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AUDIT OF LISTED COMPANIES

COURSE OUTLINE

1. LISTED COMPANY - DEFINITION

2. DISCLOSURE REQUIREMENTS AS PER FOURTH SCHEDULE TO THE
COMPANIES ORDINANCE, 1984.

3. CODE OF CORPORATE GOVERNANCE

4. INTERNATIONAL ACCOUNTING STANDARDS AS APPLICABLE IN
PAKISTAN.

5. INTERNATIONAL STANDARDS ON AUDITING AS ADOPTED BY ICAP.

6. INTERPRETATIONS OF INTERNATIONAL ACCOUNTING STANDARDS
ISSUED BY STANDING INTERPRETATIONS COMMITTEE (S.I.C.)

7. RELATED SERVICES / INTERNATIONAL AUDITING PRACTICE
STATEMENTS.

8. ACCOUNTING TECHNICAL RELEASES ISSUED BY ICAP.

9. AUDITING TECHNICAL RELEASES ISSUED BY ICAP.

10. STATEMENTS OF STANDARD AUDITING PRACTICES.

11. STATEMENT OF STANDARD ACCOUNTING PRACTICES.

12. ACCOUNTS COMPLETION CHECK LIST.

13. AUDIT COMPLETION CHECKLIST.

14. SUBSEQUENT EVENTS REVIEW CHECKLIST.

15. GOING CONCERN REVIEW CHECKLIST.

Cont’d P/G 2
(-2-)

AUDIT OF LISTED COMPANIES
2. FOURTH SCHEDULE TO THE COMPANIES ORDINANCE,
1984.
(Text of the fourth schedule is annexed)

- Balance Sheet
The assets and liabilities shall be classified in the following order :-
i) Fixed Assets.
ii) Long Term Investments.
iii) Long Term Loans and Advances.
iv) Long Term Deposits, Prepayments and Deferred Costs.
v) Current Assets.
vi) Share Capital and Reserves.
vii) Surplus on Revaluation of Fixed Assets.
viii) Redeemable Capital.
ix) Debentures and Long Term Loans.
x) Liabilities against Assets Subject to Finance Lease.
xi) Deferred Liabilities.
xii) Long Term Deposits.
xiii) Current Liabilities.
xiv) Contingencies and Commitments.
- Profit & Loss Account
The income and expenditure shall be disclosed in the following order:
i) The gross turnover and deductions therefrom in respect of commission,
brokerage, discount.
income from various sources.
ii) Value of stock in trade as at the commencement and end of the financial
year.
iii) Expenditure on
* Stores and spares consumed.
* Fuel and power.
* Salaries, wages and benefits.
* Rent, rates & taxes.
* Insurance.
* Repairs & maintenance.
* Patents, copyrights, trade marks, designs, royalties and technical
assistance.
iv) Auditors remuneration.
v) Other expenses.
vi) Amount provided for depreciation.
vii) Various losses / expenditure including taxation.
vii) Proposed dividend.
Cont’d P/G 3

(-3-)
3) CODE OF CORPORATE GOVERNANCE
(Text of the code is annexed)

The Securities and Exchange Commission of Pakistan for the purpose of establishing
a framework of good corporate governance, directed the Stock Exchanges to insert
into their listing regulations the Code of Corporate Governance (The Code).

The Code deals with following issues / areas :

- Qualification and eligibility to act as a director.
- Tenure of office of directors.
- Responsibilities, powers and functions of Board of Directors.
- Meetings of the Board of Directors.
- Significant issues to be placed for decision by the Board of Directors.
- Orientation Courses for Directors.
- Chief Financial Officer (CFO) and Company Secretary
- Appointment and approval.
- Qualification.
- Requirement to attend board meetings.
- The Director's report to shareholders.
- Frequency of financial reporting.
- Responsibility for financial reporting and corporate compliance.
- Auditors not to hold shares.
- Audit Committee.
- Composition.
- Frequency of meetings.
- Attendance at meetings.
- Terms of reference.
- Reporting procedure.
- Internal Audit.

Cont’d P/G 4

(-4-)

4) INTERNATIONAL ACCOUNTING STANDARDS AS
APPLICABLE IN PAKISTAN

ISA-1 Presentation of Financial Statements
ISA-2 Inventories
ISA-7 Cash Flow Statements
ISA-8 Net Profit or Loss for the Period, Fundamental Errors and
Changes in Accounting Policies
ISA-10 Events after the Balance Sheet Date.
ISA-11 Construction Contracts
ISA-12 Income Taxes
ISA-14 Segment Reporting
ISA-15 Information Reflecting the Effects of Changing Prices
ISA-16 Property, Plant and Equipment.
ISA-17 Leases
ISA-18 Revenue
ISA-19 Employee Benefits.
ISA-20 Accounting for Government Grants and Disclosure of
Government Assistance.
ISA-21 The Effects of Changes in Foreign Exchange Rates
ISA-22 Business Combinations
ISA-23 Borrowing Costs
ISA-24 Related Party Disclosures
ISA-26 Accounting and Reporting by Retirement Benefit Plans.
ISA-27 Consolidated Financial Statements and Accounting for
Investments in Subsidiaries
ISA-28 Accounting for Investments in Associates
ISA-29 Financial Reporting in Hyper inflationery Economies
ISA-30 Disclosures in the Financial Statements of Banks and
Similar Financial Institutions.
ISA-31 Financial Reporting of Interests in Joint Ventures
ISA-32 Financial Instruments : Disclosure and Presentation.
ISA-33 Earnings per share
ISA-34 Interim Financial Reporting
ISA-35 Discontinuing Operations
ISA-36 Impairment of Assets.
ISA-37 Provisions, Contingent Liabilities and Contingent Assets.
ISA-38 Intangible Assets
ISA-39 Financial Instruments : Recognition and Measurement.
ISA-40 Investment Property
ISA-41 Agriculture

Cont’d P/G 5

(-5-)

5) INTERNATIONAL STANDARDS ON AUDITING AS ADOPTED
BY ICAP.

AS-1 Objectives and General Principles Governing an Audit of
Financial Statement.
AS-2 Terms of Audit Engagements..
AS-4 Planning
AS-5 Using the Work of Another Auditor.
AS-6 Risk Assessments and Internal Control.
AS-7 Quality Control for Audit Work.
AS-8 Audit Evidence
AS-9 Documentation
AS-10 Considering the Work of Internal Auditing
AS-11 The Auditor’s Responsibility to Consider Fraud and Error
in an Audit of Financial Statements.
AS-12 Analytical Procedures
AS-13 The Auditors' Report on Financial Statements.
AS-15 Auditing in a Computer Information System Environment.
AS-16 Computer Assisted Audit Techniques
AS-17 Related Parties
AS-18 Using the Work of an Expert.
AS-19 Audit Sampling and Other Selective Testing Procedures.
AS-21 Subsequent Events
AS-22 Management Representations
AS-23 Going Concern
AS-24 The Auditors' Report on Special Purpose Audit
Engagements.
AS-25 Audit Materiality.
AS-26 Audit of Accounting Estimates
AS-27 The Examination of Prospective Financial Information.
AS-28 Inittial Engagements - Opening Balance.
AS-30 Knowledge of the Business.
AS-31 Consideration of Laws and Regulations in an Audit of
Financial Statements.
AS-32 Comparatives.
AS-33 Communications of Audit Matters with those charged with
governance.
AS-34 External Confirmations

Cont’d P/G 6

(-6-)

6) INTERPRETATIONS OF INTERNATIONAL ACCOUNTING
STANDARDS - STANDING INTERPRETATIONS COMMITTEE
(S.I.C.)

SIC IAS SUBJECT MATTER
1 2 Consistency
2 23 Consistency
3 28 Elimination of unrealised profits and losses on
transactions with associate
5 32 Classification of Financial instruments.
6 Cost of modifying existing software.
7 21 Introduction of the Euro
8 1 First Time application of IAS's
9 22 Business Combination
10 20 Government Assistance
11 21 Capitalization of Losses resulting from severe
currency devaluation.
12 27 Consolidation - Special Purpose Entities.
13 31 Non Monetary contribution by venturers.
14 16 Compensation for the impairment or loss of items.
15 17 Operating leases - Incentives.
16 32 Treasury Shares.
17 32 Costs of an Equity Transaction
18 1 Consistency - Alternative Methods
19 21 & 29 Reporting Currency
20 27 Equity accounting method
21 12 Income Taxes
22 22 Business Combinations
23 16 Major Inspection or Overhaul costs.
24 33 Financial Instruments and Other Contracts that may
be settled in shares.
25 12 Changes in the tax status of an enterprise or its
shareholders.

Cont’d P/G 7

(-7-)

7) RELATED SERVICES / INTERNATIONAL AUDITING
PRACTICE STATEMENTS

RS-1 & 2 Engagements to review financial statements.

RS-3 Engagements to perform agreed upon procedures regarding
Financial Information.

RS-4 Engagement to Compile Financial Information

IAPC-1000 Inter-Bank Confirmation Procedure.
IAPC-1001 IT Environments - Stand Allow Personal Computer

IAPC-1002 IT Environment -On-Line Computer System

IAPC-1003 IT Environment - Data Base System

IAPC- 1004 The Relationship Between Bank Supervisors and External
Auditors

IAPC-1005 The Special Consideration in the Audit of Small Entities

IAPC-1006 The Audit of International Commercial Banks.

IAPC-1010 The Consideration of Environmental Matters in the Audit of
Financial Statements.

IAPC-1012 Auditing Derivative Financial Instruments.

Cont’d P/G 8

(-8-)

8) ACCOUNTING TECHNICAL RELEASES

(WD) TR-1 Capitalization of Interest on Loan
(WD) TR-2 Financial Statement Presentation - Credit Card
(WD) TR-3 Depreciation - Treatment in the Accounts of Companies
Enjoying Tax Holiday.
(WD) TR-4 Gratuity - Provision in the Accounts of a Company.
TR-5 IASC Standards - Council's Statement on Applicability
TR-6 Fixed Assets Register
(WD) TR-7 Treatment of Depreciation in the event of Revaluation of
Fixed Assets.
TR-8 Clarification regarding basis of calculation of Workers
Profit Participation Fund.
(WD) TR-9 Treatment of Post-Dated Cheques or Promissory Notes.
TR-10 Deferred Taxation
TR-11 Depreciation on Idle Fixed Assets
TR-12 Debt Extinguishment
(WD) TR-13 Accounting for Compensated Absences
TR-14 Revaluation of Fixed Assets - Accounting Treatment.
TR-15 Bonus Shares - Accounting Treatment
(WD) TR-16 Pending Litigation settled in favour of client after the
Balance Sheet Date
(WD) TR-17 Finished Pieces of Equipment hold by Manufacturer for
customers.
(WD) TR-18 Good Accounting Software
TR-19 Excise Duty - Accounting Treatment
TR-20 Accounting for Expenditure during Construction period
TR-21 Date of Commencement of Commercial Production
TR-22 Book Value per Share
TR-23 Accounting for Investments
TR-24 Exchange Risk Fee - Accounting Treatment
TR-25 Prudential Regulations for Banks
(WD) TR-26 Purchase of Export Quota - Accounting Treatment
TR-27 IAS-12 - Accounting for Taxes on Income.
TR-28 Golden Handshake Accounting.

WD = Withdrawn

Cont’d P/G 9

(-9-)

9) AUDITING TECHNICAL RELEASES

ATR-1 Only Members to sign audit documents.
(WD) ATR-2 Statement on the explanation of the word
communication
ATR-3 Incoming Auditors to help in during professional
dues of retiring auditors.
ATR-4 Audit of Government Corporations
(WD) ATR-5 Replying to enquiries for credit jobs.
ATR-6 Audit by ex-employee
ATR-7 Some glaring omissions by the Auditors pointed out
by CLA/SECP.
ATR-8 Preparation of Accounts from incomplete records
and report thereon as auditor.
ATR-9 Signing of correspondence and financial statements
by members.
ATR-10 Communication of consent by incoming auditors
ATR-11 Appointment of Auditor – I
ATR-12 Appointment of Auditor – II
ATR-13 Lien on books of accounts due to non-payment of
professional dues.
ATR-14 Minimum hourly charge-out rates for audit work by
practicing members.
ATR-15 Qualification in Auditors Report – Going concern
assumption for organization formed with a limited
life.

WD = Withdrawn

10. STATEMENT OF STANDARD AUDITING PRACTICE

SAP-1 Bank Reports for Audit Purposes
SAP-3 Verification of Inventories
SAP-5 Verification of Debtors balances confirmation by direct
communication.

11. STATEMENT OF STANDARD ACCOUNTING PRACTICE

SSAP-1 Classification of Stores & Spares

Cont’d P/G 10
(-10-)

12. 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.

2. Ensure that accounting period covered by the accounts is
correctly mentioned.

3. Para (b) (i) :
If there is any change in accounting policy(ies) para should
be amended by stating "except for the changes as stated in
note(s) with which we concur".

4. Statement 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)

5. Ensure 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.

Cont’d P/G 11

(-11-)
FINANCIAL STATEMENTS :

S. NO. DESCRIPTION FINAL DRAFT

1. 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.

2. 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 in 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.

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

5. Ensure that accumulated profit / loss brought forward in
profit and loss account is correct.

6. Ensure that un-appropriated balance of profit / loss
transferred to balance sheet is correct.

7. Ensure that the words "Contingencies and Commitments"
appear on the Balance Sheet.

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

9. Ensure that all accounting policies are consistently applied,
and if not, this fact is disclosed in 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 Adviser's 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.

Cont’d P/G 13
(-13-)

12. AUDIT COMPLETION CHECKLIST

CLIENT : YEAR ENDED

Each section of this checklist should be completed by the supervising senior / manager at the end of
each phase of the audit, prior to partner's review.
YES/NO/ INITIAL &
N.A. DATE
1. Has all the work been planned before the start of detailed
audit procedures and properly documented in the planning
file ?
2. Has the continuing accuracy of the accounting and internal
control systems been confirmed by walk-through procedures
or other means ? Have the necessary observations and
conclusion been documented?
3. Is all the audit work executed & documented in the
Execution File, including
1) Audit programs that are initialed, dated, and cross
referenced with each audit step performed during the
course of the audit ?
2) Lead schedules are completed and conclusions are
drawn on each financial statement component ?
3) Lead schedules are properly supported by the evidence
gathered during the course of the audit? Ensure that
they are properly referred and cross referenced with
supporting schedules.
4. Has the work of each audit staff been reviewed in detail by
the supervisory staff?
5. Have all matters raised in the last internal control
memorandum management letter been resolved / followed
up and the client's action recorded?
6. Has a management letter detailing weakness of accounting
and internal control systems in respect of the current visit
been drafted? Have client's comments been recorded ?
7. Have new client services opportunities, resulting from
internal control matters, arising during the audit been
identified and highlighted ?
8. Have all important matters been documented in the Audit
Execution File, including identified auditing and reporting
problems which may arise during final audit visit ?
10. Have confirmations relating to banks, lawyers, debtors
creditors et c. been obtained? If not, is the summary of the
same documented in the execution file & other alternative
procedures been applied?
11. Has final draft initialed accounts been referenced to the
working papers and documented in the Completion &
Reporting File ?
12. Have the workings of cash flow statement been documented
and properly referenced with final accounts ?
13. Has accounts completion checklist been filled out before
issuing initialed accounts to the client?
14. Has partner review notes & queries been properly disposed
off?
15. Have all significant matters relating to audit and other areas
of assignment been documented in the summary review
memorandum?
16. Have analytical review procedures were followed at overall
review stage and comments on the same been documented ?
17. Has a representation letter been drafted based on the firm's
latest standard letter ?
18. Has, letter to the board of directors been issued to the
management including areas, which needs to be
communicated to approved by the board of directors?
19. Has matters of important nature that needs to be considered
in the next audit are properly documented in the points
carried forward to next year?
20. Has an appropriate financial statements disclosure checklist
been completed?
21. Have subsequent event review checklist been filled out
covering evaluation of all possible post balance sheet event
up to the date of the auditor's report ?
22. Has going concern checklist been filled out to ensure that
going concern assumption is appropriate?
23. Have all adjustments been entered into the books of account
to make them agree with the draft financial statements?
24. Has review by the second partner been carried out (in case
of large clients or as per firm's policy) and proper evidence
of the same is documented in the completion and reporting
file?
25. Have all related party transactions (e.g., transactions with
directors and associated undertaking been identified and
effect of these transactions has considered ?

Prepared by (Supervising Senior Manager) Date

Reviewed by (Partner) Date

Cont’d P/G 15

(-15-)

CLIENT : Initial
Date
YEAR END : COMPLETED BY : ______
REVIEWED BY : _______
14. SUBSEQUENT EVENTS REVIEW CHECKLIST
Yes/No N.A.
(Any note on
separate
sheets)
EVENTS DISCOVERED UPTO SIGNING OF AUDIT REPORT

1. Adjustable Events :

A) Have under given possible events (alongwith checking procedures)
which may be adjusted been identified clearly, discussed with client's
officials and adjusted in accounts?

a) Subsequent determination of price of fixed assets purchase or
sale before the year end.

b) Property and investments : Evidence of permanent diminution
in value.

- See valuation certificate.

c) Stock and work-in-process: Subsequent sale proceeds for
evidencing of net realizable value at balance sheet date.

d) Long-term contracts : Estimated final result shows the
accrued profit thereon was materially inaccurate.

e) Adequacy of provision for bad debts : Evidence as to
collectability and negotiation with debtors.

f) Claims receivable : Negotiated at the balance sheet date.

g) Discovery of frauds and errors : Indicating financial
statement are incorrect.

h) Dividend receivable / payable : Declared after balance sheet
date.

Cont’d P/G 16

(-16-)

2. Non Adjustable Events : (Only disclose if material)

B) Have under noted possible events been discussed with client's officials
and disclosed in accounts in compliance with IAS-10?

a) Mergers and acquisitions of any business.
b) New issue of shares or acquisition of loan capital.
c) Acquisition or disposal of material assets or investments.
d) Major changes in market price of investments.
e) Losses of fixed assets or stocks as a result of catastrophe such as
fire and flood.
f) Opening / extending of trading activities.
g) Closing of significant part of trading activities not expected to close
at year-end.
h) Major exchange rate movements.
i) Effects 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 evidence 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.

Cont’d P/G 17

(-17-)

CLIENT : Initial
Date
YEAR END : COMPLETED BY : ______
REVIEWED BY : _______
15. GOING CONCERN REVIEW CHECKLIST
1. Have the following points been discussed with client and observed Yes/No N.A.
during the course of audit ? (Any note on
separate
sheets)
A) Indication for Company may not be able to pay its debts :

- Substantial operating losses in excess of owner equity.
- Heavy dependence on short-term finances for long-term needs.

- Working capital deficiency.

- Adverse key 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

Cont’d P/G 18

(-18-)

- 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.

- Changes in legislation or government policy.

2. Have the sufficient evidences been obtained for above said points?
(-1-)

AUDIT OF NON LISTED COMPANIES

COURSE OUTLINE

1. NON LISTED COMPANY - DEFINITION.

2. DISCLOSURE REQUIREMENTS AS PER FIFTH SCHEDULE TO THE
COMPANIES ORDINANCE, 1984.

3. DIFFERENCE BETWEEN DISCLOSURE REQUIREMENTS OF FOURTH
SCHEDULE AND FIFTH SCHEDULE.

4. APPLICABILITY OF INTERNATIONAL ACCOUNTING STANDARDS ON
UNLISTED PUBLIC COMPANIES AND PRIVATE LIMITED COMPANIES

Cont’d P/G 2

(-2-)
2. FIFTH SCHEDULE OF THE COMPANIES ORDINANCE, 1984
(Text of the fifth schedule is annexed)

- Balance Sheet
The assets and liabilities shall be classified in the following order :

i) Fixed Assets.
ii) Long Term Investments.
iii) Long Term Loans and Advances.
iv) Long Term Deposits, Prepayments and Deferred Costs.
v) Current Assets.
vi) Share Capital and Reserves.
vii) Surplus on Revaluation of Fixed Assets.
viii) Redeemable Capital.
ix) Debentures and Long-Term Loans.
x) Liabilities against Assets subject to Finance Lease.
xi) Defend Liabilities.
xii) Long Term Deposits.
xiii) Current Liabilities.
xiv) Contingencies and Commitments.

- Profit and Loss Account
The income and expenditure shall be disclosed in the following order:-

i) The gross turnover and deduction therefore in respect of commission,
brokerage, discount, etc ;
Income from various sources
ii) Value of stock in trade as at the commencement and end of the financial
year.
iii) Expenditure on :
* Stores and spares consumed.
* Fuel and power.
* Salaries, wages and benefits.
* Rent, Rates & taxes.
* Insurance.
* Repairs & maintenance.
* Patents, copyrights, trade marks, designs, royalties and technical
assistance.
iv) Auditors remuneration.
v) Donation
vi) Amount provided for depreciation.
vii) Various losses / expenditure including taxation.
viii) Proposed dividend.

Cont’d P/G 3

(-3-)

3. DIFFERENCE BETWEEN DISCLOSURE REQUIREMENTS OF
4TH SCHEDULE AND 5TH SCHEDULE
Disclosures regarding following information as required under fourth schedule (listed
companies) are not required under fifth schedule (non listed companies)

BALANCE SHEET :-

* Long-Term Investments

- The nature and extent of investment made.

- The name of company, modaraba, firm, Government, Municipal
Committee and local authority, in which investments are made.

- In case of investment in shares, classes and paid-up values.

- In case of investment in modaraba and redeemable capital, the number
and nominal values of certificates.

- In case of investment in debentures and bonds, the terms of redemption,
if any, and the rate of interest.

- The name of the chief executive, managing agent or modaraba company
in case of investments in unlisted companies and modarabas other than
subsidiary and associated companies.

- Percentage of the equity held by the company in an investee company
or modaraba or a controlled firm or other associated undertaking, where
it exceeds ten percent of the investee's total equity.

- Mode of valuation of investment.

* Long Term Loans and Advances
- The name of each borrower together with the amount of loans and
advances, the terms of loans and advances and the particulars of
collateral security held, if any; in case of loans and advances to
subsidiary and associated companies / undertakings.

- The aggregate amount of loans and advances to the directors chief
executive and executives together with the purposes and general terms
of repayment.

Cont’d P/G 4

(-4-)

- In respect of other loans and advances, the name of the borrower and
terms of repayment together with the particulars of collateral security
held, if any.

- In case of loans and advances to subsidiary and associated companies /
undertakings and to directors, chief executive and executives of the
company, the maximum aggregate amount of loans and advances
outstanding at any time since the date of incorporation or since the date
of the previous balance sheet, which ever is later.

* Long Term Deposits, Prepayments and deferred costs.

- In respect of each material item of prepayments and deferred cost, the
basis on which each item is being amortized or written off and in
respect of each item of deferred costs, the reasons for carrying forward
of such costs.

* Current Assets.

- In respect of trade debts, loans and advances due for repayments within
a period of twelve months from the date of the balance sheet and other
receivables, the maximum amount of debts at any time since the date of
incorporation or since the date of the previous balance sheet, whichever
is the later. Such maximum amounts to be calculated by reference to
month-end balance.

PROFIT & LOSS ACCOUNT :-

* Other expenses, showing separately every material item and the nature of each
such item. In the case of donations, where any director or his spouse has
interest in the donee, the names of such directors, their interest in the donee
and the names and address of all donees.

* The aggregate amount charged in the financial statements in respect of the
directors, chief executive, managing agents and executives the company as
fee, remuneration, allowances, commission, perquisites or benefits or in any
other form or manner and for any services rendered, separately for the
directors, chief executive, managing agents and executives together with the
number of such directors and executives, under appropriate heads.

Cont’d P/G 5

(-5-)

* In the case of sale of fixed assets otherwise than through a regular auction,
made to chief executive or a director or managing agent or an executive or a
share-holder holding not less than ten percent of the voting shares of the
company or any associated undertaking, irrespective of the value of assets, and
in the case of any other person, if the book value of the asset or assets exceeds
in the aggregate five thousand rupees, particulars of the assets and in aggregate
(a) cost or valuation, as the case may be (b) the book value, and (c) the sale
price and mode of disposal (e.g. by tender or negotiation) and the particulars
of the purchaser.
* Disclosure in respect of transactions with associated undertakings.

4. APPLICABILITY OF INTERNATIONAL ACCOUNTING
STANDARDS ON UNLISTED PUBLIC COMPANIES AND
PRIVATE LIMITED COMPANIES

The Section 234(3) of the Companies Ordinance, 1984 requires that every listed
company to comply with certain International Accounting Standards for the purpose
of preparing their annual accounts. The C.O. neither requires nor forbid the unlisted
public companies and private limited companies to comply with these IASs.
However, the preface to statements of IASs makes it very clear that IASs apply to the
published financial statements of every commercial, industrial or business enterprise
irrespective of its corporate and legal status.

Moreover, ICAP and ICMAP, as members have undertaken to support the objective of
IASC (to promote the acceptance and observances of IASs) by using their best
endeavours.

IASC has also does not distinguish between the legal and corporate status of the
companies and as such all companies have to comply with applicable IASs.
However, certain IASs such as IAS-14 "Segment Reporting" and IAS-33 "Earning per
Share" etc. have been specifically formulated for the enterprises whose securities are
publicly traded (listed companies) and as such these IASs shall not be applicable to
unlisted public companies and private limited companies.
(-1-)

AUDIT OF FUNDS

COURSE OUTLINE

1. FUND - DEFINITION

2. PROVIDENT FUND

3. GRATUITY FUND

Cont’d P/G 2

(-2-)
AUDIT OF FUNDS

1. FUND

Fund is defined under Fourth Schedule to the Companies Ordinance, 1984, as "Fund
in relation to any reserve, shall be used only where such a reserve is represented by
specifically earmarked investments or other assets realizable at not less than the
amount of the reserve

2. PROVIDENT FUND

What is Provident Fund ?

Provident fund is a fund established for the benefit of all permanent employees of an
organization. The fund is being contributed as a Trust and is being managed by the
trustees, whose decision shall be final and binding upon all the members.

Trustees

These include representatives of the Employer (Organization) and Employees
(member). The Trustees have entire control over the management of the Fund who
shall be vested with powers, authorities and direction.

Members

All the employees of the company being permanent employees, who have opted for
the membership of fund, are called members of the fund.

Concept

Every member contributes every month to the Fund an amount equal to 10% or such
other percentage as may be prescribed in the Provident Fund Rules, of his fixed
monthly salary. The contribution of each member is being deducted at the time of
payment of such monthly salary and being paid over to the fund.

The organization at the end of each month contribute and pay to the Fund a sum
equal to the aggregate contributions of all the members during the month.

Cont’d P/G 3

(-3-)

Recognized / Unrecognized
A Provident Fund Scheme which is registered under Part I of the Sixth Schedule to
the Income Tax Ordinance, 2001 shall be treated as recognized Provident Fund
Scheme. A Provident Fund Scheme which is not so registered, shall be treated as
unrecognized Provident Fund.

Section 227 of the Companies Ordinance, 1984

When a trust has been created by a company with respect to any Provident Fund, the
company shall be bound to collect the contributions of the employees concerned and
pay such contributions as well as its own contributions, to the trustees within fifteen
days from the date of collection, and thereupon, the obligation shall devolve on the
trustees and shall be discharged by them instead of the company.

A special account shall be opened by the company in a scheduled bank or in the
National Savings Schemes, in which all moneys contributed to Provident Fund,
whether by the company or by employees or any interest or profit received on
investments, shall be deposited and kept.

Moneys so received shall be invested in :

- Government Securities : or
- In bonds, redeemable capital, debt securities or instruments issued by
Pakistan Water and Power Development Authority and in listed
securities subject to the conditions as may be prescribed by SECP.

Employees' Provident Fund (Investment in listed Securities) Rules, 1996

Where it is decided to make investment, out of the provident fund constituted for the
employees of a company, in securities of the companies listed on any stock exchange
in Pakistan, such investment shall be subject to the following conditions, namely :-

i) Total investment in listed securities shall not exceed thirty percent of
the provident fund.

ii) Investment in shares or other listed securities of a particular company
shall not exceed five per cent of its paid up capital;

Cont’d P/G 4

(-4-)

iii) In the case of investment in the shares of listed companies, it shall be
made only where such companies :-

a) Have a minimum operational record of five years; and
b) Have paid not less than fifteen percent dividend to their share
holders during the three preceding consecutive years ;

iv) In the case of investment in securities other than shares of listed
companies, it shall not be made unless such securities have been rated
as an investment grade with minimum rating of "BBB" by a credit
rating company registered with the Authority under the Securities and
Exchange Ordinance, 1969 (XVII of 1969), and the rating is maintained
as such at the time of investment ; and

v) Investment shall not be made in a security if it is publicly known that
the issuer of the security has committed default while availing of any
financing facility.

3. GRATUITY FUND

What is Gratuity Fund?

Gratuity fund is a fund establisted for the benefit of all employers / workers,
fulfilling certain conditions of an organization. The fund is being constituted
as a Trust and being managed by the trustees, whose decision shall be final
and binding upon all the members.

Trustees

These include representatives of the Employer (Organization) and Employees
(member). The Trustees have entire control over the management of the Fund
who shall be vested with powers, authorities and direction.

Members

All the employees of the company being eligible employees, who have
opted for the membership of fund, are called members of the fund.

Who is entitled to Gratuity?
A person is entitled to gratuity if all these conditions are satisfied.

Cont’d P/G 5

(-5-)

i) If the organization has twenty or more workmen employed at any
day during the preceding twelve months.

ii) A person has to be a ‘workman’ as defined it section2 (i) of the West
Pakistan Industrial and Commercial Employment (Standing Orders)
Ordinance, 1968. Workmen means any person employed in any
industrial or commercial establishment to do any skilled or unskilled,
manual or clerical work, for hire or reward.
iii) Workmen’s length of employment or sevice should be of six months or
more. For any service period of less than six months in any year , no
gratuity is payable for that year.

Gratuity when payable:

i) On resignation by a workman; and
ii) Termination of service by the employer due to any reason other
than misconduct (whether the misconduct result in financial loss to
employer or not).

Rate of Gratuity
The rate of gratuity is thirty (30) days wages for every completed year of
service or for any period in ecess of six months in the same establishment.
Hence for a period of service which is six months or less no gratuity is
payable.

“Completed year of service” means a period of twelve months service
counted from the date of first appointment in the same establishment.It
does not means calendar year, financial year or any other period

What are wages?
Wages adminssible to a workman in the last month of service if he is a
fixed rate workman or the highest pay drawn during the last twelve
months in the case of peice rated workman.

Recognized / Unrecognized

A Gratutity Fund Scheme which is registered under Part III of the Sixth
Schedule to the Income Tax Ordinance, 2001 shall be treated as recognized
Gratuity Fund Scheme. A Gratuity Fund Scheme which is not so registered,
shall be treated as unrecognized Gratutity Fund.
(-1-)

International Accounting Standards - IAS - 18 to IAS - 30

COURSE OUTLINE :

- Subject Matters of IAS 18 TO IAS 30

Cont’d P/G 2

(-2-)
International Accounting Standards - IAS - 18 to IAS 30

SUBJECT MATTER

IAS – 18 Revenue
IAS – 19 Employee Benefits
IAS – 20 Accounting for Government Grants and Disclosure
of Government Assistance.
IAS – 21 The Effects of Changes in Foreign Exchange Rates.
IAS – 22 Business Combinations
IAS – 23 Borrowing Costs
IAS – 24 Related Party Disclosures
IAS – 26 Accounting and Reporting by Retirement Benefit
Plans.
IAS – 27 Consolidated Financial Statements and Accounting
for investments in Subsidiaries.
IAS – 28 Accounting for investments in Associates
IAS – 29 Financial Reporting in Hyperinflationery Economies.
IAS – 30 Disclosures in the Financial Statements of Banks and
Similar Financial Institutions.

Cont’d P/G 3

(-3-)

INTERNATIONAL ACCOUNTING STANDARD IAS - 18

♦ Objective :
To prescribe the accounting treatment of revenue arising from certain types of
transactions and events.

♦ Scope :
This standard should be applied in accounting for revenue arising from the
following transactions and events.

- the sale of goods;
- the rendering of services; and
- the use by others of enterprise assets yielding interest, royalties and dividends.

♦ Definition :
'Revenue' is the gross inflow of economic benefits during the period arising in the
course of the ordinary activities of an enterprise when those inflows result in
increases in equity, other than increases relating to contribution from equity
participants.

'Fair Value' is the amount for which an asset could be exchanged or a liability
settled, between knowledgeable, willing parties in an arm's length transaction.

♦ Measurement of Revenue :
Revenue should be measured at the fair value of the consideration received or
receivable.

Fair value is the market value taking into account the amount of any trade
discount and relate allowed by the enterprise.

When goods or services are exchanged or swapped for goods or services which
are of a similar nature and value, the exchange is not regarded as a transaction
which generates revenue. This is often the case with commodities like oil or milk
where suppliers exchange or swap inventories in various locations to fulfill
demand on a timely basis in a particular location.

When goods are sold or services are rendered in exchange for dissimilar goods or
services, the exchange is regarded as a transaction which generates revenue. The
revenue is measured at the fair value of the goods or services received, adjusted
by the amount of any cash or cash equivalents transferred.
Cont’d P/G 4

(-4-)

Revenue Recognition

- Sale of Goods
When
a) the enterprise has transferred to the buyer the significant risks and
rewards of ownership of the goods.

b) the enterprises retains neither continuing managerial involvement to the
degree usually associated with ownership nor effective control over the
goods sold;

c) the amount of revenue can be measured reliably;

d) It is probable that the economic benefits associated with the transaction
will flow to the enterprise; and

e) the costs incurred or to be incurred in respect of the transaction can be
measured reliably.

- Rendering of Services
When

a) the amount of revenue can be measured reliably;

b) it is probable that the economic benefits associated with the transaction
will flow to the enterprise;

c) the stage of completion of the transaction at the balance sheet date can
be measured reliably; and

d) the costs incurred for the transaction and the costs to complete the
transaction can be measured reliably.

Cont’d P/G 5

(-5-)

- Interest, Royalties and Dividends
When

a) it is probable that the economic benefits associated with the transaction
will flow to the enterprise; and

b) the amount of revenue can be measured reliably.
Disclosure
An enterprise should disclose :

a) the accounting policies adopted for the recognition of revenue including
the methods adopted to determine the stage of completion of
transaction involving the rendering of services;

b) the amount of each significant category of revenue recognized during
the period including revenue arising from :

i) the sale of goods;
ii) the rendering of services;
iii) interest
iv) royalties;
v) dividends; and

c) the amount of revenue arising from exchanges of goods or services
included in each significant category of revenue.

Cont’d P/G 6

(-6-)

INTERNATIONAL ACCOUNTING STANDARD IAS - 19

EMPLOYEE BENEFITS

♦ Objective :
To prescribe the accounting and disclosure for employee benefits.

♦ Scope :
This standard should be applied by an employer in accounting for employee
benefits.
♦ Definition :
Employee benefits include :

- Short term employee benefits such as wages, salaries and social
security contribution, paid annual leaves and paid sick leaves, profit
sharing and bonuses (if payable within twelve months of the end of the
period) and non-monetary benefits (such as medical care, housing, cars
and free or subsidized goods or services) for current employees;

- Post employment benefits such as pension, other retirement benefits,
post employment life insurance and post employment medical care;

- Other long-term employee benefits, including long - service leave or
sabbatical leave, jubilee or other long service benefits, long term
disability benefits and if they are not payable wholly within twelve
months after the end of the period, profit sharing, bonuses and deferred
compensation;

- Termination benefits; and

- Equity compensation benefits.

♦ Distinction Between Defined Contribution Plans and Defined Benefit
Plans.

Under defined contribution plans, an enterprise pays fixed contribution into a
separate entity (a fund) and will have no legal or constructive obligation to pay
further contribution if the fund does not hold sufficient assets to pay all employee
benefits relating to employee service in the current and prior period. The standard
requires an enterprise to recognize contributions to a defined contribution plan
when an employee has rendered service in exchange for those contributions.
Cont’d P/G 7

(-7-)

All other post employment benefit plans are defined benefit plans. Defined
benefit plans may be unfunded, or they may be wholly or partly funded.
Accounting by an enterprise for defined benefit plans involves the following
steps.

a) using actuarial technique to make a reliable estimate of the amount of benefit
that employees have earned in return for their service in the current and prior
period.

b) discounting that benefit using the projected unit credit method in order to
determine the present value of the defined benefit obligation and the current
service cost.

c) determining the fair value of any plan assets;
d) determining the total amount of actuarial gains and losses and the amount of
those actuarial gains and losses that should be recognized;

e) where a plan has been introduced or changed, determining the resulting past
service cost; and

f) where a plan has been curtailed or settled, determining the resulting gain or
loss.

♦ Amount to be recognized in the balance sheet :
The amount recognized as a defined benefit liability should be the net total of the
following amounts:

a) the present value of the defined benefit obligation at the balance sheet date;

b) plus any actuarial gains less any actuarial losses not recognized;

c) minus any past service cost not yet recognised;

d) minus the fair value at the balance sheet date of plan assets (if any) out of
which the obligations are to be settled directly;

e) a reconciliation showing the movements during the period in the net liability
(or asset) recognised in the balance sheet;

f) the total expense recognised in the income statement for each of the following,
and the line items of the income statement in which they are included :

Cont’d P/G 8

(-8-)

i) Current service cost;
ii) Interest cost;
iii) the expected rates of return for the periods presented in the financial
statements on any reimbursement rights recognised as an asset;
iv) the expected rates of salary increase;
v) medical cost trend rates; and
vi) any other material actuarial assumption used.

An enterprise should disclose each actuarial assumption in absolute terms (for
example as an absolute percentage) and not just as a margin between different
percentages or other variables.
Cont’d P/G 9

(-9-)

INTERNATIONAL ACCOUNTING STANDARD IAS - 20
ACCOUNTING FOR GOVERNMENT GRANTS AND
DISCLOSURE OF GOVERNMENT ASSISTANCE
♦ Scope :
This standard should be applied in accounting for, and in the disclosure of,
government grants and in the disclosure of other forms of government assistance.
♦ Definition :
"Government grants" are assistance by government in the form of transfer of
resources to an enterprise in return for past or future compliance with certain
conditions relating to the operating activities of the enterprise. They exclude those
forms of government assistance which cannot reasonably have a value placed
upon them and transactions with government which cannot be distinguished from
the normal trading transactions of the enterprise.
"Government assistance" is action by government designed to provide an
economic benefit specific to an enterprise or range of enterprises qualifying under
certain criteria. Government assistance for the purpose of this standard does not
include benefits provided only indirectly through action affecting general trading
conditions, such as the provision of infrastructure in development areas or the
imposition of trading constraints on competitors.
♦ Recognition of Government Grant :
Government grants, including non-monetary grants at fair value, should not be
recognized until there is reasonable assurance that :
a) the enterprise will comply with the conditions attaching to them; and
b) the grants will be received
Government grants should be recognised as income over the periods necessary to
match them with the related costs which they are intended to compensate, on a
systematic basis. They should not be credited directly to shareholders interests.

♦ Presentation of Grants Related to Assets :
Government grants related to assets, including non-monetary grants at fair value,
should be presented in the balance sheet either by setting up the grant as deferred
income or by deducting the grant in arriving at the carrying amount of the asset.

♦ Presentation of Grants Related to Income :
Grants related to income are sometimes presented as a credit in the income
statement, either separately or under a general heading such as "Other income”
Alternatively, they are deducted in reporting the related expense.

Cont’d P/G 10

(-10-)

♦ Repayment of Government Grants :
A government grant that becomes repayable should be accounted for as a revision
to an accounting estimate.

Repayment of a grant related to income should be applied first against any
unamortised deferred credit set up in respect of the grant. To the extent that the
repayment exceeds any such deferred credit or where no defered credit exists, the
repayment should be recognised immediately as an expense.

Repayment of a grant related to an asset should be recorded by increasing the
carrying amount of the asset or reducing the deferred income balance by the
amount repayable. The cumulative additional depreciation that would have been
recognised to date as an expense in the absence of the grant should be recognised
immediately as an expense.

♦ Disclosure :
The following matters should be disclosed :
a) the accounting policy adopted for government grants, including the methods of
presentation adopted in the financial statements;

b) the nature and extent of government grants recognised in the financial
statements and an indication of other forms of government assistance from
which the enterprise has directly benefitted; and

c) unfulfilled conditions and other contingencies attaching to government
assistance that has been recognised.

Cont’d P/G 11
(-11-)

INTERNATIONAL ACCOUNTING STANDARD IAS - 21
THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

♦ Objective :
The principal issues in accounting for foreign currency transactions and foreign
operations are to decide which exchange rate to use and how to recognise in the
financial statements the financial effect of changes in exchange rates.

♦ Scope :
This standard should be applied :

a) in accounting for transaction in foreign currencies; and

b) in translating the financial statements of foreign operation that are
included in the financial statements of the enterprise by consolidation
or by the equity method.

♦ Definition :
- Foreign Operation is a subsidiary, associate, joint venture or branch of
the reporting enterprise, the activities of which are based or conducted
in a country other than the country of the reporting enterprise.

- Foreign entity is a foreign operation, the activities of which are not an
integral part of those of the reporting enterprise.

- Reporting currency is the currency used in presenting the financial
statements.

- Foreign Currency is a currency other than the reporting currency of an
enterprise.

- Exchange rate is the ratio for exchange of two currencies.

- Exchange difference' is the difference resulting from reporting the same
number of units of a foreign currency in the reporting currency at
different exchange rates.

- Closing rate is the spot exchange rate at the balance sheet date.

Cont’d P/G 12

(-12-)
♦ Initial recognition of foreign currency transaction :
Should be recognised by applying to the foreign currency amount the exchange
rate between the reporting currency and the foreign currency at the date of the
transaction.

♦ Reporting at subsequent balance sheet date :
At each balance sheet date :

a) foreign currency monetary items should be reported using the closing rate;

b) non-monetary items which are carried in terms of historical cost denominated
in a foreign currency should be reported using the exchange rate at the date of
the transaction; and

c) non-monetary items which are carried at fair value denominated in a foreign
currency should be reported using the exchange rates that existed when the
values were determined.

♦ Recognition of Exchange Differences :
Benchmark treatment.

Exchange differences using on the settlement of monetary items or on
reporting an enterprises monetary items at rates different from those at which
they were initially recorded during the period or reported in previous financial
statements, should be recognised as income or as expenses in the period is
which they arise.

Allowed alternative treatment.
Exchange differences may result from a severe devaluation or depreciation of
a currency against which there is no practical means of hedging and that
affects liabilities which cannot be settled and which arise directly on the recent
asquisition of an asset invoiced in a foreign currency. Such exchange
differences should be included in the carrying amount of the related asset,
provided that the adjusted carrying amount does not exceed the lower of the
replacement cost and the amount recoverable from the sale or use of the asset.

♦ Disclosure :
1. An enterprise should disclose :

Cont’d P/G 13

(-13-)
a) the amount of exchange differences included in the net profit or loss for the
period.

b) net exchange differences classified as equity as a separate component of
equity, and a reconciliation of the amount of such exchange differences at the
beginning and end of the period.

c) the amount of exchange differences arising during the period which is
included in the carrying amount of an asset in accordance with the allowed
alternative treatment.

2. When the reporting currency is different from the currency of the country in
which the enterprise is domiciled the reason for using a different currency
should be disclosed. The reason for any change in the reporting currency
should also be disclosed.

3. When there is a change in the classification of a significant foreign operation,
an enterprise should disclose :

a) the nature of the change in classification;
b) the reason for the change;
c) the impact of the change in classification on shareholder's equity;

Cont’d P/G 14

(-14-)

INTERNATIONAL ACCOUNTING STANDARD IAS - 22
BUSINESS COMBINATIONS
♦ Objective :
To prescribe the accounting treatment for business combination. The standard
covers both an acquisition of one enterprise by another and also the rare situation
of a uniting of interest when an acquirer cannot be identified.

♦ Definition :
A 'business combination' is the bringing together of separate enterprises into one
economic entity as a result of one enterprise merging with or obtaining control
over the net assets and operations of another enterprise.

An 'acquisition' is business combination in which one of the enterprises, the
acquirer, obtains control over the net assets and operations of another enterprise,
the acquiree, in exchange for the transfer of asset, incurrence of a liability or issue
of equity.

A 'uniting of interests' is a business combination in which the shareholders of the
combining enterprises combine control over the whole or effectively the whole, of
their net assets and operations to achieve a continuing mutual sharing in the risks
and benefits attaching to the combined entity such that neither party can be
identified as the acquirer.

'Control' is the power to govern the financial and operating policies of an
enterprise so as to obtain benefits from its activities.

'Fair value' is the amount for which an asset could be exchanged or a liability
settled between knowledgeable, willing parties in an arm’s length transaction.

♦ Acquisition :
In virtually all business combinations, one of the combining enterprises obtains
control over the other combining enterprise, thereby enabling an acquirer to be
identified. Control is presumed to be obtained when one of the combining
enterprises acquir morethan one half of the voting rights of the other combining
enterprise unless, in exceptional circumstances, it can be clearly demonstrated
that such ownership does not constitute control.

Cont’d P/G 15

(-15-)

♦ Uniting of Interest :
In exceptional circumtances, it may not be possible to identify an acquirer. Instead
of a dominant party emerging, the shareholders of the combining enterprises join
in a substantially equal arrangement to share control over the whole, or effectively
the whole, of their net assets and operations. In addition, the managements of the
combining enterprises participate in the management of the combined entity. As a
result, the shareholders of the combining enterprises share mutually in the risks
and benefits of the combined entity. Such a business combination is accounted for
as uniting of interests.

Cont’d P/G 16

(-16-)

INTERNATIONAL ACCOUNTING STANDARD IAS - 23
BORROWING COSTS

♦ Objective :
To prescribe the accounting treatment for borrowing costs. This standard
generally requires the immediate expensing of borrowing costs. However, the
standard permits as an allowed alternative treatment, the capitalization of
borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset.

♦ Definition :
"Borrowing Costs" are interest and other costs incurred by an enterprise in
connection with the borrowing of funds.

"A qualifying asset" is an asset that necessarily takes a substantial period of time
to get ready for its intended use or sale.

♦ Borrowing Costs May Include :
a) interest on bank overdrafts and short term and long term borrowings;

b) amortization of discounts or premium relating to borrowings;

c) amortization of ancillary costs incurred in connection with the
arrangement of borrowings;

d) Finance charges in respects of finance lease recognized in accordance
with IAS - 17, Lease; and

e) exchange differences arising from foreign currency borrowing to the
extent that they are regarded as an adjustment to interest costs.

♦ Examples of qualifying assets :
- Inventories that requires a substantial period of time to bring them to a
saleable condition;

- Manufacturing plants;

- Power generation facilities ; and

- investment properties
Cont’d P/G 17

(-17-)

♦ Recognition of Borrowing Costs :
Benchmark Treatment.

Borrowing cost should be recognized as an expense in the period in which
they are incurred.

Allowed Alternative Treatment

Borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset should be capitalized as part of the cost of
that asset. The amount of borrowing costs eligible for capitalization should be
determined in accordance with this standard.

♦ Disclosure :
Benchmark Treatment

The financial statements should disclose the accounting policy adopted for
borrowing costs.

Allowed Alternative Treatment

The financial statements should disclose :

a) the accounting policy adopted for borrowing costs;

b) the amount of borrowing costs capitalized during the period; and

c) the capitalization rate used to determine the amount of borrowing costs
eligible for capitalization.

Cont’d P/G 18

(-18-)

INTERNATIONAL ACCOUNTING STANDARD IAS - 24
RELATED PARTY DISCLOSURES

♦ Scope :
This standard should be applied in dealing with related parties and transactions
between a reporting enterprise and its related parties.
This standard deals only with those related party relationships described in.

(a) to (e) below :

a) enterprises that directly, or indirectly through one or more
intermediaries, control, or are controlled by or are under common
control with, the reporting enterprise. (This includes holding
companies, subsidiaries and fellow subsidiaries).

b) associates ;

c) individuals owning, directly or indirectly, an interest in the voting
power of the reporting enterprise that give them significant influence
over the enterprise, and close members of the family of any such
individual;

d) key management personnel including directors and officers of
companies and close members of the families of such individuals; and

e) enterprises in which a substantial interest in the voting power is owned,
directly or indirectly, by any person described in (c) or (d) or over
which such a person is able to exercise significant influence. This
includes enterprises owned by directors or major shareholders of the
reporting enterprise and enterprises that have a member of key
management in common with the reporting enterprise.

♦ Definition :
"Related Party", parties are considered to be related if one party has the ability to
control the other party or exercise significant influence over the other party in
making financial and operating decision.

"Related party transaction", a transfer of resources or obligations between related
parties, regardless of whether a price is charged.

"Control" ownership directly, or indirectly through subsidiaries, of more than one
half of the voting power of an enterprise, or a substantial interest in voting power
and the power to direct, by statute or agreement, the financial and operating
policies of the management of the enterprise.
Cont’d P/G 19

(-19-)

"Significant influence" participation in the financial and operating policy
decisions of an enterprise, but not control of those policies - significant influence
may be exercised in several ways, usually by representation on the board of
directors, but also by, for example, participation in the policy making process,
material inter company transactions, interchange of managerial personnel or
dependence on technical information, Significant influence may be gained by
share ownership, statute or agreement with share ownership. Significant influence
is presumed in accordance with the definition contained in IAS - 28, Accounting
for Investment in Associates.

♦ Examples of Situations where related party transactions may lead to
disclosures by a reporting enterprise in the period which they affects :

- purchases or sales of goods (finished or unfinished);
- purchases or sales of property and other assets;
- rendering or receiving of services;
- agency arrangements;
- leasing arrangement;
- transfer of research and development;
- licence agreements;
- finance (including loans and equity contribution in cash or in kind);
- guarantees and collaterals; and
- management contracts.

♦ Disclosure :
1. Related party relationship where control exists should be disclosed
irrespective of whether there have been transactions between the related
parties.

2. If there have been transactions between related parties, the reporting enterprise
should disclose the nature of the related party relationships as well as the types
of transactions and the elements of the transactions necessary for an
understanding of the financial statements.

3. Items of a similar nature may be disclosed in aggregate except when separate
disclosure is necessary for an understanding of the effects of related party
transactions on the financial statements of the reporting enterprise.

Cont’d P/G 20

(-20-)

INTERNATIONAL ACCOUNTING STANDARD IAS - 26
ACCOUNTING AND REPORTING BY RETIREMENT
BENEFIT PLANS

♦ Scope :
This standard should be applied in the reports of retirement benefits plans where
such reports are prepared.

♦ Definition :
'Retirement benefit plan' are arrangements whereby an enterprise provides
benefits for its employees on or after termination of service (either in the form of
an annual income or as a lump sum) when such benefits, or the employer's
contributions towards them, can be determined or estimated in advance of
retirement from the provision of a document or from the enterprise's practices.

'Defined contribution plans' are retirement benefits plans under which amounts to
be paid as retirement benefits are determined by contributions to a fund together
with investment earnings thereon.

'Defined benefit plans' are retirement benefit plans under which amounts to be
paid as retirement benefits are determined by reference to a formula usually based
on employees' earning and / or years of service.

♦ Defined Contribution Plans :
The report of a defined contribution plan should contain a statement of net assets
available for benefits and a description of the funding policy.

The objective of reporting by a defined contribution plan is periodically to
provide information about the plan and the performance of its investments. That
objective a usually achieved by providing a report including the following :

a) a description of significant activities for the period and the effect of any
changes relating to the plan, and its membership and terms and conditions;

b) statements reporting on the transaction and investment performance for the
period and the financial position of the plan at the end of the period; and

c) a description of the investment policies.

Cont’d P/G 21

(-21-)

♦ Defined Benefit Plans :
The Report of a defined benefit plan should contain either :

a) a statement that shows :

i) the net assets available for benefits;

ii) the actuarial present value of promised retirement benefits, distinguishing
between vested benefits and non-vested benefits; and;

iii) the resulting excess or deficit; or

b) a statement of net assets available for benefits including either :

i) a note disclosing the actuarial present value of promised retirement
benefits distinguishing between vested benefits and non-vested benefits; or
ii) a reference to this information in an accompanying actuarial report.

If an actuarial valuation has not been prepared at the date of the report, the most
recent valuation should be used as a base and the date of the valuation disclosed.

The actuarial present value of promised retirement benefits should be based on
the benefits promised under the terms of the plan on service rendered to date
using either current salary levels or projected salary levels with disclosure of the
basis used. The effect of any changes in actuarial assumption that have had a
significant effect on the actuarial present value of promised retirement benefits
should also be disclosed.

Cont’d P/G 22

(-22-)

♦ Disclosure :
The report of a retirement benefit plan, whether defined benefit or defined
contribution, should also contain the following information.

a) a statement of changes in net assets available for benefits;

b) a summary of significant accounting policies; and

c) a description of the plan and the effect of any changes in the plan during the
period.

The report of a retirement benefit plan contain a description of the plan, either as
part of the financial information or in a separate report. It may contain the
following :

a) the names of the employers and the employee groups covered;

b) the number of participants receiving benefits and the number of other
participants, classified as appropriate.
c) the type of plans-defined contribution or defined benefit;

d) a note as to whether participants contribute to the plan;

e) a description of the retirement benefits promised to participants;

f) a description of any plan termination terms; and

g) changes in items (a) to (f) during the period covered by the report.

Cont’d P/G 23

(-23-)

INTERNATIONAL ACCOUNTING STANDARDS IAS - 27
CONSOLIDATED FINANCIAL STATEMENTS
AND ACCOUNTING FOR
INVESTMENTS IN SUBSIDIARIES

♦ Scope :
This standard should be applied in the preparation and presentation of
consolidated financial statements for a group of enterprises under the control of a
parent. This standard should also be applied in accounting for investments in
subsidiaries in a parent's separate financial statements.

♦ Definitions :
'Control' is the power to govern the financial and operating policies of an
enterprise so as to obtain benefits from its activities.

A 'Subsidiary' is an enterprise that is controlled by another enterprise (known as
the parent)

A 'Parent' is an enterprise that has one or more subsidiaries.

A 'group' is a parent and all its subsidiaries.
'Consolidated financial statements' or the financial statements of a group
presented as those of a single enterprise.

'Minority interest' is that part of the net results of operations and of net assets of a
subsidiary attributable to interests which are not owned, directly or indirectly
through subsidiaries, by the parents.

♦ Presentation of Consolidated Financial Statement :
A parent should present consolidated financial statements.

A parent that is a wholly owned subsidiary or is virtually wholly owned, need not
present consolidated financial statements provided, in the case of one that is
virtually wholly owned, the parent obtains the approval of the owners of the
minority interest. Such a parent should disclose the reasons why consolidated
financial statements have not been presented together with the basis, on which
subsidiaries are accounted for in its separate financial statements. The name and
registered office of its parent that publishes consolidated financial statements
should also be disclosed.
Cont’d P/G 24

(-24-)

♦ When control is presumed to exist :
Control is presumed to exist when the parent owns, directly or indirectly through
subsidiaries, more than one half of the voting power of an enterprise unless, in
exceptional circumstances, it can be clearly demonstrated that such ownership
does not constitute control.

Control also exists even when the parent owns one half or less of the voting
power of an enterprise when there is :

a) power over more than one half of the voting rights by virtue of an agreement
with other investors;

b) power to govern the financial and operating policies of the enterprise under a
statute or an agreement;

c) power to appoint or remove the majority of the members of the board of
directors or equivalent governing body; or

d) power to cast the majority of votes at meetings of the board of directors or
equivalent governing body.

♦ Accounting for Investments in Subsidiaries in a
Parent's Separate Financial Statements :

In a parent's separate financial statements, investments in subsidiaries, that are
included in the consolidated financial statements should be either :
a) carried at cost ;

b) accounted for using the equity method as described in IAS-28, Accounting for
investments in associates; or

c) accounted for as available for sale financial assets as described in IAS - 39,
Financial Instruments; Recognition and Measurement.

Investments in subsidiaries that are excluded from consolidated financial
statements should be either :

a) carried at cost;

b) accounted for using the equity method as described in IAS - 28;

c) accounted for as available for sale financial asset as described in IAS - 39.

Cont’d P/G 25

(-25-)

♦ Disclosure :
a) in consolidated financial statements, a listing of significant subsidiaries
including the name, country of incorporation or residence, proportion of
ownership interest and, if different, proportion of voting power held;

b) in consolidated financial statements, where applicable ;

i) the reason for not consolidating a subsidiary;

ii) the nature of the relationship between the parent and a subsidiary of which
the parent does not own, directly or conductly through subsidiaries, more
than one half of the voting power;

iii) the name of an enterprise in which more than one half of the voting power
is owned, directly or indirectly through subsidiaries, but which, because of
the absence of control, is not a subsidiary;

iv) the effect of the acquisition or disposal of subsidiaries on the financial
position at the reporting date and on the corresponding amounts for the
preceeding period; and

c) in the parent's separate financial statements, a description of the method used
to account for subsidiaries.
Cont’d P/G 26

(-26-)

INTERNATIONAL ACCOUNTING STANDARD IAS - 28
ACCOUNTING FOR INVESTMENTS IN ASSOCIATES

♦ Scope :
This standard should be applied in accounting by an investor for investments in
association.

♦ Definition :
An 'associate' is an enterprise in which the investor has significant influence and
which is neither a subsidiary nor a joint venture of the investor.

'Significant Influence' is the power to participate in the financial and operating
policy decision of the investor but is not control over these policies.

'Control' is the power to govern the financial and operating policies of an
enterprise so as to obtain benefits from its activities.

'The equity method' is a method of accounting whereby the investment is initially
recorded at cost and adjusted thereafter for the post acquisition change in the
investor's share of net assets of the investee. The income statement reflects the
investor's share of the results of operations of the investee.

'The cost method' is a method of accounting whereby the investment is recorded
at cost. The income statement reflects income from the investment only to the
extent that the investor receives distribution from accumulated net profits of the
investee arising subsequent to the date of acquisition.

♦ Significant Influence :
The existence of significant influence by an investor is usually evidenced in one
or more of the following ways :

a) representation on the board of directors or equivalent governing body of the
investee;
b) participation in policy making processes;
c) material transaction between the investor and the investee;
d) inter change of managerial personnel; or
e) provision of essential technical information

Cont’d P/G 27

(-27-)

♦ Separate Financial Statements of the Investor :
An investment in an associate that is included in the separate financial statements
of an investor that issues consolidated financial statements and that is not held
exclusively with a view to its disposal in the near future should be either :

a) carried at cost;

b) accounted for using the equity method as described in this standard; or

c) accounted for as an available for sale financial asset as described in IAS - 39

An investment in an associate that is included in the financial statements of an
investor that does not issue consolidated financial statements should be either :

a) carried at cost ;

b) accounted for using the equity method as described in this standard if the
equity method would be appropriate for the associate if the investor issued
consolidated financial statements; or

c) accounted for under IAS - 39, as an available for sale financial asset or
financial asset held for trading, based on the definition in IAS-39.

♦ Disclosure :
The following disclosures should be made :

a) an appropriate listing and description of significant associates including the
proportion of ownership interest and, if different, the proportion of voting
power held; and

b) the methods used to account for such investments.
Cont’d P/G 28

(-28-)

INTERNATIONAL ACCOUNTING STANDARD IAS - 29
FINANCIAL REPORTING IN HYPER INFLATIONARY
ECONOMIES
♦ Scope :
This standard should be applied to the primary financial statements, including the
consolidated financial statements, of any enterprise that reports in the currency of
a hyper inflationery economy.
♦ Characteristics Indicating Hyper Inflation :
a) the general population prefers to keep its wealth in non-monetary assets or in a
relatively stable foreign currency. Amounts of local currency held are
immediately invested to maintain purchasing power;
b) the general population regards monetary amounts not in terms of the local
currency but in terms of a related stable foreign currency Prices may be quoted
in that currency.
c) sales and purchases an credit take place at prices that compensate for the
expected loss of purchasing power during the credit period even if the period
is short;
d) Interest rates, wages and prices are linked to a price index; and
e) the cumulative inflation rate over three years is approaching or exceeds 100%.
♦ Disclosure :
The following disclosures should be made :

a) the fact that the financial statements and the corresponding figures for
previous periods have been restated for the changes in the general purchasing
power of the reporting currency and, as a result, are stated in terms of the
measuring unit current at the balance sheet date;
b) whether the financial statements are based on a historical cost approach or a
current cost approach; and

c) the identity and level of the price index at the balance sheet date and the
movement in the index during the current and the previous reporting period.

Cont’d P/G 29

(-29-)

INTERNATIONAL ACCOUNTING STANDARD IAS - 30
DISCLOSURES IN THE FINANCIAL STATEMENTS OF
BANKS AND SIMILAR FINANCIAL INSTITUTIONS

♦ Scope :
This standard should be applied in the financial statements of banks and similar
financial institutions.

For the purposes of this standard, the term 'bank' includes all financial institutions,
one of whose principal activities is to take deposits and to borrow with the
objective of lending and investing and which are within the scope of banking or
similar legislation. The standard is relevant to such enterprises whether or not
they have the word 'bank' in their name.

♦ Accounting Policies :
In order to comply with IAS - 1, Presentation of Financial Statements, and thereby
enable users to understand the basis on which the financial statements of a bank
are prepared, accounting policies dealing with the following items may need to be
disclosed.

a) the recognition of the principal types of income;

b) the valuation of investment and dealing securities;

c) the distinction between those transactions and other events that result in the
recognition of assets and liabilities on the balance sheet and those transactions
and other events that only give rise to contingencies and commitments.

d) the basis for the determination of losses on loans and advances and for writing
off uncollectable loans and advances; and

e) The basis for the determination of charges for general banking risks and the
accounting treatment of such charges.
♦ Income Statement :
A bank should present an income statement which groups income and expenses
by nature and discloses the amounts of the principal types of income and
expenses.

In addition to the requirements of other International Accounting Standards, the
disclosures in the income statement or the notes to the financial statements,
should include, but are not limited to the following items of income and expenses.

Cont’d P/G 30

(-30-)

- Interest and similar income;
- Interest expense and similar charges;
- Dividend income;
- Fee and commission income;
- Fee and commission expenses;
- Gains less losses arising from dealing securities;
- Gains less losses arising from investment securities;
- Gains less losses arising from dealing in foreign currencies;
- Other operating income;
- Losses on loans and advances;
- General Administrative expenses; and other operating expenses.

♦ Balance Sheet :
A bank should present a balance sheet that groups assets and liabilities by nature
and lists them in an order that reflects their relative liquidity.

In addition to the requirements of other International Accounting Standards, the
disclosures in the balance sheet or the notes to the financial statements should
include, but are not limited to, the following assets and liabilities;

♦ Assets :
Cash and balance with the central bank;
Treasury bills and other bills eligible for rediscounting with the central bank;
Government and other securities held for dealing purposes;
Placements with, and loans and advances to, other banks;
Other money market placements;
Loans and advances to customers; and
investment securities.
♦ Liabilities :
Deposits from other banks;
Other money market deposits;
Amount owned to other depositors;
Certificates of deposits;
Promissory notes and other liabilities evidenced by paper; and other borrowed
funds.
(-1-)

INTERNATIONAL STANDARDS ON AUDITING
ISA-22 TO ISA-32

SUBJECT MATTER

ISA-22 Management Representations
ISA-23 Going Concern
ISA-24 The Auditors Report on Special Purpose Audit
Engagements
ISA-25 Audit Materiality
ISA-26 Audit of Accounting Estimates
ISA-27 The Examination of Prospective Financial
Information
ISA-28 Initial Engagements - Opening Balances
ISA-30 Knowledge of the Business
ISA-31 Consideration of laws and regulations in an audit
of financial statements
ISA-32 Comparatives

Cont’d P/G 2

(-2-)
ISA-22/IFAC-SM NO-580
MANAGEMENT REPRESENTATIONS
PURPOSE

To establish standards and provide guidance on the use of management
representations as audit evidence, the procedures to be applied in evaluating and
documentary management representations and the action to be taken if management
refuse to provide appropriate representations.

ACKNOWLEDGMENT BY MANAGEMENT OF ITS
RESPONSIBILITY FOR THE FINANCIAL STATEMENTS.

The auditor can obtain evidence of management's acknowledgment of its
responsibility for the fair presentation of the financial statements and approval from:

♦ Relevant minutes of meetings of the board of directors or similar body;

♦ By obtaining a written representation from management; or

♦ A signed copy of the financial statements.

BASIC ELEMENTS OF A MANAGEMENT REPRESENTATION LETTER
Addressee:
Would be the auditor
Date:
A management representation letter would ordinarily be dated the same date as the
auditors report. However, in certain circumstances, a separate representation letter
regarding specific transaction or other events may also be obtained during the course
of the audit at a date after the date of the auditors report.

Signature:
A management representation letter would ordinarily be signed by the members of
management who have primary responsibility for the entity and its financial aspects
(ordinarily the senior executive officer and the senior financial officer) based on the
best of their knowledge and belief.

Cont’d P/G 3

(-3-)

ISA-23/IFAC-SM NO-570
GOING CONCERN
PURPOSE

To establish standards and provide guidance on the auditors responsibility in the audit
of financial statements with respect to the going concern assumption used in the
preparation of the financial statements, including considering management's
assessment of the entity's ability to continue on a going concern.

GOING CONCERN ASSUMPTION

Under the going concern assumption, an entity is ordinarily viewed as continuing in
business for the foreseeable future with neither the intention nor the necessity of
liquidation, cease trading or seeking protection from creditors pursuant to laws or
regulations. Accordingly, assets and liabilities are recorded on the basis that the entity
will be able to realize its assets and discharge its liabilities in the normal course of
business.

EXAMPLES OF EVENTS OR CONDITIONS, WHICH INDIVIDUALLY
OR COLLECTIVELY MAY CAST SIGNIFICANT DOUBT ABOUT
THE GOING CONCERN ASSUMPTION.

Financial:
♦ Net liability or net current liability position.

♦ Negative operating cash flows.

♦ Adverse key financial ratios.

♦ Arrears or discontinuance of dividend.

♦ Inability to pay creditors on due dates.

♦ Inability to comply with the terms of loan agreements.

Operating:
♦ Loss of key management without replacement.

♦ Loss of a major market, franchise or principal supplier.

♦ Labour difficulties.

Cont’d P/G 4

(-4-)

Others:
♦ Non compliance with capital or other statutory requirements.

♦ Changes in legislation or government policy expected to adversely affect the
entity.

AUDITOR'S RESPONSIBILITY
The auditor's responsibility is to consider the appropriateness of management's use of
the going concern assumption in the preparation of financial statements and consider
whether there are material uncertainties about the entity's liability to continue as a
going concern that need to be disclosed in the financial statements. The auditor
considers the appropriateness of management's use of the going concern assumption.

ADDITIONAL AUDIT PROCEDURES WHEN EVENTS OR
CONDITIONS ARE IDENTIFIED.

When events or conditions have been identified which may cast significant doubt on
the entity's ability to continue as a going concern, the auditor should:

a) Review management's plans for future action based on its going concern
assessment. Such plans include plans to liquidate assets, borrow money or
restructure debt, reduce or delay expenditures, or increase capital.

b) Gather sufficient appropriate audit evidence to confirm or dispel whether or not a
material uncertainty exists through carrying out procedures considered necessary,
including considering the effect of any plans of management and other mitigating
factors, and

c) Seek written representation from management regarding its plans for future
action.

AUDIT CONCLUSION AND REPORTING
Going Concern assumption appropriate but a material uncertainty exists.

The auditor considers whether the financial statements:
a) Adequately describe the principal events or conditions that give rise to the
significant doubt on the entity's ability to continue in operation and management's
plans to deal with these events or conditions.

b) State clearly that there is a material uncertainty related to events or conditions
which may cast significant doubt on the entity's ability to continue as a going
concern and, therefore, that it may be unable to realize its assets and discharge its
liabilities in the normal course of business.

Cont’d P/G 5

(-5-)

If adequate disclosure is made in the financial statements, the auditor should express
an unqualified opinion but modify the auditors report by adding an emphasis of
matter paragraph that highlights the existence of a material uncertainty relating to the
event or condition that may cast significant doubt on the entity's ability to continue as
a going concern and draws attention to the note in the financial statements that
discloses the matters set out in above paragraph.
In extreme cases such as situations involving multiple material uncertainties that are
significant to the financial statements, the auditor may consider it appropriate to
express a disclaimer of opinion instead of adding an emphasis of matter paragraph.

If adequate disclosure is not made in the financial statements, the auditor should
express a qualified or adverse opinion, as appropriate. The report should include
specific reference to the fact that there is a material uncertainty that may cast
significant doubt about the entity's ability to continue as a going concern.

GOING CONCERN ASSUMPTION INAPPROPRIATE

If in the auditors judgment, the entity will not be able to continue as a going concern,
the auditor should express an adverse opinion if the financial statements have been
prepared on a going concern basis.

Cont’d P/G 6

(-6-)

ISA-24/IFAC-SM NO-800
THE AUDITOR'S REPORT ON SPECIAL PURPOSE
AUDIT ENGAGEMENTS
PURPOSE

To establish standards and provide guidance in connection with special purpose audit
engagements including:

♦ Financial statements prepared in accordance with a comprehensive basis of
accounting other than International Accounting Standards or national standards.
♦ Specified accounts, elements of accounts, or items in a financial statements
(Component of financial statements).

♦ Compliance with contractual agreements; and

♦ Summarized financial statements

GENERAL CONSIDERATION

Before undertaking a special purpose audit engagement the auditor should ensure
there is agreement with the client as to the exact nature of the engagement and the
form and content of the report to be issued.

When requested to report in a prescribed format, the auditor should consider the
substance and wording of the prescribed report and when necessary, should make
appropriate changes to conform to the requirements of this ISA, either by rewording
the form or by attaching a separate report.

The auditor should consider whether any significant interpretation of an agreement
on which the financial information is based are clearly disclosed in the financial
information.

REPORT ON FINANCIAL STATEMENTS PREPARED IN
ACCORDANCE WITH A COMPREHENSIVE BASIS OF
ACCOUNTING OTHER THAN INTERNATIONAL ACCOUNTING
STANDARDS OR NATIONAL STANDARDS.

The auditors report on financial statements prepared in accordance with another
comprehensive basis of accounting used or should refer to the note to the financial
statements giving that information. The opinion should state whether the financial
statements are prepared, in all material respects, in accordance with the identified
bases of accounting.
Cont’d P/G 7

(-7-)

If the financial statements prepared on an other comprehensive basis are not suitably
titled or the basis of accounting is not adequately disclosed, the auditor should issue
an appropriately modified report.

REPORTS ON A COMPONENT OF FINANCIAL STATEMENTS.

In determining the scope of the engagement, the auditor should consider those
financial statement items that are interrelated and which could materially affect the
information on which the audit opinion is to be expressed.

The auditors report on a component of financial statements should include a
statement that indicates the basis of accounting in accordance with which the
component is presented or refers to an agreement that specifies the basis. The opinion
should state whether the component is prepared, in all material respects, in
accordance with the identified basis of accounting.
When an adverse opinion or disclaimer of opinion on the entire financial statements
has been expressed, the auditor should report on components of the financial
statements only if those components are not so extensive as to constitute a major
portion of the financial statements.

REPORTS ON COMPLIANCE WITH CONTRACTUAL AGREEMENTS

Engagements to express an opinion as to an entity's compliance with contractual
agreements should be undertaken only when the overall aspects of compliance relate
to accounting and financial matters within the scope of the auditor's professional
competence. The report should state whether, in the auditors opinion, the entity has
complied with the particular provisions of the agreement.

REPORTS ON SUMMARIZED FINANCIAL STATEMENTS

Unless the auditor has expressed an audit opinion on the financial statements from
which the summarized financial statements were derived, the auditor should not
report on summarized financial statements.

Cont’d P/G 8

(-8-)

ISA-25/IFAC-SM NO-320
AUDIT MATERIALITY
PURPOSE

To establish standards and provide guidance on the concept of materiality and its
relationship with audit risk.

DEFINITION

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.

CONSIDERATION OF MATERIALITY
Materiality should be considered by the auditor when:

a) Determining the nature, timing and extent of audit procedures; and

b) Evaluating the effect of misstatements.

RELATIONSHIP BETWEEN MATERIALITY AND AUDIT RISK
There is an inverse relationship between materiality and the level of audit risk, that is,
the higher the materiality level, the lower the audit risk and vice versa. The auditor
takes the inverse relationship between materiality and audit risk into account when
determining the nature, timing and extent of audit procedures.

Cont’d P/G 9

(-9-)

ISA-26/IFAC-SM NO-540
AUDIT OF ACCOUNTING ESTIMATES
PURPOSE
To establish standards and provide guidance on the audit of accounting estimates
contained in financial statements.

WHAT IS ACCOUNTING ESTIMATE?

Accounting estimate means an approximation of the amount of an item in the absence
of a precise means of measurement.

Examples are:
♦ Allowances to reduce inventory and accounts receivable to their estimated
realizable value.

♦ Provision to allocate the cost of fixed assets over their estimated useful lives.

♦ Accrued revenue.

♦ Deferred tax.
♦ Provision for a loss from a lawsuit.

♦ Losses on construction contracts in progress.

♦ Provision to meet warranty claims.

AUDIT PROCEDURES

The auditor should obtain sufficient appropriate audit evidence as to whether an
accounting estimate is reasonable in the circumstances and, when required, is
appropriately disclosed.

The auditor should adopt one or a combination of the following approaches in the
audit of an accounting estimate:

a) Review and test the process used by management to develop the estimate;

b) Use an independent estimate for comparision with that prepared by management;
or

c) Review subsequent events which confirm the estimate made.

Cont’d P/G 10

(-10-)

ISA-27/IFAC-SM NO-810
THE EXAMINATION OF PROSPECTIVE
FINANCIAL INFORMATION
PURPOSE

To establish standards and provide guidance on engagements to examine and report
on prospective financial information including examination procedures for best
estimate and hypothetical assumptions.

WHAT IS PROSPECTIVE FINANCIAL INFORMATION?

Financial information based on assumptions about events that may occur in the future
and possible actions by an enterprise. It is highly subjective and its preparation
requires the exercise of considerable judgment. Prospective financial information can
be in the form of a forecast, a projection or a combination of both.

A 'forecast' means prospective financial information prepared on the basis of
assumptions as to future events which management expects to take place and the
actions management expects to take as of the date the information is prepared (best
estimate assumptions).

A 'projection' means prospective financial information prepared on the basis of:
a) Hypothetical assumptions about future events and management actions which are
not necessarily expected to take place, such as when some entities are in a start-up
phase or are considering a major change in the nature of operations; or

b) A mixture of best estimate and hypothetical assumption.

ACCEPTANCE OF ENGAGEMENT

Before accepting an engagement to examine prospective financial information, the
auditor would consider, amongst other things:

♦ The intended use of the information

♦ Whether the information will be for general or limited distribution

♦ The nature of the assumptions, that is, whether they are best estimate or
hypothetical assumptions.

♦ The elements to be included in the information

♦ The period covered by the information
Cont’d P/G 11

(-11-)

PERIOD COVERED

The auditor should consider the period of time covered by the prospective financial
information.

The following are some of the factors that are relevant to the auditor's consideration
of the period of time covered by the prospective financial information:

♦ Operating cycle, for example, in the case of a major construction project the time
required to complete the project may dictate the period covered.

♦ The degree of reliability of assumptions, for example, if the entity is introducing a
new product the prospective period covered could be short and broken into small
segments, such as weeks or months.

♦ The needs of users, for example, prospective financial information may be
prepared in connection with an application for a loan for the period of time
required to generate sufficient funds for repayment.

EXAMINATION PROCEDURES

When determining the nature, timing and extent of examination procedures, the
auditor's consideration should include:

a) The likelihood of material misstatement.

b) The knowledge obtained during any previous engagements;
c) Management's competence regarding the preparation of prospective financial
information;

d) The extent to which the prospective financial information is affected by the
management's judgment; and

e) The adequacy and reliability of the underlying data

PRESENTATION AND DISCLOSURE

The auditor will used to consider whether:

a) The presentation of prospective financial information is informative and not
misleading.

b) The accounting policies are clearly disclosed in the notes to the prospective
financial information.
Cont’d P/G 12

(-12-)

c) The assumption are adequately disclosed in the notes to the prospective financial
information.

d) The date as of which the prospective financial information was prepared is
disclosed; and

e) Any change in accounting policy since the most recent historical financial
statements is disclosed, along with the reason for the change and its effect on the
prospective financial information.

REPORT ON EXAMINATION OF PROSPECTIVE FINANCIAL
INFORMATION

♦ When the auditor believes that the presentation and disclosure of the prospective
financial information is not adequate, the auditor should express a qualified or
adverse opinion in the report on the prospective financial information, or
withdraw from the engagement, as appropriate.

♦ When the auditor believes that one or more significant assumptions do not
provide a reasonable basis for the prospective financial information on the basis
of best-estimate assumptions or that one or more significant assumptions do not
provide a reasonable basis for the prospective financial information given the
hypothetical assumption, the auditor should either express an adverse opinion in
the report on the prospective financial information, or withdraw from the
engagement.

♦ When the examination is affected by condition that preclude application of one or
more procedures considered necessary in the circumstances the auditor should
either withdraw from the engagement or disclaim the opinion and describe the
scope limitation in the report on the prospective financial information.
Cont’d P/G 13

(-13-)

ISA-28/IFAC-SM NO-510
INITIAL ENGAGEMENT - OPENING BALANCES
PURPOSE
To establish standards and provide guidance regarding opening balances when the
financial statements are audited for the first time or when the financial statements for
the prior period were audited by another auditor.

For initial audit engagement, the auditor should obtain sufficient appropriate audit
evidence that:

a) The opening balances do not contain misstatements that materially affect the
current period's financial statements.

b) The prior period's closing balances have been currently brought forward to the
current period or, when appropriate, have been restated; and

c) Appropriate accounting policies are consistently applied or changes in accounting
polices have been properly accounted for and adequately disclosed.

OPENING BALANCES
Opening balances means those account balances which exist at the beginning of the
period. Opening balances are based upon the closing balances of the prior period and
reflect the effects of:
a) Transactions of prior periods; and

b) Accounting policies applied in the prior period

In an initial audit engagement, the auditor will not have previously obtained audit
evidence supporting such opening balances.
AUDIT PROCEDURES

The sufficiency and appropriateness of the audit evidence the auditor will need to
obtain regarding opening balances depends on such matters as:

♦ The accounting policies followed by the entity.

♦ Whether the prior period's financial statements were audited, and if so whether
the auditor's report was modified.

♦ The nature of the accounts and the risk of misstatement in the current period's
financial statements.

Cont’d P/G 14

(-14-)

♦ The materiality of the opening balances relative to the current period's financial
statements.

AUDIT CONCLUSION AND REPORTING

♦ If auditor is unable to obtain sufficient appropriate audit evidence concerning
opening balances, the auditor's report should include a qualified opinion, a
disclaimer of opinion or in those jurisdiction where it is permitted, an opinion
which is qualified or disclaimed regarding the results of operations and
unqualified regarding financial position.

♦ If the current period's accounting policies have not been consistently applied in
relation to opening balances and if the change has not been properly accounted
for and adequately disclosed, the auditor should express a qualified opinion or an
adverse opinion, as appropriate.
Cont’d P/G 15

(-15-)

ISA-30/IFAC-SM NO-310
KNOWLEDGE OF THE BUSINESS

PURPOSE

To establish standards and provide guidance on what is meant by a knowledge of the
business, why it is important to the auditor and to members of the audit staff working
on an engagement, why it is relevant to all phases of an audit, and how the auditor
obtains and uses that knowledge.

OBTAINING THE KNOWLEDGE

The auditor can obtain a knowledge of the industry and the entity from a number of
sources. For example:

♦ Previous experience with the entity and its industry.

♦ Discussion with people with the entity (for example directors and senior operating
personnel)

♦ Discussion with internal audit personnel and review of internal audit reports.

♦ Discussion with other auditors and with legal and other advisors who have
provided services to the entity or within the industry.

♦ Discussion with knowledgeable people outside the entity (for example, industry
economists, industry regulators, customers, suppliers, competitors).

♦ Publications related to the industry (for example, government statistics, surveys,
taxes, trade journals, reports prepared by banks and securities dealers, financial
newspaper).

♦ Legislation and regulation that significantly affect the entity.

♦ Visits to the entity's premises and plant facilities.

USING THE KNOWLEDGE
The auditor makes judgment about many matters throughout course of the audit
where knowledge of the business is important. For example:
♦ Assessing inherent risk and control risk.

♦ Considering business risks and management's response thereto.

♦ Developing the overall audit plan and the audit program.

Cont’d P/G 16

(-16-)

♦ Determining a materiality level and assessing whether the materiality level chosen
remain appropriate.

♦ Assessing audit evidence to establish its appropriateness and the validity of the
related financial statement assertions.

♦ Evaluating accounting estimates and management representation.

♦ Identifying areas where special audit consideration and skills may be necessary.

♦ Identifying related parties and related party transaction.
♦ Recognizing conflicting information (for example, contradictory representations).

♦ Recognizing unusual circumstances (for example, fraud and non compliance with
laws and regulations)

♦ Making informed inquiries and assessing the reasonableness of answers.

♦ Considering the appropriateness of accounting policies and financial statement
disclosures.
Cont’d P/G 17

(-17-)

ISA-31/IFAC-SM NO-250
CONSIDERATION OF LAWS AND REGULATIONS IN AN
AUDIT OF FINANCIAL STATEMENTS

PURPOSE
To establish standards and provide guidance on the auditor's responsibility to
consider laws and regulation in an audit of financial statements.

When planning and performing audit procedures and in evaluating and reporting the
results thereof, the auditor should recognize that non compliance by the entity with
laws and regulation may materially affect the financial statements.

WHAT IS NON COMPLIANCE?
The term 'non compliance' as used in this ISA refers to acts of omission or
commission by the entity being audited, either intentional or unintentional, which are
contrary to the prevailing laws or regulations. Such acts include transactions entered
into by, or in the name of, the entity or on its behalf by its management or employees.
For the purpose of this ISA, non compliance does not include personal misconduct
(unrelated to the business activities of the entity) by the entity's management or
employees.

RESPONSIBILITY OF MANAGEMENT FOR THE COMPLIANCE
WITH LAWS AND REGULATIONS.
It is management's responsibility to ensure that the entity's operations are conducted
in accordance with laws and regulations. The responsibility for the prevention and
detection of non compliance rests with management.

THE AUDITOR'S CONSIDERATION OF COMPLIANCE WITH LAWS
AND REGULATIONS.
The auditor is not, and cannot be held responsible for preventing noncompliance. The
fact that an annual audit is carried out may, however, act as a deterrant.

An audit is subject to the unavoidable risk that some material misstatements of the
financial statements will not be detected even though the audit is properly planned
and performed in accordance with ISA. This risk is higher with regard to material
misstatements resulting from noncompliance with laws and regulations due to factors
such as.
♦ The effectiveness of audit procedures is affected by the inherent limitations of the
accounting and internal control systems and by the use of testing.

Cont’d P/G 18

(-18-)

♦ Much of the evidence obtained by the auditor is persuasive rather than conclusive
in nature.

The auditor should plan and perform the audit with an attitude of professional
skepticism recognizing that the audit may reveal conditions or events that would lead
to questioning whether an entity is complying with laws or regulations.

In order to plan the audit, the auditor should obtain a general understanding of the
legal and regulatory framework applicable to the entity and the industry and how the
entity is complying with that framework. To obtain the general understanding of laws
and regulations, the auditor would ordinarily.

♦ Use the existing knowledge of the entity's industry and business.

♦ Inquire of management concerning the entity's policies and procedures regarding
compliance with laws and regulations.

♦ Inquire of management as to the laws or regulations that may be expected to have
a fundamental effect on the operations of the entity.

♦ Discuss with management the policies or procedures adopted for identifying
evaluating and accounting for litigation claims and assessments.

After obtaining the general understanding, the auditor should perform procedures to
help identify instances of non compliance with those laws and regulations where non
compliance should be considered when preparing financial statements, specifically:

♦ Inquiring of management as to whether the entity is in compliance with such laws
and regulations.

♦ Inspecting correspondence with the relevant licensing or regulatory authorities.

Further, the auditor should obtain sufficient appropriate audit evidence about
compliance with those laws and regulations generally recognized by the auditor to
have an effect on the determinations of material amounts and disclosures in financial
statements. The auditor should have a sufficient understanding of these laws and
regulations in order to consider them when auditing the assertions related to the
determination of the amounts to be recorded and the disclosures to be made.

The auditor should be alert to the fact that procedures applied for the purpose of
forming an opinion on the financial statements may bring instances of possible
noncompliance with laws and regulations to the auditors attention.

The auditor should obtain written representations that management has disclosed to
the auditor all known actual or possible noncompliance with laws and regulations
whose effects should be considered when preparing financial statements.
Cont’d P/G 19

(-19-)

PROCEDURES WHEN NONCOMPLIANCE IS DISCOVERED

When the auditor becomes aware of information concerning a possible instance of
noncompliance, the auditor should obtain an understanding of the nature of the act
and the circumstances in which it has occurred, and sufficient other information to
evaluate the possible effect on the financial statements.

When the auditor believes there may be noncompliance, the auditor should document
the finding and discuss them with management.

When adequate information about the suspected noncompliance cannot be obtained,
the auditor should consider the effect of the lack of audit evidence on the auditors
report.

The auditor should consider the implications of noncompliance in relation to other
aspects of the audit, particularly the reliability of management representations.

Cont’d P/G 20
(-20-)

ISA-32/IFAC-SM NO-710
COMPARATIVES
PURPOSE
To establish standards and provide guidance on the auditor's responsibility to
regarding comparatives.

WHAT ARE COMPARATIVES
The frameworks and methods of presentation are refered to in this standard as
follows:

a) Corresponding Figures where amounts and other disclosures for the
preceding period are included as part of the current period financial
statements, and are intended to be read in relation to the amounts and other
disclosures relating to the current period (refered to as “current period figures”
for the purpose of this ISA). These corresponding figures are not presented as
complete financial statements capable of standing alone, but are an integral
part of the current period financial statements intended to be read only in
relationship to the current period figures; and

b) Comparative Financial Statements where amounts and other disclosures
for the preceding period are included for comparison with the financial
statements of the current period, but do not form part of the current period
financial statements.

ESSENTIAL AUDIT REPORTING DIFFERENCES

a) For corresponding figures the auditor’s report only refers to the
financial statements for the current period; whereas

b) For comparative financial statements, the auditor’s report refers to each
period that financial statements are presented.

(-1-)
ACCOUNTING TECHNICAL RELEASES

SUBJECT MATTER

TR-5 IASC Standards, Council's Statement on
applicability
TR-6 Fixed Assets Register
TR-8 Clarification regarding basis of calculation of
Worker Profit Participation Fund.
TR-10 Deferred Taxation
TR-11 Depreciation on Idle Fixed Assets
TR-12 Debt Extinguishment
TR-14 Revaluation of fixed assets
TR-15 Accounting treatment - Bonus shares
TR-19 Accounting treatment - Excise duty
TR-20 Accounting for expenditure during construction
period
TR-21 Date of commencement of commercial
production.
TR-22 Book value per share
TR-23 Accounting for Investments
TR-24 Accounting treatment - Exchange risk fee
TR-25 Prudential Regulations for Banks
TR-27 IAS-12, Accounting for taxes on income
TR-28 Accounting for Golden Handshake

Cont’d P/G 2
(-2-)

TR-5 - IASC STANDARDS - COUNCIL'S STATEMENT ON
APPLICABILITY
ISSUE

Misunderstanding about the applicability of International Accounting Standards
(IASs) and the obligation with regard to the compliance with such Standard the
auditors carry while expressing on opinion on published financial statements which
have been fully defined in para 5 of the preface to statement of IASs and para 7 and 9
of the Framework for the Preparation and Presentation of Financial Statement issued
by International Accounting Standards Committee (IASC).

RECOMMENDATION

The auditor, while expressing an opinion on published financial statements, should
satisfy himself that they do comply with IASs in all material respects and that in the
event of any departure from or inconsistancy with such standards, the auditors report
should contain suitable qualification. It should however be emphasized that IASs do
not over ride the local statutory provisions under Companies Ordinance, 1984 and the
disclosure requirements under the Fourth and Fifth Schedules. Compliance with IASs
shall be mandatory in so far as such standards are not inconsistent with local
regulations or standards, directives or pronouncements issued by ICAP.

The terms financial statements covers balance sheets, income statements or profit and
loss accounts, cash flow statements or statements of fund flows, notes and other
statement and explanatory material which are identified as being part of the financial
statements. Financial Statements do not, however, include such items as reports by
directors, statements by the chairman, discussion and analysis by management and
similar items that may be included in a financial or annual report.

The users of financial statements are:

♦ Investors

♦ Employees

♦ Lenders

♦ Suppliers and other trade creditors

♦ Customers

♦ Government and their agencies

♦ Public
Cont’d P/G 3
(-3-)

TR-6 - FIXED ASSETS INVENTORY AND RECORDS
ISSUE

Section 230 of the Companies Ordinance, 1984 requires every company to keep
proper books of accounts with respect to a number of items which includes all assets
of the company. Fixed assets comprise a significant portion of a company's assets.
Except for the companies engaged in production, processing, manufacturing or
mining activities to which section 230(1) (2) applies and which under separate
costing rules are required to maintain separate fixed assets records, no guidance is
available for other companies.

RECOMMENDATION

Adequate itemized records of fixed assets should be maintained which at minimum
must indicate following particulars:

a) Description of each item.

b) Cost of the item.

c) The date of its acquisition.

d) Classification of the item.

e) The location and / or custodian of the item.

f) The rate of depreciation.

g) Accumulated depreciation.

h) Depreciation charge for the period.

i) The department / cost centre / product to which the depreciation in charged.

j) Date of revaluation (if any).

k) Revalued amount (if any) of the items.

l) Depreciation on revalued amount.

m) Accumulated depreciation on the revalued amount.

Moreover, physical verification of fixed assets should be carried out on a cyclical
basis according to a formal plan once in five years. The physical inventory should be
reconciled with the fixed assets records and adjusted accordingly.

Cont’d P/G 4
(-4-)

TR-8 - CLARIFICATION REGARDING BASIS OF
CALCULATION OF WORKERS PROFITS PARTICIPATION
FUND (WPPF)
ISSUE

Whether WPPF is to be calculated after or before charging it against the profits of the
year ?
For illustration purpose an example is given here under:

a) Profit of the Company Rs. 250,000
WPPF @ 5% of Rs. 250,000 Rs. 12,500

b) Profit of the Company Rs. 250,000
WPPF @ 5/105 Rs. 11,905

RECOMMENDATION

Contribution to WPPF is to be made on the basis of provision contained in clause (b)
of sub-section (1) of section 3 of Companies Profits (Workers' Participation) Act,
1968. This provides that the amount should be 5% of its profits as per audited
accounts. If there are no profits, no contribution is payable. Hence, this is in the
nature of an appropriation of profits.

Accordingly, method indicated in example (a) is correct and should be followed.

TR-10 – DEFERRED TAXATION
ISSUE

Whether or not any credit on account of depreciation charged in accounts on revised
value of revalued assets should be given for computing provision of deferred
taxation?

RECOMMENDATION

a) An enterprise which carries out a revaluation of its fixed assets in excess of
cost is not required or permitted to setup corresponding deferred taxation
account unless it is probable that potential tax liability will crystallise.
Such a probability can be foreseen only when the enterprise decides to sell
the assets and not before.

Cont’d P/G 5

(-5-)
b) When the potential tax liability is foreseen deferred tax on such sale could
be appropriated from surplus on revaluation.

c) No credit could be taken against the current tax charge from deferred tax
account by way of a claw back because provision for deferred tax for
potential tax liability is intended to meet such liability in case of sale only.

TR-11 - DEPRECIATION ON IDLE FIXED ASSETS
ISSUE

a) Whether depreciation should be charged on fixed assets which are idle?

RECOMMENDATION

Fixed assets in a business include assets in use and held with reasonable expectation
of these being used. Depreciation should, therefore, normally be charged on all fixed
assets. Temporarily idle, reserve or stand-by assets should also continue to be
depreciated.

If the assets are persistently idle, there is a need to review the remaining useful lives
of such assets in accordance with IAS 16 Property Plant and Equipment. IAS 16
provides that the useful lives of major depreciable assets or classes of depreciable
assets should be reviewed periodically and depreciation rates adjusted for the current
and future periods if expectations are significantly different from the previous
estimates.

ISSUE
b) Whether on assets used by a company in business or operation of seasonal nature,
depreciation be charged commensurate with the extent of their use in a season?

RECOMMENDATION
With regard to assets used in the operation of seasonal nature, the rates of
depreciation determined initially, impliedly take into account, the useful lives based
on such seasonal operation. The rate and consequently the amount of annual
depreciation so determined should thus not be adjusted further to commensurate with
the length of seasonal operation in an accounting period.

Cont’d P/G 6

(-6-)
TR-12 - DEBT EXTINGUISHMENT

ISSUE
This technical release explains circumstances for an extinguishment of debt, and the
reporting of gains and losses on extinguishment.

WHEN A DEBT IS CONSIDERED TO BE EXTINGUISHED
A debtor shall consider debt to be extinguished for financial reporting purpose in the
following circumstances:

a) The debtor pays the creditor and is relieved of all its obligations with respect to
the debt.

b) The debtor is legally released from being the primary obligor under the debt either
judicially or by the creditor and that the debtor will not be required to make future
payments with respect to the debt under any guarantees.

ACCOUNTING TREATMENT
Gains and losses from extinguishment of debt should be included in the
determination of net income and, if material, classified as an extraordinary or unusual
item. This shall apply whether an extinguishment is early or at scheduled maturity
date or late.

Gains or losses from extinguishment of debt, if material, should be described
sufficiently to enable users of financial statements to evaluate their significance.
Accordingly, a description of the extinguishment transaction, including the sources of
any funds used to extinguish debt, if it is practicable to identify the sources, shall be
disclosed in a single note to the financial statements or adequately cross-referenced if
in more than one note.

Cont’d P/G 7

(-7-)

TR-14 - ACCOUNTING FOR REVALUATION OF FIXED
ASSETS
ISSUE
The International Accounting Standard 16, Property, Plant and Equipment (PPE)
under the benchmark and allowed alternative treatments has given option to either
carry an item of PPE at its cost less any accumulated depreciation or at revalued
amount.

There is a conflict between IAS 16 and Companies Ordinance, 1984 regarding the
treatment of recognizing increase in carrying amount of assets. The Companies
Ordinance, 1984 in sub-section (2) of section 235 requires that except and to the
extent actually realized on disposal of the assets which are revalued, the surplus on
revaluation of fixed assets shall not be applied to set off or reduce any deficit or loss
whether past, current or future, or in any manner applies, adjusted or treated so as to
add to the income, profit or surplus of the company, or utilized directly or indirectly
by way of dividend or bonus. IAS – 16 in paragraph 37 however provides when an
assets carrying amount is increased as a result of a revaluation the increase should be
credited directly to equity under the heading of Revaluation Surplus. However a
revaluation increase should be recognized as income to the extent that it reverses a
revaluation decrease of the same asset previously recognized as an expense.

IAS – 16 in paragraph 33 provides two ways for adjusting accumulated depreciation
at the date of revaluation, either to (a) restate proportionately with the change in the
gross carrying amount of the assets of the revaluation equals its re-valued amount or
(b) eleminate against the gross carrying amount of the assets and the net amount
restated to the re-valued amount of the asset.

RECOMMENDATION
To recognize increase in assets’ carrying amount, the requirement of Companies
Ordinance, 1984 should be followed.

It is recommended that when an item of PPE is re-valued, any accumulated
depreciation at the date of revaluation should be credited to the asset amount.

In the first instance, generally the profits are appropriated and transferred to reserve
for issue of bonus share. The reserve is then utilized for issue of capital on
completion of necessary formalities.

Cont’d P/G 8

(-8-)

TR-15 - ACCOUNTING TREATMENT - BONUS SHARES
WHAT ARE BONUS SHARES?
Bonus shares are the shares issued by a company from distributable reserves to its
ordinary shareholders, without consideration, by way of either capitalization of its
profits or utilization of share premium account.
Issue of bonus shares is prompted mainly by desire to give the recipient shareholders
some separate evidence of part of their respective interests in undistributed profits
without distribution of cash which the board of directors deem necessary to retain in
the business.

ISSUE
How the issue of bonus shares should be accounted for by the Issuer and the
Recipient.

RECOMMENDATION
Issuer:
A bonus issue does not give rise to any change in either the Company's assets or its
respective shareholder’s proportionate interest therein. The Company issuing bonus
shares shall account for such shares by transferring from Reserves to Issued Share
Capital an amount equal to the par value of additional shares issued.

In the first instance, generally the profits are appropriated and transferred to Reserve
for issue of Bonus share. The Reserve is then utilized for issue of capital on
completion of necessary formalities.

Recipient:
Capitalization of accumulated profits by the issue of fully paid bonus shares by a
company does not infact change the net worth of that company and by the same token
does not add anything to the assets or income of the recipient shareholder. The
correct treatment of bonus shares, therefore, in the hands of the recipient would be
merely to add to the number of shares it owns without giving any monetary effect in
the accounts either in terms of cost or value thereof as no accretion in fact is taking
place in the hands of the recipient.

TR-19 - ACCOUNTING TREATMENT - EXCISE DUTY
ISSUE
Some of the industries follow the practice of charging excise duty to profit and loss
account treating the duty as period cost while a majority of companies recognize such
duty as element of manufacturing cost and allocate a portion of such costs to
inventory valuation:
Cont’d P/G 9
(-9-)

RECOMMENDATION
Paragraph 7 of IAS-2 'Inventories states:
" The cost of inventories should comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their present
location and condition".

Paragraph 8 of above IAS describes cost of purchase as:
" The costs of purchase of inventories comprise the purchase price, import
duties and other duties (other than those subsequently recoverable by the
enterprise from the taxing authorities), and transport, handling and other costs
directly attributable to the acquisition of finished goods, materials and
services. Trade discounts, rebates and other similar items are deducted in
determining the costs of purchase.

Excise duty is generally levied at rate fixed per unit, a percentage of value, or on
capacity basis. Irrespective of the basis of computation or time at which the duty is
collected, such duty is in the nature of a tax on production and manufacture of
excisable goods.

EXCISE DUTY ON PURCHASE:
Excise duty should be reported as an element of cost of sales or a part of the related
expenditure, as appropriate.

EXCISE DUTY ON PRODUCTION CAPACITY OR AS A FIXED
AMOUNT:
The amount of excise duty levied on the basis of production capacity or as a fixed
amount should be recognized as an element of cost of sales for the period to which
such levy relates to, thus treating it as a period cost.

TR-20 - ACCOUNTING FOR EXPENDITURE DURING
CONSTRUCTION PERIOD
ISSUE
How to treat expenditure incurred during construction period up to the date of
commencement of commercial production, if an enterprise is devoting substantially
all of its efforts in establishing a new project.

RECOMMENDATION
♦ Formation expenses such as preliminary expenses shall be written off during a
period not exceeding five years commencing from the financial year in which the
costs are incurred as provided in paragraph 5(c) of Part II of the Fourth Schedule
to the Companies Ordinance, 1984.
Cont’d P/G
10
(-10-)

♦ Direct project costs such as, invoice costs, import duties etc. should be
capitalized.

♦ Indirect costs such as general and administrative expenses, depreciation etc,
which are not attributable to a specific asset, shall be allocated to buildings and
plant and machinery in proportion to their respective costs.

♦ Borrowing costs such as financial charges shall be dealt with in accordance with
IAS 23 and provisions of the Companies Ordinance, 1984.

♦ Any revenues including profit on trial run earned during construction period shall
be set off against expenditure incurred during construction period.

TR-21 - DATE OF COMMENCEMENT OF COMMERCIAL
PRODUCTION
ISSUE
How to treat expenditure incurred during construction period up to the date of
commencement of commercial production, if an enterprise is devoting substantially
all of its efforts in establishing a new project.

RECOMMENDATION

Date of commencement of commercial production is the date when the plant is ready
for the production of intended products in commercially feasible quantities. The cut
off date so established is without regard when the plant actually commences
commercial production. Where the construction of an asset is completed in parts and
each part is capable of being used while construction continues on the other parts,
capitalization of costs for each part should cease as it is completed.

TR-22 - BOOK VALUE PER SHARE
ISSUE
Different practices and polices are being used for computing book value (break-up
value) of shares. For instance, in some cases all the assets including intangibles,
defered costs and fictitious assets are included in considering the book value without
regard to their recoverability. In some other cases, intangibles are excluded from the
shareholders equity. Practices also vary regarding adjustment of contingent and other
losses.

RECOMMENDATION
Book value per share in the equity capital of the company is the amount each share is
worth on the basis of carrying value per balance sheet, prepared in accordance with a
framework of recognized accounting standards.
Book value per share is computed by dividing shareholders equity with the number of
shares issued. Shareholders equity includes:
Cont’d P/G 11
(-11-)

♦ Paid-up capital

♦ Revenue reserves and retained earning, (less accumulated losses, if any)
after deducting contingent losses in accordance with IAS 37. "Provisions,
Contingent Liabilities and Contingent Assets”.

♦ Capital reserves

TR-24 - ACCOUNTING TREATMENT - EXCHANGE
RISK FEE
ISSUE

Whether the exchange risk fee paid on foreign currency loans acquired for capital
requirements be capitalized after commencement of commercial production or not.

RECOMMENDATION

Exchange risk fee is incurred in order to eliminate, or reduce substantially, the risk of
loss from changes in exchanges rates. This involves use of forward exchange contract
to establish the amount required at settlement date of transaction.

IAS 23', Borrowing Costs', provides that borrowing costs include exchange
differences arising from foreign currency borrowing to the extent that they are
regarded as an adjustment to interest costs. The exchange risk fee is therefore in the
nature of borrowing costs and its accounting treatment should be in accordance with
IAS 23. 'Borrowing Costs', Accordingly, exchange risk fee incurred by an entity after
commencement of commercial production should be recognized as an expense and
not be capitalized.

TR-25 – PRUDENTIAL REGULATIONS FOR BANKS
It deals with full scope audit, acceptance of assignment and applicability of TR to
prudential regulations for Non Banking Financial Institutions (NBFIS).

TR-27 – IAS – 12, ACCOUNTING FOR TAXES ON INCOME
It deals with applicability of section 80C, 80CC and 80D of the Income Tax
Oridinance, 1979 (now, Income Tax Ordinance, 2001), accounting for tax losses.

Cont’d P/G 12

(-12-)

TR-28 - ACCOUNTING FOR GOLDEN HANDSHAKE
To restructure the organization, a number of banks, financial institutions and public
and private sector corporations and companies are offering golden handshake to their
employees. Large amounts are involved in the golden handshake incentives. A
question has arisen whether the entire amount of golden handshake be accounted for
as a period cost or be treated as a deferred cost.

The matter has been examined by council of the institute and it has been decided to
issue following guidance in this respect:

a) In case the organization is being closed down, all such expenses will have to
be treated as period cost.

b) In case the purpose of golden handshake is downsizing / rightsizing, the
management of the organization concerned may treat such expenses as period
cost or deferred cost in the manner provided below.

c) In case such expenses are treated as period cost then those should be shown
separately as a line item in the profit and loss account with appropriate
disclosure in the notes to the accounts.

d) Such expenses may be treated as deferred cost only when it is probable that
future economic benefits associated with the scheme will flow to the
enterprise and:-

I. those benefits can be quantified as far as possible;
II. the period in which those benefits will flow can also be determined
reasonably, and
III. the Golden Handshake scheme showing the above elements has been
approved by the board of directors.

e) These deferred expenses should be amortized over the period the benefits are
expected to accrue restricted to a maximum period of five years including, the
year in which these are incurred and complete disclosure about such treatment
should be made in the notes to the financial statements, until such time the
deferred cost is fully amortized.

f) Subject to the limit of 5 year amortization as stated in the preceeding
paragraph, the carrying amount of deferred cost should be reviewed at every
balance sheet date and approved by the board of directors in order to assess
whether the future economic benefits as envisaged in the original scheme,
approved by the board of directors, are still available to the enterprise. When a
decline has occurred, the carrying amount should be reduced to the
recoverable amount, which should be amortised over the balance period.
Hence, the amount of reduction should be recognized as an expense
immediately.