10. verification

AUDIT LECTURES SLIDES

AUDIT VERIFICATION

1. VERIFICATION BY Atta-ur-Rahman Arif

2. PURPOSE Verification enables an auditor to confirm the result of Vouching about the ownership or the existence of the assets and the liabilities. Essential to discharge the legal duties imposed on the auditor by Companies Ordinance sub-section 3 of section 255. Enable an auditor to submit the report addressed to the shareholders.

3. SIX POINTS TECHNIQUES Physical existence of an asset or liability Asset or liability is correctly valued Ownership of asset and liability Correct disclosure of asset and liability Assets suffering from charge Proper authorisation of acquisition or disposal of asset and liability

4. 1. PHYSICAL EXISTENCE Physical existence of an item will be varify by two techniques: Actual count, weighing or measurement. For example: cash must be counted by the auditor as on the date of balance sheet. Documentary evidence and certified inventories duly signed by responsible official of company, where first technique is not practicable or feasible. For example: bank balance is to be verified with reference to a certificate obtained directly from the client’s bank

5. 1. PHYSICAL EXISTENCE ( Contd …) Bank balances must to be verified by a certificate Investments held must be physically examined. Certificate for physical inventory count of fixed assets must be obtained.

6. 2. CORRECT VALUATION It is the duty of auditor to check the valuation of the asset with reference to any evidence. Where technical knowledge is involved he is entitled to rely upon the information supplied to him by the skilled and technical persons. Auditor should apply all possible tests to obtain satisfaction that the asstes have been valued upon the GAAP and in accordance with the 4 th Scedule and 5 th Scedule of Companies Ordinance.

7. 2. CORRECT VALUATION ( Contd …) Different basis is being used for valuation depending upon the nature of business:- Fixed Assets: Acquired for earning income and not for resale. For a going concern valued at Cost-Dep. Market value not considered b/c It does not affect their earning power Not considered at the time of replacement of asset Not realizable value except placed in market for resale. If sale at any point of time not treated as business income.

8. 2. CORRECT VALUATION ( Contd …) Current Assets: Which are required for the purpose of sale and their subsequent conversion into cash e.g. Stocks, Book debts, bank balance, cash on hand etc. Important points to be considered for valuation Cost or market price whichever is lower Temporarily fall in market price may be ignored Same principal adopted in subsequent years Depreciation must be provided in necessary Wasting Assets: Fixed nature assets consumed or exhausted in the process of income e.g. mine Reduction in book value on estimation basis

9. 3. OWNERSHIP Auditor must satisfy himself that the ownership of assets and liabilities which are shown on the balance sheet is vested in his client. Techniques which enabling the auditor to acquire the satisfaction on this point, depending upon the nature of an asset or liability. For example the ownership of Investments is to be verified either by the physically seeing the name of the client on the share certificate or by seeing a confirmatory certificate directly obtained from the client’s banker.

10. 4. CORRECT DISCLOSURE 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. Legal requirements are: Disclosure requirements governing Companies are contained in the 4 th (Listed)and 5 th (non-listed) Schedule of Companies Ordinance 1984. Disclosure requirements governing financial statements contains in IAS 1.

11. 5. ASSETS SUFFERING CHARGE Ownership of an assets is of two types Clean, Charge Charge means: Mortgage (given the right to the mortgagee to sold the property through court in case of non-payment by the mortgager, to realize his dues. If the sale proceeds are insufficient, mortgager will remain personally liable for the payment of the debt) Pledge ( It is bailment of goods as security for the payment of a debt. It can be made of moveable property alone. The borrower must be in possession of the moveable property under a legal right) Pawn : Something given as security for a loan Lien : The right to retain the lawful possession of the property of another until the owner fulfills a legal duty to the person holding the property

12. Steps to taken to know whether as assets if suffering from charge: Obtain certificate from management whether asset shown in Balance sheet free from any charge, if so then details must by obtained. Enquire about the nature of charge Examine the object of holding any security Scrutiny of the register of mortgage and charges are required to be maintained under section 125 of the ordinance Securities are in safe custody, it could be ascertained by taking certificate from bank, investment co. 5. ASSETS SUFFERING CHARGE ( Contd …)

13. The duty of an auditor to adopt such ways and means whereby he ascertains whether an asset of the company is suffering from charge or not. Whether the nature of the charge is indicated in the Balance sheet . If the management does not agree to mention the nature of charge in the balance sheet, he must qualify his report to the shareholders. Section 121 requires that mortgages and charges created by a company must be registered. 5. ASSETS SUFFERING CHARGE ( Contd …)

14. 6. PROPER AUTHORISATION The auditor must acquaint with the relevant clauses affecting the auditor as liad down in the memorandum and articles of association. Auditor must examine and use the documentary evidence which establishes a proper authorisation for complete verification of the entries made in the books of accounts.

15. Verification of Assets not in possession In following cases auditor has recourse to client’s banker for verification Balance of Accounts Bills under discount and not matured Bills held by bankers for collection Title deeds, Securities, investments, held for safe custody Balances of loans, Overdrafts, limits and nature of charge

16. Verification of Assets not in possession Necessary certificates obtained from Officials Certified inventory of Plant and Machinery Certified stock Sheets Certified lists of bad or doubtful debts List of all outstanding liabilities Third Parties Bankers: Balance of accounts, overdraft Agents: Cash balances Mortgagors: Title deeds

17. Events occurring after the closing date Auditor has to report that the balance sheet exhibits a true and correct view of the state of affairs of the firm at a particular date. Should also take care of the events occurring after the closing date Liabilities: Amounts of contingent liabilities Provision for taxation Fixed assets: Acquiring and consideration was not determined as of closing date Debtors: Subsequent realization and adjustments Stock in Trade: Establish realizable value

18. REPRESENTATION LETTER Representation by Management as Audit Evidence is a title of ISA 580, which explains rational, documentation, written representation, action to be taken. Auditor should obtain evidence that management acknowledges its responsibility for appropriate presentation of financial statements These representations either unsolicited or in response of specific inquiries .

19. REPRESENTATION LETTER If relate to matters which are material to the financial statements then auditor should Seek corroborative audit evidence from sources inside or outside the entity Evaluate whether the representation made by management appear reasonable and consistent with other audit evidence obtained Consider whether the individuals making representations can be expected to be well informed in matter.

20. REPRESENTATION LETTER Auditor can document in his working paper evidence of management's representation To avoid misunderstanding representation must be in writing Letter should be address to Auditor, contain the information requested by him Should be dated the same date as the auditor’s report on the financial statements. Should the signed by the members of management who have primary responsibility

21. ANALYTICAL PROCEDURES Used to describe the analysis of significant ratios and trends including the resulting investigation of usual fluctuations and items. ISA 520 deals with nature of analytical review procedures. These procedures include Comparable information for prior periods Anticipated results (Budget, forecast) Similar industry information These procedures are used to Assist auditor in planning the nature, timing and extent of auditing procedure When Substantive test to obtain Overall review of the financial information at final stage.