Chapter no. 5, 6, 7 & 9 of the book

1. PRESENTATION OF SLIDES
BY: MEHROZE TARIQ #78
BBA (HONS) VII-B
TO: SIR AMIR HUSSAIN
PRINCIPLES OF AUDITING
BY PROF. KHWAJA AMJAD SAEED
Mehroze Tariq

2. CONTENTS:
 Chapter #05: Verification- General
 Chapter #06: Verification- Liabilities
 Chapter #07: Verification- Assets
 Chapter #09: Auditor of a Limited Company
All selected from the book:
Principles of Auditing,
by Prof. Khwaja Amjad Saeed
Mehroze Tariq

3. Chapter #05
Verification- General
Summary:
The chapter defines the need for
verification and suggests a six
point technique for verification.
Mehroze Tariq

4. NEED FOR VERIFICATION:
• Verification is the process carried out by the auditor
that would enable him to submit his report addresses
to the shareholders to his entire satisfaction.
• An auditor is required to submit a report to
shareholders mentioning whether the balance sheet is
a true & fair representative of company’s financial
position.
• Verification enables auditor to check possible change
of ownership, decreased asset value or its ceased
existence.
Mehroze Tariq

5. SIX POINT VERIFICATION TECHNIQUE:
1) Satisfaction as to the existence of an asset & liability.
2) Ensuring the correct valuation of assets & liabilities.
3) Verifying the validity of the question of ownership in
respect to asset or liability.
4) Satisfaction as to the disclosure of each asset or liability as
required by the law.
5) Check weather any of the assets is under charge or not,
and a disclosure to that effect.
6) Checking the acquisition and disposal of assets & liabilities
with accordance to proper authorization as laid down in
the memorandum of the company.
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6. 1. Physical Existence:
Checking the physical existence of an item appearing in
balance sheet is carried out by TWO techniques;
#01: A stress on physical verification of items by actual
count, weighing or measurement.
#02: Check documentary evidence and certified inventories
duly signed by an authorized person.
E.g., Physical existence of the cash in hand, cash must be
counted by the auditor as on the date of balance sheet.
• Investments held must be physically examined.
• Certainty to the existence of liability must be made to
relevant documentary evidence.Mehroze Tariq

7. 2. Correct Valuation:
• Fixed Assets: Fixed assets are valued at cost less
depreciation. Their market value is ignored because
market value does not affect their earning power.
• Current Assets: These assets is being valued on the basis
of cost or market price whichever is lower.
• Wasting Assets: The book value of gradually consumed
assets in the process of earning income must be reduced
to the extent of estimated amount by which it has
diminished in value.
Book Value = Cost - Accumulated Depreciation
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8. 3. Ownership:
• Ownership of investments is to be verified by
physically seeing the name of client on share
certificate/ physical examination by the auditor/
seeing a confirmatory certificate directly from the
banker.
• Ownership of bank balance in the name of the
client will be verified by reference to the
confirmation of client’s banker.
• Example: The ownership of motor car is to be
checked with registration book seeing that the
name of the client is stated as the owner.
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9. 4. Correct Disclosure:
The part of the auditor to verify whether
the information which is required by law
has in fact been given in the balance
sheet on which the auditor is submitting
his report.
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10. 5. Assets Under A Charge:
Assets under charge means the assets is being used as
collateral to obtain some liability. Following steps must be
taken to by the auditor to check weather an assets is running
undercharge or not:
1. Certificate from management proving the freedom of
assets from any kind of charge.
2. If any of the loan is being held by the company, auditor
should enquire the nature of charge established.
3. If there is no security found against the loan then further
enquiry is to be made by contacting the financial
institution from which the liability is being obtained.
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11. 6. Proper Authorization:
• Auditor must verify that the document used
to obtained loan is being signed by the
authorized person as mentioned in the
memorandum of association.
• Examination of documentary evidence
which establishes a proper authorization for
complete verification of entries in books.
• The auditor shall require minutes of board
of directors.
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12. VERIFICATION OF ASSETS
NOT IN CLIENT’S POSSESSION:
• Checking the balances in balance sheet in favor of client.
• Bills not yet matured.
• Bills held by bankers for collection.
• Check the documents held by the client’s banker including:
i. Title Deeds
ii. Securities
iii. Investments
iv. Bill of Exchange
• Balance in respect of loans, overdrafts or cash credits.
• These documents can be obtained from 2 sources:
i. From Officials
ii. From Third Party
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13. EVENTS OCCURRING AFTER THE
DATE OF BALANCE SHEET:
• An auditor has to report that the balance sheet is a
true & fair representative of company’s financial
position. This needs assistance from events occurring
after the date of balance sheet.
• Some items appearing in balance sheet are stated
here;
i. Liabilities
ii. Provision of Taxation
iii. Fixed Assets
iv. Debtors
v. Stock in Trade
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14. SUBSEQUENT EVENTS:
• Events occurring between the date of financial
statements and the date of auditor’s report &
facts that become known to the auditor after
the date of auditor’s report.
• They provide evidence of conditions that
existed at/ arose after the date of financial
statements.
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15. ANALYTICAL PROCEDURES:
• Evaluation of financial information through
analysis of plausible relationships among both
financial & non-financial data.
• Performing substantial analytical procedures at
the end of audit assist the auditor to form an
overall conclusion on financial statements.
• These are risk assessment procedures.
• It is used to obtain relevant & reliable audit
evidence.
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16. QUALITY CONTROL FOR AUDIT
OF FINANCIAL STATEMENTS:
• A firm has an obligation to maintain a
system of quality control to provide
with reasonable assurance.
• Engagement teams implement QC
procedures, applicable to audit
engagement.
• They are entitled to rely on firm’s QC
system.
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17. EXTERNAL CONFIRMATION:
• Audit evidence obtained as a direct written
response to the auditor from a third party in paper
form, or by electronic or other medium.
• Depending on the circumstances of the audit, audit
evidence in the form of external confirmations
received directly by the auditor from confirming
parties may be more reliable than evidence
generated internally by the entity.
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18. Chapter #06:
Verification- Liabilities
Summary:
The detail procedure regarding
verification of capital, reserves,
deferred taxation, debentures, loans,
unclaimed dividends, liabilities,
unexpired discounts & contingent
liabilities.
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19. CAPITAL:
Steps to be taken for verifying share capital of company:
• Check the authorized share capital with the Memorandum
of Association.
• Obtain the list of the share holders, check with the
register of members & verify the control account.
• Verify entries in respect of additions on account of issue
of new shares (calls, fresh issues, rights, bonus)
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20. To check the above point following steps are to be taken:
• To check the amount of shares issued against the
permissions.
• To check the issued capital not exceeds the approved limits.
• Check the applications of shares and their allocation.
• Make voucher of the money received from applicants of
shares and their allotment.
• Make detail verification of the amounts received in respect
to the amount credited to this account,
• Strictly verify the shares issued other then cash or on some
kind of agreement verify those agreements,
• Check the amount of premium amount will be separated
from the share capital.
• Auditor must also verify the amount of discounts given to
the shareholders.
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21. In case of forfeiture of shares auditor must clear himself on the
points:
• To check the forfeiture in accordance with the articles of the
company.
• Check the entries made in the books and their respective
adjustments.
• Check weather those shares were been sold or re-issued,
• If those shares is being utilized auditor must make sure the
respective amount is being added into the company's reserves.
• If the shares of a company is being internationally issued check
the state bank approval.
• Check the amount of redeemable shares of a company and what
conditions are applied to them.
• Examine the shareholders rights in the articles of association.
If the company has reduced the amount of share capital auditor
needs to check the following points:
• Check the amount mentioned in the articles of association,
• Check weather the proper adjustments is being made in the
balance sheet. Mehroze Tariq

22. SHARE TRANSFER AUDIT:
Audit of share transfer is not compulsory although is being done to
avoid any kind of frauds and errors during the process:
• Examine the articles of association.
• Company’s notices to transferees for transfer of funds if liable.
• Proper record of transfer in the books.
• Check the transfer dead and stamp on it.
• Verify signatures of transferer.
• Cancelled certificates should properly examined.
• Examine the director’s minutes approving the transfers.
• Check the total balance transferred with the shareholder account.
• Compare the total issued capital with the balances on
shareholder’s account in the member’s registrar.
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23. RESERVES:
• Obtain a movement schedule of each type of
reserve.
• The opening balance of each reserves should
be checked with audit working papers of
previous year or audited balance sheet.
• See that all reserves required under the tax
laws have been created.
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24. DEFERRED TAXATION:
• Provision of future tax liability which is deferred due to
the accelerated rates of depreciation under the
Income Tax Ordinance and Rules, as compared to low
rate of depreciation charged in accounts.
• The auditor should check the computation.
• Verify the movements during the year.
• The amount is either provided in the accounts or
shown by way of a foot note.
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25. DEBENTURES:
• Examine the amount allowed by the Board of directors to be
borrowed.
• See the actual debenture and examined its terms and
conditions.
• Detail debenture capital audit.
• Redemption of debentures.
• Check the list of registered debenture holders.
• The various type of debentures must be separately mentioned
in the balance sheet.
• The remuneration payable to the trustees.
• Risk premium debentures must be mentioned separately in
balance sheet.
• Debentures issued against the loan as a collateral.
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26. LOANS:
SECURED LOANS
Study the contract for loan
noting the maximum limit
sanctioned, rate of interest, plan
of repayment, installments
payable, the nature & extent of
scrutiny & type of charge
(pledge, hypothecation,
mortgage etc.)
UNSECURED LOANS
Check correct classification.
Ascertain company’s borrowing
powers & that they are not
exceeded. See that interest
accrued & due on unreceived
loans has been accounted for in
books.
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27. UNCLAIMED DIVIDENDS:
• Obtain a schedule giving the movement in
the unclaimed dividend’s account.
• Trace transfer of dividend accounts which
remained unpaid for a longer period to
unclaimed dividends.
• For any remittance of unclaimed dividend to
non-residents, see the approval of State Bank
of Pakistan.
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28. LIABILITIES:
• Obtain liability certificate.
• Enquire against special claims lodged against the
company.
• Examine the files for court cases against the debtors &
establish an opinion about doubtful debts.
• Scrutinize invoices, petty cash vouchers, payment
vouchers & journal vouchers.
• Examine reasons for fluctuations in schedule of liabilities
with previous year.
• Check the provision of leave, retirement & gratuity
benefits to the staff with terms of service.
• Compare statements received from creditors with the
balance shown on the accounts.
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29. UNEXPIRED DISCOUNTS:
• Incase of financial institutions whose
business is to discount bills of
exchange on large scale.
• “Rebate on Bills Discounted” shall
represent discounts received in the
current year but attributable to the
next year.
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30. CONTINGENT LIABILITIES:
A liability which is contingent to the happening or not
happening of an event.
Some types of contingent liabilities to be verified are;
i. Bills Discounted
ii. Uncalled Capital on Investments
iii. Guarantees
iv. Law Suits
v. Arrears of Cumulative Preference Dividends
vi. Labor Disputes
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31. Chapter #07:
Verification- Assets
Summary:
The concept of balance sheet
audit. Verification of all types of
fixed & current assets. Inclusion
of a suggested stock certificate.
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32. BALANCE SHEET AUDIT:
• Verification of existence of assets shown in the balance
sheet.
• Securities in hand of a third party be examined whether
he/she is entitled to get hold of such assets.
• It includes verification of assets like;
 Fixed Assets
 Preliminary Expenses
 Stock
 Bill of Exchange
 Commission on Shares &
Debentures
 Advances
 Book Debts
 Underwriting Commissions
 Stores & Spare Parts
 Loose Tools
 Investments
 Cash & Other Balances
 Livestock  Contingent Assets
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33. FIXED ASSETS:
Goodwill Freehold Land Leasehold Land Buildings
Capital Work in
Progress
Assets Abroad Railway Sidings
Plant &
Machinery
Furniture &
Fixture
Development
Expenditures
Mines &
Quarries
Patents
Trademarks,
Copyrights &
Designs
Vehicles
Interest Paid out
Capital
Assets Acquired
on Hire-
Purchase System
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34. PRELIMINARY EXPENSES:
Examining the legal
cost of registering the
company.
Stamp duty & fees
paid on authorized
capital.
Cost of preparing &
printing memorandum
& articles of
association.
Cost of preparing all
preliminary
agreements including
stamp duties.
Cost of preparation,
printing & publication
of prospectus.
Accountant’s charges
for certifying profits.
Cost of preparing &
printing share
certificates, letters of
allotment, debentures,
trust deed etc.
Cost of first set of
accounting, statutory
& statistical books &
common seal of the
company.
All legal & professional
charges in promoting
& forming the
company.
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35. COMMISSIONS ON SHARES &
DEBENTURES:
It shall be lawful for a company to pay commissions if;
• The payment of commission is authorized by the
article.
• The commission paid or agreed to paid shall not
exceed the authorized amount.
• The rate of commission shall be disclosed in the
prospectus
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36. STORES & SPARE PARTS:
• Obtain a certified inventory of stores signed by authorized
official & compare with store & spare parts ledger.
• Check the casting, valuation, invoices, receipts & vouchers.
• Ascertain whether any physical count was carried out by the
client.
• A physical test of closing balance be carried out.
• A certificate shall be inquired by a responsible official
indicating the valuation & total amount present in store.
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37. LOOSE-TOOLS:
• Ascertain & certify by Chief Engineer ,
the cost, if the company manufacture its
own tools.
• Obtain a certified closing inventory &
check its valuation.
• The closing balances should be check
with the loose tools register.
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38. LIVESTOCK:
• Obtain a certified inventory of the animals.
• Check it with the livestock register.
• Check annual revaluation.
• Identify if any losses due to sale or death of
animals have been written off.
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39. STOCKS:
Stock of
Goods sent
out on Sale
or Returns
Examination
of Stock-
Taking
procedure
Verification
of Quantities
of Stock
Stock in
Transit
Work in
Process
Stock of
Packages &
Empties
Stock of
Goods sent
on
Consignment
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40. BILLS OF EXCHANGE:
• Obtain a schedule of bills receivable.
• Check casts & compare individual balances with
bill receivable books.
• Count the bills on hand and note over due bills.
• Obtain direct confirmation from parties for large
amounts.
• Obtain direct bank certificates regarding bills in
process of collection.
• Check adequacy of reserves for bills that are
doubtful for recovery. Mehroze Tariq

41. ADVANCES:
• Proper verification of;
• Loans against security of goods
• Loans against insurance policy
• Loans against security of shares
• Loans against security of land & property
• Deposits
• Repayments
• Recoverable Claims
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42. INVESTMENTS:
Obtain a certified schedule of all investments
and verify;
• Face value & ownership
• Book Values
• Market Values
• Receival of interests
• Contingent Liabilities
• Speculative Transactions
• Short term purchases and sales
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43. CASH & OTHER BALANCES:
• All cash on hand shall be brought on one table & physically
counted as on the closing date.
• Last numbers of Receipt Books, Cash Memo Books, Cheque
Payment Vouchers, Cash Payment Vouchers, Cheque book &
Cheque Receipts should be noted.
• Verify;
o Cash in Transit
o National Prize Bonds
o Bank Balances
o Balance with Agents
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44. DEFERRED REVENUE
EXPENDITURE:
These are heavy expenditures made for long term
benefits for the business. It includes the
verification of expenses like;
• Cost of removal of business to a more
convenient place.
• Exceptional repairs of plants, buildings etc.
• Abnormally heavy amount of advertising to
popularize a new product.Mehroze Tariq

45. CONTINGENT ASSETS:
• No requirement to mention as a footnote in balance
sheet.
• Examples of contingent assets are;
o An option to apply for shares in another
company.
o Refund for octroi paid for goods which have
been sent out later.
o Claim for money from a previous endorser of a
bill recoverable which have been discounted but
might be dishonored.
• Disclosure of such assets would assist to exhibit a
true position of the balance sheet
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46. STOCK CERTIFICATE:
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47. Chapter #09:
Auditor of a Limited
Company
Summary:
The chapter defines various appointment types
of auditors. Remuneration, qualifications &
disqualifications of an auditor, his powers &
duties, lien, status, committee & materiality
concept.
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48. APPOINTMENT OF AUDITORS:
• First Auditors
• Subsequent Appointment
• Casual Vacancies
• No Appointment
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49. First Auditors
>>>
Within 60 days
of company’s
incorporation.
In annual general meeting, if
not done before.
He / She cannot be removed
until his/her tenure is
completed.
Subsequent
Appointment
>>>
A replacement
of retiring
auditor of the
company.
Notice for new appointment
shall be given not less than
14 days before annual
general meeting.
Notice shall be given to
company members, retiring
auditor, one English & ne
Urdu newspaper.
Casual
Vacancies
>>>
To be filled by
directors of the
company.
New appointment shall hold office until the conclusion of
the next annual general meeting.
No
Appointment
>>>
SECP shall take
action in case:
1ST auditor
not appoint-
ted within
120 days of
company’s
incorporation
No
appointments
were made in
annual
general
meeting.
Appointed
persons not
willing to act
as auditors.
If auditors are
removed by
the firm.
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50. REMUNERATION:
Auditor appointed by
Directors or Securities &
Exchange Commission
Directors or Securities &
Exchange Commission
Appointment in all other
cases
The company in general meeting
or in such manner as the general
meeting may determine.
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51. QUALIFICATION OF AN AUDITOR:
• He/ She must be a CA for private limited
companies with paid up capital Rs. 3
million and above (Chartered
Accountant Ordinance, 1961).
• A company with all partners practicing
in Pakistan as CA’s can be appointed as
auditors in the name of their company.
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52. DISQUALIFICATION OF AN
AUDITOR:
The following attributes disqualify a person to act as an
auditor of a firm;
• A person who is, or at any time during the preceding 3
years was a director, partner, other officer or employee of
the company.
• The spouse of a director of a company.
• Debtor to the company (indebted to a sum not exceeding
Rs. 500,000 to credit card issuer or a sum to a utility
company in form of unpaid dues for not more than 90
days)
• A body corporate.
• A person holding shares prior to his appointment as
auditor shall disclose & disinvest within 90 days.
• Disqualified person acting as an auditor shall be fined Rs.
25,000 followed by a new appointment by SECP.
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53. INDEPENDENCE OF AN AUDITOR:
An auditor shall be working independently from the
management of the firm under audit.
CATEGORY OF
INDEPENDENCE
SALIENT FEATURES
i. Programming An auditor shall perform the way he wants to
express his independent opinion. He shall decide
the extent & types of tests of tests required.
ii. Investigative The right to access all books, accounts & vouchers.
iii. Reporting Freedom to express opinion on financial
statements without any pressures imposed upon
him.
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54. POWERS & DUTIES OF
AN AUDITOR:
 To access all books, papers, accounts & vouchers
kept anywhere.
 To require from the company, directors, other
offices info necessary for the auditor to perform.
 To access copies of books of branch offices working
outside Pakistan.
 To attend general meeting of the company, to be
heard at, receive all notices, communications which
any member of the company is entitled to receive.
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55. AUDITOR’S REPORT ON
ANNUAL ACCOUNTS:
MAJOR CONSIDERATIONS
i. Information & explanation to be obtained
ii. Books of accounts to be kept as required
under the Ordinance.
iii. Conformity of the financial statements with
law.
iv. Business conducted, investments made &
expenses incurred to be in accordance with
object of the company.
v. Zakat was deducted & deposited in Central
Zakat Fund.
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56. REQUIREMENTS OF AN
AUDITOR’S REPORT:
Reading &
Inspection of the
Report
• The report to be
read before the
company in
annual general
meeting.
• The report shall
be open to
inspection by any
member of the
company.
Signatures on Audit
Report
• By the person
appointed as
auditor of the
company.
• By a partner in
firm practicing in
Pakistan.
Audit of Cost
Accounts
• Cost auditor may
be a Chartered
Accountant or
Cost &
Management
Accountant.
• He shall be vested
with same
powers, duties &
liabilities as any
other auditor.
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57. AUDITOR’S LIEN:
 Auditors have no lien on books of accounts
being audited by them.
 Only if they have worked on the books in the
capacity of an accountant.
Moreover,
 An auditor can retain the books if he got the
books by an authoritative officer and his fee is
not being paid.
 Documents retained must belong to the person
liable to pay auditor’s fee.
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58. STATUS OF AUDITOR:
As Agent of the Members:
Auditor appointed by the shareholders of the company shall present
the report to them.
As Officer of the Company:
Auditor is not an officer of the company.
• Only in case of liquidation of firm, past & present auditors are liable
to make good any losses caused due to their negligence.
• An auditor may be punished if a charge of falsification of accounts
is brought against him.
• An auditor may be asked on the matters of amalgamation of
companies or reconstruction of capital of limited company.
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59. AUDIT COMMITTEE:
Consists of non-executive directors.
OBJECTIVE:
to establish an effective link between BOD’s & management team of the
firm.
SCOPE OF WORK:
• Review management letter received from the auditor & make relevant
recommendations.
• Appraising the company’s accounting policies.
• Identifying areas to improve audit efficiency.
• Reviewing internal audit reports of a company.
• Resolving possible conflicts between the directors & the company.
BENEFITS:
• A communication link between the auditor & executive board.
• Facilitation of efficient audit work.
• Insured improvements.
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60. MATERIALITY TO ACCOUNTS
& THE AUDITOR:
• A comparison of the figures in percentage terms be
made with the total of the group items.
• A cut-off percentage is considered to be material if it
is 10 percentage or more of a total amount.
• The amount may be compared with the
corresponding amount of this year.
• The impact in terms of changing to profit figure into a
loss or vice versa be carefully considered.
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61. Mehroze Tariq