Presenter: Altaf Noor Ali Chartered Accountant

1. Training SessionAudit Service TriangleUser - Auditor FrameworkWhat auditor says in Report, what it means…the auditor as a userSession I Presenter: Altaf Noor Ali Chartered Accountant

2. 1st Session 9.30 -11 am = 90minAudit Service Framework • Session Objective • Auditors’ Report: what it says, what it means • Audit Service Triangle: Auditor, Auditee & User • Audit Assignment Framework: Input, Process, Output • Audit Input Triangle: Aim, Situation, Knowledge. • Audit Process Triangle: Procedures, Effort, Assessment. • Audit Output Triangle: Record, Review, Report. • Conclusion.

3. Session Objectives • Discuss and understand what auditors’ report says and means • Discuss what if an auditor assumes the role of user: • What are the limitations of present accounting and auditing framework? • Why a technically sound audit is not good enough unless ‘discloses’ fairly • What should be auditors role in improving disclosures?

4. AUDITORS’ REPORT TO THE MEMBERS

5. Para 1 We have audited the annexed balance sheet of PAK LEATHER CRAFTS LIMITED as on June 30, 2006 and the related profit and loss account, cash flow statement, statement of changes in equity together with the notes forming part thereof, for the year then ended and we state that we have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit.

6. Para 2 It is the responsibility of the company’s management to establish and maintain a system of internal control, and prepare and present the above said statements in conformity with the approved accounting standards and the requirements of the Companies Ordinance, 1984. Our responsibility is to express an opinion on these statements based on our audit.

7. Para 3>> We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements are free of any material misstatement.

8. Contd. Para 3 & 4 An audit includes examining, on a test basis, evidence supporting the accounting policies and significant estimates made by the management, as well as, evaluating the overall presentation of the above said statements. We believe that our audit provides a reasonable basis for our opinion and, after due verification, we report that: • a) In our opinion, proper books of accounts have been kept by the company as required by the Companies Ordinance, 1984;

9. Para 5 • b) In our opinion: • i) the balance sheet and profit and loss account together with the notes thereon have been drawn up in conformity with the Companies Ordinance, 1984, and are in agreement with the books of accounts and are further in accordance with the accounting policies being consistently applied; • ii) the expenditure incurred during the year was for the purpose of the company’s business; and • iii) the business conducted, investments made and expenditures incurred during the year were in accordance with the objects of the Company;

10. Para 6 • c) in our opinion and to the best of our knowledge and according to the explanations given to us; the balance sheet, profit and loss account, cash flow statement, and the statement of changes in equity together with the notes forming part thereof conform with approved accounting standards as applicable in Pakistan, and give the information required by the Companies Ordinance 1984, in the manner so required and respectively give a true and fair view of the state of the company’s affairs as at June 30, 2006 and of the profit, its cashflow and changes in equity for the year then ended; and

11. Para 7 • (d) in our opinion Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980), was deducted by the company and deposited in the Central Zakat Fund established under section 7 of that Ordinance.

12. Para 8 • The financial statements of prior year were audited by another firm and they have issued an unqualified audit report on October 8, 2005.

13. Para 9 • S.M.Rehan & Co • Chartered Accountants • Karachi: October 3, 2006

14. Auditors’ Report: Key Terms • Para 1: ‘all the information and explanations’ • Para 2: ‘expression’ • Para 3: ‘reasonable assurance’ • Para 3: ‘material misstatement’ • Para 3: ‘evaluating the overall presentation of [financial] statements’ • Para 3: ‘test basis’

15. Auditors’ Report: Key Terms • Para 4: ‘proper books of accounts’ • Para 4: ‘balance sheet and profit and loss account drawn up in co84’ • Para 7: ‘give the information required by the co84’ • Para 7: ‘true and fair view’ • Para 9: ‘unqualified opinion’

16. How Auditors’ Report can be improved? Any suggestions….

17. How Auditors’ Report can be improved? • Disclose for how long the auditor is performing the audit • The fact that a management letter was issued detailing the areas requiring improvement that came during the course of audit [an annexure simply stating the observations/areas where management has been advised to improve] • Use simple language, omit unrealistic assertions e.g. business conducted, expenditure made, zakat • 1-page summary of business in auditors’ own words

18. Key points of Discussion With specific reference to Audit Service Delivery Triangle

19. Audit Service Delivery Triangle • The auditor: The natural person [or firm] designated to perform audit. • The auditee: The natural or artificial person responsible for transaction[s] being audit. • The user: The prime beneficiary or beneficiaries of audit.

20. Audit Service Triangle:Three Relationships • User-auditee The outcome of this relationship is the appointment of auditor. • Auditor-user The performance of this relationship is the report. • Auditor-auditee

21. Type of Users Society Directors Management Investor Customer Lender Employee Role of User Legislate and regulate Appoint management and auditor Set oversight mechanism Monitor progress Participate in corporate affairs User: Responsibility

22. Responsibility to User Code of Ethics Apply updated technical standards Obtain ‘reasonable assurance’ Report findings Responsibility to Auditee Constructively Interact Conduct an audit effectively and efficiently Auditor: Responsibility

23. Responsibility to User Conduct business responsibly Be accountable for resources Devote resources for accountability Select appropriate accounting policies Prepare financial statements Responsibility to auditor Consult and interact Make available all information Auditee: Responsibility

24. How about looking at financial statements as a user? [before we do so as an auditor] Would it add any value to our ‘audit assignment framework’ or to any of its stages?

25. Corporate Accountability: Key Limitation of Financial Statements • The financial statement do not explain the reasons for change from one year to the other. It simply discloses figures without any explanations. • The information is incomplete as it does not helps users in drawing conclusions. • Audit and accounting are connected but distinct compartments of accountability.

26. Why a technically perfect audit without adequate disclosures is not good enough for user? • Audit may be divided into two major components. • The first one relates to the field work, the purpose of which is to gain audit evidence and reach to proper conclusions about validity of financial information produced by the underlying record. • The second part relates to its disclosure in the financial statements. • The first is hidden from user, the second is not.

27. Visible part of audit • Financial statements are the most visible and tangible part of the accounting and audit process

28. How about looking at financial statements as a user? [before we do so as an auditor] Would it add any value to our ‘audit assignment framework’ or to any of its stages? The answer is YES Lets recap ipo now . We will focus on financial disclosures in the second session

29. Audit Assignment FrameworkRecap

30. A framework for understanding AuditIPO • Input: The ‘inputs’ that have to be in place to conduct an audit. We will call it Audit Input Triangle • Process: The ‘process’ that needs to conduct a PCA. We will call it Audit Process Triangle. • Output: The ‘output’ or ‘conclusion’ of the process. We will call it Audit Output Triangle.

31. Audit Input Triangle = ASK • Aim: The ‘objective’ of performing an audit. This is defined by legal framework. • Situation: What is to be done? • Knowledge: The level of knowledge, experience and expertise available with the auditor.

32. Audit Process Triangle = TEA • Tests: This involves translating knowledge and expertise to decide about the audit approach in terms of tests to be conducted. • Examine & Evaluate: Gain data. Position to conduct and perform tests. • Assess: Reach to an initial assessment.

33. Audit Output Triangle = RRR • Record: Document and record. Recording may involve electronic means. • Review: Current information. Past information. • Report: Reach to a final conclusion.

34. Conclusion • ‘An auditor performs for the user. He must be utmost conscious of the requirements of the user, not that of legal and technical framework only’. • ‘Reviewing the financial statements as a user provides valuable insights to the auditor to interact with auditee for improving disclosures. It helps in understanding of business environment and its operations. It is the raw material for identifying audit risk factors and defining audit strategy’.

35. End of Session I Thank you.

36. Training SessionAudit Training FrameworkProposed skills building schemeSession II Altaf Noor Ali Chartered Accountant

37. 2nd Session 11.30-1.30=120 minUser-Auditor Framework • Session Objective • Case Study: Pakistan Leather Crafts Limited • Balance Sheet • Profit & Loss Account • Cash Flow Statement • Statement of Changes in Equity • Related Notes • The corporate process • Conclusion

38. Session Objectives • Review the Annual Report 2006 [the handout] of Pak Leather Crafts Limited as a ‘Prime’ User of Financial Statement. • Gain an understanding of its business and operating environment. • Identify what is missing and why it is not there. • Use our learning for defining our audit strategy.

39. Company Name • Pak Leather Crafts Limited: what does the name tells you? What kind of business do you expected it is engaged in? • How about its nature of organisation?

40. Contents p.1 • Read ‘contents’ • Go through each page and make first observation • What would you prefer to read first and why?

41. Contents p.1 • No vision or mission statement (see p.9, clause 5) • No graphs • No photographs of directors or company facility

42. Corporate Profile p.2 • Board of Directors • Audit Committee • Chief Financial Officer and Company Secretary • Bankers • External Auditors • Legal Advisors • Registered Office

43. Corporate Profile p.2Key Observations • Board of Directors => Executive and non executive directors. Refer to p.5 Director # 3 • Audit Committee => Do they have the expertise to oversee the function? • Chief Financial Officer and Company Secretary => No qualifications mentioned • Bankers => Why do they have relationship with so many banks • External Auditors • Legal Advisors • Registered Office => No website or tel. contact

44. Notice of Annual General Meeting • For how long this company is in existence as a listed company? • The first item on agenda is confirmation of minutes, how come not minutes are a part of this report [refer to contents]?

45. Directors’ Report p.4 • Financial results • Dividend • Sales • Cost of Sales • Future Outlook • Corporate and financial reporting • Value of investments of provident fund • Number of Board meetings • Pattern of Shareholding • Auditors • Statement of Compliance with the Code • Acknowledgement • Worker Management Relationship

46. Directors’ Report p.4 • Financial results => satisfactory? • Dividend => No comparison • Sales => slightly decreased? • Cost of Sales => GP, slight increase? COS, slight decrease? • Future Outlook => heavy orders for export? • Corporate and financial reporting • Value of investments of provident fund = Rs. 1.47 m • Number of Board meetings => 4. Changes in the Board during the year not mentioned. • Pattern of Shareholding => separately annexed, no reference • Auditors => Audit Committee recommends reappointment. How many times did the audit committee met during the year? P.10 c15 • Statement of Compliance with the Code => separately annexed • Acknowledgement => especially thank to all our bankers • Worker Management Relationship => how many employees?

47. Statement of Value Added p.7 • Wealth generated • Wealth distributed • To employees • To government • To providers of capital • Retained for reinvestment & future growth

48. Statement of Value Added p.7 • Wealth generated • Total revenue = net sales • Brought in material and services = CNG • Wealth distributed • To employees = CNG • To government = CNG • To providers of capital = Dividend = Less than any other stakeholder • Retained for reinvestment & future growth = CNG

49. Six years at a glance p.8 • Net sales • Gross profit • Net profit (loss) before tax • Cash dividend = 2005 is Rs. 2550 [p.16 dividend paid = 10% = 3,400] • Gross profit % • Net profit % • Earnings per share • Current ratio

50. Six years at a glance p.8What is missing? • Assets • Liabilities • Net Assets = Equity • Profit after tax • Cashflows • Capacity utilisation • Number of employees • Return on capital employed ratio • Stock prices The technique of gross sum and averages to check completeness of data