KPMG Audit Report

1. AUDIT REPORT

NAME: Saad Ahmad

Roll #: 17110014

Major: BSc. (Hons) ACF

Audit Firm: KPMG Taseer Hadi & Co.

2. Klynveld Peat Marwick Goerdeler (KPMG) was formed as a result of the merger of Peat
Marwick International (PMI) and Klynveld Main Goerdeler (KMG) in 1987. PMI was formed in
1911 when William Barclay Peat & Co. and Marwick Mitchell & Co. merged together. Similarly
KMG was formed in 1979 with the merger of Deutsche Treuhand-Gesellschaft and McLintock
Main Lafrentz. The head office of KPMG is located in Amstelveen, Netherlands. KPMG has
revenues amounting to about $24.82 billion for the FY 2014 (KPMG) and it excels in having the
largest number of clients amongst the Big Four Audit Firms.
In Pakistan, KPMG Taseer Hadi& Co. is operating as an affiliate of KPMG International/Global.
It has a professional staff of over 1300, 31 Partners and 1 Executive Director. The firm has
regional offices in the major cities of Pakistan like Lahore, Karachi and Islamabad. The
professional services provided by KPMG include Information Risk Management, Financial
Advisory, Risk Advisory, Tax services, Corporate services, and Audit and Assurance services,
which is the major contributor of revenues to the firm. KPMG’s major specialization is in
Financial Audit services. KPMG has the pleasure of auditing a huge number of local
organizations that include Ferozsons Laboratories Ltd., JDW Sugar Mills Ltd., Rafhan Maize
Products Co. Ltd., Tariq Glass Industries Ltd., Ghani Glass Ltd., Shakarganj Foods, Allied Bank
Limited, Fazal Cloth Mills, Azgard 9 Ltd., Agritech Ltd., NTDC Ltd., and Adamjee Insurance
Company Ltd. From the next year onwards there will be an addition to the list of its audit clients
in the form of Muslim Commercial Bank (MCB).
Client:
During the course of my internship I was appointed as a team member on an audit assignment of
Style Textile Pvt.Ltd. Style was founded in 1992 and is considered a pioneer in designing and
manufacturing apparel for huge corporations like Nike, Adidas, Reebok, Tommy Hilfiger, Levis,
Calvin Klein and other acknowledged international brands. Style Textile uses high quality
imported machinery in its processes and has an inhouse quality control laboratory which helps
guarantee the high quality of the products as per the requirements of the clients (Style).
Organizational Hierarchy:
As Style Textile is a private company so the owners themselves are the Director, and the Chief
Executive Officer. The management hierarchy is such that the Director reports directly to the
CEO/Chairman. The CEO and the director are the strategic managers as well i.e. all management
plans, and production plans are created by them. They set the rules and expect the operational
managers to implement the plans. Apart from the director there is also a CSR department that
directly reports to the CEO and under this department come the front line staff and lower level
managers. Chief Financial Officer, Chief Operating Officer, and Chief Information Officer report
to the directors. Similarly, Manager Accounts, Operations, Information Technology report
directly to the CFO, COO, and CIO’s and respectively managers gather information from the
lower level staff and officers. Style currently has a labor force of over 10,000 working in its
factories located around Lahore.

3. Industry Analysis:
Pakistan is the fourth largest producer of cotton and contributes 5% to the global textiles after
China and India and approximately 40% of the total work force is employed in the textile
industry. Pakistan’s textile industry consists of large scale organized sector and highly
fragmented medium and small units. The textile industry has experienced reasonable growth
over the span of last few years internationally due to economic growth in China, Bangladesh,
Vietnam, Turkey and India. The overall changes in the exchange rate have affected the exports
of the textile industry and this is because the Pakistani rupee appreciated against the US dollar in
the recent year so this had resulted in a fall in the GDP. However, the currency has depreciated
and hence the exports have become slightly cheaper. The current inflation rate in Pakistan is
approximately 8% and the growth rate is approximately 2% so if the growth rate is adjusted from
inflation then still 6% remains. This has increased the cost of inputs used for manufacturing
export quality items e.g. yarn. There are government policies that allow rebates like tax credits to
the textile industry because it is a major contributor towards Pakistan’s GDP but some other
counter policies like unscheduled load shedding and increased electricity rates have affected the
operations. Most of the companies in the textile industry have adopted a Just in Time (JIT)
inventory system due to intense competition which allows it to produce products on demand in a
shorter period of time and at a lower cost. The use of a number of quality control procedures has
helped some companies add value to their products. So this gives some textile companies a
comparative advantage over others. Some businesses have also made use of Enterprise Resource
Planning (ERP) software that enables the integration of all operations of the entity into one
smooth flow.
Associated Concerns:
One of the issues that Style has faced is the recent floods which led to the price of cotton being
doubled. As cotton is a cash crop the constraint in its supply has led to constant lags in apparel
production. Also due to the dominant energy crisis investment has been declining. There has
been a fall in incentives for exporters so now producers are considering moving their production
facilities to countries like Bangladesh where the labor and raw material is cheap. Some other
associated concerns like poor worker training, lack of awareness about the job, use of inadequate
tools, poor maintenance of machinery, and tight scheduling have led to minor industrial
accidents. Style’s main source of revenues is its exports and these majorly relate to brands like
Nike, Reebok etc. These companies favor outsourcing as a result of a lower comparative cost of
manufacturing in developing countries like Pakistan due to low raw material cost. The major
expense of Style is incurred on the purchase of yarn which is the prime raw material in the
production of apparel. Now the expense has increased even more due to recent floods in the
areas of Punjab.
Future Prospects:
Style uses a software called the Inventory Management System for production process and this
has reduced the complications faced during communication of production orders. This software
generates a request by the store when it needs something. The request is then transferred to the

4. Human Resource department and then it is further processed by the finance department so that
the funds can be approved. It has also opened a new unit on Kot Manna Singh near Multan Road
and it is yet to open another unit at Kana.
Audit Methodology:
The first and foremost thing in KPMG’s audit methodology is the KPMG Sampling Plan (KSP).
This plan contains sampling techniques that determine the materiality and the effect of
misstatements on the audit as well as the financial statements. There are 2 types of sampling
techniques: random and haphazard. In the random approach (also called statistical approach) the
KSP selects a sample size where every element has an equal probability of being selected.
Whereas on the other hand the haphazard approach or the non-statistical approach follows a
certain sequence. There is an equal chance of low value figures being selected i.e. a random
approach and there is a 100% chance of high value figures being selected. Both of the
approaches were used during the audit e.g. in the case of Transaction Testing of Journal
Vouchers of accrued liabilities a total of 25 samples that contained JV's of salaries payable,
expenses, provisions, bonuses, insurance claim etc. was selected via a random approach. Of
course the materiality is also incorporated while using these approaches and materiality is set at
5% as per KSP.
Performance materiality (PM) which is calculated at 75% of materiality looks at the financial
statements as a whole. This means that if a misstatement exceeds PM when aggregated or
individual, then we report to qualify. There is also an audit misstatement posting threshold
(AMPT) which is 5% of PM. If any misstatements are greater than the AMPT they are assessed
further for identification of other errors. KPMG also performs some risk assessment procedures
(RAP) where the control and inherent risk are tested. The control risk is assessed through a test
of controls (TOCs), also known as test of effectiveness, which are applied on a company’s
procedures like sales, purchases, and Standard of Procedures (SOPs) testing. They ensure that the
relevant controls relating to the head are operating effectively on a consistent basis, there is no
control deficiency, and they help identify, prevent and detect the fraud. For example for the
TOCs of purchases for the head Stores and Spares the minimum sample size of 25 transactions
was selected because as per the KPMG Audit Methodology (KAM) the frequency of control
activity is multiple times per day with lower risk of failure. Another audit procedure is the
substantive procedures that contain the Test of Details (TODs) and analytical procedures e.g. a
sample of 111 transactions was selected using KSP for TODs of purchases for stores and spares.
In the case of analytical procedures the difference between the actual amount and the
misstatement divided by the total and then multiplied by 100, should never be greater than 5%
otherwise there would be a risk of audit misstatement.
Use of IT:
IT structure that KPMG makes use of in most of its audit engagements is the ‘eAudIT’. It helps
the user maintain and store electronic audit related data of its clients and provides industry
knowledge so that the audit can be more effective. In each audit engagement the entire audit
lifecycle from the planning stage to the execution stage and the subsequent completion of

5. deliverables and the resulting archiving of the engagement is electronically recorded in this
software. It works in way that at the initiation of the audit an engagement file is created. The
information that is stored in the planning tool is imported by the software and it is then adjusted
in the work paper templates that are already available in the software. It also helps in
understanding the entity, identifying risks, testing and evaluation of controls, and audit strategy.
Communication to those charged with governance and forming the audit opinion are other
features that the software performs (KPMG). The software provides easy and complete access to
all the components of the audit engagement for future references and maintains a comprehensive
database of all the audits performed by KPMG. The data is used for reference in the future audits
and can be used for internal reviews such that the processes of KPMG could be reviewed and
any shortcomings in the audit road map, if present, could be resolved through the review of this
data base. This tool helps in the audit engagement by providing standardized work paper
templates which are used throughout the KPMG Global network thus standardizing the audit
procedures carried out throughout KPMG globally.
Some of the rewards of this software that I observed were that it contains data systematically in a
proper sequence so when one needs to look for specific data contained in the application it would
be so much easier to find it. ‘eAudIT’ also acts as an authentic source of reference like when you
want to cross check some data that is available in a physical form so that process can be
performed with ease and this also makes it less time consuming. However, there were some
shortcomings of this software. For a person who does not have complete knowledge of computer
systems, he would face problems e.g. one of the juniors in our audit team was facing some
trouble when working with working paper templates. Another disadvantage of this software I
believe could be that if there is a system breakdown then there might be a chance that the data
would be lost and it would be very hard to recover vital data.
Apart from ‘eAudIT’ another IT device by the name of encrypted USBs is also used. One
advantage of these devices is that they have been configured to only work on the firm provided
laptops. So this makes the client data somewhat more secure as compared to unencrypted USBs.
On the other hand there can be a disadvantage associated with the device i.e. due to their small
size they may be lost and all important data may be lost.
Assigned Area:
The area I had been assigned was Fixed Assets (FA) but my work was not confined to one head.
I also worked partially on the Stores & Spares head but the main focus was on the FA. However,
in the FA head the first thing that I had to do was to gain an understanding of the procedure used
to purchase PPE for production and administrative purposes and then write it down. I learned
that the department which requires assets raises an acquisition through General Demand (GD) on
the Inventory Management System (IMS). The GD is then forwarded to the head of the relevant
department. After the Head of Department’s (HOD) approval the GD is sent to the director for
his approval and then it is sent to the relevant general store. If the required asset with same
specifications & quantity is available with the store then it would issue the asset to the relevant
department. In case when the asset is not available with the store, it forwards the GD to the
procurement department. The procurement department would then raise quotations and after
making a comparative analysis an item order/purchase order (PO) is generated and is also

6. forwarded to the selected vendor. The PO is prepared & approved by procurement department
via the IMS. When the vendor has supplied the required item a Goods Gate Entry Pass is
generated at the gate. It includes particulars like the supplier's name, receiving unit & time, the
quantity received, vehicle number through which items have been supplied and remarks, if any.
The pass is then forwarded to the administration department which then generates an Inward gate
pass (IGP) and then sends the IGP to the relevant store which prepares the Goods
Inspection/Receipt Note (GRN) on the basis of the IGP. The store then passes an entry
Dr Store & Spares


Cr
GR/IR Account
Payable

The invoice created, which also holds the GRN number, is then forwarded to the Finance
department which then enters the GRN number for data retrieval and generates a GRN
Purchase Invoice. Once the invoice is created another journal entry is passed to eliminate the
effect of GRN Accounts Payable.
Dr
GR/IR Accounts
Payable


Cr Trade Creditor


A document is then generated through the Accounts Management System (ACMS). Later on a
requisition issue is created by the relevant general store and another entry is passed so that the
asset may be recorded in the FA’s head.
Dr
Property Plant &
Equipment


Cr Stores & Spares
This eliminates the effect of Stores & Spares which the store had debited earlier.

The depreciation policy of the company states that it uses a straight line method for the whole
class of assets. Depreciation is calculated for the whole month on a new asset in the month of
purchase and no depreciation is charged on the asset in the month of disposal. Depreciation
relating to Building, Lease Hold Equipments, Plant & Machinery, and Electric Installations is
charged to Cost of Sales. Depreciation relating to Furniture & Fixture, Vehicles, Arms &
Ammunition and Computers is charged to Admin. I also had to understand the company’s
fixed assets disposal policy. The first step is to communicate information about the ‘to be’
disposed asset to the procurement department. The department then communicates the matter
to the Director and afterhis approval the procurement department obtains the rate either
through brokers or through company employees. In the case of Vehicles, the vehicle is tagged
and parked in the company premises with contact details of the procurement department and
then the highest of rate given from any of the employees or brokers is selected.
Once the above process was completed the next thing was to create a walkthrough. The
purpose of a walkthrough is to review the entire process for the purchases of items of PPE and
evaluate that the overall design of the process is existing and implemented in the same manner.
So for this we select a single item from fixed assets acquisition and then look at the practical
implementation of the process discussed earlier. The asset that I looked upon was a digital
power analyzing meter and the walkthrough contained all relevant information regarding the
asset like by whom was the order approved, who is the vendor, what is the PO #, IGP #, GRN

7. # and by whom are they prepared, who has received and delivered the order, what was the
mode of transportation and the vehicle number etc. For cross checking reference the
documents that contained all of the above information were physically verified and an
electronic copy of the documents was attached with the working papers.
The next step that I performed was a TOC of additional assets purchased. The approach used
here for sampling was a random approach in which a sample of any 25 transactions was
chosen. For every transaction, I had been provided a voucher number and the amount (Rs.) of
the asset. In the control testing process the first thing I checked was whether there is the
approval of the HOD and the Director on the GD that was raised. Once this had been done I
had to see if a PO was raised against the quotation called and secondly check if the IGP
preparer has matched the quantity that was received with the PO. This was done by entering
the voucher # in the system which gave us the IGP # and then via that the quantity was
matched. So through this we were able to check the occurrence as well as the existence
assertion. When the company receives an asset an entry is posted in the Accounts Payable (AP)
as mentioned earlier in the process. Then an AP voucher (APV) is created through the system
so there was an APV # for every transaction in the sample and we had to apply the TOCs on
them as well. So, the first thing to test was whether the invoice is stamped and signed by the
APV's preparer. Secondly, I had to ensure that the APV is prepared by the Accounts
Supervisor and thirdly, make sure that the voucher is approved by the Accounts Manager. This
was done by verifying the hard copy of the respective vouchers because it contains information
about who prepared the voucher, who checked the voucher and who had approved it.
My next task was to do a TOD of additions in operating assets in order to ensure that they are
not materially misstated. It was performed using the KSP and it gave us a sample of 28
transactions going from more material to less material amounts. Additional information
provided to us was the assets names, dates, GRN #s and the APV #s. Through the voucher # I
verified that the asset has been posted in the correct account and with the correct amount (Rs.)
in the system as well as on the voucher in a hard form. So here the classification and the
accuracy assertions were tested. The completeness assertion was also tested when I had to
check that the expense had actually been recorded and for double reference I also checked the
invoices that were attached with the vouchers and this also helped in knowing whether
withholding tax was deducted at source, which was another TOD. Another one of the things to
look at was whether the invoices are in the name of the company so I had to see that the
original invoices stated the company’s name as a customer. Also by looking at the invoices we
had an idea that the machinery was owned by the company and hence the assertion rights and
obligations under balance sheet was also met.We also had to gain an insight on whether the
expense is for the purpose of business and for this I had to question the accounts supervisor
regarding the use of the asset. So the assertion, occurrence and rights and obligations, under
presentation & disclosure was also ensured. I also had to make sure that the transaction related
to the period and for this I had to look at the vouchers. So here the cut off assertion was tested.
After all of the above had been done then I was required to physically trace the payments into
the bank statement and also look at the payment dates. For this we retrieved the Bank Payment
Voucher (BPV) and the bank name from the system which made it easier to trace the entries.

8. The bank payment tracing was not confined to the FA head. I also performed it under the
Stores & Spares (purchases) head, prepaid insurance and rent and security deposit lease assets.
Once the payments have been traced I was required to get a photocopy of the bank statements
stating the amounts (Rs.) as a proof. I also created a physical verification sheet in which a total
of 113 items were to be verified. For this we had to visit the plant/factory and then ensure that
they were in the right location and the correct quantity of the items was present. Therefore, the
existence assertion was also checked. Procedures regarding depreciation and disposal were not
performed by me.
The overall experience in the audit firm was an excellent industry exposure. An individual
gains an insight about how things actually work in the corporate world. The skills I learned at
the managerial level were how to plan an audit and then how to delegate this plan of action.
We felt motivated when we were entrusted by the senior with a responsibility because it
showed his trust in our capabilities. I learned how to interact with the different departments for
data collection. Although I faced issues regarding compliance of the staff but I was able to
convince them and explain to them the importance of the relevant data required so it was a
valuable experience as to how to handle such situations. I also learned that coordination
between departments was also vital to us because that would ease our dilemma of gathering
information. We were required to give a daily report to our Senior and at the end of the audit
he would review the work done by us and inform us of any issues or discrepancies. We learned
some presentation skills e.g. I had to report to the senior about the reason withholding tax was
unclaimed for the ambulances kept by Style. Thus I had to ask the accounts supervisor about
the basis behind it and then report forward. I also learned that time management was extremely
central. We were required to deliver the work received within the due time because every
process is dependent on another so a time lag could create a problem. We also worked
overtime and this was only done so that today’s work would not pile up for tomorrow. The
overall audit process was smooth because the control processes used by the client were no less
than standard audit procedures e.g. their every entry was double checked by 2 to 3 employees
in the department and then the manager.
Such experiences in one’s existence prove to be valuable when one approaches towards the
practical life. For me the application of the processes and the rules learned will help improve
my abilities and help excel in the field I have chosen.

(3943 words)

9. Citations:
"KPMG Revenues for FY14." KPMG UK, 2015. Web. 20 Sept. 2015.
Styletextile.com. Style Textile, n.d. Web. 22 Sept. 2015.
KPMG Taseer Hadi & Co., KPMG Pakistan Transparency Report - 2014Contents (n.d.): n.
KPMG, 2014. Web. 26 Sept. 2015.