACCOUNTING AND

INTERNAL CONTROL SYSTEMS

INTERNAL CONTROL
Procedures and processes designed by management to provide
reasonable assurance that organizational objectives are met.
Improve effectiveness management decision making &
efficiency of business process Increase reliability of
accounting information Achieve appropriate compliance with
rules and regulations

ELEMENTS OF INTERNAL CONTROL SYSTEM

Control Environment Risk Assessment
Control Activities

1
2
3

o Performance Review
o Information Processing Controls
o Physical Controls

o Segregation Of Duties Information And

Communication Monitoring Activities

CONTROL RISK ASESSMENT

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

OBTAINING AN UNDERSTANDING OF ACCOUNTING & INTERNAL CONTROL

SYSTEMS
Interviews Review Of Company Documents Observations Transactions WalkThrough

DOCUMENTING THE ACCOUNTING & INTERNAL CONTROL SYSTEMS

Written Narrative Flowcharts Control Questionnaire Decision Table
Combination Of Previous

LINKAGE TO AUDIT TESTING

Controls
Identify
Strengths
Test of Controls

Reliance = Reduce Substantive

Test
Controls
Weaknesses
Offsetting Controls Or Substantive
Tests

REPORTING ON INTERNAL CONTROL

Reportable Conditions:
1

Efficiency or Effectiveness
Management Letter

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

Management Letter
1

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

Qualification in Auditors Report

INTERNAL CONTROL QUESTIONNAIRE

CONTENTS
I. CONTROL ENVIRONMENT
A. Management Philosophy and Operating Style
B. Organization Structure
C. Personnel Policies and Procedures
D. Management Control Methods
E. Internal Audit Function
II. ACCOUNTING SYSTEM

A. General Accounting
B. Preparation of Financial Statements
III. REVENUE CYCLE
A. Revenue and Receivables
B. Cash Receipts

1. IV. EXPENDITURES CYCLE

2. A. Purchases and Accounts Payable
3. B. Payroll
4. C. Cash Disbursements
V. PRODUCTION (CONVERSION) CYCLE
A. Production Costs and Inventories
B. Property and Equipment

VI. FINANCING (TREASURY) CYCLE

A. Investments
B. Equity Capital
PAGE NO.
2-40 2-40 2-40 2-41 2-41

2-43 2-44

2-45 2-49

2-51 2-54 2-56

2-59 2-65

2-67 2-68

I.

CONTROL
ENVIRONMENT
YES NO N/A

A. Management Philosophy and Operating Style

Questions-Policies and Procedures
1

Does management have clear objectives in terms of

budgets, profit and other financial and operating goals?

Are such policies:

1
2
3
4

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

Objective
Definitions of responsibilities and authority assigned to
specific individuals permit identification of whether
persons are acting within the scope of their authority.
Questions-Policies and Procedures
1
2
3

Is the organisation of the entity clearly defined in terms of lines of authority and
responsibility?
Does the entity have a current organisation chart and related materials such as job
descriptions.
Is there adequate computer system documentation?

C. Personnel Policies and Procedures

Questions-Policies and Procedures

1.

Does the entity:

1
2

a.
Adequately plan for staff needs?
b.
Employ sound hiring practices, including
background investigations, where appropriate?

YES NO N/A
1
2
3
D.

Are employees adequately trained to meet their job responsibilities?

Does the entity systematically evaluate the performance of employees?
Is good performance appropriately rewarded?
Management Control Methods

Questions-Policies and Procedures

1

Are there regular meetings of the board of directors (or comparable bodies) to set
policies and objective, review the entitys performance and take appropriate action,
and are minutes of such meetings prepared and signed on a timely basis?
Has the entity established planning and reporting systems that set forth managements
plans and the results of actual performance?
Do the planning and reporting system in place:

1
2

a.
b.

4.

Adequately identify variances from planned performance?

Adequately communicate variances to the appropriate management level?

Does the appropriate level of management:

1
2

5.

a.
b.

Adequately investigate variances?

Take appropriate and timely corrective action?

Does the entity have established policies for developing and modifying accounting
systems and control procedures?

E. Internal Audit Function

Question-Policies and Procedures
1
2

Does the entity have an internal audit function?

If an internal audit function is present:
a.

Are the internal auditors independent of the activities they audit?

YES NO N/A

b.

Is the internal audit function adequately staffed in terms of the number of

2
3
4
5
6

employees, and their training and experience?

c.
Don the internal auditors document the internal control structure and perform
tests of control
d.
Do they perform substantive tests of the details of transactions and account
balances?
e.
Do they render written reports on their findings and conclusions?
f.
Are their reports submitted to the board of directors or to a committee thereof?
g.
Are copies of reports made available to external auditors?
Are copies of reports made available to external auditors?

1
2

Does management take adequate and timely actions to correct conditions reported by
the internal audit function.
Does the internal audit function follow up on corrective actions taken by management?

II. ACCOUNTING SYSTEM

YES NO N/A
A. General Accounting
Objectives
1
2
3
4

a.
Accounting policies and procedures, including selection among alternative
accounting principles are determined in accordance with managements authorization.
b.
Access to the accounting and financial records is limited to minimise
opportunities for errors and irregularities and to provide reasonable protection from
physical hazards.
c.
Accounting entries are initiated and approved in accordance with
managements authorisation.
d.
All accounting entries are appropriately accumulated, classified and
summarised in the accounts.

Question-Policies and Procedures

1
2
3
4
5
6

Does the entity have adequate written statements and explanations of its accounting
policies and procedures?
Are the entitys accounting policies and procedures adequately communicated to
appropriate personnel?
Are there adequate facilities for custody of the general ledger and related records?
Are all journal entries reviewed and approved by designated individuals at appropriate
levels in the organisation?
Are all journal entries adequately explained and supported?
Do all journal entries include indication of approval in accordance with managements
general or specific authorisation?

Do all journal entries include adequate identification of the accounts in which they are
to be recorded?
YES NO N/A

1
2
3
4

Are adequate accounts and records maintained so that adjustments and write-offs made
to account balances do not impair accountability for actual amounts?
Is approval of responsible official required to open new accounts?
Are accounting records updated regularly and on timely basis?
Are correction of entries prohibited except through procedures for journal entries.

B. Preparation of Financial Statements

Objectives
1
2

a.
The general ledger and related records permit preparation of financial
statements in conformity with approved accounting standards.
b.
Individuals at appropriate levels in the organisation consider sufficient, reliable
information in making the estimates and judgments required for preparation of
financial statements including related disclosures and other externally reported
financial information.
c.
Financial statements including related disclosures are prepared and released in
accordance with managements authorisation.

Questions-Policies and Procedures

1
2

Are there adequate instructions and procedures for statement preparation?

Are financial statements subjected to overall review, including comparisons with the
prior period and budgeted amounts, by appropriate levels of management before the
statements are approved for issuance?

III. REVENUE CYCLE

YES NO N/A
A. Revenue and Receivables
Sales Orders
Objectives
1
2

a.
The types of goods and services to be provided, the manner in which they will
be provided and the customers to which they will be provided are in accordance with
managements authorisation.
b.
The prices and other terms of sale of goods and services are established in
accordance with managements authorisation.

Questions-Control Policies and Procedures

1.

Do policies and procedures for acceptance and approval of sales orders appear clearly
defined and adequately communicated for:
1
2
3
4

a.
b.
c.
d.

Is responsibility clearly assigned for approval sales orders before shipment or

performance?
Are sales orders approved in accordance with managements general or specific
authorisation before shipment or other performance concerning:

2
1
2
3
4
5
4.
1
2
3

a.
b.
c.
d.
e.

Customer?
Description and quantities?
Price?
Other terms of sales?
Credit (account balances limits)?

Are all approved sales orders recorded on appropriate forms which include indication
of proper approval and are subject to:
a.
Pre-numbering?
b.
Accounting for all forms used?
c.
Recording in detail? (For example, listing in a register or log, or copies of all
sales orders issued in file.)
d.

Standard goods and services?

Unusual delivery arrangements?
Export sales?
Sales to related parties?

Timely
shipping

communication
or

to

YES NO N/A
persons
who
perform
service

the
function?

Are there appropriate procedures for approval of No charge services and services
performed under a warranty?
Are unfilled sales commitments periodically reviewed?

Credit
Objective
Credit terms and limits are established in accordance with
managements authorisation.
Questions-Control Policies and Procedures

1
2
3

Do policies on granting of credit appear clearly defined and adequately

communicated?
Is there periodic review of credit limits?
Do persons who perform the credit function receive timely information about past due
accounts?

Shipments
Objectives
1

a.
Goods delivered and services provided are based
on orders which have been approved in accordance
with managements authorisation.

b.
Deliveries of goods and rendering of servicesresult in preparation of accurate
and timelybillings.

Question-Control Policies and procedures

1
2

Are goods shipped or services rendered based on documented sales or work orders
which include indication of approval in accordance with managements authorisation?
Are shipping documents prepared for all shipments?
YES NO N/A

3.

Are shipping documents subjected to:

1
2
3
4
5
1
2
3

a.
Pre-numbering?
b.
Accounting for all shipping documents issued?
c.
Timely communication to persons who physically perform the shipping
function?
d.
Timely communication to persons who perform the billing function?
e.
Timely communication to persons who perform the inventory control function?
Is access to finished goods and merchandise restricted so that withdrawals of inventory
are based only on properly approved sales orders
Are quantities of goods shipped independently verified?
Are shipping and performance documents reviewed and compared with billings on a
timely basis to determine that all goods shipped or services rendered are billed and
accounted for?

Billings and Records

Objectives

1
2

a.
Sales and such related transactions as commissions and sales taxes are based on
deliveries of goods or rendering of services and recorded at the correct amounts and in
the appropriate period and are properly classified in the accounts.
b.
Sales related deductions and adjustments are made in accordance with
managements authorisation.

Questions-Control Policies and Procedures

1.

Are sales invoices prepared for all shipments of goods or services rendered (including
purchases which are shipped directly to customer)?
YES
NO
N/A

2.
Are billing and invoice preparation functions performed by
persons who are independent of the selling (soliciting and
receiving orders from customers), credit, and cash functions?
3.

Are all sales invoices:

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

4.

Are sales invoices listed in detail?

5.

Are all credit memos:

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

6.

Are monthly statements and specific billings sent for trade

receivables:

a. b.

7.

8.

Reviewed by a responsible employee who is

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

Is an aging schedule or schedule of past due accounts

prepared monthly by someone independent of the billing and
cash receipts functions?
Is the accounts receivable subsidiary ledger reconciled
monthly to the general ledger control account?
YES NO N/A
1
2
3

Does the credit manager review monthly ageing schedules or listings of past due
customer accounts and investigate delinquent accounts and unusual items on a timely
basis?
Is there documentation of review and analysis of accounts receivable balances to
determine valuation allowances (for doubtful accounts) and any specific balances to be
written-off?
Are valuation allowances and write-offs approved by a responsible employee?

B. Cash Receipts
Processing Collections Objectives
1
2

a.
Access to cash receipts and cash receipts records, accounts receivable records,
and billing and shipping records is controlled to prevent or detect, on a timely basis,
the taking of unrecorded cash receipts or the abstraction of recorded cash receipts.
b.
Details transaction and account balance records are reconciled, at reasonable
intervals, with applicable control accounts and bank statements for timely detection
and correction of errors.

Question-Control Policies and Procedures

1
2
3

Is the mail opened by a person(s) whose duties do not involve any shipping, billing,
accounts receivable detail, general ledger, invoice processing, payroll and cash
disbursement functions?
Are receipts of currency controlled by cash registers and/or pre-numbered cash receipt
forms?
Are each days receipts (by mail and over the counter) except for post-dated items
deposited intact daily?

4
5

Are post-dated items segregated on daily detail listings of remittances to aid in control
of total items received?
Are all employees who handle receipts adequately bonded?
YES NO N/A

Are banks instructed not to cash cheques and other instruments drawn to the order of
the company?
Does company policy prohibit the asking of any accommodation cheques for example,
personal and payroll cheques) out of collections?
Are entries to the cash receipts journal compared with

1
2

a.
b.

9.

Duplicated deposit slips authenticated by the bank?

Deposits per the bank statements?

Are the comparisons described in item 13 above made by a person(s) whose duties do
not include cash receipts and accounts receivable functions?

Recording Collections
Objectives
All cash receipts recorded are at the correct amount in the period in which received and are
properly classified and summarised.
Question-Control Policies and Procedures
1

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

1
2

a.
b.

2
3

Physical handling of collection?

Posting accounts receivable subsidiary detail?

IV. EXPENDITURE CYCLE

YES NO N/A
A. Purchases and Accounts Payable Purchases

Objectives
The types of goods, other asset and services to he obtained, the manner in which they are
obtained, the vendors from which they are obtained, the quantities to be obtained and the
prices and other terms are initiated and executed in accordance with management's general or
specific authorization.
Adjustments to vendor accounts and account distributions are made in accordance with
management's general or specific authorization.
Questions-Control Policies and Procedures
1
2
3
4
5
6
7
8

Are all purchases based on requisitions which have been approved in accordance with
management's authorization ?
Are written purchases orders (or other equivalent document) used for all commitments
and do those orders include the vendor description, quantity, price, term and delivery
requirements for the goods or services ordered?
Are all purchase orders, before issuance, approved by specific individuals or classes of
individuals designated by management?
Are all purchase orders pre-numbered?
Is the purchases function independent of receiving, shipping, invoice processing and
cash functions?
Are all purchase orders routinely accounted for?
Is custody of unissued purchases order form adequate to prevent their misuse?
Are open purchase orders periodically reviewed and investigated?

Receiving
Objectives
1 a.
All goods, other assets and services received are accurately accounted for on a
timely basis
2 b.
Only authorized goods, other assets and services are accepted and/or paid for.
YES NO N/A
Questions-Control Policies and Procedures
1
2
3
4

Are all goods received inspected for condition and independently counted, weighed or
measured to provide for comparison with the applicable purchase order?
Is there evidence that all services received are evaluated for quality and completeness?
Are receiving reports prepared promptly for all goods received?
Are receiving reports subjected to the following

1
2
3

a.
b.
c.

Pre-numbering?
Listing in detail?
Accounting for all receiving reports used?

d.
Distribution of copies for timely matching withpurchase orders and vendor's
invoices and ifapplicable, timely maintenance of perpetual inventoryrecords?

5.

Are receiving functions performed by designated

employees who are independent of the purchasing,
shipping, invoice processing and cash functions?
Invoice Processing
Objectives
1 a.
Only authorized goods, other assets and services received are paid for.
1 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:
2 (1) Permit preparation of reports and statements in
conformity with generally accepted accounting
principles or other criteria.
2

3 (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

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?
YES

3.

4.
5.

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?
Are advances to suppliers made in accordance with
management's authorization?
Are vendors invoices, prior to payment, reviewed for
correctness of:
a. Clerical accuracy?
b. Adjustment of advances?
c. Freight charges?
d. Account distribution?

NO

N/A

6.

Are processed invoices and supporting documents

approved by designated employees before payment?
7. Are approved debit memos used to notify vendors of
goods returned and other adjustments of their accounts?
8. Are accumulation of processed invoice and follow-up of
unmatched purchase orders and receiving reports adequate
to result in a proper cut off for financial reporting
purposes?
9. Are vendors statements reviewed for overdue items and
reconciled with accounts payable detail
10. Are there adequate controls to ensure recognition of
liabilities for goods/services received but not invoiced?
11. Are employee expense accounts:
a. Prepared in accordance with criteria set by
management?
b. Submitted promptly?
c. Adequately supported?
d. Approved before payment?
12. Are approved debit memos used to notify vendors of
goods returned and other adjustments of their accounts?
13. Is accounts payable detail periodically reconciled with the
control accounts at reasonable intervals?
YES NO N/A
B. Payroll
Authorization of Wages, Salaries, and Deductions Objectives
Objectives
1 a.
Employees are hired and retained only at rates, benefits and perquisites
determined in accordance with management's general or specific authorization.
2 b.
Payroll deductions are based on evidence of appropriate authorization.
3 c.
Payroll include only those employees who worked during the period.
Questions-Control policies and procedures
1
2
3
4

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

Preparation and Recording

Objectives
1 a.
Compensation is made only to company employees at authorized rates and for
services rendered in accordance with management's authorization.
2 b.
Gross pay, deductions and net pay are correctly computed based on authorized
rates and services rendered and properly authorized deductions.
3 c.
Payroll costs and related liabilities are correctly accumulated, classified, and
summarized in the accounts in the appropriate period.
Questions-Control Policies and Procedures
1.
1
2

Do employees who perform the payroll processing function receive timely notification
of.
a.
Wage and salary rates resulting from new hires, rate changes, changes in
position, and separations?
b.
Changes in authorized deductions?
YES NO N/A

2.

Is gross pay determined using authorized rates and:

1

a.
Time or attendance records for employees paid by
the hour or by salary?

b.
Piecework records for employees whose wages are
based on production?

c.
Adequate detail records of sales for commission
salesmen?

Are accruals for gratuity provided on the based of contractual agreements with the
employees?
Are total production hours used for determination of gross pay reconciled with
production statistics used for cost accounting purposes?
Are piece rate records reconciled with production records?
Are salesmens commission records reconciled with recorded sales?
Are such data as hours worked, piecework and commission sales used to determine
gross pay compared at reasonable intervals with applicable production and sales
records by responsible persons.

2
3
4
5

Disbursement ( Payroll)
Objective

Not pay is disbursed to the appropriate employees when due.

Questions-Control Policies and Procedures
1 Are payrolls approved in writing by responsible employees before issuance of payroll
cheques or distribution of cash for net pay?
2 Is net pay distributed, by persons who are independent of payroll preparation, timekeeping, and cheque preparation functions?
3 For payrolls paid by cheque:
1
2
4.

a.
b.

Are cheques drawn on a separate imprest account?

Are deposits equal to the amount of net Pay?

For payrolls paid in cash.

1
2

a.
Are adequate security precautions taken?
b.
Does the cash requisition equal the amount of net
pay to he distributed as cash?

c.
Is distribution made by persons independent of
payroll preparation functions?

d.

Are receipts obtained from employees and revenue stamps affixed?

YES NO N/A

1
2

Is responsibility for custody and follow-up of unclaimed wages assigned to a

responsible person independent of personnel, payroll processing, and cash
disbursements functions?
Are procedures adequate to result in timely and accurate preparation and filing of
payroll tax returns and payment of related accumulated accrued taxes?

Segregation of Functions and Physical Safeguards

Objectives
1
2

a.
Functions are assigned so that no single individual is in a position to both
perpetrate and conceal errors or irregularities in the normal course of his duties.
b.
Access to personnel and payroll records is limited to minimize opportunities
for errors, and irregularities

Questions-Control Policies and Procedures

Is there adequate separation of duties among employees who perform the following
functions:
1 a.
Written authorization of new hires, any rates and changes thereto, benefits,
changes in position, and separations?
2 b.
Maintenance of personnel records?

3
4
5

c.
d.
C.

Preparation of payrolls?
Approval of payrolls?
Cash Disbursements

Assignment of Functions
Objective
Functions are assigned so that no single. individual is in a position to both perpetrate and
conceal errors or irregularities in the normal course of his duties.
Questions-Control Policies and Procedures
1.
1
2
3
4

Is the cash disbursements function performed by persons who are independent of the
following functions:
a.
Purchasing?
b.
Receiving?
c.
Invoice processing?
d.
Shipping?
YES NO N/A

Processing Disbursements
Objectives
1
2
3
4

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

Questions-Control Policies and Procedures

1
2
3
4
5
6

Are all bank accounts authorized by the board of directors?

Are all cheque signers authorized by the board of directors?
Are bank promptly notified of any changes in authorized cheque signers?
Are all disbursement and bank transfers based on vouchers and cheque requests which
have been approved by responsible employees designated by management?
Are all disbursements except from petty cash made by cheque?
Are properly approved supporting documents presented with cheques and reviewed by
the cheque signer(s) before signing the cheques?

7
8

Are supporting documents for cheques properly canceled and cheque number entered
to avoid duplicate payment?
Are cash funds on an imprest basis and

1
2
3

a.
b.
c.

1
2
3
4

Are all disbursements from cash funds:

a.
Supported by vouchers which are prepared in ink?
b.
Approved in accordance with management's authorization?
c.
Canceled to prevent reuse?
d.
Subject to a predetermined maximum limit for any individual disbursement?

9.

Kept in a safe place?

Reasonable in amount?
Periodically counted by someone other the custodian?

YES NO N/A
10.

Are reimbursements of cash funds:

1
2

a.
Subject to the same review and approval as processed invoices?
b.
Remitted by cheques drawn payable to the order of the custodian of the cash
fund?

1
2

Are all voided cheques retained and mutilated?

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

Bank Reconciliations
Objective
Comparison of detail records, control accounts, and bank statements are made at reasonable
intervals for detection and appropriate disposition of errors or irregularities.
Questions-Control Policies and Procedures
1
2

V.

Are the bank accounts reconciled monthly by an employee(s) who is independent of

invoice processing, cash disbursements, cash receipt, petty cash and general ledger
functions?
Are old outstanding cheques investigated?

PRODUCTION
(CONVERSION)
CYCLE YES NO
N/A

A.

Production Costs and Inventories

Authorization of Production Activities and Planned
Inventory Levels

Objective
All production activity and accounting therefor is
determined in accordance with management's general or
specific authorization.
Questions-Control Policies and Procedures
1
2
3.

Are planned inventory levels or service capabilities to be maintained determined in

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

Recording Resources Used in Production and

Completed Results
Objective
Resources obtained and used in the production
process and completed results are accurately
recorded on a timely basis.
Question-Control Policies and Procedures
1.
(a) Are receiving reports prepared which
include adequate information for posting
detailed inventory records and allow for
summarization into a source for posting
inventory control accounts?
(b)
Is goods receiving department independent of
storage and purchasing department?
1
2

Are all releases from storage of raw materials, supplies, and purchased parts inventory
based on approved requisition documents?
Is authority to approve inventory requisitions assigned to responsible employees.

YES NO N/A
1
2
3
4
5
1
2
3
4
9.

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

Recording Transfers to Customers and Other Inventory Dispositions

Objective
Transfer of finished production to customers and other disposition such as sales of scrap
are accurately recorded on a timely basis.
Questions-Control Policies and Procedures
1
2
3

Are releases of finished goods inventory to customers based on shipping documents

which have been approved in accordance with management's authorization?
Are releases of excess, obsolete, defective or scrap inventory for disposition based on
documented instructions which have been approved in accordance with management's
authorization?
Is authority to approve instructions for the release of inventory assigned to responsible
employees.
YES NO N/A

4.

Do shipping documents and release documents for such other dispositions as

sales of scrap-:
1

a.
Include adequate information for recording reductions in the detailed inventory
records, charges to cost of sales, and cross-reference or connection with source

documents used to recognize revenue and the related receivable?

b.
Provide a means (such as pre-numbering or hatching) of accounting for all
shipping documents and other release documents issued?

Accumulation and Classification of Production and Inventory Costs and Costs of

Sales
Objective
Inventory, production costs, and costs of sales are accumulated and classified in the
accounts to-:
1
2

(1)
Permit preparation of statements in conformity with recognize accounting
principles.
(2)
Maintain accountability for costs incurred.

Questions-Control Policies and Procedures

1.

If a cost accounting system is used, is it reconciled at reasonable intervals

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

3.
1
2
3
1
2
3

a.
Review to determine that requisitions are completed and approved in
accordance with management's authorization?
b.
Accounting for all requisitions used?
c.
Summarization of requisitions at reasonable intervals for consistent and timely
maintenance of control accounts?
Are burden rates and amounts of overhead applied to production compared at
reasonable intervals with actual overhead costs incurred and updated in accordance
with management's authorization?
Is access to the detailed inventory records and control accounts limited to persons
responsible for their maintenance, and internal audit?
Are the inventory detail records and control accounts adjusted to physical counts at
least annually?
YES NO N/A

1
2

Are the detailed inventory records and control accounts adjusted for reports of excess,
slow-moving, and obsolete inventories in accordance with management's general or
specific authorization?
For standard cost systems:
a.

Are standard rates and volume compared at reasonable intervals with actual
costs and activity and revised accordingly for changes in underlying

conditions?
(For example, comparison of raw material costs with vendors' invoices, standard labor
rates with actual rates, standard material usage and machine hours with product
engineering changes, standard labor hours with time studies, etc.)
b.
Are significant variances investigated and the resulting explanation brought to
management's attention on timely basis?
Inventory Safeguarding
Objectives
1
2

a.
Inventory is protected from unauthorized use or removal.
b.
Access to inventory, property, cost and production records is limited to
designated individuals in accordance with management authority so that unauthorized
dispositions may be prevented or detected within a timely period.

Questions-Control Policies and Procedures

1
2

Do physical safeguards of inventory appear reasonably adequate in relation to the

materiality of the inventory and its susceptibility to theft?
Does inventory appear reasonably protected from physical deterioration?

Physical Counts of Inventory

Objective
Recorded balance of inventory are substantiated and evaluated at reasonable intervals by
comparison with and evaluation of actual quantities on hand.
YES NO N/A
Questions-Control Policies and Procedures
1
2
3

Is inventory subjected to physical count at least annually?

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

a.
Complete and accurate perpetual records which are
maintained on a timely basis?

b.
Adequate control over physical movement ofinventories (receipts, internal
transfers, andshipments) and accurate recording of cutoffs toprovide timely and
accurate source data formaintaining the perpetual records and clearidentification of
classes of items to be counted?

4.

c.
Sufficient segregation of duties so that errors of
omission or commission are prevented or detected
promptly?
Do detailed written inventory procedures and instructions
exist which have been approved in accordance with
management's authorization before issuance and use?

5.
Do the inventory procedures adequately address the
following matters:

Location and orderly physical arrangement of

inventories?

Identification and description of the inventories by

persons familiar with it?

Segregation and proper identification of goods that

are not property of the client, such as customers'
goods and goods held on consignment?

Method of determining quantities such as weight,

count or measure.

Recording of items on count sheets or ticketsincluding complete descriptions,

identifying codesas well as quantities counted?
Special considerations for work in process such as
identifying stage of completion?

g
h

Identification of stock counted to determine whether

all items are counted and to preclude duplicate
counting?
YES

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

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

NO

N/A

physical counts?
m. Investigation and disposition of differences between
physical counts and detailed inventory records?
6.

Are inventory instructions adequately communicated to and

understood by persons who perform the physical count?
7. Is inventory movement adequately controlled during the
count so that items are not missed or double counted.
8. Are controls over purchases and receiving activity
sufficient to result in recording of liabilities for any item
include in inventory which have not been paid for?
9. Are controls over sales and shipping activity sufficient to
result in exclusion from the physical inventory of any
items which have been sold and billed but not yet
shipped?
10. Are inventory counts subject to adequate verification such
as recounts by persons other than those who made the
initial counts or spot checks by others, such as internal
auditors?
11. Are difference between physical counts and detailed
inventory records investigated in accordance with
management's authorization before the records are
adjusted?
12. Is there documentation of review and analysis of the
physical inventory to:
a. Conform with the lower of cost or market
principle,
b. Identify items which are excessive, slow-moving,
defective or obsolete?
c. Determine the need for adjustments or valuation
allowances?
13. Are adjustments of the inventory detail records and
control accounts given prior approval in accordance with
management's authorization?
YES NO N/A
B.

Property and Equipment

Initiation and Execution of Property and Equipment Transactions

Objective
Additions and related accumulation of depreciation or amortization, retirements, and

dispositions of property and equipment (owned and leased) are made in accordance with
management's authorization.
Questions-Control Policies and Procedures
1
2
1
2
1
2
3

Is advance approval in accordance with management's criteria required for all property
and equipment transactions?
Are requests for additions, transfers, major maintenance and repair, retirement and
disposition of property and equipment.
a.
Initiated by designated individuals in accordance with management's
authorization?
b.
Formally documented, including an adequate description of the proposal, its
reasons, and the estimated amount of the transactions?
Are authorizations to execute property and equipment or transactions adequately
documented?
Are procedures adequate for determining that component and services for property and
equipment are received?
Are procedures adequate for determining that all dispositions of property and
equipment have been executed and proceeds, if any, received in accordance with
managements authorization?

Recording Property and Equipment and related Depreciation and Amortization

Objective
Transactions involving property and equipment and related depreciation and /or
amortization are accurately recorded, accumulated, and classified in detail and in
control accounts to:
1 (1)
Permit preparation of statements in conformity with recognized accounting
principles or
2 (2)
Maintain accountability for assets.
Questions-Control Policies and Procedures
1.

Are detailed records maintained for each classes of property and equipment (owned
and leased)?
YES NO N/A
1
2
3

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

Safeguarding Property and Equipment

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

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

A.

Investments

Authorization of Investment Transactions

Objective
The nature and terms of investment transactions are made in
accordance with managements authorization.
Questions-Control Policies and Procedures
1
2

Are investment transactions initiated and approved in accordance with management

authorization?
Are brokers advices and other evidence of execution of transactions promptly
compared with documented authorizations and differences brought to the timely
attention of management?

Recording and Classifying Investment Transactions

Objective
Investment transactions, including accrual and collection of
related income, are recorded at the correct amounts in the
accounting periods in which they were executed or earned.
and properly classified in the accounts.

Questions-Control Policies acid Procedures

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

a.
Reporting of the findings to management?
b.
Determination of need for any valuation
allowances?
YES NO N/A

5.

Are detailed investment records reconciled with the general ledger control
accounts, including related income?

Physical Safeguards and Custodial Accountability

Objective
Documents evidencing ownership of investments and related collateral, and other investment
records are subjected to reasonably adequate physical safeguards and effective custodial
accountability procedures.
Questions-Control Policies and Procedures
1
2
3
B.

Are investment securities and related collateral subject to reasonably adequate,

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

Questions-Control Policies and Procedures

Recording and Classifying Equity Capital Transactions
Objective

Transactions and obligations concerning equity capital are promptly and accurately recorded
and classified in detailed recorded and control accounts.
Questions-Control Policies and Procedures
1
2

Does the general ledger include appropriate control accounts for equity capital?
Are detailed share certificate records reconciled at reasonable intervals with the control
records and the general ledger?
YES

NO

N/A

Physical Safeguards and Custodial Procedures

Objectives
1 a.
Access to records, agreements, and such negotiable documents as share
certificates concerning equity capital is permitted only in accordance with
management's authorization
2 b.
Records, agreements, and negotiable documents are subjected to reasonably
adequate physical safeguards and custodial procedures.
Questions-Control Policies and Procedures
1
2

Are unissued share certificates subject to reasonable physical safeguards?

Are unissued share certificates examined and all certificate numbers accounted for at
reasonable intervals by, a responsible official?

2.2.6 MATERIALITY
There are two aspects to materiality -Planning materiality, and Reporting materiality.
Planning materiality is concerned with whether a misstatement, or an aggregation of
misstatements, in an underlying financial statement item, account balance or class of
transaction, is likely to result in a material misstatement in the financial statements as a whole.
Auditors use planning materiality to determine which financial statement items, account
balances and transactions to test and which to not test. Financial statement items, account
balances and transactions, which equal or exceed their materiality level are selected for
testing.

LEVEL OF
MATERIALITY LEVEL
AGGREGATION

EVALUATION

Financial
statement level

A misstatement of a financial statement

item is material when the misstatement,
aggregated with misstatements of other
financial statement items, is likely to
equal or exceed the level of reporting
materiality.

Account balance
level

A misstatement of an account balance

underlying a financial statement item is
material when the misstatement,
aggregated with misstatements in other
account balances underlying the
financial statement item, is likely to
result in a material misstatement of the
financial statement item.
A misstatement of a transaction
underlying an account balance is
material when the misstatement,
aggregated with misstatements in other
transactions underlying the account
balance, is likely to result in the
material misstatement of the account
balance.

Class of
transaction level

Materiality at the financial

statement level may be evaluated
by reference to (i) reporting
materiality and (ii) the expected
nature, number and value of
financial statement items included
in the financial statements.
Materiality at the account balance
level is evaluated by reference to
(i) materiality at the financial
statement level and (ii) the
expected nature, number and
value of account balances
underlying the financial statement
item.
Materiality at the class of
transaction level is evaluated by
reference to (i) materiality at the
account balance level and (ii) the
expected nature, volume and
value of transactions underlying
the account balance.

Whereas planning materiality is primarily concerned with the judgments of the auditor,
reporting materiality is primarily concerned with the auditor's evaluation of the
judgments of users of financial statements.
Reporting materiality refers to the extent of a misstatement.
Reporting materiality is concerned with whether a misstatement of a financial statement item,
or an aggregation of such misstatements, is likely to affect the judgments of users of financial
statements. It requires an evaluation by the auditor in both the client acceptance/ retention
stage and the opinion formulation stage.
In the client acceptance stage the auditor evaluates whether, if the client is accepted or
retained, the audit risk (the risk of a material misstatement in the audited financial statements)
can be reduced to an acceptable level. In this, the initial audit stage, "a material misstatement"
refers to the level of reporting materiality. Similarly in the final opinion formulation stage, the
auditor evaluates the likelihood of the audited financial statements containing a material
misstatement. Again, this evaluation is based on the level of reporting materiality.
Auditors to assess reporting materiality use the following materiality guidelines:
Pre-tax income 5-10%

Net (or after-tax) income 5-10%

Gross revenue 0.5-1%
Equity 5-10%
Total assets 0.5-1%
(This chart is only for guidance purposes)
Where an entity's results are expected to be "normal", then reporting materiality is based on
after tax income amounts. However, where the entity incurs losses, has potential going
concern problems or the results are in other ways unusual, materiality may be based on one or
more of the other factors referred to above. For example, if the entity is incurring losses, both
before and after tax, the auditor may use total assets or total revenue, whichever is the greater.
The final assessment of reporting materiality is subjective and depends on the auditor's
perception of, for example, what information is relevant, who the users of the financial
statements are, what decisions the users may make and what would influence those decisions.
Note that financial statements may be materially misstated as a result of either a quantitative
misstatement (in relation to its monetary value) or a qualitative misstatement (in relation to its
accuracy of presentation, disclosure, description).

2.2.7 REVIEW OF FINANCIAL PERFORMANCE OF THE CLIENT

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

Suggested Format of Financial Performance Review

A. SUMMARY FINANCIAL DATA PERIOD

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

X1

X2

X3

X4

NET INCOME
B. PROFITABILITY OF OPERATIONS
GROSS MARGIN PERCENTAGE
OPERATING INCOME PERCENTAGE
EFFECTIVE TAX RATE
NET INCOME PERCENTAGE
EPS
C. FINANCIAL LEVERAGE
DEBT TO EQUITY RATIO
2-73
D. ASSET TURNOVER
RATIO REVENUE TO TOTAL ASSETS
RECEIVABLES TURNOVER RATIO
INVENTORY TURNOVER RATIO

E. LIQUIDITY
WORKING CAPITAL
OPERATING CASH FLOW
CURRENT RATIO
QUICK RATIO

INTEREST AND DIVIDEND COVERAGE

2-74

2.3 DETAILED PLANNING

2.3.1 COMPUTER INFORMATION SYSTEM (CIS) CHECKLIST
Introduction
A CIS environment exist when a computer of any type or size is involved in the processing by
the entity of financial information of significance to the audit, whether that computer is
operated by the entity or by a third party.
The auditor should consider how a CIS environment affects the audit.
The overall objective and scope of the audit does not change in a CIS environment.
However, the use of computer changes the processing, storage and communication of
financial information and may affect the accounting and internal system employed by
the entity. Accordingly a CIS environment may affect:
The procedures followed by the auditor in obtaining
a sufficient understanding of the accounting and
internal control system. The consideration of
inherent risk and control risk through which the
auditor arrives at the risk assessment. The
auditors design and performance of tests of control
and substantive procedures appropriate to meet the
audit objective.
This checklist prepared using the guidance provided in the Auditing Standards. It is designed
as a
source of reference to assist audit teams in: understanding the design and operations of the
CIS environment and planning and executing an audit approach that is responsive to
the audit risk present in
CIS.
In the preparation of this checklist, no assumptions have been made regarding the degree of
sophistication or complexity of client systems. Therefore, in evaluating the overall CIS
environment of diversified client portfolio, this checklist may be tailored to the requirements
of their particular CIS environment. For this purpose guidance may also be sought from the
following statements on auditing

 CIS Environments Stand Alone Micro computers (refer IAPS - 1) CIS

Environments On Line Computer Systems (refer IAPS - 2) CIS Environments
Database Systems (refer IAPS - 3)
This checklist must also be considered in the context of the professional and technical
requirements of the individual assignment in which an auditor is reporting. To satisfy such
requirements, it may be necessary to refer to additional technical guidance and need for an
expert may arise. This checklist is not intended to be used in an all-inclusive context.
CLIENT: ________________________________________________ YEAR
ENDED: ___________________________________________
INFORMATION TECHNOLOGY GENERAL CONTROLS REVIEW CIS

DEPARTMENT - RISKS AND CONTROLS

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

1.
1.1
1.2
1.3
1.4
1.5
1.6

1.7

2.

2.1
2.2
2.3

CIS RISK - 1 General controls

Organisational and management controls
Physical controls
Data access controls
EDP safeguards
System software controls
Application systems development and maintenance
controls
Comput
er
operatio
ns
controls
CIS
RISK 2
Applic
ation
control
s
Controls over input
Controls over processing and computer data files
Controls over output

2.4
2.5
3.
3.1
3.2

Programme change controls

Control over maintain of the program
CIS RISK 3
Other controls
Contingency Planning
CONCLUSION:

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

Date:
Date:
Date:
Yes /
No.

RISK
ADDRESSED
HIGH MEDIUM LOW

CIS RISK - 1. General Controls

Organisational and management Controls
1.1.1 Does the organisation of the CIS function provide for an
adequate segregation of duties among the following
functions to prevent the performance of incompatible
functions:
- initiating and authorising source documents
- entering into the system
- changing programs and data files
- using or distributing output
- modifying the operating system
1.1.2 Is there appropriate segregation of duties within IT
department:
- IT management
-system analysis and programming
-technical support (system programming)
-database administration
- computer operations
-data control
-file librarian
-data security
1.1.3 -Does appropriate procedures exist relating to:
- rotation of sensitive duties/shifts
- holiday/vacation arrangements
- termination of employment (e.g. immediate

discharge, deletion of passwords etc.)

1.1.4 Are system design standards and programming standards
documented and enforced.
1.2 Physical controls
1.2.1 Are there adequate physical controls over the peripherals?
1.2.2 Are the backup data placed in a secured (fire proof )
place ?
Yes / RISK ADDRESSED
No.
HIGH

1.3
1.3.1
1.3.2

1.3.3

Data access controls

Is some access protection software in use?
Are there password controls which
- identify authorised users
- restrict each user to limit range of activities
- limit attempts to password
- give time when unauthorised access was attempted so that
person attempting such access may be identified
- limit simultaneous logins
Are there controls in place to ensure
- Password of adequate length
- regular change of password
- prohibition of use of similar passwords as used before
- passwords are stored in encrypted format
- change of passwords for vendor supplied user profiles;

1.3.4
1.3.5

Are there special arrangements to cover physical access by

outside contractors, maintenance engineers and cleaners
Are there procedures to ensure that:
- number of invalid sign-on attempts are limited;
- written authorisation for addition and deletion of user profiles;
- user profiles are not shared;
- privileged users and authorities are controlled;
- user functions are assigned such that segregation of duties is
enforced
- deactivate/disconnect inactive terminals;
- remote and incoming network access is controlled.

1.3.6

Are there procedures to minimise the risk that unauthorised jobs

are run:
- Supervisors are employed on all shifts;
- job schedule (operations checklist) is prepared;

MEDIUM

LOW

- operating instructions prepared for operators (e.g. operator

response to console messages, response to job aborts);
- unscheduled job run requests are authorised before execution;
- if scheduling software is used, ensure that controls for the
following exist: - access to scheduling functions restricted; audit trail for changes to schedules is reviewed;

Yes /
RIS
K No.
ADDRESSED
HIGH MEDIUM LOW

1.4 EDP safe guards

1.4.1 Are there adequate measures to take regular backup
of the data ?
1.4.2 Are there any recovery procedures for use of data in
case of loss or destruction of data ?
1.4.3 Is there any provision for off site processing in
the event of disaster?
1.4.4 Are there controls which ensure the use of the
correct tape disk files?
1.4.5 Ensure offline copies of computer files (such as
tapes) are externally labelled:
1.4.6 If offline files are used in job processing, controls exist
to ensure that the correct files are used.
1.5 System software controls
1.5.1 Are there adequate controls over authorisation, approval, testing, implementation and
documentation of new systems software and systems software modifications ?
1.5.2 Is there any restriction on access to systems software
and documentation ?
1.6 Application system development and Maintenance
control

1.6.1 Are there adequate controls over testing conversion implementation and documentation
of new or revised systems to application system ?
1.6.2 Are there controls over changes to application
systems?
1.6.3 Whether controls over acquisition of application
system from 3rd parties exist ?
1.7 Computer Operation Controls
1.7.1 Whether the systems are used for authorised
purpose only ?
1.7.2 Is access to computer operations restricted to authorised
personnel only ?
1.7.3 Are authorised programs used only ?
1.7.4 Are processing errors
timely basis ?

detected and corrected on a

Yes / RISK ADDRESSED
No.
HIGH

Application Controls

CIS RISK

2.1

Controls over input

2.1.1

2.1.3

Is there any authorisation structure over transactions being

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

2.2

Controls over processing and computer data files

2.1.2

MEDIUM

LOW

2.2.1
2.2.2
2.2.3
2.3
2.3.1
2.3.2
2.3.3
2.4
2.4.1
2.4.2

2.4.3
2.4.4
2.4.5

Are there any controls to ensure that transactions,

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

RISK
ADDRESSED
HIGH MEDIUM LOW

2.4.6 Are separate test/production program/data libraries in

use;
2.4.7 Is access by programmers to production program
libraries is prevented (using program library software and
access control software);
2.4.8 Is there adequate program and system testing (including
interaction between programs);
2.4.9 Have newly made programs adequately being tested by
users (e.g. parallel runs or pilot tests):
2.4.10 Are there adequate implementation procedures?
Ensure:
program changes are reviewed and approved by
supervisory programmers;

controls are implemented over the transfer of programs

from test to production libraries:
- source codes are recompiled by computer
operators and not by programmers or analysts;
library management software is used to:
- record and report changes made
- increment program version numbers
- encrypt sensitive programs; and
2.4.11 Are there controls are implemented to ensure the object
copy is complied from the correct source and both are
implemented as production version.
2.5
Is there adequate control over maintenance of the
programs?
Ensure:
emergency fixes applied directly to production
programs:
- reported for review by supervisory programmers
- reported to user management for subsequent
approval.
Yes / RISK
No. ADDRESSED
HIGH

3.1
3.1.1
3.1.2
3.1.3
3.1.4
3.1.5

3.1.6
3.1.7

Other Control
Is edit list extracted and approved before processing the
transactions?
Is there control over duplicate number of JV & receipt &
payment voucher ?
Does the computer generate the voucher numbers?
In case the computer generates number, make sure they
cannot be changed, otherwise ensure report of missing
numbers.
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
Are there any provision for offsite processing in the event
of disaster.
Whether account codes not in use are deleted from the
programmes after proper approval ?

MEDIUM

LOW

3.2
3.2.1

CONTINGENCY PLANNING
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.

2.3.2 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
2

The auditor should obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the audit opinion.
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.
1. 3. Financial statement assertions are assertions by management, explicit or
otherwise, that are embodied in the financial statements. They can be categorized
as follows: a) Existence: an asset or a liability exists at a given date; b) Rights and
obligation: an asset or a liability pertains to the entity at a given date; c)
Occurrence: a transaction or event took place which pertains to the entity during
the period; d) Completeness: there are no unrecorded assets, liabilities,
transactions or events, or undisclosed items; e) Valuation: an asset or liability is
recorded at an appropriate carrying value; f) Measurement: a transaction or event is
recorded at the proper amount and revenue or expense is allocated to the proper
period; and
2. g)Presentation and disclosure: an item is disclosed, classified, and described in
accordance with the applicable financial reporting framework.
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.
The aspects of the accounting and internal control systems about which the auditor
would obtain audit evidence are:
Design: the accounting and internal control systems are suitably
designed to prevent and/or detect and correct material
misstatements; and
a)Operation: the systems exist and have operated effectively throughout the
Relevant period.

6.

Substantive procedures means tests preformed to obtain audit evidence to

detect material misstatements in the financial statements, and are of two
types:
a) Tests of details of transactions and balances: and b) Analytical procedures.

7.

Procedures for Obtaining Audit Evidence

The auditor obtains audit evidence by one or more of the following procedures:
inspection, observation, inquiry and confirmation, computation and analytical
procedures. The timing of such procedures will be dependent, in part, upon the periods
of time during which the audit evidence sought is available.
Inspection
Inspection consists of examining records, documents, or tangible assets. Inspection of
records and documents provides audit evidence of varying degrees of reliability
depending on their nature and source and the effectiveness of internal controls over
their processing. Three major categories of documentary audit evidence, which
provide different degrees of reliability to the auditor, are:
1
2
3

(a)
(b)
(c)

documentary audit evidence created and held by third parties;

documentary audit evidence created by third parties and held by the entity; and
documentary audit evidence created and held by the entity.

inspection of tangible assets provides reliable audit evidence with respect to their
existence but not necessarily as to their ownership or value.
Observation
Observation consists of looking at a process or procedure being performed by others,
for example, the observation by the auditor of the counting of inventories by the
entity's personnel or the performance of control procedures that leave no audit trail.
Inquiry and Confirmation

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

entity. Inquiries may range from formal written inquiries addressed to third parties to
informal oral inquiries addressed to persons inside the entity. Responses to inquiries
may provide the auditor with information not previously possessed or with
corroborative audit evidence.
Confirmation consists of the response to an inquiry to corroborate information
contained in the accounting records. For example, the auditor ordinarily seeks direct
confirmation of receivables by communication with debtors.
Computation
Computation consists of checking the arithmetical accuracy of source
documents and accounting records or of performing independent calculations.
Analytical Procedures
Analytical procedures consist of the analysis of significant ratios and trends including
the resulting investigation of fluctuations and relationships that are inconsistent with
other relevant information or deviate from predicted amounts.
8. Cut-Off test
A cut-off test is a type of evidence gathering activity, in particular, the cut-off test
gathers evidence that transactions are recorded in the period to which they refer.
A cut off test, depending on its direction, provides evidence as to whether:
-economic events occurring in the financial period being audited are recorded in the
related account balance in the subsequent accounting period (a misstatement
relating to completeness).
-economic events occurring in the period following the period being audited are
recorded in the related account balance in the period being audited (a
misstatement relating to validity).
A simple example in relation to accounts receivable and related sales transactions is as
follows. On balance sheet date (or other appropriate cut-off date) the auditor obtains
details (including details of the sequential identification number) of the last delivery
advice to be issued in the accounting period by physically examining the source
documents at the close of business.
If the auditor needs evidence as to the completeness of accounts receivable and related
sales transactions, then subsequent to balance sheet date the auditor will trace the
details on the last delivery advice issued for the year to the relevant sales invoice and
then to the accounts receivable records to ensure that the sale has been included in the

accounting records before year end. In addition, the auditor selects a sample of sales
invoices posted to accounts receivable in the first few days of the month following
balance sheet date. All of the invoices selected should refer to delivery advices having
a reference number after the number noted on balance date.
If the auditor needs evidence as to the validity of accounts receivable the auditor
selects a sample of invoices that have been included in accounts receivable in the last
few days of the financial year. All of the invoices selected should refer to delivery
advices having a reference number before (or including) the number noted on balance
sheet date.

Sample Audit Programs

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

Index
Balance Sheet Equities & Liabilities

S.No. Title of Account

Reference No.

Page No.

1.

Share Capital

AA/AP

2-88

2.

Reserves

BB/AP

2-89

3.

Surplus on Revaluation of Fixed Assets

CC/AP

2-90

4.

Long term loan/ Redeemable Capital/Current Maturity

DD/EE/MM/AP

2-91

5.

Liabilities against Assets subject to finance lease

FF/AP

2-93

6.

Deferred Liabilities

GG/AP

2-94

7.

Long term Deposit

HH/AP

2-96

8.

Short term Borrowings

JJ/AP

2-97

9.

Creditors, Accrued & other liabilities

NN/AP

2-99

10.

Provision for taxation

PP/AP

2-102

11.

Dividend payable

RR/AP

2-103

12.

Contingencies & commitments

SS/AP

2-104

Reference No.

Page No.

Balance Sheet Assets

S.No. Title of Account

1.

Tangible fixed assets

A- AP

2-107

2.

Assets subject to finance lease

B- AP

2-109

3.

Capital Work in Progress

C- AP

2-110

4.

Intangible Assets

E- AP

2-111

5.

Unallocated pre-production expenditure

H- AP

2-113

6.

Long Term Investments/ Investments income

K- AP

2-114

7.

Long term loan & advances

L- AP

2-117

8.

Deferred Cost

M-AP

2-119

9.

Stock in trade

N/R- AP

2-120

10.

Trade debts

S- AP

2-122

11.

Advances, Deposits, Prepayments & Other receivable

V- AP

2-124

12.

Short Term Investment/Marketable Securities

W- AP

2-125

13.

Cash & Bank Balances

X- AP

2-128

Profit & Loss Account Test of Control

S.No. Title of Account

Reference No.

Page No.

1.

Sales/ Receivable

TC 1

2-129

2.

Purchases/Inventory/Accounts payable

TC 2

2-132

Profit & Loss Account Substantive

S.No. Title of Account

Reference No.

Page No.

1.

Sales

PL 1- AP

2-137

2.

Cost of sales

PL 2 - AP

2-139

3.

General/admin/selling & distribution expenses

PL 3&4 AP

2-140

4.

Financial Charges

PL 5 AP

2-141

5.

Other Charges

PL 6 AP

2-142

6.

Other Income

PL 7 AP

2-143

Client Name
Audit Program Share Capital
Accounting
Period

File No. Prepared By:

Reference: AA/AP Date:

Reviewed By:

Date:

S. No. Audit Procedures

Audit
Assertion
Addressed

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

Check the number of shares and amount of

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

Existence
Ownership
Completeness

For shares issued for cash, check the entries

in bank statement

Existence
Completeness

Existence
For shares issued for consideration other than
Ownership
cash, check the amount of consideration with
Completeness
supporting documents.

Performed Reference
by

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

Agree the amount of share capital with the

general ledger.

Completeness

Check that members register has been

properly maintained as required by the
Companies Ordinance, 1984.

Completeness

Determine that disclosures have been made in Presentation/

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

Client Name
Audit Program Reserves
Accounting
Period

File No. Prepared By:

Reference: BB/AP Date:

Reviewed By:

Date:

S. No. Audit Procedures

Audit Assertion Performed by Reference

Addressed

Trace opening balances from last

years audited financial statements and
general ledger.

Completeness

Obtain board resolutions for transfers Existence Ownership

Completeness
made during the year.

Check that any statutory requirements

for creating any specific reserve have
been fulfilled.

Ownership

Check that profits have been

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

Ownership

Agree closing balances with general

ledger.

Completeness

Determine that disclosures have been

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

Presentation/
Disclosure

Client Name
File No.
Audit Program Surplus on

Prepared By:

Reference: CC/AP
Date:

revaluation of
fixed assets
Accounting
Period

Date:

Reviewed By:

S. No. Audit Procedures

Audit
Assertion
Addressed

Examine the valuers report to ensure the

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

Check that increase in value of assets has been

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

Check that the surplus on revaluation of fixed

Ownership
assets has been applied: a) Only to the extent
actually realised on disposal of revalued assets. b)
On setting-off any deficit arising from the
revaluation of any other fixed assets of the
company.

Check that assets have been depreciated with

reference to the revalued amounts.

Completeness

Valuation

Performed byReference

Determine that disclosures have been made in

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

Client Name
File No.
Audit Program Long term loans/

Presentation/
Disclosure

Prepared By:

Reference: DD-EE-MM/AP
Date:

Reviewed By:

Date:

current maturity.
Accounting
Period

S. No. Audit Procedures

Audit
Assertion
Addressed

Obtain a schedule of long-term loans Completeness

payable and match the balances with
general ledger.

For selected loans, circularize

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

For loans taken during the year:-(a)

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

Completeness
Obligation
Valuation
Existence

For loans repaid during the year:-(a)

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

Completeness
Obligation
Valuation
Existence

Performed by

Reference

Check calculations of interest

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

Compute that portion of loans, which Presentation

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

S. No. Audit Procedures

Audit
Assertion
Addressed

Determine, if there is a need to

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

Determine that disclosures have been Presentation/

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

Client Name
File No.
Audit Program Liabilities against

Prepared By:

Performed by

Reference

Reference: FF/AP
Date:

assets subject to
finance lease.
Accounting
Period

S. No. Audit Procedures

Reviewed By:

Date:
Audit Assertion Performed Reference
Addressed
by

Obtain a schedule of obligations under

finance lease and agree the balances with
general ledger.

Completeness

For new leases obtained during the year:(a)

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

Obligation
Completeness
Existence

For rentals paid during the year:(a) Check

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

Obligation
Completeness
Existence
Valuation

For selected parties, circularize

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

Obligation
Valuation
Existence

Check that lease liabilities are properly

bifurcated into current and non-current
portions.

Presentation

Check calculation of financial charges

from amortization schedule.

Valuation

Determine that disclosures have been made

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

Presentation/
Disclosure

Client Name
Audit Program Deferred liabilities
Accounting
Period

File No. Prepared By:

Reference: GG/AP Date:

Reviewed By:

Date:

S. No. Audit Procedures

Audit
Assertion
Addressed

Obtain a schedule showing all deferred

liabilities and agree with general ledger.

For deferred liability regarding gratuity:(a)

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

For deferred liability regarding pensions:Existence

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

S. No. Audit Procedures

Performed byReference

Completeness

Audit
Assertion
Addressed

Performed byReference

d) Check other requirements as per IAS 19

(revised).
For deferred liability regarding taxation:(a)
Calculate taxable and deductible timing
differences. (b) Apply appropriate rate of
taxation on total of reversible timing
differences (as per old IAS 12. However,
as per revised IAS 12, all timing
differences whether reversing in the
foreseeable future or not, are required to be
incorporated into the accounts) (c) Ensure
that proper amount has been taken in profit
and loss account by taking difference of
opening and closing balance of deferred
tax liability.

Valuation

Determine that disclosures have been made Presentation/

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

Client Name
File No.
Audit Program Long term

Prepared By:

Reference: HH/AP
Date:

deposits
Accounting
Period

Reviewed By:

S. No. Audit Procedures

Date:

Audit Assertion Performed

Addressed
by

Ascertain the nature of deposits by

inquiry or by reviewing prior years
working papers.

Completeness

Examine the supporting documents of Obligation

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

Reference

Circularize confirmations to selected Obligation

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

Check that the amounts of deposits

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

Determine that disclosures have been Presentation/

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

Client Name
File No. Prepared By:

Reference: JJ/AP Date:

Reviewed By:

Date:

Audit Program Short Term

Accounting
Period

Borrowings

S. No. Audit Procedures

Audit Assertion Performed

Addressed
by

Compare the account balances with

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

Rights &
Obligation

Inspect original or authenticated

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

Existence Rights
Obligation

Identify liens, securities interests,

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

Rights &
Obligation

Reference

Review calculations and other

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

Review refinancing agreements

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

Review minutes, agreements and

Presentation &
bank and other confirmations replies Disclosure
for evidence of the existence of
short-term lines of credit or similar
obligations.

Test interest paid and accrued during Existence

the period.
Valuation

Client Name
File No.
Audit Program Creditors,

Valuation

Prepared By:

Reference: NN/AP
Date:

accrued and
other liabilities
Accounting
Period

S. No. Audit Procedures

Reviewed By:

Audit
Assertion
Addressed

CREDITORS
1

Obtain a list of creditors showing Completeness

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

Date:
Performed by

Reference

Make a selection from creditors and Existence

circularize confirmation requests. Obligation
Valuation

Match replies to confirmation

Valuation
requests with the amounts given in
the schedule.

For non-replies, check subsequent

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

Agree the balances with the general Completeness

ledger.

Existence
Completeness
Valuation

ACCRUED AND OTHER

LIABILITIES
1

Inquire about the nature of each

Completeness
significant accrued expense account.

Inquire about the reasons for

significant changes in accrued
expenses since prior year.

S. No. Audit Procedures

Completeness

Audit
Assertion
Addressed

For selected subsequent cash

Completeness
disbursements or unpaid invoices
that indicate liabilities incurred but
not recorded as accounts payable in
the audit period, ascertain that they
were recorded in an appropriate
accrued expense account.

Performed by

Reference

Inquire and consider existence of

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

Make a selection of significant

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

For selected accounts that are

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

S. No. Audit Procedures

Audit
Assertion
Addressed

Check that liabilities outstanding for Completeness

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

Performed by

Reference

Determine that disclosures have

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

Client Name
File No.
Audit Program Taxation /

Presentation/
Disclosure

Prepared By:

Reference: PP/AP
Date:

provision for
taxation
Accounting
Period

Reviewed By:

S. No. Audit Procedures

Audit
Assertion
Addressed

Obtain a schedule showing year-wise

tax position of the client.

Completeness

Obtain a schedule showing calculation Valuation

of taxable income and tax expense.
Measurement

Check the accuracy of computation of Valuation

taxable income.

Check computation of tax expense by Valuation

applying appropriate tax rates.

Test check advance payments of tax

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

Obtain summary of tax assessments

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

Date:
Performed by

Reference

Circularize confirmation to tax adviser Completeness

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

Determine that disclosures have been Presentation/

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

Client Name
File No.
Audit Program Dividend payable
Accounting
Period

Prepared By: Reviewed

By:

S. No. Audit Procedures

Reference: RR/AP
Date: Date:

Audit
Assertion
Addressed

Trace the opening balance from general ledger.

Completeness

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

book closure date.

Obtain copy of board resolution to verify the rate Existence/

of dividend (interim and final) announced.
Valuation

Check calculation of dividend for selected

members.

Check that Zakat has been deducted at source and Completeness /

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

Check that income tax has been deducted from

dividend under the provisions of income tax
Ordinance, 1979.

Check payment of dividend (i.e. dispatch of

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

Valuation

Completeness /
Measurement

Performed Reference
by

Agree closing balance with general ledger.

Determine that disclosures have been made in

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

Client Name
File No.
Audit Program Contingencies

Prepared By:

Completeness

Reference: SS/AP
Date:

and
Commitments
Accounting
Period

S.No. Audit Procedures

Reviewed By:

Date:

Audit Assertion Performed

Addressed by

Reference

Inquire of and discuss with

Existence
management the clients policies and
Existence
procedures for identifying, evaluating, Measurement
and accounting for contingencies,
Completion
including those resulting from
litigation, claims, and unasserted
claims. The inquiry should consider
addressing oral arrangements, such as
an oral guarantee of the debt of others,
as well as written arrangements. Obtain
from management or legal adviser a
description and evaluation of the
litigation, claims and unasserted claims
that existed at the balance sheet date
and during the period from the balance
sheet date to the date the information is
provided to the auditors. Examine
documents, including correspondence
and invoices from lawyers, in the
clients possession concerning
litigation, claims and unasserted
claims. Obtain and evaluate letters
from legal Advisor.

S. No. Audit Procedures

Audit Assertion Performed

Addressed
by

Reference

Inquire of and discuss with

management the clients policies and
procedures for identifying, evaluating,
and accounting for commitments.
Review the results of audit procedures
performed in other accounts. Read the
minutes of corporate meetings (e.g.,
shareholders, board of directors, and
relevant committees of the board) held
during the period being examined and
through to the date of the auditors
report. Read significant contracts, loan
agreements, leases, service guarantees,
insurance policies (or note the lack of
insurance), and other applicable to
sales or leases. Determine, through
inquiry and review of sales and/or
lease agreements, polices in effect
with respect to returns, repurchases,
and future allowances applicable to
sales or leases. Determine, through
inquiry and review of minutes,
contracts/agreements, and bank
confirmations, accounting and
operating policies in effect with
respect to interest rate and foreign
currency futures/hedges.

Rights &
Obligation
Occurrence
Existence
Existence
Existence
Existence

Examine returned standard bank

Existence
confirmations forms and any other
Completions
returned confirmations of bank credit
Valuation
arrangements for contingent liabilities,
Occurrence
letters of credit, and compensating
Measurement
balance arrangements. Inquire as to
material commitments to complete
sales contracts at a loss or that cannot
be fulfilled; repurchase assets
previously sold; purchase quantities in
excess of requirements or at prices in
excess of prevailing market prices;
construct or acquire property, plant,
equipment, investments, investments,
intangibles, or other non current
assets. Review cost and progress
estimation procedures for long term
projects. Evaluate the possibility of
subsequent events, to ensure that there
is no unrecorded contingency Obtain
the clients representation regarding
contingencies & commitments as part
of the financial statement
representation letter.

Client Name
File No.
Audit Program Tangible fixed

Prepared By:

Reference: A/AP
Date:

assets
Accounting
Period

Reviewed By:

Date:

S. No. Audit Procedures

Audit
Assertion
Addressed

Obtain schedule of property, plant and

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

Trace opening balances from fixed assets Completeness

register, general ledger and last years
working papers.

Make a selection of fixed assets held by Rights &

client at year end and physically inspect Obligation
them to ensure that: (a) Asset is owned
and held by client. (b) Remaining useful
life appears to be correct

Trace the carrying value of selected assets Valuation

with supporting documents i.e. (a) For
purchases in current year, capital
expenditure approvals and vendors
invoices. (b) Ensure that additions to fixed
assets do not include any amount of a
nature of revenue expenditure.

For selected assets disposed of during the Existence

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

S. No. Audit Procedures

Audit
Assertion
Addressed

Performed
by

Reference

Performed
by

Reference

To check depreciation expense: (a)

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

Trace closing balances with general ledgerCompleteness

Determine that disclosures have been

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

Inspect evidence of ownership e.g.

Vehicle registration certificate

Client Name
File No.
Audit Program Audit Program for

Rights &
Obligation

Prepared By:

Reference: B/AP
Date:

Reviewed By:

Date:

assets subject to
finance lease
(Steps in addition to
those of owned assets)
Accounting
Period

S. No. Audit Procedures

Audit
Assertion
Addressed

For additions during the year, check from

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

Performed by Reference

To check depreciation on leased assets

ensures that appropriate depreciation rates
have been used. If there is no reasonable
certainty that the lessee will obtain
ownership by the end of the lease term,
the assets should be fully depreciated over
the shorter of the lease term or its useful
life (IAS-17).

Valuation

2-109
Client Name
File No.
Audit Program Capital work in

Prepared By:

Reference: C/AP
Date:

progress
Accounting
Period

Reviewed By:

S. No. Audit Procedures

Date:

Audit Assertion Performed by Reference

Addressed

Obtain a schedule showing opening

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

Existence

Trace opening balances from general

ledger.

Completeness

For selected additions during the year :(a) Ownership

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

For selected transfers to fixed assets during Measurement

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

For items stuck-up for considerable period Valuation

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

Agree closing balances with general

ledger.

Determine that disclosures have been made Presentation/

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

Client Name
File No.
Audit Program Intangible assets
Accounting
Period

Completeness

Prepared By: Reviewed

By:

S. No. Audit Procedures

Reference: E/AP
Date: Date:

Audit Assertion Performed Reference

Addressed by

Ascertain the nature of each significant

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

Completeness

Inquire as to the reasons for significant

changes in intangible assets balances since the
prior year.

Existence

Obtain a schedule of intangibles like goodwill,

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

Existence

Match the balances with general ledger.

Completeness

For selected intangibles additions during the

year :(a) Trace the recorded value to
supporting documents e.g. independent
valuation for purchases in current year. (b)
Obtain authorization or board minutes.

Valuation
Existence
Ownership

For selected intangibles disposed off during

the year :-(a) Examine supporting documents
(e.g. cash receipts). (b) Calculate gain or loss
on sale of assets

Ownership

Determine that clients accounting policies for

amortization are appropriate and applied
consistently.

Valuation

S. No. Audit Procedures

8

Audit
Performed byReference
Assertion
Addressed
Calculate on a test basis, amortization charge Valuation
for the year and ensure proper amount has been Measurement
charged to Profit & Loss account.

Determine whether expectations of future

benefits are reasonable in relation to
amortization period.

10

Determine that disclosures have been made in Presentation/

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

Client Name
File No.
Audit Program Un-allocated pre
Accounting
-production
Period
expenditure

Prepared By: Reviewed

By:

S. No. Audit Procedures

Valuation

Trace opening balances from general

ledger.

Reference: H/AP
Date: Date:

Audit Assertion Performed by Reference

Addressed

Completeness

Review items of un-allocated preExistence

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

Examine supporting documents for

Completeness
selected items to ensure their validity. Existence
Valuation

Check that at the time of

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

Agree closing balances with general

ledger.

Determine that disclosures have been Presentation/

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

Client Name
File No.
Audit Program Long Term

Completeness

Reference: K/AP

Prepared By:

Date:

Reviewed By:

Date:

Investments
Accounting
Period

S. No. Audit Procedures

Audit Assertion Performed

Addressed
by

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

Trace the opening balances from the Completeness

general ledger

Reference

Trace the carrying value of selected Ownership

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

For selected investments disposed of Existence

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

S. No. Audit Procedures

Audit Assertion Performed

Addressed by

5.

Test the casting and cross -casting of

the schedule.

Valuation

6.

Trace ending balances of investments Completeness

to the general ledger.

7.

For investments held by client at

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

Existence

Reference

8.

For selected investments, compute

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

9.

For each portfolio of investments,

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

10.

Determine that disclosures have been

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

S. No. Audit Procedures

Valuation

Presentation/
Disclosure

Audit
Assertion
Addressed

Investment Income
1.

Obtain a schedule showing opening Existence

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

2.

Trace opening balance of accrued

income from general ledger/ trial
balance.

Completeness

Performed by Reference

3.

Make a selection of accruals and

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

4.

Examine subsequent receipts of

income accrued at period-end.

Measurement
Occurrence

5.

Trace ending balances of accrued

income from general ledger.

Completeness

Client Name
File No.
Audit Program Long term loans

Prepared By:

Reference: L/AP
Date:

and advances.
Accounting
Period

Reviewed By:

S. No. Audit Procedures

Date:
Audit
Assertion
Addressed

Obtain a schedule of loans and advances

Existence

Trace opening balances from general

ledger

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

Existence

For repayments made during the year:(a)

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

Valuation
Existence
Ownership

Completeness

Performed byReference

Circularize confirmations to selected

parties. Match replies with the amounts
outstanding against each party.

Rights &
Obligation
Completeness
Existence

Check calculation of interest income on

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

Measurement
Valuation

S. No. Audit Procedures

Audit
Assertion
Addressed

Obtain age-analysis of long-term loans

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

Agree closing balances with the general

ledger and trial balance.

Select a sample of loans entered, renewed Rights &

or otherwise restructured and analyze
Obligation
whether management has considered
potential risk related to these loans

Test check loan agreement and legal

Rights &
documents to verify the terms and
Obligation
conditions of the advances
Determine that disclosures have been
Presentation/
made in accordance with the requirements Disclosure
of Companies Ordinance, 1984 and
relevant accounting pronouncements.

10

Client Name

Completeness

Performed byReference

Audit Program Deferred cost

Accounting
Period

File No. Prepared By:

Reference: M/AP Date:

Reviewed By:

Date:

S. No. Audit Procedures

Audit
Assertion
Addressed

Ascertain the nature of each item of

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

Existence

Obtain schedule of deferred cost

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

Check casting and calculation of

schedule and agree balances with
general ledger.

Ensure that costs that should have been Completeness

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

Determine that clients accounting

Measurement
policies and procedures for amortization
are appropriate and applied consistently.

Determine that no such events have

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

Re-compute charge of amortization for Completeness

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

Valuation
Completeness

Performed by

Reference

Determine that disclosures have been Presentation/

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

Client Name
File No.
Audit Program Store spares &

Prepared By:

Reference: N-R/AP
Date:

loose tools and

stock in trade
Accounting
Period

Reviewed By:

S. No. Audit Procedures

Audit
Assertion
Addressed

Observe physical count of inventories Existence/

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

Check that inventories not owned by Occurrence

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

For items owned by client but not

physically held, obtain independent
confirmations from custodians.

Obtain final inventory compilation

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

Existence
Ownership

Date:
Performed
by

Reference

To test check cut-off of inventory,

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

Determine that the basis of valuation of Valuation

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

S. No. Audit Procedures

Audit
Assertion
Addressed

Compare cost of closing stock with its

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

Determine that disclosures have been

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

Performed
by

Reference

Valuation

Client Name
Audit Program Trade debts
Accounting
Period

S. No. Audit Procedures

File No. Prepared By:

Reference: S/AP Date:

Reviewed By:

Date:
Audit
Assertion
Addressed

Obtain the schedule of receivables/trial balance Completeness

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

Performed Reference
by

Make a selection of customers balances and

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

Obtain a schedule of allowance for doubtful debts Valuation

showing beginning and ending balances write- Completeness
offs, recoveries and bad debts expense. Trace
ending balances to general ledger. Ensure the
recoverability of the debtors considered good.

Trace ending balances from general ledger.

Determine that methods used by management to Valuation

estimate doubtful debts are appropriate and
applied consistently.

Calculate provision for doubtful debts based on

age-analysis of debtors.

Valuation

Review documents, supporting correspondence

and authorization for selected write-offs during
the year.

Valuation

S. No. Audit Procedures

Ownership
Existence
Valuation

Completeness

Audit
Assertion
Addressed
Completeness
Occurrence

Select transactions from sales invoices and

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

Determine that disclosures have been made in

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

Client Name

Performed byReference

File No.
Audit Program Trade deposits, short-

Prepared By:

Reference: V/AP
Date:

Reviewed By:

Date:

term prepayments,
loans, advances and
other receivables.
Accounting
Period

S. No. Audit Procedures

Audit
Assertion
Addressed

Obtain a detailed scheduled showing separately trade Existence

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

Inquire about the nature of trade deposits.

Corroborate movements in trade deposits with
supporting documents.

Review short-term prepayments analytically. Inquire Existence

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

For short-term loans and advances to staff, review

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

Document the nature of other receivables, check the Valuation

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

Determine that accounting policies for recording the Measurement

above items are appropriate and applied consistently.

Determine that disclosures have been made in

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

Completeness

Presentation/
Disclosure

Performed Reference
by

Client Name
File No.
Audit Program Short Term

Prepared By:

Reference: W/AP
Date:

Investments
Accounting
Period

S. No. Audit Procedures

Reviewed By:

Date:

Audit Assertion Performed

Addressed
by

Reference

Compare the account balances with

Rights &
those of prior periods and investigate
Obligation
any unexpected changes (or the
Valuation
absence of expected changes).
Valuation
Compare current years to market
Existence/ Rights
value of the security. Perform an
& Obligation
overall test of the reasonableness of
Valuation
interest income by multiplying the
Valuation
average interest rates by the average
Measurement
amounts invested. Verify the existence
Existence
and ownership of recorded securities
through confirmation or examination
of evidence of ownership (e.g., stock
certificates). Inspect market quotations
or other evidence of the current value
of marketable securities. Determine
that marketable securities are carried
at the appropriate amounts. Review
minutes, agreements and confirmation
replies for evidence of the existence of
marketable securities, and of

S. No. Audit Procedures

Audit Assertion Performed

Addressed
by

Reference

Liens, pledges or other security

Valuation
interests in marketable securities.
Valuation &
Discuss with the client procedures
Measurement
used to determine whether a decline in
market value of a marketable equity
security is other than temporary.
Determine if any decline in market
value of a marketable security below
cost is other than temporary be
performing some or all of the
following procedures: -Reviewing the
issuers most recent audited financial
statement. -Considering the time and
the extent to which the market value
has been less that cost. -Considering
any specific events that may influence
the operations of the issuer.
-Determining if decline in market
value relates to cyclical patterns of the
issuers industry or is -Review any
client reconciliations of statements
(e.g., from banks and brokers) with
the clients records. -When marketable

S. No. Audit Procedures

Reference
Audit Assertion Performed
Addressed
by

Securities are carried at market value,

verify the unrealized gains and losses
recorded.

Client Name
Audit Program Cash and bank
Accounting
Period

File No. Prepared By:

Reference: X/AP Date:

Reviewed By:

Date:

S. No. Audit Procedures

Prepare standard bank confirmation requests for all

bank accounts and circularize them.

Audit
Assertion
Addressed
Existence
Completeness
Valuation
Ownership

Performed Reference
by

Agree balances and contingent liabilities reported in Existence

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

Examine the clients bank reconciliations (or prepare Completeness

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

Arrange physical count or obtain certificate of cash

in hand of significant imprest account and undeposited cash receipts.

Existence
Valuation

Determine that disclosures have been made in

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

Presentation/
Disclosure

Client Name
File No.
Audit Program Sales/Receivables
Accounting
Period

S. No. Control Objective

1.

Reference: TC-1

Prepared By: Reviewed Date: Date:

By:

Tests of Controls

Orders are approved by

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

2. (a) Order entry data is transferred

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

Performed Reference
by

3.

Only valid orders are input and

processed

Examine documentary evidence

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

4.

Invoices are generated using

authorized terms and prices.

Ensure that invoices were priced

using approved price lists and
that exceptions were approved
by the management.

5.

Invoices are accurately calculated Make a selection of invoices and

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

6.

Credit notes and adjustments to Agree summary information

accounts receivable are accurately from the clients actual reports
calculated and recorded.
(e. g. details of all credits to
accounts receivable for one
month) to the general ledger and
trace information (e.g. customer
name, credit amount and reason
thereof) from underlying records
(e.g. credit memos) into the
clients reports to ensure that
relevant information is properly
reported. Review documents
evidencing that the management
monitored the nature, volume
and amount of recorded credit
notes, writeoffs 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.

8.

Credit notes for all goods returned Understand and document the
are issued in accordance with the policies related to issuance of
approved policy.
credit notes (e.g. evidence of
return of goods, original
invoices, time periods, within
which credit must be requested
and approval thereof). Make a
selection of credit notes and
ensure that policies have been
implemented.

9.

All invoices and credit notes

issued are recorded.

Make a selection of sequentially

numbered invoices and credit
notes and obtain source
document for each selection
alongwith the document before
and after each selection. Trace
selected items to clients reports
and determine their proper
inclusion or exclusion. Inquire
about any missing or duplicate
invoices and credit notes.

10.

Invoices are recorded in the

appropriate period.

Client Name
File No.
Audit Program Purchases/Inventory /

Make a selection of shipments

between the dates of one week
before the end of accounting
period and one week after the
end of accounting period and
ensure that goods shipped at,
before or after the end of
accounting period are securitized
and reconciled to ensure
complete and consistent
recording in the appropriate
accounting period including
issuing and recording of related
invoices.

Prepared By:

Reference: TC-2
Date:

Accounts Payable
Accounting
Period

Reviewed By:

Date:

S. No. Control Objective

Tests of Controls

1.

Ensure that: a) Goods received

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

Raw materials are received and

accepted only if they have valid
purchase orders.

Performed Reference
by

2.

Raw materials received are

recorded accurately.

Make a selection of physical

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

3.

All raw materials received are

recorded

a) Obtain goods receipt vouchers

and ensure that they are
sequentially pre-numbered. For
selected vouchers, obtain source
documents alongwith the
document before and after each
selection to verify the integrity of
sequence around each selection.
Trace selected items to client
reports and determine their proper
inclusion or exclusion. b)
Invoices not matched to goods
receipt notes should be
investigated. Ensure that
payments of such invoices have
been specifically approved by the
management.

4.

Receipts of raw materials are

recorded timely and in the
appropriate period.

Examine a selection of
documented listing of goods
received, supplier invoices and
credit notes at, before or after the
end of the accounting period.
Ascertain that the client has
scrutinized and reconciled all
such transactions to ensure
complete and consistent recording
in the appropriate accounting
period.

5.

Determine raw materials are

returned timely to suppliers.

Observe that the rejected raw

materials are adequately
segregated from other raw
materials at various times
throughout the period of intended
reliance. Examine documentary
evidence supporting that such
rejected raw materials were
monitored and returned to the
supplier within a reasonable
period of time.

6.

All transfers of raw materials to Make a selection of transfers of

production are recorded accurately raw materials to production.
and in the appropriate period.
Examine documents evidencing
that received inventories were
properly counted and inventory
product numbers, quantities and
receipt dates were compared to
receipt or transfer documentation
that was used to support the
recording of the inventory receipt
in the accounting records.

7.

Finished goods returned by

Ensure that gods receipt vouchers
customers are recorded completely were sequentially pre-numbered.
and accurately in the appropriate Ensure that finished goods returns
period.
have been specifically mentioned
in the goods receipt vouchers.

8.

Finished goods received from

production are recorded
completely and accurately in the
appropriate period.

Agree summary information from

the clients actual reports (e. g.
total received amount of
inventories) to the general ledger.
Trace a selection of information
from the underlying records (e. g.
inventory subsidiary ledgers) into
the clients reports to ensure that
relevant information is properly
reported.

9.

Goods received from production

or returned by customers are only
accepted in accordance with the
organizations policies.

Examine documentary evidence

indicating that the client
performed quality control
inspections in accordance with
their policies and procedures.
Ascertain that the goods inspected
were either returned to inventory,
reworked or scrapped in
accordance with the
recommendations of the quality
control inspection.

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).

11.

Shipments are recorded accurately.Agree summary information from

the clients actual reports (e. g.
monthly sales) to the general
ledger. Trace information (e. g.
customer name, invoice number,
date and amount) from a selection
of invoices into the clients
reports to ensure that relevant
information is properly reported.

12.

Shipments are recorded timely and Examine a selection of

in the appropriated period.
documented listing of goods
shipped at before or after the end
of the accounting period.
Ascertain that the client has
scrutinized and reconciled all
such transactions to ensure
complete and consistent recording
in the appropriate accounting
period, including raising and
recording of the related invoices.

13.

Inventory is relieved only when a) Examine documents

goods are shipped with approved evidencing that before goods are
customers orders.
shipped, the details of the
approved order are compared to
actual goods prepared for
shipment by an individual
independent of the order picking
process.
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).

14.

Cost of shipped inventory are

recorded accurately

Examine documentary evidence

indicating that management
reviewed relevant sales, accounts
receivable, cost of sales and
inventory reports related to order
entry, shipping and invoicing and
monitored significant unusual
relationships.

Client Name
Audit Program Sales
Accounting
Period

File No. Prepared By:

Reference: PL 1/AP Date:

Reviewed By:

Date:

S. No. Audit Procedures

1

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

Make a selection of sales transactions from

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

Occurrence

Test the completeness of source records by

ensuring their numerical sequences.

Completeness

For each item selected above : (a) Trace it to a Completeness

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

Performed Reference
by

Make a selection of recorded sales returns andCompleteness

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

6.

Make a selection of transactions from

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

S. No. Audit Procedures

Completeness
Occurrence

Audit
Assertion
Addressed

7.

Determine that the accounting policies and

methods of revenue recognition are
appropriate and are applied consistently.

8.

Determine that disclosures have been made in Presentation/

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

Performed Reference
by

Valuation
Measurement

Client Name
File No. Prepared By:

Reference: PL 2/AP Date:

Reviewed By:

Date:

Audit Program Cost of sales

Accounting
Period

S. No. Audit Procedures

Perform analytical review of cost of sales and

inquire and corroborate significant variations.

Audit Assertion Performed byReference

Addressed

Completeness
Occurrence

Perform tests of details as under: a) Reconcile

recorded cost of sales to corresponding
credits in inventory accounts. b) Make a
selection of debits to inventory accounts (i.e.
purchases) during the year. For each items
selected: (i) Trace the item to a purchases
journal total. (ii) Make a selection of
individual purchases from the journal. (iii)
Trace the selected purchases to a supplier
invoice and receiving records. (iv) Determine
that the purchases were recorded in the
correct period. c) Ensure proper cut-off of
purchases.

Completeness
Completeness
Occurrence

For other items in cost of sales: a) Review all

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

Occurrence

Determine that disclosures have been in

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

Presentation/
Disclosure

Client Name
File No.
Audit Program General and

Prepared By:

Reference: PL 3 & 4 /AP

Date:

Reviewed By:

Date:

admin expenses /
selling and
distribution
expenses.
Accounting
Period

S. No. Audit Procedures

Audit
Assertion
Addressed

Perform analytical procedures to evaluate operating Completeness

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

Make a selection of recorded expenses and examine Occurrence

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

Determine that disclosures have been in accordance Presentation/

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

Client Name
File No.
Audit Program Financial charges
Accounting
Period

S. No. Audit Procedures

Prepared By: Reviewed

By:

Perform
ed by

Reference

Reference: PL 5/AP
Date: Date:

Audit
Assertion
Addressed

Make a selection of recorded financial

Occurrence
charges and perform the following :-a)
Measurement
Examine supporting documents to verify Completeness
rates of financial charges. b) Re-calculate
amount of financial charges on the basis of
amounts, number of days and rates of
financial charges.

Performed
by

Reference

Determine that all loans, borrowings, leases Completeness

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

Determine that disclosures have been in

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

Presentation/
Disclosure

2-141
Client Name
File No.
Audit Program Other Charges
Accounting
Period

S. No. Audit Procedures

Reference: PL 6/AP
Prepared By: Reviewed By: Date: Date:

Audit Assertion Performed

Addressed
by

Reference

Obtain details of each expense in other

Existence
charges (e.g., WWF & WPPF) For
Valuation
determining the amount of WWF
Valuation
ensure that charge of WWF has been
Presentation &
calculated on the basis of taxable
Disclosure
income. Ensure that charge has been
Completions
properly calculated (i.e.WPPF@5% )
Ensure that each major item separately
recorded & properly disclosed in the
financial statements. Compare balances
with prior period for unusual
fluctuations.

Client Name
Audit Program Other Income
Accounting
Period

S. No. Audit Procedures

File No. Prepared By:

Reference: PL 7/AP Date:

Reviewed By:

Date:

Audit Assertion Performed

Addressed
by

Reference

Obtain detailed analyses of selected

Existence
revenue accounts and trace the details
Existence
to the source data. Review the
Valuation
marketable securities and related
Valuation &
accounts (e.g., interest and dividend
Measurement
income) in the general ledger for
Valuation
unusual items. Test accrued interest and
Existence
interest earned during the period on
receivables; determine whether interest
should be imputed on long-term
receivables arising during the period.
Verify interest and dividend income on
marketable securities, investments, and
equity in earnings (losses) of investees
by calculating interest earned or by
referring to published records of
dividends paid or to the financial
statements of investees. Verify
computations of gains and losses from
sales of marketable securities and
investments. Inspect authorizations and
other data supporting retirements, sales,
and other disposals of property, plant,
and equipment and test the
computations of the resulting gains and
losses.

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).

2.3.3 ANALYTICAL REVIEW PROCEDURES

The term "analytical procedures" refers to a collection of activities performed by auditors to
gather evidence.
Analytical procedures be performed in the audit planning stage to identify possible problem
areas and in the substantive testing stage as a means of gathering substantive evidence in
relation to one or more account balances or classes of transactions (i.e. as a substantive
procedure, or substantive test); and in the opinion formulation stage (overall review stage), as
a means of gathering evidence as to the consistency of the financial statements with the
auditor's knowledge of the business of the entity.
All analytical procedures involve a comparison of the value of the actual (ratio/trend/account
balance/ transaction etc.) with the value of the expected (ratio/trend/ account balance/
transaction etc.) with the objective of identifying any unusual or unexpected values. The
procedure requires the investigation of the reason for any unexpected or unusual value.
Analytical procedures include:
reasonableness tests: In a reasonableness test, the expected value is determined by reference
to data partly or wholly independent of the accounting information system, and for that
reason, evidence obtained through the application of such a test may be more reliable than
evidence gathered using other analytical procedures. e.g. the reasonableness of the total annual
revenue of a freight company may be estimated by calculating the product of the total tonnes
carried during the year and the average freight rate per tonne.
scanning. An auditor may scan account balances, listings of transactions etc., with the object
of detecting any unusual or unexpected balances or transactions.
review . An auditor may review reconciliation, compilations and aggregations of transactions
and/or account balances, again with the object of detecting any unusual or unexpected
balances or transactions.
ratio analysis . The computation and comparison of the actual value of a ratio with the
expected value. The expected value may be based, for example, on:
prior period values.
values in other divisions of the entity.
industry averages.
forecast values.

Once again, the objective of this analytical procedure is to detect any unusual or unexpected
value for the ratio.
2-145
common size analysis is a type of cross-sectional analysis used for comparing the percentage
components of balance sheets and income statements of one entity, or a division of an entity,
with comparable data from one or more other entities/ divisions. This analysis may be used for
either (i) the comparison of a (prospective) client's data with the industry average and/or an
industry competitor or (ii) for the comparison of income statements of different divisions of
the same entity.
When analytical procedures are used as a substantive procedure (or substantive test), and the
application of the procedures does not identify any unusual or unexpected differences, then,
by inference, the results provide evidence in support of management's assertions.
Analytical procedures generally provide less reliable substantive evidence than the other
category of substantive procedures/tests, (tests of detail). The substantive evidence gathered
using analytical procedures is thus generally used to corroborate other substantive evidence
gathered, rather than used as a sole source of evidence.

2-146
Client

File No.

Analytical Review-Balance Sheet-Liabilities

Name

Initial

Date

Prepared by
Checked by
Year End :

Job Incharge
Reviewed by Manager/Partner

Account
Code

Ref. Rupees Current Period Rupees Previous

Period

Authorize
d capital
Issued,
Subscribed
& Paid-up
Capital
General
Reserves
Capital
Reserves
Unappropri
ated Profit
& Loss

Surplus on
Revaluatio
n of Fixed
Assets
Redeemab
le Capital
Long Term
Loans
Liabilities
Against
Assets
Subject to
Finance
Lease
Deferred
Liabilities
Long
Terms
Deposits

Rupees
Increase/Decrease

Increase/ Reason fo
Decrease
%

Current
Liabilities
Short Term
Loans
Current
Portion of
Long Term
Loans
Creditors,
Accrued &
Other
Liabilities
Provision
for
Taxation
Proposed
Dividend

Total
Liabilities

Client

File No.
Name

Analytical Review-Balance Sheet

Assets

Initial

Date

Prepared by
Checked by

Year End :

Job Incharge
Reviewed by Manager/Partner

Account
Code

Ref. Rupees Current Period Rupees Previous

Period

Operating
Fixed
Assets
Capitalwork-inprogress

Intangible
Assets
Long Term
Investment
s

Rupees
Increase/Decrease

Increase/ Reason fo
Decrease
%

Long Term
Loan &
Advances
Long Term
Deposits ,
Prepayme
nts &
Deferred
Cost

Current
Assets
Stores,
Spares &
Loose
Tools
Stock-intrade
Trade
Debts
Short Term
Deposits,
Prepayme
nts &
Other
Receivable
Short Term
Investment
Cash &
Bank
Balances

Total
Assets

Client
Analytical Review - Sales

File No.
Name

Initial

Date

Prepared by
Checked by
Year End :

Job Incharge
Reviewed by Manager/Partner

Account
Code

Ref. Rupees Current

Period

Rupees Previous
Period

Rupees
Increase/Decrease

Increase/
Decrease %

Rea
Dec

Export

Local

Add : Export Rebate

Less : -Commission -Brokerage and

Discount -Excise Duty -Sales Tax
Client

File No.
Name

Analytical Review - Cost of Goods Sold

Initial

Date

Prepared by
Checked by
Year End :

Job Incharge
Reviewed by Manager/Partner

Account
Code

Ref. Rupees Current Period Rupees Previous

Period

Raw
material
consumed
Salaries,
wages and
benefits

Rupees
Increase/Decrease

Increase/ Reason fo
Decrease
%

Stores and
spares
consumed
Packing
material
consumed
Fuel and
power
Rent, rates
and taxes
Insurance
Repairs
and
maintenan
ce
Depreciati
on

Other
manufact
uring
overheads
:
Vehicle
Running &
Maintenan
ce
Telephone
and
postage
Utilities
Printing
and
stationery
Travelling
and
conveyanc
e
Legal and
profession
al
Others
Work in
process :
Opening
stock
Closing
stock

Finished
Goods:
Opening
stock
Closing
stock

Cost of
Goods
Sold

Client

File No.
Name

Analytical Review - Administrative

Expenses

Initial

Date

Prepared by
Checked by

Year End :

Job Incharge
Reviewed by Manager/Partner

Account
Code

Ref. Rupees Current Period Rupees Previous

Period

Directors'
remmuner
ation
Staff
salaries
and
benefits
Rent, rates
and taxes
Insurance
Repairs
and
maintenan
ce
Travelling
and
conveyanc
e
Legal and
profession
al
Vehicle
running
and
maintenan
ce

Rupees
Increase/Decrease

Increase/ Reason fo
Decrease
%

Utilities
Printing
and
stationery
Postage,
telephone
and telex
Fees,
subscriptio
n and
periodicals
Entertainm
ent
Auditors'
remmuner
ation
Advertisem
ent
Charity
and
donation
Depreciati
on
Other

Client

File No.

Analytical Review - Selling Expenses

Name

Initial

Date

Prepared by
Checked by
Year End :

Job Incharge
Reviewed by Manager/Partner

Account
Code

Ref. Rupees Current

Period

Salaries and Benefits

Rupees Previous
Period

Rupees
Increase/Decrease

Increase/
Decrease %

Rea
Dec

Freight and Octroi

Clearing and Forwarding

Travelling

Advertisement and Sample

Others : Export Development Surcharge

Market Survey Bank Charges Insurance

Client

File No.

Analytical Review - Financial Charges

Name

Initial

Date

Prepared by
Checked by
Year End :

Job Incharge
Reviewed by Manager/Partner

Account
Code

Ref. Rupees Current Period Rupees Previous

Period

Markup /
interest
on :

-Redeema
ble Capital

-Debenture
-Long
Term
Loans
-Lease
Finance

Rupees
Increase/Decrease

Increase/ Reason fo
Decrease
%

-Short
Term
Borrowings

- Loan
from
Directors &
Associated
Undertakin
g

- Workers'
Profit
Participatio
n Fund
Excise
Duty on
Borrowings
Bank
Charges
and
Commissio
n
Exchange
(Gain) /
Loss
Exchange
Risk Fee
on Foreign
Currency
Loan

Client

File No.
Name

Analytical Review - Other Income

Prepared by
Checked by
Year End :

Job Incharge
Reviewed by Manager/Partner

Initial

Date

Account
Code

Ref.

Rupees Current
Period

Income from Investments - net of Zakat

Income from Redeemable Capital

Income from Modaraba or Modaraba

Certificates

Profit on Sale of Investment

Profit on sale of fixed assets

Rental Income

Scrap sales

Others

Unusual income

Prior year income

ANALYTICAL REVIEW RATIO ANALYSIS

FO R M U LA

Rupees Previous
Period

Rupees
Increase/Decrease

Increase/
Decrease %

Rea
Dec

A. 1. 2. 3. 4. 5. PERFORMAN
6. 7. 8. 9. 10. 11. CE ANALYSIS
12. 13. 14.
Installed
Capacity
Capacity
utilized
Production in
units i.e. Kgs.
metres etc.
Production after
conversion, if
any. Gross Sale
in % -Local
-Export Gross
Profit % to Net
Sales Raw
material
consumption
cost to cost of
Local Gross
goods
manufactured. Sales Gross
Total Sales
Average raw
Export Gross
material
purchase price Sales Gross
Total Sales
per unit.
Gross Profit Net
Average
conversion cost Sales
Consumption
per unit of
Cost Cost of
production
Conversion cost goods
manufactured
without
depreciation per Total Purchase
unit Labour cost Price of Raw
material total
per unit of
production Store units purchased
Conversion Cost
and spares
consumption per unit produced
Conversion Cost
unit of
without
production.
depreciation
Electricity
consumption per units produced
Labour Cost
unit of
units produced
production
Packing material Store & Spares
cost per unit of consumption in
rupees units
production
produced
Electricity
consumption in
rupees units
produced
Packing material
cost units
produced

Y1

Y2

Y3

Y4

Y2

Y3

Y4

FO R M U LA
Y1
15.

Administrative Administration
expenses / unit Expenses units
of production produced

16.

17.
18.

19.

20.

Selling expenses Selling

per unit sold.
Expenses units
sold
Financial
in rupees
charges
Net Profit /
(Loss) per unit Net Profit /
(Loss) unit sold
sold
Net profit (Loss) Net Profit /
percent of sales (Loss) Sales X
one hundred
Production in %
-Finished goods
in production
-Visible waste
-Invisible waste

21.

Average selling
rate per unit
-Local

-Export

B.
1.

2.

3.

Finished goods
produced in
units raw
material
consumed in
units 100

Local Sales
Total Units Sold
Export Sales
Total Units Sold

In case of
Textile
PROFITABILI
TY RATIOS
Return on assets Net Profit after
(ROA)
tax Average total
assets
Return on
Net Profit after
Capital
tax Average total
Employed
capital
(ROCE)
employed
Earning per
Net profit
share (EPS)
available to
equity holder
Number of
ordinary shares
outstanding

Reasons for
Fluctuations:
FO R M U LA

Y1
4.

Earning yield

5.

Price Earning
Ratio

Earning per
Share
Market value
per share
Market price as
a Share

Y2

Y3

Y4

6.

7.

Earning per
Share
Operating
Operating
Expenses ratio Expenses
(administrative Net Sales
Expenses ratio)
Administrative Administrative
Expenses ratio Expenses
Net Sales

8.

Selling
Selling
Expenses ratio Expenses
Net Sales

9.

Financial
Financial
Expenses ratio Expenses
Net Sale

C.
1.

ACTIVITY
RATIOS
Inventory
Turnover

ii.

iii.

2.

3.

4.

5.

6.

7.

Raw Material
Turnover

Cost of raw
material used
Avg. raw
material
inventory
Work in process Cost of good
turnover
manufactured
Avg. Work in
process
inventory
Finished goods Cost of good
turnover
sold
Avg. finished
goods inventory
Debtor turnover Credit Sales
Debtors
Average debt
Months (days)
collection period in a year
Debtor turnover
Cost of good
Assets turnover sold
Average total
assets
Fixed assets
Cost of goods
turnover
sold
Average fixed
assets
Current assets Cost of good
turnover
sold
Average current
assets
Working Capital Cost of good
turnover
sold
Net working
capital

FO R M U LA
Y1

D.

LIQUIDITY
RATIOS

1.

Current Ratio

Current assets
Current
liabilities

2.

Acid - Test
quick ratio

Quick assets
Current
liabilities

3.

Creditors

Net credit
purchase
Average
creditors

E.

LEVERAGE /
CAPITAL
STRUCTURE
RATIOS

1.

Debt - Equity
ratio

2.

Equity Turnover

Y2

Y3

Y4

Total debt Share

holders equity

Sales Net worth

3.

Owners stake in Fixed assets Net

the fixed assets worth

Reasons for
Fluctuations:
2.4 AUDIT ADMINISTRATION & OTHER MATTERS
2.4.1 STAFF PLANNING AND TIME ALLOCATION
CLIENT :
PERIOD OF ACCOUNT :

Staff :

DETAILED TIME BUDGET

Prepared by

Reviewed by

Approved by

Budget

BUDGET (hours)
Partner

Strategic plan
Detailed planning
Audit program & budget
INTERIM WORK

Manager

ACTUAL (hours)
Sup.

Sr.

S.Sr.

Jr.

Total

Partner

Manager

Sup.

Sr.

S.

Cost of goods sold/manufacturing expenses

Purchases
Wages and salaries
Administration and general expenses
Sales and other Income
P&L - Other

Cash and bank

Debtors (incl. Circulatization)
Fixed assets
Stock and work-in-progress
Physical stock taking
General ledger and journal
Internal control memorandum
Travelling
Supervision
General

TOTAL INTERIM WORK

BUDGET (hours)
Partner

FINAL WORK
Share capital/dividends
Reserves
Deferred liabilities
Loans
Creditors - ourchases
Outstanding expenses
Taxation
Contingent liabilities
Fixed assets and depreciation

Manager

Sup. Sr. S.Sr.

ACTUAL (hours)
Jr.

Total

Partner

Manager

Sup.

Sr. S.Sr.

Invenstments
Stock and work-in-progress
Trade debtors
Advances, deposits and prepayments
Cash and bank balances
Sales and other income
Manufacturing expenses
Selling and administration expenses

Travelling
Supervision
Reports/Memoranda
Review Memorandum
Standard Schedule for Audit Summary file
General
Conferences with client

TOTAL FINAL WORK

TYPING
COMPARING
GRAND TOTAL (hours)
Rate per unit
Valuation

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

2.4.3 MINIMUM HOURLY CHARGE OUT RATES FOR AUDIT WORK

BY PRACTICING MEMBERS
ATR 14 (Revised)
The Council in its meeting held on 29 January 2000 reconsidered the minimum hourly charge
out rates for audit work by practicing members and decided to suitably increase the same. The
Council has authorized the following minimum hourly rates, which it considers reasonable
under the present conditions, as an indication, of the range of professional charges for audit
work presenting no exceptional characteristics. These are exclusive of traveling, hotel
expenses, out of pocket expenses and other disbursements:
Partner
Qualified Assistants
Senior (5 years and above)
Junior (0-5 years)
Supervisor
Senior
Semi-Senior
Junior

Rs. 3,000
Rs. 1,800
Rs. 1,200
Rs. 450
Rs. 300
Rs. 240
Rs. 150

The actual fees charged in individual cases will be a matter of agreement between
the member and the client.
This ATR supersedes ATR 14 (revised) issued pursuant to the Council's decision of I6
July 1997.
(136th Meeting of the Council - 29 January 2000)
2.4.4 INSTRUCTIONS FROM CLIENT/ KEY DATES
1.
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9

SCHEDULED DATE
FINANCIAL YEAR END TIME TABLE
Annual General Meeting (AGM)
Meeting of Board of Directors (BOD)
Initialed audited accounts
Representation letter
Final draft accounts
First draft account with trial balance
Consolidated financial statements, if applicable
Schedules and documents relating to financial statements
Physical count and verification of.
1 - inventories
2 - investments
3 - cash

1.10 Circulation of confirmation letters to:

1 - banks
2 - legal advisors
3 - debtors/creditors
- others
1.11 Availability of the following for Auditors Review
1 - Tax files
2 - Legal files
-AGM minutes
3
4
5

- BOD minutes
- Statutory records and corporate files
- Material agreements and documents

1.12 Preliminary meeting with auditors

1.13 Meeting with the following, where applicable:
1 - Other auditors
2 - Tax consultants

3
4
5

- Previous auditors
- Experts
- External or in house legal advisor
REMARKS

2.4.5 LIST OF SCHEDULE REQUIRED FROM CLIENT

(Date)
The Chief Accountant
Dear Sir
AUDIT FOR THE YEAR ENDING

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

1.
2.

Draft financial statements -Balance sheet -Profit & Loss account -Statement of Changes in Equities
-Accounting policy and other detailed notes to the accounts
(If financial statements are available on soft copy, please provide the same)

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

-Capital commitments, showing for main items

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

Please have available for our inspection the title deeds in respect of any freehold property.
Investment, showing for each item -name or nature -nominal value -book value -market value -income booked for
the year
Inventories

The latest financial statements of investee companies (if any) should be made available for our review.
detailed listing for each category of inventory, showing

reference
description
quantity
unit (ie. kilogram, metre, etc.)
unit price
valuation

-goods in transit, listed by banks handling the transactions

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

Receivables and prepayments

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

1
2

Affiliates balances
Bank balances/overdrafts
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.
-Please complete the attached letter in respect of each bank with which the company has had dealings during the
year, and return it to us, once signed, for us to forward to the banks concerned.
-Bank reconciliations for all current accounts, showingCheques drawn but not yet cleared by bankCheque
numberDate drawnPayeeAmountDate presented (after balance sheet date)

Deposits not yet credited by bank

Date deposited
Drawer of cheque etc.
Amount

Date cleared (after balance sheet date)

1.
2.

Cash

Please obtain confirmations of balances held by holders of all cash floats and petty cash funds at different
locations (if any).
Payables and accruals -Trade creditors -Bills payable showing
Payee Date of maturity Amount -foreign currency (for foreign bills)
-local currency-Sundry payables, showing nature of the debt-Accruals
Nature (eg. salaries, leave pay, utilities, communications etc.) Period of accrual Basis of
calculation Amount accrued

1.
2.

Employees terminal benefits

Show for each employee

Date of employment
Basic salary
Basis of calculation
Amount.

Loans payable. For all medium and long term loans outstanding, show Source of loan Purpose of loan Original
amount Period of loan Balance outstanding Interest rate Repayment arrangements Security given
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.
1 Statement of Changes in Equities
Movement schedule of paid-up capital (if any)
Form A
Other details of statutory forms submitted to the registrar of companies
Minutes
The minutes of all board and general meetings held during the year should be made available for our inspection.

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

Note: The

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

industry

2.4.6 FORMATS OF CONFIRMATIONS

1
2
3
4
5

Bank confirmation letter

Lawyers Confirmation
Tax Consultants Confirmation
Debtor/Creditor Balance Confirmation
Loan/Lease Confirmation
BANK LETTER

BANKS NAME AND ADDRESS DATE

Dear Sir,

CLIENTS NAME
REQUEST FOR BANK REPORT FOR
AUDIT PURPOSES FOR THE YEAR
ENDED

In accordance with your above-named customer's authorization given below, please provide to us, as
auditors of your customer, information relating to its affairs as at the close of business on
on the white copy of the attached form which should
be returned to us direct. The yellow copy of the form is for your records. With respect to items 3,5 and
11 on the form the information requested should cover the period from to .
Please state under each item in the space provided any factors which may limit the completion of your
reply; if there is nothing to report, state "NONE". Where the space provided is insufficient please use
additional sheets appropriately referenced and stamped and signed by the bank. If you find it necessary
to provide the information in a different format, please return the white copy of the attached form with
your reply.
It is understood that any replies given are in strict confidence, for the purposes of audit.

Yours truly For and on behalf of Firm name

DISCLOSURE
AUTHORISED For and on
behalf of

Signed in accordance with

terms and conditions for the
conduct of customer's bank
account.
Encls
To:FIRM

Page 1 of 4
NAME AND From: BANKS NAME ADDRESS

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

Yours truly
Date: Bank's stamp & signature INFORMATION REQUESTED
(1) BANK ACCOUNT BALANCES
Please give full titles of ALL accounts whether in rupees or in any other currency together with the account numbers
and balances therein, including NIL balances:

1
2
3

(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/
CR

BALANCE
IN FIGURES

IN WORDS

For overdraft facilities, please give the following information:

TYPE OF CHARGE
ACCOUNT NUMBER

AGREED OVERDRAFT LIMIT AND

DATE OF EXPIRY

DESCRIPTION OF SECURITY
CHARGED TO THE BANK

DATE ON WHICH CHARGE

WAS CREATED

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

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

Bank's
stamp & signature.
Page 2
of 4 NAME OF CUSTOMER : CLIENTS NAME AS AT
1
2
3
4
5

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

RELATED
ACCOUNT
NUMBER

DATE OF
AGREEMENT

SALE PRICE

PURCHASE
PRICE

PROMPT
PAYMENT
REBATE

DATE ON WHICH
REPAYMENT PERIOD
PURCHASE PRICE IS AND NUMBER OF
PAYABLE
INSTALLMENTS.

RATE OF
MARK -UP

GROSS

FULL TITLE OF ACCOUNT

DESCRIPTION

TYPE OF ACCOUNT

NET

ACCOUNT NUMBER

PERIOD

DATE OF CLOSURE

AMOUNT
IN FIGURES

IN WORDS

DESCRIPTION

PERIOD

AMOUNT
IN FIGURES

IN WORDS

Bank's stamp &

signature
217
1
Page
3
of
4
NAME OF CUSTOMER: CLIENTS NAME AS AT
1

(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:

2
3

(8)
CUSTOMER'S ASSETS HELD AS SECURITY Please give:
(i)
details of any security (other than those mentioned under item 1 and 6 above)
formally charged to the bank, including the date and type of charge (e.g. pledge,
hypothecation etc.):

DESCRIPTION

BALANCE AT ABOVE AGREED LIMITS DATE FOR

DATE
REPAYMENT/
RENEWAL

DESCRIPTION OF
SECURITY CHARGED TO
THE BANK
TYPE OF
CHARGE

DATE ON WHICH
CHARGE WAS
CREATED

TYPE OF CHARGE DESCRIPTION OF SECURITY DATE ON WHICH CHARGED TO THE BANK

CHARGE WAS CREATED

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

If a security is limited to any borrowings or if there is a prior, equal or
subordinate
charge,
please
indicate:
(9) CUSTOMER'S OTHER ASSETS HELD
Please give full details of investments, bills of exchange, documents of title, deed
boxes and any other assets of the customer held but not charged:

Bank's
signature

stamp

&

Page 4 of 4
NAME OF CUSTOMER: CLIENTS NAME AS AT
1 (10) CONTINGENT LIABILITIES All contingent liabilities, viz:
2 (a)
aggregate amounts of bills discounted for your customer, with recourse:
3 (b)
details of any guarantees, bonds or indemnities given to you by the customer in
favour of third parties
4 (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
5 (d)
aggregate amounts of acceptances
6 (e)
aggregate amounts of forward exchange contracts
7 (f)
aggregate amounts of outstanding liabilities under documentary credits
8 (g)
others - please give details
9 (11) OTHER INFORMATION
A list of other banks, or branches of your bank, where you are aware that a
customer/banker relationship has been established during the period:

Bank's
signature

SAMPLE OF LAWYERS CONFIRMATION

stamp

&

CLIENTS NAME AND ADDRESS DATE

Dear Sirs

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

Yours truly
FIRMS NAME

Authorised by
SAMPLE OF TAX CONSULTANTS CONFIRMATION

Dear Sirs

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

Yours truly For and on behalf of

Disclosure authorised by

2-175
SAMPLE OF DEBTORS/CREDITORS CONFIRMATION

Name __________________ Our Ref: _____________ Address _________________

Date ________________
_________________
Dear Sir (s)

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

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

Address of the Auditors

Yours faithfully
(________________)
THE BALANCE SHOWN ABOVE IS CORRECT / INCORRECT (Please delete as appropriate)

COMPANY:

________________________

ACCOUNT

BALANCE: ________________________ (If incorrect)

SIGNATURE:

________________________

________________________

DATE

2-176
SAMPLE OF FORMAT OF LOAN/LEASE CONFIRMATION

Dear Sirs
REQUEST FOR INFORMATION FOR AUDIT PURPOSES
FOR THE YEAR ENDED ____________________
In accordance with your above-named customers authorisation given below, please provide to us directly as auditors of your
customer, the information relating to its affairs as at the close of business on _________________and for the period from
_____________________ to ___________________.

1
2
3
4
5
6
7
8

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.
Details of loans and credit facilities, specifying agreed limits and in case of term loans, dated for repayment or
renewals.
Amounts of interest, commitment fees, service charges etc., charged during the period.
Details of amounts accrued but not charged or credited at the above date: e.g., interest, commitment fees, service
charged etc.
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.
Details of customers assets held as security (other then those mentioned in your response to 5 above) or for other
purposes.
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.
Any other information that you consider appropriate for the purposes of the audit.

Please state in respect of each item any factors, which may limit the completion of your reply. If there is nothing to report
state, NONE.
It is understood that any replies given are in strict confidence for the purpose of audit.
Yours truly
For and on behalf of

DISCLOSURE AUTHORISED
For and on behalf of

2-177

2.4.7 LIST OF AUTHORISED SIGNATORIES

Name

Designation

Monetary Limit Allowed

Signature

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

DATE VENUE TIME

FIRM
REPRESENTATIVES

Name

Designation

Name
CLIENT
REPRESENTATIVES

Designation

CONCLUDING REMARKS

Sign off

Prepared by Reviewed by Date Date

AGENDA FOR MEETING
Latest audited accounts Coordinating persons

Information about Other Auditors/ Co-auditors(if any) Availability of Accounting manuals and any changes Areas
Requiring special attention
Physical Existence Verification

Approx. Va lue
Stock
Cask
Investment

Date

Location(s)

Coordinator(s)

Others

Clients expectation of Completion of Interim audit Expected date of Client to prepare

financial statements Clients expectation of completion of audit Clients expectation of
receipt of audited accounts
Details of branches / Operations

Any significant accounting and audit issues identified during the last audit which are
brought forward
Involvement of internal audit
1
2
3
4
5

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

Confirmation circularization dates Banks Debtors

Creditors
Legal Advisors
Tax Advisors
Other
Changes in economic conditions
Changes in industry and operations
Significant Changes in Business since Last year

Changes in key finance and operations managers

Changes in management / Stake holders / Owners

Business objectives and whether they are being met

Changes in market strategies

Availability of latest cash flows / budgets Actual results to date (comment generally)
Financial restriction placed by debt covenants

Risk / Probability of breach of debt covenants

Changes in credit terms for customers since last year

Changes in information systems and technology in use

Changes in significant accounting processes

Effects of any recent or pending government legislation / actions

Effects of outcomes of litigation since last year
Effect of any new tax rules / legislation

New competitors in product lines of the company

Changes in market share

Significant changes in major customers / suppliers

Acquisitions / disposals of associates or any anticipation thereof
Changes in internal reporting formats
Changes in capital structure of the entity

Names of key financiers and changes thereto.

Significant changes in system of internal controls since last year

Significant changes in accounting policies
Effect of new accounting pronouncements
Clients international reporting requirements and changes thereto
Miscellaneous
Client:_____________________________ Prepared by:____________
Date:______________Accounting Period:___________________ Reviewed
by:___________ Date:______________

2.4.9 NOTES OF REVIEW OF CORESPONDENCE FILE

Letter

Addressed
Dated

Particulars
To

From

Note: Only document those significant matters, which needs to be communicated to

the audit staff except for those matters documented in Instruction from client.

4.12 POINTS FORWARD TO NEXT YEAR

Name of client:
Prepared by:

Year ended
Date

Reviewed by

Date

S.No.

Schedule
Reference

Description of issue

Service Improvement Plan

Note: This schedule would be carried forward to the next year Audit Planning File as
Points Brought Forward From Previous Year.
CLIENT:
PERIOD OF ACCOUNT:
SUBJECT: AUDIT PLANNING CHECKLIST
This checklist should be completed and initialed prior to the partners approval of the audit
plan.
YES/NO/N.A
INITIALS
W

ORKING
AND
P
APER
DATE
RE
FERENCE Terms of Engagement
1
2
3
4
5
6
7

Has the partner or management discussed with client officials their requirement for this years
examination?
If the client is a member of a group, have group audit instructions been received and have
group requirements been given full consideration in developing the plan?
Have the implications of changes in accounting and auditing conventions, laws and regulations
been considered?
Have areas in which client staff, including internal auditors, can make our work more efficient
and effective been considered?
Has an appropriate letter to the client been drafted confirming our current understanding of the
clients requirements, our timetable, and the assistance which client staff will give us?
Has a paragraph regarding Quality Control Review of our working papers files by the Institute
of Chartered Accountants of Pakistan been included in engagement letter?
Is an appropriate up-to-date engagement letter on file?

Updating the information base

1.

Has sufficient work been performed

to update the information based on
the clients:

1
2
3
4
5
2.

(1) Nature of business?

(2) Business environment?
(3) Accounting systems and control procedures?
(4) Financial affairs?
(5) Accounting principles and practices?

In preparing the plan, has due consideration been given to changes in:

1
2
3
4
5
6
7
8

(1) Key personnel or organisation structure?

(2) Operating locations, subsidiaries, or divisions?
(3) Operating premises and plant?
(4) Products or services provided?
(5) Customers and suppliers?
(6) Financing arrangements?
(7) Work force and labour relations?
(8) The clients business environment?

Does the Planning File reflect our current understanding of the clients business?
1 4. If the client use computers for accounting purposes have we considered:
2 (1) The implications for our work?
3 (2) The most effective use of computer audit specialists?
4 (3) The use of CAAT?

Overall Audit Plan

1
2
3
4

Has client profile been documented/updated?

Has an understanding of clients business been obtained and documented?
Have all critical audit areas and factors that may affect clients business been evaluated
and documented?
Have risk assessment procedures been applied and understanding of accounting &
internal control systems been documented? Has Internal Control Questionnaire (ICQs)
been filled out?

Has accounting and internal control system been evaluated and documented in the
following manner:

1
2

-System flowcharts/narrative -Risk assessment -Observations/transactions-walk

through -Conclusion/ reliance on internal controls -Control weaknesses/Management
Letter
Has materiality level been determined and used in the sampling procedures to verify
the significant transactions?
Has financial performance review been carried out and documented with comments?

Detailed Audit Plan

1
2
3
4

Has understanding of Computer Information System (CIS) been obtained and CIS
checklist been filled out?
Have audit programs been prepared for all significant financial statement components
to document the detailed audit procedures, after considering the results of test of
controls?
Have analytical review procedures been applied at planning stage and comments on
the variations since previous period been documented?
Audit Administration & Other Matters

Has the following matters relating to audit

administration been documented? -Staff planning/time allocation/time sheets -Job
costing/recovery -Instruction from client -List of schedules -List of authorized
signatories -Notes of meeting with client -Notes of review of correspondence file
-Points brought forward from previous year
Has the following matters relating to audit
administration been documented? -Staff planning/time allocation/time sheets -Job
costing/recovery -Instruction from client -List of schedules -List of authorized
signatories -Notes of meeting with client -Notes of review of correspondence file

-Points brought forward from previous year Planning File, Overall audit plan,
Detailed audit Plan and planning checklist reviewed and approved by
Partner _______________________ Date __________ Manager ______________________
Date __________

3.1

GENERAL INSTRUCTIONS FOR DOCUMENTATION OF AUDIT

EXECUTION FILE
1
2

1
2

Planning file must be completed, reviewed and signed by at least a senior audit staff
before commencement of field work.
The job incharge should ensure that following has been done / completed before
presenting the file for review:
2.1

Total of the lead schedules for each head agrees with the accounts.

2.2

Lead schedules must be supported by the audit evidence gathered

during the course of the audit

2.2

Lead schedules adequately cross-referenced to supporting schedules.

2.3

There should be a conclusion preferably on the lead schedule on each financial

statement component, signed by the person who has executed the work as well
as the reviewer.

2.4

Lead schedules and sub-schedules are initialled and dated by auditor who has
prepared the schedule and carried out the work.

2.5

List of final outstanding points and exceptions with their disposals should be
stated in un-ambiguous terms and cross-referenced to working paper files.

2.6

Audit symbols used must explain the work performed and ensure that
percentage of work completed must be stated for each financial statement
component, which is not fully verified. If sampling procedures used by the
auditor, ensure that steps are properly correlated with the materiality threshold
determined at the planning stage

2.7

All audit program steps should be cross-referenced with the schedules

containing work done.

A copy of the relevant audit program is to be filed with each significant financial
statement component
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.

3.2 EXCEPTIONS AND CONTROL WEAKNESSES

CLIENT:
_________________________________________________________
ENDED:

YEAR

___________________________________________________

PREPARED BY: __________________ REVIEWED BY: ________________

EXCEPTIONS/CONTROL WEAKNESSES NOTED

RISK ADDRESSED

RECOMMENDATION MANAGER/PARTNERS COMMENTS OR DISPOSALS

3.3 AUDIT WORKING PAPERS GUIDELINES

1. Introduction.
The objective of an audit of financial statement is to enable the auditor to express an opinion
whether the financial statements are prepared, in all material respects, in accordance with an
identified financial reporting framework. In order to express the opinion, the auditor follows
certain procedures, performs tests, and obtains information and reaches conclusion after
examining the financial statements.

The auditor should document matters that are important in providing evidence to support the
audit opinion. This documentation of working papers may be in the form of data stored on
paper, film, electronic media or other media,
2. Purpose.
Audit working papers:
a) Assist in the planning and performance of the audit;
b) Aid in the conduct, supervision and review of the audit work; and
c) Record the audit evidence resulting from the audit wok performed to support the
auditors opinion.
3. Need.
The need of audit working papers is to show that the audit engagement is adequately planned,
executed, the work of the assistants has been properly supervised and that the working papers
support the contents of the opinion.
4. Standardization.
The quantity, type, content and form of working papers will vary with the policy of the firm
and circumstances, depending on the type of audit. A standard form or group of forms cannot
be devised to cover all situations. The auditor must have the capability to devise new or
modify forms to meet situations as they arise. Factors affecting our judgment about the
working papers prepared and their content include:

The nature of the engagement;

The nature of the report we are to issue;
The nature of the financial information on which we are to report;
The nature and condition of the clients records;
The degree of reliance on the clients controls;
The extent of supervision and review of the work required in the circumstances can be
significantly impacted by the extent of direct executive participation in the audit work
and
teaming, and
The specific audit methodology and technology used in the course of the audit.
5. General consideration.
Working papers are designed and organized to meet the circumstances and our needs for each
individual audit. The use of standardized working papers (for example, checklists, specimen
letters, and standard organization of working papers) improve the efficiency with which such
working papers are prepared and reviewed. They facilitate the delegation of work while
providing a means to control its quality.
To improve audit efficiency, we may utilize schedules, analyses and other documentation
prepared by the client. In such circumstances, we need to be satisfied that those materials have

been properly prepared.

6. Types of working papers files.
During the course of an audit, the auditor accumulates audit evidences in the form of audit
working papers and keeps the records to support his opinion on the financial statements,
therefore it is apparent that the audit working papers will vary in form and composition. There
are basically two types of audit working papers files:
Permanent audit files.
In the case of recurring audits, some working paper files may be classified as ''permanent''
audit files which are updated with new information of continuing importance.
Current audit files.
As distinct from the above, current audit files contains information relating primarily to
the audit of a single period. Current working papers files may be divided into the
following categories:
a) Audit Planning File.
b) Audit Execution File.
c) Completion and Reporting file.
7. Working papers preparation.
Financial statements should be supported by schedules, which should be prepared to facilitate
analytical review, adjustments leading to final figures and cross reference to the underlying
working papers. Audit working papers should state the clients name, descriptive title of the
working paper, the period covered, name of the auditor preparing the paper and date of
preparation.
8. Indexing.
Working papers should be arranged in such a way that any item in the financial statements or
report may be traced back to the trial balance and supporting schedules and any other analysis
or documents.
9. Confidentiality, Safe Custody, Retention and Ownership of Working Papers.
The auditor should adopt appropriate procedures for maintaining the confidentiality and safe
custody of the working papers and for retaining them for a period of time sufficient to meet
the needs of the practice and in accordance with legal and professional requirements of record
retention.

SIGNIFICANT COMPONENTS OF BALANCE SHEET AND P

& L ACCOUNT
MAIN INDEX
Name

of

Client

___________________________________

Year

end________________________________________
Page No.

CAPITAL AND LIABILITIES

AA SHARE CAPITAL 3-8 BB RESERVES AND ACCUMULATED PROFIT 3-10
CC SURPLUS ON REVALUATION OF FIXED ASSETS 3-12 DD
REDEEMABLE CAPITAL 3-14 EE DEBENTURES AND LONG -TERM
LOANS 3-16 FF LIABILITIES AGAINST ASSETS SUBJECT 3-18 TO
FINANCE LEASE GG DEFERRED LIABILITIES 3-20 HH LONG -TERM
DEPOSITS 3-22 JJ SHORT -TERM LOANS AND FINANCIAL 3-24
ARRANGEMENTS MM CURRENT PORTION OF LONG TERM 3-26
LIABILITIES NN CREDITORS, ACCRUED AND OTHER 3-28 LIABILITIES
PP TAXATION

3-30

RR

3-33

SS

DIVIDENDS

CONTINGENCIES AND COMMITMENTS

3-35
3-5

MAIN INDEX
Name of Client ___________________________________ Year
end________________________________________

AS S ETS
Page No.

A OPERATING ASSETS 3-37 B ASSETS SUBJECT TO FINANCE LEASE 338 C CAPITAL WORK - IN - PROGRESS 3-41 D STORES AND SPARES
HELD FOR CAPITAL 3-43 EXPENDITURE E INTANGIBLE ASSETS 3-45 H
UNALLOCATED PRE - PRODUCTION 3-47 EXPENDITURE K LONG
-TERM INVESTMENTS 3-49 L LONG - TERM LOANS AND ADVANCES 351 M LONG - TERM DEPOSITS, PREPAYMENTS AND 3-53 DEFERRED
COSTS N STORES, SPARES AND LOOSE TOOLS 3-55 R STOCK - IN
-TRADE 3-57 S TRADE DEBTS 3-59 V TRADE DEPOSITS, SHORT TERM
3-61 PREPAYMENTS, LOANS, ADVANCES AND OTHER RECEIVABLES
W MARKETABLE SECURITIES / SHORT -TERM 3-63 INVESTMENTS
X 3-65

CASH AND BANK BALANCES

3-6

MAIN INDEX

PROFIT AND LOSS ACCOUNT

Page No.

PL 1 SALES 3-67 PL 2 COST OF SALES

3-69

PL

GENERAL AND ADMINISTRATIVE EXPENSES 3-72 PL 4 SELLING AND DISTRIBUTION EXPENSES 3-74

PL 5 FINANCIAL CHARGES 3-76 PL 6 OTHER CHARGES 3-78 PL 7 OTHER INCOME 3-80 PL 8

APPROPRIATIONS 3-82
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

AA

Accounting
Period
Whether placed in File
Reference

SHARE CAPITAL
Audit program

AA
AA/AP

Lead schedule

AA/LS

Supporting Schedules

AA1-19

Form "A", supporting schedules and other forms

AA/20

as applicable
List of shareholders alongwith workings.

AA-21

Minutes representation letter.

AA-22

Summary, extracts or copies of minutes

AA-23

Initial of Reviewer

File No.

Reference

Prepared by

Date

Reviewed by

Date

AA/LS

Accounting
Period
Current Period Rupees Previous Period Rupees
Reference

AUTHORIS
ED
CAPITAL
Number of
shares
Shares' face
value (per
share)
Total
Authorised
Capital
Types of shares

B/S

B/S

Types of shares

B/S

B/S

- ISSUED,
SUBSCRIBE
D AND PAID
UP
CAPITAL
Number of
shares
Amount
(Total)
Value of each
share
MOVEMEN
T DURING

THE YEAR
Numbers
Beginning of
the year (a)
Issued during
the year
Cash (b)
Kind (c)
Bonus/Right
(d)
(b) + (c) +
(d)= (e)
At the end of
the year a+e

B/S

B/S

CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

BB

Accounting
Period
Whether Placed in File
Reference

RESERVES AND ACCUMULATED

PROFIT

BB

Audit program
Lead schedule ( capital and revenues )

BB/AP
BB/LS

Initial of Reviewer

Supporting Schedules
-Revenue reserves
-Capital reserves
-Accumulated Profit/(Loss)

BB-1
BB-2
BB-3

Board Minutes

BB4

Advance against future issue of capital *

BB5

Movement schedule for disclosure purposes.

BB10

* To be placed after net worth

Reference BB/LS
Date Date

Current Period Rupees

Previous Period Rupees

Transfer during the year

Reference

Capital Reserves

BB-1

- Capital redemption reserve

- share premium account
- profit prior to incorporation
- other (to be specified)
- ----- reserve not regarded free for distribution
Revenue Reserves

BB-2

- General reserve
- dividend equalisation reserve
- other reserve (to be specified)
- unappropriated profit

-Accumulated Profit/(Loss)

BB-3

Surplus on revaluation of fixed assets (section 235)

Total

B/S B/S
CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matter to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting

CC

Other during

year

Period
Whether Placed in File
Reference

SURPLUS ON REVALUATION OF
FIXED ASSETS
Audit program
Lead schedule
Basic information and summary of revaluation
report *
Procedure for release of reserve. Tests including
reconciliation with disposal of assets schedule

* Description as per respective fourth / fifth

schedule

CC

CC/AP
CC/LS
CC-21
CC-22

Initial of Reviewer

File No.

Reference

Prepared by

Date

Reviewed by

Date

CC/LS

Accounting
Period
Current Period Rupees
Reference

Previous Period
Rupees

-Surplus on Revaluation of Fixed Assets

Opening Balance
Surplus on revaluation during the year

Utilization on disposal of Final Assets

<

><

* Increamental Value / Reduction in Value

Revalued or reduced carriying value
* Data of Revaluation
- Name & Revaluation
- Ban's of Revaluation
- Nature of indiecs used
* After revaluation of Assets, these items should be
shown in each subsequent balance sheet

B/S B/S

>

CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
3-13
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

DD

Accounting
Period
Whether Placed in File
Reference

REDEEMABLE CAPITAL
Audit program
Lead schedule
Supporting Schedules
Confirmations summary, reconciliation and documents
Related information in respect of redeemable capital
Board minutes
Extracts/Copies of agreements

DD
DD/AP
DD/LS
DD1-19
DD-20
DD-21
DD-22
DD-23

Initial of Reviewer

File No.

REFERENCE

DD/LS

Name

Initial

Date

Prepared by
Checked by Job Incharge
Reviewed by Manager / Partner

Account
No.

Ref.

P. T. C.

Musharika
arrangement

T. F. C.

Long term
running finance
under markup
arrangement

Current Period
Rupees

Previous Pe
Rupees

Participatory / Non - Participatory

Secured / Unsecured

Opening balance

Obtained/adjustment during the period

Redeemed during the year

Current Portion Shown under current

Liabilities

Instalment due

<

> <

> <

> <

> <

> <

> <

> <

> <

> <

Redemption within one year

<

> <

> <

> <

> <

> <

> <

> <

Principal amount

Marked up price

Markup

Rebate on timely payment

Instalment Payment Rest

Instalment amount

Number of Instalments

Installment commenced from

Interest / Markup rate per annum

Sub Note :
(Securities arrangement for sharing
profit and loss, provision/ creation of
reserve, features of conversion,
events of default in payments)

CONCLUSION

1
2
3

The audit has been completed in accordance with Audit Program.

The working papers demonstrate that adequate work has been undertaken.
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.

In my opinion _________________ of Rs. ______________________ are fairly stated and on a consistent basis with the previous period.

Job Supervisor : ____________________________ ________________________ Date : __________________

Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period

EE

> <

> <

Whether Placed in File

Reference

LONG - TERM LOANS

EE

Audit program
Lead schedule
Supporting Schedules
Confirmation summary, reconciliation and documents
Related information
Board minutes
Extracts/Copies of agreements
Copies of ledger accounts
(if related parties)

EE/AP
EE/LS
EE1-19
EE-20
EE-21
EE-22
EE-23
EE-24

3-16
File No.

Reference

EE/LS
Name

Prepared by

Date

Initial of Reviewer

Checked by Job Incharge

Reviewed by Manager / Partner

Client
L
e
a
d
S
c
h
e
d
u
l
e
:
L
O
N
G
T
E
R
M
L
O
A
N
S
Y
e
a
r
E
n
d
:

Account Ref.
Banking
From
From
director
s
Others
Current
Period
P
revious Period
No.

Companies
subsidiaries
(
including and other
controlled firm
Chief
Executi
ves)
Rupees
R
upees financial
m
a
n
a
g
e
d
i
n
s
t
i
t
u
t
i
o
n

m
o
d
a
r
a
b
a
s
a
n
d
o
t
h
e
r
a
s
s
o
c

i
a
t
e
d
u
n
d
e
r
t
a
k
i
n
g
s

Secured / Unsecured
Opening balance
Obtained / adjusted during the period
Repaid / adjustment / transferred
during the period
<><><><
><
><><><><<>
Current portion shown under current
liabilities

Instalment due
Payable within one year
<><><><
><
><><><><<>
Number of equal instalments
Amount of Instalments
Instalment payment rest
Date of commencement of first
instalment

Interest % per annum/Mark-up

paisas per Rs. 1,000/- per day

Foreign Currency
Sub Note :(Securities, priority in payment,Conversion features, recognitionof exchange differences and othermaterial terms)

CONCLUSION

1
2
3
4

The audit has been completed in accordance with Audit Program.

The working papers demonstrate that adequate work has been undertaken.
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.
In my opinion _________________ of Rs. ______________________ are fairly stated and on a consistent basis with the previous period.

Job Supervisor : ____________________________ ________________________ Date : __________________

Index
Client:
Lead Schedule:
Liabilities against assets subject to
finance lease.
Whether Placed
Initial Reference
in
of File
Reviewer

LIABILITIES AGAINST ASSETS SUBJECT FF

TO FINANCE LEASE
Audit program FF/AP
Lead schedule FF/LS
Working schedules FF-1
Confirmations summary, reconciliation and documents FF-20
Copies of Lease Agreements/extracts summary FF-21
File No.

Reference

Prepared by

Date

Reviewed by

Date

FF

Accounting
Period

File No.

REFERENCE
Name

G
Initial

Date

Prepared by
Checked by Job Incharge
Reviewed by Manager / Partner

Account
No.

Ref.

Opening Balance

Assets acquired during the period

Current Period Previous Period

Rupees
Rupees

Paid during the period

<

> <

><

> <

> <

> <

> <

> <

> <

> <

>

<

> <

><

> <

> <

> <

> <

> <

> <

> <

>

Current portion shown under current

liabilities

Instalment due

Payable within one year

Principal amount
Deposit amount
Instalment amount
Instalment payment rest
Number of Instalment
Applicable rate of finance %

Sub note :
Purchase option, executory cost born
by lessor/ lessee, residual value of
assets, financing restriction

Contingencies and other material term

The future minimum lease payment

to which the company is committed at
is as under :

Year Ending

Financial charges allocated to future

period

CONCLUSION

1
2
3
4

The audit has been completed in accordance with Audit program.

The working papers demonstrate that adequate work has been undertaken.
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.
In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
Job Supervisor :________________ Date ________________

Index

Client:
Lead Schedule: Deferred Liabilities
Whether Placed
Initial Reference
in
of File
Reviewer

DEFERRED LIABILITIES
GG
Audit program GG/AP
Lead schedule GG/LS
Supporting schedules ( gratuity / deferred taxation ) GG-1-19
Actuary's reports.
GG-20
Copies of lease agreements / other agreements GG-21
Board of Directors' approval GG-22
File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period

GG

File No.

Reference

Prepared by

Date

Reviewed by

Date

GG/LS

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.
Job Supervisor :________________ Date ________________
3-21
Index
Client:
Lead Schedule: Long-term deposits
Whether Placed
Initial Reference
in
of File
Reviewer

LONG - TERM DEPOSITS

HH
Audit program HH/AP
Lead schedule HH/LS
Supporting Schedules HH-1-19
Confirmations summary, reconciliation and documents HH-20
Compliance to S.226 of Companies Ordinance, 1984 HH-21
(Note) B/S B/S
File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period

HH

File No.

Reference

Prepared by

Date

Reviewed by

Date

HH/LS

Accounting
Period
Current Period Rupees Previous Period Rupees
Reference

-Customers

HH-1

-Employees

HH-2

-Others(Due to related party, if any)

* Following items should be shown seperatily

-Nature
-Repayment Period
-Rate of interest
- Other Material Term

HH3-19

CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
3-23
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

JJ

Accounting
Period
Whether Placed in File
Reference

SHORT - TERM LOANS AND

FINANCIAL ARRANGEMENTS
Audit program
Lead schedule
Supporting Schedules and bank reconciliations
Confirmations summary, reconciliation and
documents
Copies of agreements
Copies of ledger accounts
(if related parties)
Resolution/Power of attorney from
Board of Directors

JJ

JJ/AP
JJ/LS
JJ1-19
JJ-20
JJ-21
JJ-22

JJ-23

Initial of Reviewer

File No.

Reference

Prepared by

Date

Reviewed by

Date

JJ/LS

Accounting
Period
Current Period Rupees Previous Period Rupees
Reference

Secured/Un Secured
-Banking Companies and Financial Institutions

JJ-1

-Subsidiary Companies

JJ-2

-Controlled Firms

JJ-3

-Managed Modarabas

JJ-4

-Other Associated Undertakings

JJ-5

-Directors' including Chief Executive

JJ-6

-Others

JJ7-19

* Sub-note
-Rate of interest
-Nature of security
-Un-availed credit facility
-Other material terms

B/S B/S
CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
3-25
Index

B/S B/S
CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
3-27
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

NN

Accounting
Period
Whether Placed in File
Reference

CREDITORS, ACCRUED AND OTHER

LIABILITIES
Audit program
Lead schedule
Supporting Schedules
Confirmation of creditors and other liabilities
This area could include the following types of
documentation-detailed trial balance of accounts
payable and/or reconciliation of details to
general ledger control account at confirmation
date (if other than year-end)
Also summarize confirmation responses
Detailed trial balance of creditors and/or
reconciliation of details to general ledger
control account at year end
-Reconciliation of confirmation replies
-Alternate procedures

NN

NN/AP
NN/LS
NN1-19
NN-20

NN-21
NN-22
NN-23

Initial of Reviewer

Subsequent position and aging of creditors

Subsequent payments review
Copies of ledger accounts of related parties

NN-24
NN-25
NN-26

File No.
Reference NN/LS
Prepared by Date
Reviewed by Date
Accounting
Period
Current Period
Rupees
Reference

CREDITORS
- ACCRUED
LIABILITIE
S
- BILLS
PAYABLE
- ADVANCE
PAYMENTS,
UNEXPIRED
DISCOUNTS
AND
DEFERRED
INCOME
- MARK UP
ACCRUED
ON
SECURED
LOANS

NN-1
NN-2
NN-3

NN-4

NN-5

Previous Period
Rupees

Increase/ Reason for

Decrease % variation

Remarks

For the purpose of dis

amounts due to associ
period end be enter be
Rs...) Statist
confirmed - subsequen

- MARK UP
ON EACH
CLASS OF
REDEEMAB
LE
CAPITAL
- MARK UP
NN-6
ACCRUED
ON
UNSECURE
D LOANS
- PROFIT,
RETURN OR
NN-7
MARKUP
ACCRUED
- WORKERS'
PROFIT
NN-8
PARTICIPAT
ION FUND
- WORKERS'
WELFARE
NN-9
FUND
- PAYABLE
TO DEBTOR
- OTHER
LIABILITIE
NN-10
S
- OTHER
NN-11
DEPOSITS
- TRADE
NN-12
CREDITORS
NN-13
ADVANCES
FROM
CUSTOMER
S
- CUSTOM
EXCISE
NN-14
DUTY
PAYABLE
CONTRACT
ORS
NN-15
EARNEST/P
ETENTION
MONEY
- SALES
TAX
NN-16
PAYABLE
- MARK UP
ON
NN-17
RUNNING
FINANCES
- MARK UP
ON TERM
NN-18
FINANCES
DISTRIBUT
ORS
NN-19
SECURITY
DEPOSITS
PAYABLE
ON
NN-20
TERMINATI
ON OF
DEALERSHI
P
- OTHERS
NN-20-25

1
2
3
4

B/S B/S
The audit has been completed in accordance with Audit program.
The working papers demonstrate that adequate work has been undertaken.
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.
In my opinion above amounts are fairly stated and on a consistent basis with
the previous period.
Job Supervisor :________________ Date ________________
Index

Client:
Lead Schedule: Taxation
Whether Placed
Initial Reference
in
of File
Reviewer

TAXATION PP
Audit program PP/AP
Lead schedule PP/LS
Tax position-Year wise
PP-1

Tax

PP-2

Schedule

computation (computation of income)

of tax depreciation
PP-3 Statement
of excess perquisites
PP-4 Statement
of liabilities over 3 years U/s 25(i)
PP-5 Reconciliation of accounting records of tax
payment with the tax record (IT - 30 year wise)
PP-6

Schedule

of advance payment of taxes

PP-7

Summary

PP-8

Summary

of tax assessments

of Appellate orders
PP-9
Confirmation from tax advisor*
PP-10
Test documents is respect of :
-Withholding tax PP-11
-unexplained credits PP-12
-unpaid loans/credits
PP
-13
* Obtain if tax work not handled by the auditing firm

File No.

Reference

Prepared by

Date

Reviewed by

Date

PP

Accounting
Period

3-30

File No.

Reference

Prepared by

Date

Reviewed by

Date

PP / LS

Accounting
Period
Current Period Rupees Previous Period Rupees
Reference

PROVISIONS - CUMULATIVE
Opening balance
Made during the year -Current
-Prior year
Total

PAYMENTS - CUMULATIVE
Opening balance
Made during the year -Current
-Prior year
-Advance
Total
Balance
Represented by:
Tax liability
Tax refundable

PP-1

Advance payment of tax

B/S

B/S

CONCLUSION
1
2
3
4

The audit has been completed in accordance with Audit program.

The working papers demonstrate that adequate work has been undertaken.
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.
In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
3-31
This page is intentionally left blank
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

RR

Accounting
Period
Whether Placed in File
Reference

DIVIDENDS

RR

Audit program

RR-AP

Lead schedule

RR/LS

Supporting Schedules

RR1-19

Bank account confirmations

RR-20

Reconciliation of Zakat/tax deduction at source

RR-21

Compliance to Sec. 248-251 of Companies

Ordinance 1984

RR-22

Initial of Reviewer

Board minutes

RR-23

File No.

Reference RR/LS

Prepared by

Date

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.
Job Supervisor :________________ Date ________________
3-34
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

SS

Accounting
Period
Whether Placed in File
Reference

CONTINGENCIES AND COMMITMENTS

(Including subsequent review)

SS

Audit program
Lead schedule
Contingencies
Subsequent review/legal matters/contingent
liabilities
Legal letters and supporting documentation
Bank confirmation contents summary

SS-AP
SS-LS
SS1

Capital commitments
Operating lease-agreements summary
Summary of unexecuted contracts in respect of
capital work in progress
Summary of BOD Meetings - report of

SS-II
SS-12

SS-2
SS-3
SS-4

SS-13

Initial of Reviewer

commitments made
Bonded Stock commitments

SS-14
SS-15

Review of subsequent material date of the

financial statements to the date of the
auditors' report
Review of subsequent cash receipts
Review of subsequent cash disbursements

SS-21
SS-22
SS-23

File No.
Prepared by
Reviewed by
Accounting

Reference
Date
Date

SS/LS

Period
Current Period
Reference Rupees

-Contingencies
-Nature of contingencies

SS-1
SS-2
SS-3
SS-4
SS-5
SS-6
SS-7

Previous Period Rupees

-Commitments (Revenue/Capital)

SS-11
SS-12
SS-13

-Subsequent Events

SS-21
SS-22
SS-23

Note Note
CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
3-36
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period

Whether Placed in File

Reference

OPERATING ASSETS
Audit program
Lead schedule
Supporting Schedules
Related information
Additions -vouching schedules
Disposals of assets vouching and linkage with
tax and profit and loss
Depreciation
Insurance - Coverage schedule
Board minutes for major additions/delations

A
A-AP
A/LS
A1-A19
A-21
A-22
A-23
A-24
A-25
A-26

3-37

Initial of Reviewer

Index
Client:
Lead Schedule:
Assets subject to finance Lease
Whether Placed
Initial Reference
in
of File
Reviewer

ASSETS SUBJECT TO FINANCE LEASE

B
Audit program B-AP
Lead schedule B/LS
Supporting Schedules/Lessor wise/ Assets
B
1-B19 categorywise schedules Additions check
B-21 Deletions
check
B-22
File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period
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 duringof unallocated the end of the Depreciation Disposal / for the year Depreciation at value %

of the Year the period the period capital expenditure Year at the Transfer the end of

Begening the year

of year

Land - freehold Land - leasehold Building on freehold land Building on leasehold land Plant and Machinery Electric Installation & Equipment Office Equipment
Furniture and Fixture Vehicle
Under lease : Plant & Machinery Equipment Vehicle

CONCLUSION

1
2
3
4

The audit has been completed in accordance with Audit program.

The working papers demonstrate that adequate work has been undertaken.
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.
In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
Job Supervisor :________________ Date ________________

Preceding Period
Depreciation for the perios has been
accumulated as under
Cost
administration

of

goods manufactured

File No.

REFERENCE

A/LS1

Name

Date

Prepared by
Reviewed by Manager / Partner

Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period
Whether Placed in File
Reference

CAPITAL WORK - IN - PROGRESS

Audit program
Lead schedule
Supporting Schedules and related information
Stage of completion certificate/commencement of
commercial production
Capitalization of work - in - progress and
pre-operating costs
Pre-operating costs
Allocation of exchange loss
Allocation of financial costs
Project wise progress position

C
C-AP
C/LS
C1-C19
C-20
C-21
C-22
C-23
C-24
C-25

Initial of Reviewer

File No.

Reference

Prepared by

Date

Reviewed by

Date

C / LS

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.
Job Supervisor :________________ Date ________________
3-42
Index

File No.
Prepared by
Reviewed by
Accounting

Reference
Date
Date

D / LS

Period
Current Period
Reference Rupees

Stores

D-1

Spares

D-2

Advances for Acquisition

D-3

Others
Provision regarding 6(B) and 6(F) of 4th schedule
i.e. basis of valuation and for the opinion of directors
it the value of current assets (stores and spares) is
less than the amount at which they are stated in the
financial statement.

D4-19

Previous Period Rupees

B/S
B/S
CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
3-44
Index
Client:
Lead Schedule: Intangible Assets
Whether Placed
Initial Reference
in
of File
Reviewer

INTANGIBLE ASSETS E
Audit program E-AP
Lead schedule E/LS
Supporting Schedules E1-19
Third party documents E-20
Extracts/copies of Agreements E-21
Patent documents E-22

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period

3-45

File No.
Prepared by
Reviewed by
Accounting

Reference
Date
Date

E / LS

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.
Job Supervisor :________________ Date ________________
3-46
Index

3-47

File No.

Reference

Prepared by

Date

Reviewed by

Date

H / LS

Accounting
Period
Current Period Rupees Previous Period Rupees
Reference

- Staff Salaries and Benefits

- Stationery and Office Supplies
- Travelling and Conveyance
- Entertainment
- Office Renovation
- Repairs and Maintenance
- Vehicles Running
- Fees and Subscription
- Auditors' Remuneration
- Legal and Professional
- Communications
- Advertisement
- Books and Periodicals
- Insurance
- Fuel and Power
- Rent, Rates and Taxes
- Security Services
- Depreciation
- Financial
- Sundries

B/S
B/S
CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
3-48
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period
Whether Placed in File
Reference

LONG - TERM INVESTMENTS

Audit program
Lead schedule
Supporting Schedules
Related information
Physical verification summary and documents
Stock exchange quotations
Break-up value -summary and documents
Board minutes
Break- up of provision for diminution in value of
investments (if any)

K
K-AP
K/LS
K-1-19
K-21
K-22
K-23
K-24
K-25

Initial of Reviewer

3-49

File No.
Prepared by

Reference
Date

Reviewed by

Date

K/LS

Accounting
Period from
Current Period
Reference Rupees

- In Subsidiary Companies

K-1

- In Controlled Firms

K-2

- In Managed Modarabas

K-3

Previous Period Rupees

- In other Associated Undertakings

K-4

- In Listed Companies

K-5

- Modarba
- In Unlisted Companies

K-6

- Modarba
- In Immoveable Properties

K-7

- In Redeemable Capital

K-8

- In Debentures and Bonds issued by government,

K-9

municipal committee on other local authority

- In Government securities

K-10

- Others

K-11

- Provisions regarding 3(B), 3(C), 3(D), 3(E), 3(F),and

3(G) of 4th schedule is regimed

CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matter to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
3-50
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting

Period from
Whether Placed in File
Reference

LONG - TERM LOANS AND ADVANCES

Audit program
Lead schedule

L
L-AP
L/LS

Supporting schedules

L1-L19

Related information

L-20

Company's Policy document

L-21

Evaluation for provision

L-22

Compliance to section 195 and 208

L-23

of the Companies Ordinance1984

Details of maximum month end balances

Initial of Reviewer

3-51
Client:
Lead Schedule:
Long Term Loans and Advances
Current Period
Pr
evious Period Reference Rupees
Rupees
(Considered good or Doubtful)
- Subsidiary Companies L-1
- Controlled Firms L-2
- Managed Modarabas L-3
- Other Associated Undertakings L-4
- Provision regarding 4(A) (ii), (iii), 4(B), 4(C), 4(D),
4(E), 4(F), and 4(G) of 4th schedule is required

File No.
Prepared by

Reference
Date

Reviewed by

Date

L / LS

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.
Job Supervisor :________________ Date ________________
3-52
Index

Client:
Lead Schedule:

Long Term Deposits,

Prepayments and
Deferred costs

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period
Whether Placed in File
Reference

LONG - TERM DEPOSITS, PREPAYMENTS AND

DEFERRED COSTS

Audit program

M-AP

Lead schedule

M/LS

Supporting Schedules

M1-19

Confirmation summary, reconciliation and documents

M-20

Copies of Documents/Summary

M-21

3-53
Lead Schedule:

Long Term Deposits,

Prepayments and

Initial of
Reviewer

Deferred costs
File No.
Prepared by

Reference
Date

Reviewed by

Date

M / LS

Accounting
Period
Current Period Previous Period Rupees RupeesReference

M-1M-2
a) Long Term Deposits b) Long Term Prepayments c)
Deferred Costs
M-3M-4M-5M-6M-7M-8 ( ) ( )

-Preliminary Expenses -Discount on Issue of Shares

-Expenses Incurred on Issue of Shares
-Commission/Brokerage on Issue of Shares -Deferred
Development Costs -Amortization -Provision regarding
5(C) of 4th schedule i.e. basis of amortization or writing
off

B/S

B/S

CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
3-54
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period

Whether Placed in File

Reference

STORES, SPARES AND LOOSE TOOLS

Audit program

N-AP

Lead schedule

N/LS

Supporting Schedules

N1-19

Stock held with third parties - including confirmations

N-20

Test of inventory transactions from physical

N-21

inventory date to year-end

Pricing tests (including tests of net realizable value)

N-22

Obsolescence review

N-23

Cutoffs tests

N-24

Initial of Reviewer

3-55

File No.

Reference

N / LS

Prepared by Date
Reviewed by Date
Accounting
Period
Schedule Current Period Rupees
Reference

In hand :
-Stores
(includes
Rs___ (19_:
Rs __)
intransit)
-Spares
(inlcudesRs__
_ (19_: Rs __)
intransit)
-Loose Tools
--do-Others --do-

Previous Period
Rupees

N-1

N-2
N-3
N-4

Total
In transit
-Stores

N-5

-Spares

N-6

-Loose Tools

N-7

-Others

N-8
N-10
N-11
N-12
N-13
N-14
N-15
N-16
N-17
N-18
N-18

-Provision for Obsolescence

Provision
regarding
6(B) and 6(F)
of 4th

N-19

()

()

schedule i.e.
basis of
valuation and
for the
opinion of
directions
regarding
value of
stores, spares
and loose
tools which
is less than
that stated in
financial
statements

B/S B/S
CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period
Whether Placed in File
Reference

STOCK -IN -TRADE

Audit program

R-AP

Lead schedule

R/LS

Initial of Reviewer

Supporting Schedules

R1-R19

Stock held with third parties including confirmations

R-20

Test of physical inventory

R-21

Pricing tests (including tests of NRV)

R-22

Obsolescence review

R-23

Cut-offs

R-24

3-57

File No.

Reference

Prepared by

Date

Reviewed by

Date

R / LS

Accounting
Period

Reference

Current Period Rupees

Previous Period Rupees

Notes:(i) Provision , if any, should be disclosed separ

items(2) Disclosure to be made (a) fixed production o
cost compound (b) FIFO or weighted average cost wh

LIFO or base stock formula used (IAS-2)(3) Inventor

base of cost and net valuable value (4) Disclosure to b
valued at NRV (IAS-2 para 34)(5) Stock held by third
disclosed by way of note (IAS-2 para 34(6) Amount a
related to reversals of write-down recognised as incom

- Raw Material
and component

R-1

- Packing
Material

R-2

-Work in Process

R-3

-Finished Goods

R-4

- Waste stock

R-5

- Stock-in-Bond

R-6

-Stock-in-transit

R-7

- Other stocks
(to be specified)

R-8

Provision
regained 6(B)
and 6(F) of 4th
schedule i.e.
basis of
valuation and
direction opinion
regarding value
of stock-in-trade
which is less
than that stated
in
financial
statements

B/S B/S
CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.

3
4

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.
In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period from
Whether Placed in File
Reference

TRADE DEBTS

Audit program

S-AP

Lead schedule

S/LS

Supporting Schedules

S1-S18

Detail trial balance and/or reconciliation of details

to general ledger control account at year-end

S-19

Confirmations

S-20

Aging of trade debts

S-22

Review of activities Subsequent to the year-end

S-23

Evaluation of allowance for doubtful accounts and

supporting Schedules

S-24

Initial of Reviewer

3-59
File No.

Reference:

Prepared by

Date

Reviewed by

Date

S/LS

Accounting
Period

Client:
Lead Schedule: Trade Debts

Current Period Previous Period

Increase/
Remarks
(including
Reference
(decrease)
details of
security)
Rupees Rupees
Amount %
- Trade Debts
Considered Good (i) secured
(ii) unsecured(no security other
then -----------security)

Considered Doubtful

Less: Provision for Doubtful Debts S-24

(

)
()

i - specific

C
urrent year Prior
ii- general

1- Due from:
D
i
r
e
c
t
o
r
s
_
_
_
_
_
_
_
_
_
_
_
_
_
P
r
o
v
i
s
i
o
n
r
e
g
a
r
d
i
n
g
6
(
C
)
a
n
d

6
(
F
)
o
f
4
t
h
s
c
h
e
d
u
l
e
i
.
e
.

C
hief executives _____________ director's opinion regarding value of trade debts which
M
anaging agents _____________ is less then that stated in financial statements and the
Other executives
_____________ maximum aggregated amount due from directors / chief executive / managing agents / executives /
2
- Due from associated undertakings / controlled firms /
managed
A
ssociated undertakings _____________ modarbas.
C
o
n
t
r
o
l
l
e
d
f
i
r
m
s
_
_
_
_
_
_

_
_
_
_
_
_
_
M
a
n
a
g
e
d
m
o
d
a
r
b
a
_
_
_
_
_
_
_
_
_
_
_
_
_

3- Disclosure to be made of amount

not expected to be realised within
one year (IAS-13)
Note:

Maximum amount
held at any, time
during the year
calculated by reference
to month end balances.
(i)
above_____________

B/S B/S
CONCLUSION

1
2
3
4

The audit has been completed in accordance with Audit program.

The working papers demonstrate that adequate work has been undertaken.
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.
In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
Job Supervisor :________________ Date ________________

Index
Client:

Lead Schedule:

Trade Deposits,Short-Term
Prepayments/ Loans,Advances and
Other Receivables

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period
Whether Placed in File
Reference

Trade Deposits, Short-Term Prepayments Loans,

Advances and Other Receivables

Audit program

V-AP

Lead Schedule

V/LS

Supporting Schedules

V1-V19

Confirmations

V-20

Subsequent receipts against receivables

V-21

Client:
Lead Schedule:

Initial of
Reviewer

Trade Deposits,Short-Term
Prepayments/ Loans,Advances and
Other Receivables

File No.

Reference

Prepared by

Date

Reviewed by

Date

V/LS

Accounting
Period from
Current Period Rupees Previous Period Rupees
Reference

Deposits

V-1

Prepayments

V-2

Loans

V-3

Staff
Executives
Chief Executive
Considered good and bad
Advances
Considered good and bad

V-4

Provision regarding 6(C) of 4th schedule i.e. the

maximum aggregate amount due from direction/
managing agents/ associated undertakings / controlled
firms / managed modarbas.
Others Receivables

V-5

Tax Refunds
Others

PP-1

Current account balance with statutory authorities

V-6

CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matter to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
Index
Client:
Lead Schedule:

Marketable Securities/Short-term
Investments

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period

Whether Placed in File

Reference

MARKETABLE SECURITIES / SHORT

TERM INVESTMENTS

Audit program

W-AP

Lead schedule

W/LS

Supporting Schedules

W1-19

Confirmations / physical verification

W-20

Valuation Tests

W-21

Stock Exchange Quotations

Comparison of cost & market value

W-22

B/S B/S

Initial of Reviewer

Client:
Lead Schedule:

Marketable Securities/Short-term
Investments

File No.

Reference

Prepared by

Date

Reviewed by

Date

W / LS

Accounting
Period
Current Period Rupees Previous Period Rupees
Reference

-In Subsidiary Companies

W-1

-In Controlled Firms

W-2

-In Managed Modarabas

W-3

-In Other Associated Undertakings

W-4

-In Listed Companies

-Modarba
-In Unlisted Companies
-Modarba

W-5
W-6
W-7

-In Immoveable Properties

W-8

-In Redeemable Capital

W-9

-In Bonds issued by government,

municipal committee or other local authority
-In Government Securities

W-10

- Others
-Provision regarding 6(D) relating, to provision
(3(B), 3(C), 3(D), 3(E) and 3(F) in the 4th
schedule is regimed

W-12

W-11

B/S B/S
CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period
Whether Placed in File
Reference

CASH AND BANK BALANCES

Audit program

X-AP

Lead schedule

X/LS

Supporting Schedules/Bank account reconciliation

X1-19

Bank confirmations

X-20

Cash count sheets/cash certificates

X-21

Last document sheets

X-22

Last document cutoff test

X-23

Test of Frozen/Blocked accounts

X-24

Initial of Reviewer

File No.

Reference

Prepared by

Date

Reviewed by

Date

X/LS

Accounting
Period
Schedule
Reference

-Cash in
Hand

X-1

-Cash in
Transit

X-2

-Cash at
Bank (i) on
deposit
account
(ii) on
current
account
(iii) other
accounts
a) In
Current
Accounts
Local
Currency

Current Period Rupees Previous Period Rupees

Statistics
Confirmed
Physically
Verified

Remarks

Amount

X-3

Foreign
Currency

X-4

b) In
Deposit
Accounts
Local
Currency
Foreign
Currency

X-5
X-6

Balances in
hand
(i) Cash
(ii)
Cheques
Balances in
transit
Total

B/S B/S
CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

PL-1

Accounting
Period
Whether Placed in File
Reference

Initial of Reviewer

SALES
Audit program

PL1-AP

Lead Sehedule

PL-1/LS

Monthly analysis

Related information
Sales cut - off
Test of Control- Sales
Quantitative reconciliation
Significant Customers (80/20) 20 percent customers
(in numbers who contribute 80 percent sales)

File No.

Reference PL1/LS

Prepared by Date
Reviewed by Date
Accounting

Period

Schedule

Current Period

Previous Period

Reference

Rupees

Rupees

Increase/

Increase/

Reasons for

(decrease)

(decrease)

variation

Amount

(1) The working result of e

separately given provided t
exceed20% of the total tur
of items exported during th
provided such value exceed
the company.
Statistics
Vouched
Globally
Verified

Sales

-Exports

-Local
-Export
Quota
-Waste

Less:Commissio
n to sole
selling
agent and
to
-Other
Selling
Agent
-Discount
-Sales Tax
-Export
Duty
-Brokerage
-Brokerage
and
discount
Net sales

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.
Job Supervisor :________________ Date ________________
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

PL2

Accounting
Period from

File No.

Reference PL2/LS1

Prepared by

Date

Reviewed by

Date

Accounting
Period
Current Period Rupees Previous Period Rupees
Reference

-Work in Process
Opening
Closing

R-3

-Cost of Goods Manufactured

-Finished Goods
Opening
Closing

-Excise Duty

R-4

P/L P/L
CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________

File No.

Reference PL2/LS2

Prepared by

Date

Reviewed by

Date

Accounting
Period

Schedule Current Period

PARTICULAR

Purchases
Closing
R-1
Stock
- Stores
and
Spares N
Consume
d
- Fuel and
Power
- Salaries,

Increase/
(decrease)

Rupees

- Raw &
Packing
Material
Consume
d
Opening
Stock

Previous Period

Reference
Rupees

Amount
Statistic Vouched Amount
Globally Verified

Wages
and Staff
Welfare
bonus,
contributi
on
to
provident
and other
funds
- Rent,
Rates,
and Taxes
Insurance
- Repairs
and
Maintena
nce
- Patents,
Copyright
s, Trade
Marks,
Designs
Royalties
and
Technical
Fees
Amortizat
ion of
Research
and
Develop
ment
Costs
- Vehicle
Running
and
Maintena
nce
Telephon
e, Telex
and
Postage
Travellin
g and
Conveyan
ce
- Printing
and
Stationery
- Utilities,
Rates and

Taxes
Depreciat
ion
- Other
expense
(to be
specified)
Communi
cations
Entertain
ment

Total

Index
Client:
Lead Schedule:

File No.

General and Administrative

Expenses

Reference

Prepared by

Date

Reviewed by

Date

Accounting
Period

PL3

Client:
Lead Schedule:

General and Administrative

Expenses

File No.

Reference PL3/LS

Prepared by

Date

Reviewed by

Date

Accounting
Period from

Current Period Rupees Previous Period Rupees

Reference

Increase/
(decrease)
Amount

Increase/
(decrease) %

Variations Reasons for

Major

In case of donations w
spouse has interest in
directors their intere
and addresses of all d

Statistics % Vouched global

remunerations:Audit fee tax
sundry advisory services oth

- Directors
Remuneration
- Salaries
pages and
Benefits
- Rent, Rates,
and Taxes
- Vehicle
Running and
Maintenance
- Printing and
Stationery
- Telephone,
Telex and
Postage
- Fees and
Subscriptions
- Travelling
and
Conveyance &
entertainment
- Legal and
Professional
- Auditors'
Remuneration
Audit Fee
Other Services
Out of Pocket
Expenses
Advertisement
& Sales
promotions
Entertainment
- Charities and
Donations
names and
addresses of
the
donees and of
directors
including their
spouses and
children
interested is
required IF (--)
of 4th
schedule
- Depreciation
method of
Depreciation
- Others
- Insurance
- Repairs &
maintenance
- Bad debts
written off trade
- others

- Provision for
doubtful debts
- trade
- others
- Research &
development
cost included
in bad debts
due by:
- Directors
chief
executive,
managing
agent &
executive
- Associative
undertakings

P/L P/L
CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
Index

Client:
Lead Schedule:
Selling and Distribution

Expenses
Current Period
P
revious Period Reference
Rupees
Rupees

-Ocean Freight
-Local Freight and Octroi
-Forwarding Expenses
-Export Development Surcharge
-Bank Charges
-Others

File No.

Reference PL4/LS

Prepared by

Date

Reviewed by

Date

Accounting
Period from

P/L P/L
CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and notes of unusual matters
to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the previous period.
Job Supervisor :________________ Date ________________
3-75

Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting

PL5

Period from

File No.
Prepared by

Reference PL5 / LS
Date

Reviewed by Date
Accounting
Period
Schedule Current Period Rupees Previous Period Rupees Reasons for Major variation
Reference

-On Redeemable Capital

DD

-On Long Term Loans

EE

-On Finance Leases

FF

-On Short Term Loans/Running Finance

JJ

-On Borrowings from Associated Undertakings

JJ

-On Borrowings from Directors

JJ

Mark-up on
- Term finance
- Running finance
Other (to be specified)

CONCLUSION
1 The audit has been completed in accordance with Audit program.
2 The working papers demonstrate that adequate work has been undertaken.
3 The working papers contain sufficient information, details of significant features and
notes of unusual matters to enable us to form an opinion on financial statements.
4 In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting

PL6

Period
File No. Reference PL6/LS
Prepared by Date
Reviewed by Date

Accounting Period
Schedule Current Period Rupees Previous Period Rupees Reasons for Major variation
Reference

Workers Profit Participation Funds

Workers Welfare Fund

Provision for Doubtful Debts

Provision for Diminution in Value of Investments

Research and Development Costs

Amortization of Deferred Costs

Loss on Disposal of Assets

Loss on Sale of Investments

I &W

Loss or provision for loss on redeemable capital

Exchange loss

Others (specify)

CONCLUSION
1 The audit has been completed in accordance with Audit program.

2
3
4

The working papers demonstrate that adequate work has been undertaken.
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.
In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

Accounting

PL7

Period

File No.

Reference PL7/LS

Prepared by

Date

Reviewed by

Date

Accounting
Period
Schedule Current Period Rupees Previous Period Rupees Reasons for Major variation
Reference
PARTICULARS

Income from investments

Gain on sale of Investments

Gain on Disposal of Fixed Assets

K/W

Interest Income

Income from Redeemable Capital income from each

I&W

class of capital
Income from Modarabas or modarba certificates

Scrap sale

Miscellaneous

Income from investments in association undertakings/

others (I(A) (ii) in 4th schedule
Income from unusual items

P/L P/L
CONCLUSION
1
2
3

The audit has been completed in accordance with Audit program.

The working papers demonstrate that adequate work has been undertaken.
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.

In my opinion above amounts are fairly stated and on a consistent basis with the
previous period.
Job Supervisor :________________ Date ________________
Index

File No.

Reference

Prepared by

Date

Reviewed by

Date

PL8

Accounting
Period

File No.

Reference PL8/LS

Prepared by

Date

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.
Job Supervisor :________________ Date ________________

4.1 FINANCIAL STATEMENTS

Document the following financial statements: Final Draft Accounts Signed By The
Senior Financial Officer Initialed / Signed Accounts (Cross Referenced To
Working Papers) Published Financial Statements (Current & Previous Year)

4.2 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.

4.3 AUDIT COMPLETION CHECKLIST

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
2

Has all the work been planned before the start of detailed audit procedures and properly documented in the
planning file?
Has the continuing accuracy of the accounting and internal control systems been confirmed by walk-through
procedures or other means? Have the necessary observations and conclusions been documented?
1 3. Is all the audit work executed & documented in the Execution File, including:
2 (1) Audit programs that are initialed, dated, and cross-referenced with each audit step performed during
the course of the audit?
3 (2) Lead schedules are completed and conclusions are drawn on each financial statement component?
4 (3) Lead schedules are properly supported by the evidence gathered during the course of the audit?
Ensure that they are properly referenced and cross-referenced with supporting schedules.
Has the work of each audit staff been reviewed in detail by the supervisory staff?

4
5
6
7
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16

Have all matters raised in the last internal control memorandum / management letter been resolved / followed
up and the clients action recorded?
Has a management letter detailing weaknesses of accounting and internal control systems in respect of the
current visit been drafted? Have clients comments been recorded?
Have new client services opportunities, resulting from internal control matters, arising during the audit been
identified and highlighted?
Have all important matters been documented in the Audit Execution File, including identified auditing and
reporting problems which may arise during final audit visit?
Have confirmations relating to banks, lawyers, debtors/creditors etc. been obtained? If not, is the summary of
the same documented in the execution file & other alternative procedures been applied?
Has final draft / initialled accounts been referenced to the working papers and documented in the Completion
& Reporting File?
Have the workings of cash flow statement been documented and properly referenced with final accounts?
Has accounts completion checklist been filled out before issuing initialled accounts to the client?
Has partner review notes & queries been properly disposed off?
Have all significant matters relating to audit and other areas of assignment been documented in the summary
review memorandum?
Have analytical review procedures were followed at overall review stage and comments on the same been
documented?
Has a representation-letter been drafted based on the firms latest standard letter?
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?
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?
Has an appropriate financial statements disclosure checklist been completed?
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?
Has going concern checklist been filled out to ensure that going concern assumption is appropriate?
Have all adjustments been entered into the books of account to make them agree with the draft financial
statements?
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?
Have all related party transactions (e.g., transactions with directors and associated undertaking) been
identified and effect of these transactions has considered?

YES/NO/N.A.

INITIAL &
DATE

Prepared By (Supervising Senior / Manager) ____________________________

Reviewed By (Partner) ____________________________________________
YES/NO/N.A INITIAL / DATE

Date: ___________________
Date: ___________________

4.4 ACCOUNTS COMPLETION CHECKLIST

Name of client: ____________________ Year ended _______________ Prepared by:
____________________ Date _______________ Reviewed by ____________________ Date

_______________

AUDITORS'REPORT:
S-No.DESCRIPTION FINAL DRAFT
1

Ensure that the entity's name is correctly spelled

Ensure that accounting period covered by the accounts is correctly

mentioned.

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.

4Statement in para (C) of the auditors' report should be drafted appropriately after
confirming whether there is profit/loss for the period, from the profit and loss
account (i.e. Profit/Loss after tax)
5Ensure that para (d) of auditors' report regarding zakat is drafted after confirming
whether there was any zakat deductible. If it has been deducted ensure that it has
been deposited in the Central Zakat Fund.
6

If the accounts are for more or less than 12 months then ensure that
the auditors' report uses the word "period instead of "year.

7
Ensure that audit report is printed on firm letterhead.
FINANCIAL STATEMENTS:
S. No.

DESCRIPTION FINAL DRAFT

Ensure that name of the company appears correctly on the balance

sheet, profit and loss account, statement of changes in financial
position (cash flow statement), statement of changes in equities and
notes to the accounts.

Ensure that the correct period covered by the accounts appears on

the profit and loss account, statement of changes in financial position
(cash flow statement), statement of changes and equities and notes

to the accounts.
3

If the figures in the accounts are rupees in thousands then ensure that
this is reflected in the headings.

Ensure that totals of assets and liabilities in the balance sheet are in
agreement.

Ensure that accumulated profit/loss brought forward in profit and

loss account is correct.

Ensure that un-appropriated balance of profit/loss transferred to

balance sheet is correct.

Ensure that the words "Contingencies and Commitments" appear on

the Balance Sheet.

Ensure that last year's figures appearing in the accounts are traced
from last years signed accounts except where they have been
rearranged.

Ensure that all accounting policies are consistently applied, and if

not, this fact is disclosed accounting policy note.

10

Ensure that the statement i.e 'The annexed notes form an integral
part of these accounts." appears in the balance sheet and profit and
loss account

11

Ensure that all the carry forwards and brought forwards are in
agreement Ensure no rounding errors exist between brought
forwards and carry forwards.

12

Ensure that if the company is subject to any other ordinance or regulations disclosures
required by these have also been made. Examples of such disclosures are Investment
Advisers Rules, 1971 or SBP's prudential regulations.

13

Ensure that balance sheet, profit and loss account, statement of changes in financial
position (cash flow statement) and last page of notes to the accounts bears

signatures of Chief Executive and Director (or whichever combination is approved

by the Board of Directors).
14

Check casting of all the totals and sub totals. Check all spellings and grammar.

15

Ensure that depreciation charge computed under fixed assets schedule is in

agreement with depreciation expense disclosed in expenses. Ensure that details of
disposals agrees with fixed asset note (if applicable).

16

Ensure that the Closing Stock figures in Cost of Sales agrees with Stock on balance
sheet. (Except for Items in transit).

17

Ensure that amortization of deferred cost is in agreement with amortization

expense disclosed in expenses.

18

Ensure that change in provisions appearing on the Balance Sheet reconciles with the
amounts reflected in the Profit and Loss Account.

19

Ensure that profit/(loss) is stated in correct order.

20

Ensure that boxes are drawn correctly in the accounts

4.5 Partner Review Notes & Queries

Name of client:

Year ended

Prepared by:

Date

Reviewed by

Date

Observations/Notes

Disposal

4.6 SUMMARY REVIEW MEMORANDUM

Name of client:

Year ended

Prepared by:

Date

Reviewed by

Date

Following are the examples of items that may be reported in the Summary Review
Memorandum for the review of the partner:
Major Accounting or Auditing Issues

Change in Accounting policy with financial impact

Major acquisitions/disposal of Fixed Assets/Investments

Provisions

Acquisition of Long Term Loan/Leases

Major Contingencies/litigations including Tax etc.

Client

File No.

Analytical Review-Balance Sheet-Liabilities

Name

Initial

Date

Prepared by
Checked by
Year End :

Job Incharge
Reviewed by Manager/Partner

Account
Code

Ref. Current Period Rupees Previous Period

Rupees

Authorize
d capital
Issued,
Subscribed
& Paid-up
Capital
General
Reserves
Capital
Reserves
Unappropri
ated Profit
& Loss

Surplus on
Revaluatio
n of Fixed
Assets
Redeemab
le Capital

Increase/Decrease
Rupees

Increase/ Reason fo
Decrease
%

Long Term
Loans
Liabilities
Against
Assets
Subject to
Finance
Lease
Deferred
Liabilities
Long
Terms
Deposits

Current
Liabilities
Short Term
Loans
Current
Portion of
Long Term
Loans
Creditors,
Accrued &
Other
Liabilities
Provision
for
Taxation
Proposed
Dividend

Total
Liabilities

Client

File No.
Name

Analytical Review-Balance Sheet

Assets

Initial

Date

Prepared by
Checked by

Year End :

Job Incharge
Reviewed by Manager/Partner

Account
Code

Ref. Current Period Rupees Previous Period

Rupees

Increase/Decrease
Rupees

Increase/ Reason fo
Decrease
%

Operating
Fixed
Assets
Capitalwork-inprogress

Intangible
Assets
Long Term
Investment
s
Long Term
Loan &
Advances
Long Term
Deposits ,
Prepayme
nts &
Deferred
Cost

Current
Assets
Stores,
Spares &
Loose
Tools
Stock-intrade
Trade
Debts
Short Term
Deposits,
Prepayme
nts &
Other
Receivable
Short Term
Investment
Cash &
Bank
Balances

Total
Assets

Client

File No.
Name

Analytical Review - Sales

Initial

Date

Prepared by
Checked by
Year End :

Job Incharge
Reviewed by Manager/Partner

Account
Code

Ref. Current Period

Rupees

Previous Period
Rupees

Increase/Decrease
Rupees

Export

Local

Add : Export Rebate

Less : -Commission -Brokerage and

Discount -Excise Duty -Sales Tax
Client

File No.
Name

Analytical Review - Cost of Goods Sold

Prepared by
Checked by

Initial

Date

Increase/
Decrease %

Rea
Dec

Year End :

Job Incharge
Reviewed by Manager/Partner

Account
Code

Ref. Current Period Rupees Previous Period

Rupees

Raw
material
consumed
Salaries,
wages and
benefits
Stores and
spares
consumed
Packing
material
consumed
Fuel and
power
Rent, rates
and taxes
Insurance
Repairs
and
maintenan
ce
Depreciati
on

Other
manufact
uring
overheads
:
Vehicle
Running &
Maintenan
ce
Telephone
and
postage
Utilities
Printing
and
stationery
Travelling
and
conveyanc
e
Legal and
profession

Increase/Decrease
Rupees

Increase/ Reason fo
Decrease
%

al
Others
Work in
process :
Opening
stock
Closing
stock

Finished
Goods:
Opening
stock
Closing
stock

Cost of
Goods
Sold

Client

File No.
Name

Analytical Review - Administrative

Expenses

Initial

Date

Prepared by
Checked by

Year End :

Job Incharge
Reviewed by Manager/Partner

Account
Code

Ref. Current Period Rupees Previous Period

Rupees

Directors'
remmuner
ation
Staff
salaries
and
benefits
Rent, rates
and taxes
Insurance
Repairs
and

Increase/Decrease
Rupees

Increase/ Reason fo
Decrease
%

maintenan
ce
Travelling
and
conveyanc
e
Legal and
profession
al
Vehicle
running
and
maintenan
ce
Utilities
Printing
and
stationery
Postage,
telephone
and telex
Fees,
subscriptio
n and
periodicals
Entertainm
ent
Auditors'
remmuner
ation
Advertisem
ent
Charity
and
donation
Depreciati
on
Other

Client

File No.

Analytical Review - Selling Expenses

Name

Initial

Date

Prepared by
Checked by
Year End :

Job Incharge
Reviewed by Manager/Partner

Account
Code

Ref. Current Period

Rupees

Previous Period
Rupees

Increase/Decrease
Rupees

Increase/
Decrease %

Rea
Dec

Salaries and Benefits

Freight and Octroi

Clearing and Forwarding

Travelling

Advertisement and Sample

Others : Export Development Surcharge

Market Survey Bank Charges Insurance

Client

File No.

Analytical Review - Financial Charges

Name

Initial

Date

Prepared by
Checked by
Year End :

Job Incharge
Reviewed by Manager/Partner

Account
Code

Ref. Current Period Rupees Previous Period

Rupees

Markup /
interest
on :

Increase/Decrease
Rupees

Increase/ Reason fo
Decrease
%

-Redeema
ble Capital

-Debenture
-Long
Term
Loans
-Lease
Finance
-Short
Term
Borrowings

- Loan
from
Directors &
Associated
Undertakin
g

- Workers'
Profit
Participatio
n Fund
Excise
Duty on
Borrowings
Bank
Charges
and
Commissio
n
Exchange
(Gain) /
Loss
Exchange
Risk Fee
on Foreign
Currency
Loan

Client

File No.
Name

Analytical Review - Other Income

Initial

Date

Prepared by
Checked by
Year End :

Job Incharge
Reviewed by Manager/Partner

Account
Code

Ref.

Current Period
Rupees

Income from Investments - net of Zakat

Income from Redeemable Capital

Income from Modaraba or Modaraba

Certificates

Profit on Sale of Investment

Profit on sale of fixed assets

Rental Income

Scrap sales

Others

Unusual income

Prior year income

ANALYTICAL REVIEW RATIO ANALYSIS

FO R M U LA

Previous Period
Rupees

Increase/Decrease
Rupees

Increase/
Decrease %

Rea
Dec

A. 1. 2. 3. 4. 5. PERFORMAN
6. 7. 8. 9. 10. 11. CE ANALYSIS
12. 13. 14.
Installed
Capacity
Capacity
utilized
Production in
units i.e. Kgs.
metres etc.
Production after
conversion, if
any. Gross Sale
in % -Local
-Export Gross
Profit % to Net
Sales Raw
material
consumption
cost to cost of
Local Gross
goods
manufactured. Sales Gross
Total Sales
Average raw
Export Gross
material
purchase price Sales Gross
Total Sales
per unit.
Gross Profit Net
Average
conversion cost Sales
Consumption
per unit of
Cost Cost of
production
Conversion cost goods
manufactured
without
depreciation per Total Purchase
unit Labour cost Price of Raw
material total
per unit of
production Store units purchased
Conversion Cost
and spares
consumption per unit produced
Conversion Cost
unit of
without
production.
depreciation
Electricity
consumption per units produced
Labour Cost
unit of
units produced
production
Packing material Store & Spares
cost per unit of consumption in
rupees units
production
produced
Electricity
consumption in
rupees units
produced
Packing material
cost units
produced

Y1

Y2

Y3

Y4

Y2

Y3

Y4

FO R M U LA
15.

Y1

Administrative Administration
expenses / unit Expenses units
of production produced
16.

17.
18.

19.

20.

Selling expenses Selling

per unit sold.
Expenses units
sold
Financial
in rupees
charges
Net Profit /
(Loss) per unit Net Profit /
(Loss) unit sold
sold
Net profit (Loss) Net Profit /
percent of sales (Loss) Sales X
one hundred
Production in %
-Finished goods
in production
-Visible waste
-Invisible waste

21.

Average selling
rate per unit
-Local

-Export

B.
1.

2.

3.

Finished goods
produced in
units raw
material
consumed in
units 100

Local Sales
Total Units Sold
Export Sales
Total Units Sold

In case of
Textile
PROFITABILI
TY RATIOS
Return on assets Net Profit after
(ROA)
tax Average total
assets
Return on
Net Profit after
Capital
tax Average total
Employed
capital
(ROCE)
employed
Earning per
Net profit
share (EPS)
available to
equity holder
Number of
ordinary shares
outstanding

Reasons for
Fluctuations:
FO R M U LA

Y1
4.

Earning yield

Earning per
Share

Y2

Y3

Y4

5.

6.

7.

Market value
per share
Price Earning Market price as
Ratio
a Share
Earning per
Share
Operating
Operating
Expenses ratio Expenses
(administrative Net Sales
Expenses ratio)
Administrative Administrative
Exp enses ratio Expenses
Net Sales

8.

Selling
Selling
Expenses ratio Expenses
Net Sales

9.

Financial
Financial
Expenses ratio Expenses
Net Sale

C.
1.
I

ii.

iii.

2.

3.

4.

5.

6.

7.

ACTIVITY
RATIOS
Inventory
Turnover
Raw Material
Turnover

Cost of raw
material used
Avg. raw
material
inventory
Work in process Cost of good
turnover
manufactured
Avg. Work in
process
inventory
Finished goods Cost of good
turnover
sold
Avg. finished
goods inventory
Debtor turnover Credit Sales
Debtors
Average debt
Months (days)
collection period in a year
Debtor turnover
Cost of good
Assets turnover sold
Average total
assets
Fixed assets
Cost of goods
turnover
sold
Average fixed
assets
Current assets Cost of good
turnover
sold
Average current
assets
Working Capital Cost of good
turnover
sold
Net working
capital

FO R M U LA
Y1

D.

LIQUIDITY
RATIOS

1.

Current Ratio

Current assets
Current
liabilities

2.

Acid - Test
quick ratio

Quick assets
Current
liabilities

3.

Creditors

Net credit
purchase
Average
creditors

E.

LEVERAGE /
CAPITAL
STRUCTURE
RATIOS

1.

Debt - Equity
ratio

2.

Equity Turnover

Y2

Y3

Y4

Total debt Share

holders equity

Sales Net worth

3.

Owners stake in Fixed assets Net

the fixed assets worth

Reasons for
Fluctuations:

4.8 MANAGER REVIEW NOTES & QUERIES

Name of client: ____________________ Year ended _______________ Prepared by:
____________________ Date _______________ Reviewed by ____________________ Date
_______________
Observations/Notes

Disposal

4.9 MANAGEMENT REPRESENTATION LETTER

A management representation letter (format enclosed) is a letter addressed to the auditor that
has been drafted by the auditor and given to the client to sign. The purpose of such a letter
includes:
the minimization of misunderstandings between the client and the auditor.
the commitment to writing of representations previously made verbally by
management to the auditor.
the provision of corroborative evidence.
Note that where other evidence is available, the auditor does not rely solely on evidence
obtained through management representations. Where other evidence is not available,
evidence gathered solely by way of a management representation letter is not normally
considered to be particularly reliable.
Evidence obtained through a management representation letter may be particularly applicable

to the corroboration of evidence relating to both subsequent events and the appropriateness of
the going concern assumption.
SUGGESTED MANAGEMENT REPRESENTATION LETTER

FIRMS NAME AND ADDRESS

Dear Sirs
We confirm to the best of our knowledge and belief, the following representation made to you
during your examination of the financial statements of (clients name) for the (period of
examination).
1
2

3
1
2

We acknowledge managements responsibility for the fair presentation in the financial

statements of financial position, results of operations and changes in financial position
in conformity with prescribed accounting practices.
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.
We are not aware of:
a.
any irregularities involving management or employees who have significant
roles in the system of internal accounting control or any irregularities involving other
employees which could have a material effect on the financial statement; or
b.
any violations or possible violations of laws or regulations whose effect should
be considered for disclosure in the financial statements or as a basis for recording a
loss contingency. There have been no communications from regulatory agencies
concerning non-compliance with or deficiencies in financial reporting practices that
could have a material effect on the financial statements. The company has complied
with all aspects of contractual agreements that would have a material effect on the
financial statements in the event of non-compliance (state here exceptions, if any).
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.
The receivables in the aggregate gross amounts of Rs ___________ at (balance sheet
date) represent bonafide claims against debtors for sales or other charges arising on or
before that date and are not subject to discount except for normal cash discounts.
These receivables do not include any amounts which are collectible after one year
(state here exceptions, if any). The amount of Rs ___________ carried for doubtful

accounts and allowances is sufficient to provide for any losses which may be sustained
on realisation of the receivables.
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-firstout, 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.
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.
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.
The financial statements and appended notes include all disclosures necessary for a
fair presentation of the financial position and results of operations of the company in
accordance with prescribed accounting practices, and disclosures otherwise required to
be included therein by the laws and regulations to which the company is subject. The
following have been properly recorded or disclosed in the financial statements (if
none, include under a separate caption having the introduction there are no
.):
a)
b)
c)

d)

Related party transaction and related amounts receivable or payable, including

sales, purchases, loans , transfers, leasing arrangements and guarantees.
Share capital repurchase options or agreements or share capital reserved for
options, warrants, conversions, or other requirements.
Arrangements with financial institutions involving compensations balances or
other arrangement involving restrictions on cash balances and line of credit or
similar arrangements.
Agreements to repurchase assets previously sold.

e)

Other arrangements not in the ordinary course of business.

10.

No matters or occurrences have come to our attention up to the present time which
would materially affect the financial statements and related disclosures for the year
ended (balance sheet date) or, although not affecting such financial statements or
disclosures, have caused or are likely to cause any material change, adverse or

otherwise, in the financial position or results of operations of the company. We have no

plans or intentions that may materially affect the carrying value of classification of
assets and liabilities.
Yours truly

.. (Senior Executive
Officer)

(Senior Financial
Officer)

Date:..
Note: Representation letter must be dated same as the date of audit report. (AS 22 Para
13)
Representation letter ordinarily be signed by senior executive officer and senior
financial officer. (AS 22 Para 14)

4.10 SUGGESTED LETTER TO THE BOARD OF DIRECTORS

(BOD)
Board of Directors, Date:
ABC Company Limited,
Karachi
Dear Sir,
We are pleased to inform you that we have completed the audit of your financial statements
for
the year ended 30 June 2000, and are enclosing the 5 copies of the financial statements for
identification purposes only. The signed accounts would be issued after we have received the
following:
i) Management representation letter

ii) Approval of the Board regarding the following:

1
2
3
4
5
6
7
8

All additions to assets (including investments) (over the limits in Companies

Ordinance)
All disposals of assets
Bonuses
Level of provisions
Transfers
Items of management estimates and judgement
Deferral or Capitalisation of expenditure
Revaluation of assets

*(Further significant observations relating to legal/tax advisor, large outstanding balances,

confirmations outstanding and other significant matters that require attention of the Board of
Directors, may also be included in this letter.)

(Name
of
Auditor) sd/

the

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)]

SUGGESTED FORMAT OF MANAGEMENT LETTER

The following letter is not intended to be a standard letter. Points for inclusion in the
management letter will vary from one entity to another and from one period to the next.
(Auditor Letterhead)
(To Board of Directors or appropriate representative of senior management)
(Date)
This management letter is provided in connection with our audit of your financial statements
of for the year ended _____________. The letter highlights those weaknesses in the
accounting and internal control systems, which have come to our notice during the course of
the audit.
Because of the test nature and other inherent limitations of an audit, together with the inherent
limitations of an accounting and internal control system, there is an unavoidable risk that even
some material weaknesses or misstatements may remain undiscovered.
Issues Arising

Consequences/Risk

Recommendation

Management Response

(Management response should include agreed implementation) Note: This schedule would be
carried forward to the next year Audit Planning File as Points Brought Forward From
Previous Year.

4.12 POINTS FORWARD TO NEXT YEAR

Name of client:
Prepared by:

Year ended
Date

Reviewed by

Date

S.No.

Schedule
Reference

Description of issue

Service Improvement Plan

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.

2. B.

Non-adjustable events: (Only disclose if material) Have under noted possible events
been discussed with clients officials and disclosed in accounts in compliance with
IAS-10?

a. Mergers and acquisitions of any business.

b. New issue of shares or acquisition of loan capital. c. Acquisition or disposal of
material assets or investments.
d. Major changes in market price of investments.
e. Losses of fixed assets or stocks as a result of catastrophe such as fire and flood.
f. Opening/extending of trading activities. g. Closing of significant part of trading
activities not expected to close at year-end.
h. Major exchange rate movements.
i. Effect of any new legislation or government regulation.
j. Strike and other labour disputes. k. Significant reversal of sales and profit trend.
l. Reason of any suspension or interruption of operations.
m. Loss of major customers or contractors.
n. Potential losses on forward contracts.
o. Imposition of exchange controls.
p. Acquisition, or withdrawal, of short -term borrowings facilities.
q. Financial arrangements made but disbursements where not made.
C.

Have evidences of such above events been documented and enclosed?

D.

Have representations been taken from management for such events?

E.

Review the minutes of meetings since the year-end of directors, shareholders and
appropriate key committees.

F.

Obtain and read any post year-end management accounts and inquire the significant
variances, if any.

G.

Consider whether the going concern assumption in relation to whole or a part of the
enterprise is appropriate.

Note:

Apart from above, also consider above events upto the signing of audit report but
before its issuance and events discovered after financial statement are issued or when
there is any change in financial statements after it is issued.

CLIENT:
YEAR END:
4.15 GOING CONCERN REVIEW CHECKLIST

Initial Date COMPLETED BY :

REVIEWED BY :

1. Have the following points been discussed with client and observed during the
Yes/ No/ N.A.
course of audit? A. Indication for Company may not be able to pay its debts:
Yes=Alarming Point
-Substantial operating losses in excess of owner equity. -Heavy dependence on
(Write brief note in
short-term finances for long-term needs. -Working capital deficiency. -Adverse key separate sheet)
financial ratios. -Low liquidity ratios. -Net liability or net current liability position.
-Under capitalization. -Arrears or discontinuance of dividends. -Default in
complying with the terms of loan agreements. -Excessive obsolete stock. -Inability to
pay creditors on due date. -Long overdue debtors and excessive bad debts.
-Deterioration in the relationship with bankers and inability to obtain finances or
essential new product development or other essential investments. -Continuous use
of fixed assets. B.i. Indications for company about the continuation of business &
lead inability of paying debts (Internal Problems): -Loss of key management or
staff without replacement. -Increasing stock level.

4-34
-Work stoppage and other labour difficulties
-Shortages of important supplies
-Substantial dependence on success of particular project.
-Excessive reliance on new products.
-Uneconomic commitments.
-In case of any legal proceeding, if decided against the Company, liability can not
be met.
B.ii.
(External Problems) -Non compliance with capital or other statutory requirements.
-Loss of key patents.
-Loss of key or major market, franchise, license or principal supplier.
-Undue influence of market dominant competitors.
-Political risk.
-Pending legal proceedings against the entity that may, if successful result in
judgments that could not be met.
-Frequent financial failure of enterprise of same industry.
2.

-Changes in legislation or government policy.

Have the sufficient evidences been obtained for above said points?

4-35

PERMANENT AUDIT FILE

CLIENT_________________________________________________________________

INDEX

1
2
3
4

Formation Information and Regulation

Minutes of the Board of Directors Meetings, Containing Decisions of permanent
nature & minutes of AGM / EGM etc.
Loans & Other Long Term Agreements
Miscellaneous

Updation Date

FILE
REF.

Updated By Reviewed By Remarks

D E S C R I PTI O N

DATE

5.1 5.1.1
5.1.2
5.1.3
5.1.4
5.1.5

FILE
REF.

Formation Information and Regulation

Certificate of Incorporation Certificate of
Commencement of Business Memorandum and
Articles of Association Prospectus Other

5.2.

5.2.1

5.2.2

5.2.3

D E S C R I PTI O N

DATE

Minutes

Extracts of Important Minutes of Board of Directors Containing decisions of Permanent

nature.
Extracts of Important Minutes of Shareholders Meetings (e.g. AGM)

Other

FILE
REF.

5.3.

Loans & Other Long Term Agreements.

Loans and Other Agreements of Permanent

5.3.1 nature
(e.g. long term loans & lease agreements)

5.3.2 Other

D E S C R I PTI O N
DATE
FILE D E S C R I P T I O N
REF.
5.4.

DATE

Miscellaneous

SUMMARY OF SOME INTERNATIONAL STANDARDS ON

AUDITING (ISAs)
Contents

Page

1.AS 1 Objective and General Principles Governing an Audit of Financial Statements 6-2

2. AS 2
3.

Terms of Audit Engagements

4. AS 6 Risk Assessments and Internal Control

5. AS 7 Quality Control for Audit Work
6.

6-3
6-4
6-6
6-9
6-13

7.

8. AS 12 Analytical Procedures
9. AS 13 Auditors Report on Financial Statements

6-15
6-17
6-18

10. AS 17 Related Parties

11. AS 19 Audit Sampling and Other Selective Testing Procedures
12. AS 21 Subsequent Events
13. AS 22 Management Representations
14. AS 23 Going Concern
15. AS 25 Audit Materiality
16. AS 28 Initial Engagements Opening Balances

6-19
6-20
6-22
6-23
6-24
6-26
6-27

17. AS 30 Knowledge of the Business

6-28 The
objective of
an audit of
financial
statements
is to enable
the auditor
to express
an a
opinion
whether the
financial
statements
are
prepared, in
all material
respects, in
accordance
with an

identified
financial
reporting
framework.

The auditor should comply with the Code of Ethics for Professional Accountants issued by
the International Federation of Accountants.
Ethical principles governing the auditors professional responsibilities are:
1 Independence;
2 Integrity;
3 Objectivity;
4 Professional competence and due care;
5 Confidentiality
6 Professional behaviour; and
7 Technical standards
The auditor should conduct an audit in accordance with ISAs. These contain basic principles
and essential procedures together with related guidance in the form of explanatory and other
material.
The term of Scope of an audit refers to the audit procedures deemed necessary in the
circumstances to achieve the objective of the audit. The procedures required to conduct an
audit in accordance with ISAs should be determined by the auditor having regard to the
requirements of ISAs, relevant professional bodies, legislation, regulations and, where
appropriate, the terms of the audit engagement and reporting requirements.
An audit in accordance with ISAs is designed to provide reasonable assurance that the
financial statements taken as a whole are free from material misstatement. Reasonable
assurance is a concept relating to the accumulation of the audit evidence necessary for the
auditor to conclude that there are no material misstatements in the financial statements taken
as a whole. Reasonable assurance relates the whole audit process.
However, there are inherent limitations in an audit that affect the auditors ability to detect
material misstatement. These limitations result from factors such as:
1
2

The use of testing.

The inherent limitation of accounting and internal control system (e.g. the possibility

of collusion).
The fact that most evidence is persuasive rather than conclusive.

While the auditor responsible for forming and expressing an opinion on the financial
statements, the responsibility for preparing and presenting the financial statements is that of
the management of the entity. The audit of the financial statements does not relieve
management of its responsibilities.
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.

The auditor should plan the audit work so that the audit will be performed in an effective
manner.
1
2

3
4

Planning means developing a general strategy and a detail approach for the expected
nature, timing and extent of the audit.
Adequate planning ensures that appropriate attention is devoted to important areas of
the audit, potential problems are identified and the work is completed expeditiously,
planning also assists in proper assignment of work to assistants and in coordination of
work done by other auditors and experts.
The extent of planning will depend on the size of the entity, the complexity of the audit
and the auditors experience with the entity. However some form of planning should be
prepared for all assignments.
An overall audit plan describing the scope and conduct of the audit should be
developed and documented, after considering the following:
-

Economic factors and industry conditions affecting business

-Changes, if any, since the prior audit -Level of competence of management

-Accounting policies adopted by entity and changes in policies -Effect of new
accounting or auditing pronouncements
-Auditors Knowledge of accounting and internal
control systems and reliance to be placed
thereon -Assessment of risks and identification
of significant audit areas -Materiality level
-Extent of reliance on internal auditors and
effect on external audit procedures
-Staffing requirements -Possibility
that going concern assumption may
be subject to question -Timing of
reports required and deadlines if any
-

Analytical review procedures

Number of locations

Involvement of experts

1
2

-Condition requiring special attention, such as the existence of related parties.

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.

An audit program setting out the nature, timing and extent of planned audit procedures to
beimplemented should be developed and documented. It is a means to control and record the
proper execution of the work. A standard audit program may be developed by the firm to form
the basis, but it should be modified according to the requirements of a specific audit
engagement. The following points may be taken into account while preparing an audit
program:

-It should be so designed to serve as a set of instructions for the assistants

carrying on the audit work. -It should contain the audit objectives for each
area covered by the audit. -Time budget for performing various audit
procedures. -Consider specific assessments of inherent and control risks. -Level
of assurance to be provided by substantive procedures. -The involvement of
other auditors and experts, if any. -The audit program should be crossreferenced to working papers and should
include the name of the company being audited -Follow-up of audit
findings should be included in audit program. -Other matters of overall audit
plan may also need to be considered

The person performing the procedures and the person reviewing the work
should sign the audit program.

The auditor should obtain an understanding of the accounting and internal control systems,

sufficient to plan the audit and develop an effective audit approach. The auditor should use
professional judgement to assess audit risk and to design audit procedures to ensure it is
reduced to an acceptably low level.
The auditor performs a walk-through test, that is, tracing a few transactions through
the accounting system to confirm their understanding of the accounting and internal
control system.
Audit Risk has three components: Inherent risk, Control risk and Detection risk.

Inherent Risk
When developing the audit plan, the inherent risk should be assessed at the financial
statements level. When developing the audit program, the auditor should relate such
assessment to material account balances and classes of transactions.
To assess inherent risk, the auditor uses professional judgement to evaluate numerous
factors, examples of which are:

At the financial statement level

-Integrity
of
management
-Management experience and knowledge and changes in management during
the period
-Unusual pressures on management such as lack of capital or industry slump
-Nature of business potential for obsolescence of products, complexity of
capital structure, significance of related parties and number of locations of
production facilities
-Economic and competitive conditions of the
industry

At the Account Balance and Class of Transactions Level

-Accounts involving a high degree of estimation
-Complexity of underlying transactions
-Degree of judgment involved in determining account balances
-Susceptibility of assets to loss or misappropriation
-The completion of unusual and complex transactions, particularly at or near
period end.

Control Risk
The preliminary assessment of control risk is the process of evaluating the
effectiveness of an entitys accounting and internal control systems in preventing or
detecting and correcting material misstatements.
The auditor should document in the working papers the understanding obtained of the
entitys accounting and internal control systems and the assessment of control risk.
Tests of controls may include:

-Inspection of documents supporting transactions and other events to gain evidence

that internal controls have operated properly, e.g. verifying that a transaction has
been authorised.
-Inquiries about, and observation of, internal controls which leave no audit trail
-Reperformance of internal controls, e.g. reconciliation of bank accounts
1
2

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.
1 The auditor should obtain an understanding of the accounting system sufficient
to identify and understand:
Major classes of transactions in the entitys operation;
How such transactions are initiated;
2 Significant accounting records, supporting documents and accounts in the
3 financial statements; and
The accounting and financial reporting process, from the initiation of
significant transactions and other events to their inclusion in the financial
statements

The auditor should obtain an understanding of the control environment sufficient to

assess directors and managements attitudes, awareness and actions regarding internal
controls and their importance in the industry.

Audit Risk in the Small Business

Many internal controls, which would be relevant to large entities, are not practical in
small businesses. For example, segregation of duties may be missing or limited. In this
instance if audit evidence of supervisory controls is lacking, the audit evidence

necessary to support the auditors opinion on the financial statements may have to be
obtained entirely through the performance of substantive procedures.
The audit firm should implement quality control policies and procedures designed to ensure
that all audits are conducted in accordance with ISAs. The objectives of quality control
policies will incorporate the following:
Professional Requirements
Skills and Competence
Assignment
Delegation
Consultation
Acceptance & Retention of clients
Monitoring
The firms general quality control policies and procedures should be communicated to its
personnel in a manner that provides reasonable assurance that the policies and procedures are
understood and implemented.

Professional Requirements
Personnel in the firm should adhere to the principles of independence, integrity, objectivity,
confidentiality and professional behaviour.
Obtain from personnel written representations on an annual basis in respect of nonexistence of prohibited relationships and prohibited investments. A list of clients may
be prepared each year to allow staff to determine their independence.
Assign responsibility for obtaining representations and reviewing independence
compliance files for completeness to a person with appropriate authority.

Skills and Competence

The firm is to be staffed by personnel who have attained and maintain the technical standards
and professional competence required to enable them to fulfill their responsibilities with due
care.
Maintain a program designed to obtain qualified personnel by planning for personnel
needs, establishing hiring objectives and setting qualifications for those involved in the
hiring function.
Assign to authorised persons the responsibility for employment decisions.
Conduct an orientation program relating to the firm and the profession for newly
employed personnel.
Outline the requirements for continuing professional education and communicate them
to personnel.
Encourage participation in external continuing professional education programs.

Establish qualifications deemed necessary for the various levels of responsibility

within the firm.
Review periodically the performance of the personnel and discuss with them their
progress within the firm.
Conduct firm programs to develop and maintain expertise in specialised areas and
industries.
Maintain a reference library and technical literature including details regarding current
developments in the office for ready reference.
Provide personnel with professional literature relating to current developments in
professional technical standards.
Conduct in-house seminars on various topics for the personnel.

Assignment
Audit work is to be assigned to personnel who have the degree of technical training and
proficiency required in the circumstances.
1
2
3

Prepare time budgets for audits to determine manpower requirements and to schedule
audit work.
Give appropriate consideration to both continuity and rotation when deploying staff to
assignments.
Consider the experience and training of the audit personnel in relation to the
complexity or other requirements of the audit.

Delegation
There is to be sufficient direction, supervision and review of work at all levels to provide
reasonable assurance that the work performed meets the appropriate standards of quality.
Assign responsibility for planning an audit. Involve appropriate personnel assigned to
the audit in the planning process.
Develop background information or review information obtained from prior audits and
update for changed circumstances.
Prepare audit programs for various areas of audit interest.
Determine manpower requirements and estimated time to complete the audit.
Consider current economic conditions affecting the client or its industry and their
potential effect on the conduct of the audit.
Develop guidelines for form and content of working papers.
Utilise standardised forms, checklists and questionnaires to the extent appropriate to
assist in the performance of audits.
Provide on-the-job training during performance of audits discuss with assistants the
relationship of the work they are performing to the audit as a whole
Encourage personnel to train and develop subordinates.

Consultation

Whenever necessary, consultation within or outside the firm is to occur with those who have
appropriate expertise.
Inform personnel of the firms consultation policies and procedures.
Specify areas requiring consultation because of the nature or complexity of the subject
matter.
Maintain or provide access to adequate reference libraries and other authoritative
sources.
Maintain consultation arrangements with other firms and individuals where necessary
to supplement firms resources.
Maintain subject files containing the result of consultation for reference and research
purposes.
Designate specialists for particular industries.

Acceptance and retention of clients

An evaluation of prospective clients and a review, on an ongoing basis, of existing clients is to
be conducted. The firms independence and ability to serve the client properly and the
integrity of the clients management should be considered.
Obtain and review available financial statements regarding the prospective client.
Inquire of third parties as to any information regarding the prospective client. The
inquiries may be directed to legal advisors, bankers and others.
Communicate with the predecessor auditor and make inquiries regarding the integrity
of management, accounting policies, audit procedures and other significant matters.
Consider circumstances, which would cause the firm to regard the engagement as one
requiring special attention or presenting unusual risks.
1. Determine that the acceptance of the client would not violate codes of
professional
2. 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.

The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion.
1
2

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
1. Reliability of audit evidence can be assessed as follows:
2. -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.
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.
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.

2
3
4
5
6

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.
1. The following are the objectives of working papers: -Assist in the planning and
performance of the audit -Assist in the supervision and review of the audit work
-Record the audit evidence resulting from the audit work performed to support the
2. auditors opinion.
Working papers should include the auditors reasoning on all significant matters,
which require the exercise of judgment, together with the auditors conclusion thereon.
The use of standardised working papers, for example, checklists, specimen letters, may
improve the efficiency with which such working papers are prepared and reviewed.
They facilitate the delegation of work while providing a means to control its quality.
To improve efficiency, the auditor may utilise schedules, analyses and other
documentation prepared by the company. In such cases the auditor would need to be
satisfied that those working papers have been properly prepared.
The working papers should include indications of the work undertaken for particular
sections.
Working Papers ordinarily include the following: -Engagement letter. -Evidence of the
planning process and audit programs. -Information concerning the legal and
organisational structure of the company -Evidence of the auditors understanding of
the accounting and internal control
systems. -Evidence of inherent and control risk assessments. -Extracts or
copies of important legal documents, agreements and minutes.
-Evidence of the auditors consideration of the work of internal auditing and
conclusions reached. -Analyses of significant ratios and trends. -Analyses of

transactions and balances. -Record of nature, timing and extent of the audit procedures
performed and the
results thereof. -Evidence that the work performed by assistants was supervised and
reviewed. -An indication as to who performed the audit procedures and when they were
performed.-Copies of communication with other auditors, experts and third parties.Management letter.-Representation letter.-Conclusions drawn from the audit evidence
obtained.-Copies of the financial statements and auditors report.-Working papers should

be adequately referenced and cross-referenced.

1

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.

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.
1. Examples of analytical procedures include:
2. -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.
1

2
3

The auditor should apply analytical procedures at the planning stage to assist in
understanding the business and in identifying areas of potential risk.
1. 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.
2. - 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.

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.
1
2

6
7

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.

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.

When designing audit procedures, the auditor should determine appropriate means for
selecting items for testing so as to gather audit evidence to meet the objectives of audit test.
Audit sampling (Sampling) involves the application of audit procedures to less than 100%
of items within an account balance or class of transactions such that all sampling units have a
chance of selection. This will enable the auditor to obtain and evaluate audit evidence about
some characteristic of the items selected in order to form or assist in forming a conclusion
concerning the population from which the sample is drawn. Audit sampling can use either a
statistical or non-statistical approach.
When performing substantive test of details, audit sampling and other means of selecting
items for testing and gathering audit evidence may be used to verify one or more assertions
about a financial statement amount (for example, the existence of accounts receivable), or to
make an independent estimate of some amount (for example, the value of obsolete
inventories).
Selecting Items for Testing to Gather Audit Evidence
When designing audit procedures, the auditor should determine appropriate means of selecting
items for testing. The means available to the auditor are:
1. Selecting all items (100% examination)
The auditor may decide that it will be most appropriate to examine the entire
population of items that make up an account balance or class of transactions. 100%
examination is in unlikely in the case of test of control; however, it is more common
for substantive procedures. For example 100% examination may be appropriate when
population constitutes a small number of large value items, when both inherent and
control risks are high and other means do not provide sufficient appropriate audit
evidence, or when the repetitive nature of a calculation or other process performed by
a computer information system makes a 100% examination cost effective.
2. Selecting specific items
The auditor may decide to select specific items from a population based on such factor
as knowledge of the client business, preliminary assessment of inherent and control
risk, and the characteristics of the population being tested. The judgmental selection of
specific items is subject to non-sampling risk.
3. Audit Sampling

The auditor may decide to apply audit sampling to an account balance or class of
transactions. Audit sampling can be applied using either non-statistical or statistical
sampling methods.
The auditor should select items for the sample with the expectation that all sampling units in
the population have a chance of selection.
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.

The auditor should consider the effect of subsequent events on the financial statements and on
the auditors report.
1
2

The auditor should perform procedures designed to obtain sufficient evidence that all
events up to the date of the auditors report that may require adjustment of, or
disclosure in, the financial statements have been identified.
The procedures to identify events that may require adjustment, should be performed as
near as practicable to the date of the audit report, include:
-Reviewing procedures management has established to ensure that subsequent events
are identified
-Reading minutes of the meetings of shareholders and the board of directors held after
the balance sheet date
-Reading the companys latest available financial statements, including budgets, cash
flows and other related reports
-Inquiring or extending previous oral or written inquiries, of the companys lawyers
concerning litigation and claims
-

Inquiring of management as to whether any subsequent events have occurred

which might effect the financial statements. Such inquiries include:

1
2
3
4
5
6

The current status of items that were accounted for on the basis of preliminary or
inconclusive data
Whether new commitments, borrowings or guarantees have been entered into
Whether sales of assets have occurred or are planned
Whether the issue of new shares or an agreement to merge or liquidate has been made
or is planned
Whether there have been any developments regarding risk areas and contingencies
When the auditor becomes aware of events which materially affect the financial
statements, the auditor should consider whether such events are properly accounted for
and adequately disclosed in the financial statements

The auditor should obtain appropriate representations from management.

The auditor should obtain evidence that management acknowledges its responsibility
for the fair presentation of the financial statements and has approved the financial
statements.
Evidence may be in the form of minutes of meetings of the board of directors, written
representation from management or a signed copy of the financial statements.
The auditor should obtain written representations from management on matters
material to the financial statements when other audit evidence does not exist.
Representations by management cannot be a substitute for other audit evidence that the
auditor could reasonably expect to be available. If the auditor is unable to obtain
sufficient audit evidence regarding a material matter and such evidence is expected to
be available, this will constitute a limitation in scope of the audit, even if a
representation from management has been received.
The auditor should include in audit working papers evidence of managements
representations in the form of a summary of oral discussions with management,
however written representations constitute better audit evidence.
A representation letter is commonly used it should be addressed to the auditor,
contain specified information and be appropriately dated and signed. The date should
be the same as the date of the audit report. It should be signed by the members of
management who have primary responsibility for entity and its financial aspects
(Ordinarily the senior executive officer and the senior financial officer).
If the management refuses to provide a representation that the auditor considers
necessary, this constitutes a scope limitation and the auditor should express a qualified
opinion or a disclaimer of opinion.

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.

1
2
3

The entitys continuance as a going concern for the foreseeable future, generally a
period not to exceed one year after period end, is assumed in the preparation of
financial statements in the absence of information to the contrary.
The auditor should consider the risk that the going concern assumption may no longer
be appropriate
Indications of the same include:
-

net liability or net current liability position

fixed term borrowings approaching maturity without prospects of renewal or
repayment or excessive reliance on short term borrowings to finance long term
assets
adverse key financial ratios
substantial operating losses
inability to pay creditors on due dates
loss of key management without replacement
loss of a major market or principal supplier
pending legal proceedings which could result in large payments

The auditor should carry out procedures to resolve doubt over the companys ability to
continue in operation for the foreseeable future.
Such procedures include:
-

analyse and discuss cash flow, profit and other relevant forecasts
review events after the period end
analyse and discuss the latest interim financial statements
review terms of loan agreements and ensure none have been breached
refer to minutes of directors and shareholders meetings
inquire of the entitys lawyer regarding litigation and claims
confirm the existence, legality and enforceability of arrangements to provide or
maintain financial support with related and third parties and assess the financial
ability of such parties to provide additional funds

If in the auditors judgement, the going concern assumption is appropriate because of

mitigating factors, the auditor should consider whether such plans need to be disclosed
in the financial statements. If adequate disclosure is not made, the auditor should
express a qualified or adverse opinion.
If, in the auditors judgement, the going concern question is not satisfactorily resolved,
the auditor would consider whether appropriate disclosure of such has been made. If
adequate disclosure is made, the auditor should express an unqualified opinion and
modify the auditors report by adding an emphasis of matter paragraph that highlights
the going concern problem by drawing attention to the note in the financial statements.
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.

The auditor should consider materiality and its relationship with audit risk when conducting
an audit.
1

2
3
4
5
6

Information is material if its omission or misstatement could influence the economic

decisions of users taken on the basis of the financial statements. Materiality depends
on the size of the item or error judged in the particular circumstances of its omission or
misstatement. Thus, materiality provides a threshold or cut-off point rather than being
a primary qualitative characteristic which information must have if it is to be useful.
At the planning stage the auditor establishes an acceptable materiality level so as to
detect quantitatively material misstatements. However, qualitative misstatements need
to be considered as well, for example, failure to disclose an accounting policy.
The auditor needs to consider the possibility of misstatements of relatively small
amounts that, cumulatively, could have a material effect on the financial statements.
The higher the materiality level the lower the audit risk audit procedures are
determined on this basis.
In evaluating the fair presentation of the financial statements the auditor should assess
whether the aggregate of uncorrected misstatements that have been identified during
the audit is material.
If management refuses to adjust the financial statements and the results of extended
audit procedures do not enable the auditor to conclude that the aggregate of
uncorrected misstatements is not material, the auditor should consider the appropriate
modification to the auditors report.
If the auditor concludes that the misstatements may be material, the auditor needs to
consider reducing audit risk by extending audit procedures or requesting management
to adjust the financial statements.

For initial audit engagements, the auditor should obtain sufficient appropriate audit evidence
that:
1
2
3
4
5

The opening balances do not contain misstatements that materially affect the current
periods financial statements
The prior periods closing balances have been correctly brought forward to the current
period
Appropriate accounting policies are consistently applied
The auditor may be able to obtain sufficient evidence regarding the opening balances
by reviewing the predecessor auditors working papers.
If the prior periods financial statements were not audited, other procedures must be
adopted:
-Stock: attending a physical stock-take and reconciling it back to the opening
inventory quantities, testing valuation of opening inventory and testing gross profit
and cut-off.

-Fixed assets: investments, long term debts: examining the records underlying the
opening balances.
-Debtors/Creditors: receipts and payments during the period will verify the existence
of the opening balance
If after performing procedures, the auditor is unable to obtain sufficient appropriate
audit evidence concerning opening balances, the auditors report should include
qualified opinion or disclaimer of opinion as appropriate.
If the effect of the misstatement is not properly accounted for and adequately
disclosed, the auditor should express a qualified or an adverse opinion, as appropriate.
If the current periods accounting policies have not been consistently appliedin relation
to opening balances and if the changes has not been properly accounted for and
adequately disclosed, the auditor should express a qualified opinion or an adverse
opinion, as appropriate.
However, if a modification regarding the prior periods financial statements, the
auditor should modify the current auditors report accordingly.

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.
1
2
3
4

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.
1. 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
2. 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.

QUALITY CONTROL REVIEW COMMITTEE:

Chairman:
Mr. Ahmed Dawood Patel
Members:
Mr. Amir Jamal Abbasi Mr. M. Iqbal Ahmed Mr. Usman Ghani Akbandi Mr. Mohammad
Basheer Mr. Mushtaq Ali Hirani Mr. Majeed Uddin Khan Mr. Fazal Mahmood Mr. Aqueel
Ebrahim Merchant Mr. Muhammad Naseem Syed Mohammad Rehan Mr. Asad Ali Shah Mr.
Adnan Zaman Mr. Anis Wahab Zuberi

SUB-COMMITTEE ON AUDIT PRACTICES MANUAL

Chairman:
Mr. Asad Ali Shah
Members:
Mr. Ather Ali Mr. Hussain Lalani Mr. Saad Kaliya Mr. Shafiq Ahmed Mr. Sharjeel Butt Mr.
Mazhar H. Hameedi Mr. Nadeem Yousaf Adil