auditing project.2

8/12/2019 Auditing Project.2

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1. Introduction

The name VIP emerged on the prospect of Pakistan soon after its inception in the

year 1984. The start was modest with limited space to work and meager resources

to cater, but devotion and dedication blended along untiring honest efforts soon

flourished to bear the fruits. An honest approach in dealing, with customers, vendors

and related agencies, took the group a step ahead and is a vital contributing to its

success today.

VIP Group of Companies is one of the esteemed manufacturers and private

accredited exporter of Fashion wear, Motor bike wears in Pakistan having assets of

worth more than PKR 1.5 billion. The total area of the subjected premises consists of

112 Kanals.

VIP Group of Industries captures a wide market and its products are appreciably

accepted throughout the Pakistan most popular Leather Jackets and Leather Shoes

are its major products, contributing towards the national economy, export figures

range from 20 to 25 billion US dollars annually.

It specializes in producing high class Leather product made of superior quality

materials and possesses state production facilities in made ups and products for

various consumer needs. The company makes use of the latest technical equipment

to make sure that each product is original in style and shows exquisite

craftsmanship. This is an industry believes in originality as character and quality as

foundation. The entrepreneurial spirit of the company seeks constant development,

steady progress and outstanding performance.


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2 Overview of the organization

2.1 Brief History

2.1.1 Establishment

The name of VIP Group of Industries emerged on the horizon of Pakistans Leather

industry in 1984, A modest limited financial and other resources available, soon

flourished to bear full owing to the determination and dedication of its workers, An

honest approach in dealing, with customers, vendors and related agencies, took the

group a step ahead and is a vital contributing to its success today. At the moment

VIP Group of Industries is the leading industrial group of Pakistan, owing assets

more than PKR 1.5 billion. The VIP Group of Industries deals in Textile, Leather

wear, Fashion wear, Motor Bike wear and Gloves.

2.1.2 Development

With a balanced, efficient and competitive structure, VIP Group of Industries

explores and exploits indigenous resources for optimum production of Leather and

Fashion wear, besides seeking opportunities abroad. Services of the Companys

highly qualified and skilled expertise in the fields of Leather and Fashion wear are

frequently availed by the local and foreign companies. During the last 20 years VIP

Group of Industries has grown into a technically and commercially viable

organization.

2.1.3 Name of Chief Executive Officer (C.E.O)

Mr. Imtiaz-ud-Din Dar (Managing Director)

2.1.4 Names of Directors

Mr. Usman Dar

Mr. Umer Dar

Mr. Amir Dar


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Mr. Imran Dar

2.2. Nature of the organization

VIP Group of Industries leather wears fashion wear and textile as well with tender

care and dyed in the brilliant shades of nature adds elegance and magnificence to

this world.

VIP Group of Industries is a manufacturer of such fabulous products: products that

speaks of unparalleled quality and unmatched comfort. VIP Group of Industries

specializes in producing high class Leather and fashion wear product made of

superior quality materials and possesses state production facilities in made ups and

products for various consumer needs. The company makes use of the latest

technical equipment to make sure that each product is original in style and shows

exquisite craftsmanship. VIP Group of Industries is a company believes in originality

as character and quality as foundation too. The entrepreneurial spirit of the company

seeks constant development, steady progress and outstanding performance.

2.3. Business Volume, reward honors & success stories etc.

during last 5 years

VIP Group of Industries is using the modern technology for improving its ability to

discover the Leather and Fashion wears potential in the country. A number of major

institutional reforms and improvements have been implemented in all areas of

operations enabling the company to take up the challenge of making the

organization much efficient.

VIP Group of Industries financial performance has been consistently improving with

sustainable growth since the time it became a self-financing Company. Its business

volume for the last five years has shown a steady growth as indicated in the

schedules given on next page:


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Business Volume for last Five Years (Quantities)

Product Measurement

Scale

2008-09 2009-10 2010-11 2011-12

2012-13

Fashion

Wear

Suites 120,456 154,870 212,900 215,445 224,876

Leather

Wear

Pieces 161,534 217,927 245,537 274,006 277,408

Motor Bike

Wear

Suites 92,004 77,412 93,236 90,314 101,322

Gloves Pairs 83,445 86,670 93,234 91,889 92,917

Textile Bundles 11,038 11,998 10,989 10,859 11,890


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Business Volume for last Five Years (US $)

The Net sales & other revenues for the last five years are as under:

(In million US $)

YEARS 2008-09 2009-10 2010-11 2011-12 2012-13

Net Sales

Revenue 76.65 85.05 100.4 105.6 111

Product Measurement

Scale

2008-09 2009-10 2010-11 2011-12 2012-13

Fashion

Wear

Suites 60,22,800 80,53,240 117,09,500 118,49,475 128,17,932

Leather

Wear

Pieces 323,06,800 435,85,400 491,07,400 548,01,200 554,81,600

Motor

Bike

Wear

Suites 276,01,200 232,23,600 279,70,800 270,94,200 303,96,600

Gloves Pairs 62,58,375 65,86,920 70,85,784 71,67,342 72,47,526

Textile Bundles 44,15,200 47,99,200 46,15,380 46,15,075 50,53,250


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Product Line

In the product line of VIP Group of Industries, the following are its products by which

it is earning profits:

2.4.1 Leather Jackets

Leather jackets of the organization are very fine quality which

is demanded all over the world immensely. Its demand is

greater in Europe and America.

2.4.2 Leather Glove

Leather gloves are average used but these are very useful to

many sectors such as Gardening, Strong electric wires cutting,

weight lifting etc. It helps to keep safe hands skin which is badly

harmed by using these instruments in these fields without using

gloves.

2.4.3 Rexene Gloves

Rexene gloves are the highly used in nowadays. It used for the bike driving, to keep

hands warm in winter and also for fashion use. Rexene gloves are less costly hence

its demand is greater.


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2.4.4 Track Suites

Track Suites are widely used in the world. Peopleuse it for their teams to demonstrate themselves

from other, also use for jogging and some people

consider it as night dress.

2.4.5 Motor Bike Dresses

Motor bike dresses are used for the purpose of racing which held in foreign

countries. These dresses protect the driver/racer from injury which sometimesoccurs due to accidents.

2.4.6 Leather Shoes

Leather shoes are very important accessory in some industries. These are widely

used in chemical industry because it helps to keep feet safe from any accident or

disaster.

2.4.7 Casual Shoes

Casual shoes are also known as fashion shoes. Todays youth is

too much interested in these shoes. These shoes are produce to

fulfill the demand of youth.

2.4.8 Fashion Wears

It is the world of fashion. Everyone wants to look stylish and try to demonstrate

himself from others. For this purpose fashion wears are produced and its demand is

very high.

3.2. Number of Employees

VIP Group of Industries in Pakistan was having 3 factories but now it has established

one more so the number of total factories in Pakistan has increased from 3 to 4. Ithas a huge number of employees now. According to my information that I could get


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this organization have now almost 4,500 employees. This number was not that big

before establishing new factory.

3.3. Main Offices

Head Office, Rahim PurKhichian, Saydpur Road Sialkot. Pakistan

Zonal Office, Plot No. 384, Sector 7/A, Industrial Area, Karachi,

Pakistan

Capital Road, GhoreywaliKhangah, Sialkot, Pakistan

New York Office, 82-96 Country Pointe Circle, NY-11427, USA

Beside of these above it also have some sub units in Sialkot and premises of Sialkot.

3.4. Introduction of all departments

VIP Group of Industries have 8 main departments which include Admin, HR

department, Marketing department, Account & Finance department, Information

Technology department, Production department, Export & Import department,

Security department. Sample merchandising, leather procurement, leather cutting,

lining cutting, leather matching, screen printing, fusing, gloves unit, touching,

alteration, spray, finishing, packing etc. are the sub departments of production

department.

4. How to Audit Balance Sheet

To audit balance sheet is one of major work of auditor. In balance sheet auditing, he

has to check and to verify different assets and liabilities. Following are main steps ofBalance Sheet Audit used in Vip Wears.


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1st Step : Audit of Current Assets

First of all CA has to audit current assets and sees whether these are correct or not.

a) Cash and Bank Balance Audit

CA has to check cash balance with its physical existence. For checking bank

balance, he has to take the help of bank statement. If there difference cash

book and bank statement balance, he should check bank reconciliation

statement of company to know the real reasons behind this. If there is any

error in it, he should note which will be the part of audit report.

b) Account Receivable AuditCA also checks account receivables. He has to see bad debts account and

provision for doubtful debt account and its accounting treatment in balance

sheet.

2nd Step : Fixed Assets Audit

In this audit, CA must check the depreciation on each asset. Asset's sale value and

its profit or loss and balance value which has been shown in balance sheet.
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3rd Step: Investment Audit

In investment audit, he should audit the sources of the investments. He also should

check different investment schemes.

4th Step: Audit of Liabilities

Charted accountant has checked the solvency ability of company by liabilities audit.

He has also audit account payable, bank loans, outstanding liabilities. His eye has to

be total payment to creditors and what is recorded in the books. If he examines the

difference between both, it may be mistake or fraud and it should be noted. He alsoexamines any misconduct of accounting department relating to paying liabilities. He

also tries to know the reasons of delay in the payment of interest, long term loan and

other outstanding expenses.

Main Topic

5. How to Audit the Liabilities and Shareholder Equity

In the Vip Wears (Pvt) ltd. there are different procedure to used audit in the balance

sheet but finally follow the standard format which is used to reporting the external

persons of the company. Our topic is how to audit the liability side of the balance so

we discussed only the liability side in the prescribed format:

Balance Sheet Liability side

Liability & Shareholder Equity

Authorized CapitalShare capital

Reserves

Long term liabilities:

Bank loan

Mortgage loan

%Debentures

Long term capital lease obligation

xxxxxxxxx

xxx

xxxx

xxx

xxxx

xxxx


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Pension fund liability

Current liabilities:

Bank indebtness

Bank loan

Trade & other payables

Notes payable

Sundry creditors

Account payables

Accrued liabilities

Un earned revenue

Current portion of long term debt

Current portion of capital lease obligation

Provision for tax

Staff provident fund

xxxx

xxxx

xxxx

xxxx

xxxx

xxx

xxx

xxx

xxxxxxx

xxx

xxx

xxxx

Let us discussed them one by one how to audit and what instruments are used toaudit the liability side of balance sheet:

Total Liabilities

Liabilities have the same classifications as assets: current and long term.

Current liabilities - These are debts that are due to be paid within one year or the

operating cycle, whichever is longer. Such obligations will typically involve the use of

current assets, the creation of another current liability or the providing of some

service.

Usually included in this section are:

Bank indebtedness - This amount is owed to the bank in the short term,

such as a bank line of credit.


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Accounts payable - This amount is owed to suppliers for products and

services that are delivered but not paid for.

Wages payable (salaries), rent, tax and utilities - This amount is payable to

employees, landlords, government and others.

Accrued liabilities (accrued expenses) - These liabilities arise because an

expense occurs in a period prior to the related cash payment. This accounting

term is usually used as an all-encompassing term that includes customer

prepayments, dividends payables and wages payables, among others.

Notes payable (short-term loans)- This is an amount that the company

owes to a creditor, and it usually carries an interest expense. Unearned revenues (customer prepayments)- These are payments

received by customers for products and services the company has not

delivered or for which the company has not yet started to incur any cost for

delivery.

Dividends payable- This occurs as a company declares a dividend but has

not yet paid it out to its owners.

Current portion of long-term debt - The currently maturing portion of the

long-term debt is classified as a current liability. Theoretically, any related

premium or discount should also be reclassified as a current liability.

Current portion of capital-lease obligation - This is the portion of a long-

term capital lease that is due within the next year.

Long-term Liabilities - These are obligations that are reasonably expected to be

liquidated at some date beyond one year or one operating cycle. Long-term

obligations are reported as the present value of all future cash payments. Usually

included are:

Long-term debt (bonds payable)- This is long-term debt net of current

portion.

Deferred income tax liability - GAAP allows management to use different

accounting principles and/or methods for reporting purposes than it uses for

corporate tax fillings to the IRS. Deferred tax liabilities are taxes due in the

future (future cash outflow for taxes payable) on income that has already been


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recognized for the books. In effect, although the company has already

recognized the income on its books, the IRS lets it pay the taxes later due to

the timing difference. If a company's tax expense is greater than its tax

payable, then the company has created a future tax liability (the inverse would

be accounted for as a deferred tax asset).

Pension fund liability - This is a company's obligation to pay its past and

current employees' post-retirement benefits; they are expected to materialize

when the employees take their retirement for structures like a defined-benefit

plan. This amount is valued by actuaries and represents the estimated

present value of future pension expense, compared to the current value of thepension fund. The pension fund liability represents the additional amount the

company will have to contribute to the current pension fund to meet future

obligations.

Long-term capital-lease obligation- This is a written agreement under

which a property owner allows a tenant to use and rent the property for a

specified period of time. Long-term capital-lease obligations are net of current

portion.

Now I explained that how audit the liability side of balance sheet follow the following

standard in the Vip Wears (pvt) ltd.

The following is the text of the Guidance Note onAudit of Liabilitiesby the Auditing

Practices Committee of the Council of the Institute of Chartered Accountants. This

Guidance Note should be in conjunction with the Statements on Standard Auditing

Practices issued by the Institute.

1. Para 2.1 of the Preface to the Statements on Standard Auditing Practices issued

by the Institute of Chartered Accountants that the "main function of the APC is to

review the existing auditing practices and to develop Statements on Standard

Auditing Practices (SAPs) so that these maybe issued by the Council of the

Institute." Para 2.4 of the Preface states that the "APC will issue Guidance Notes on

the issues arising from the SAPs wherever necessary."


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2. The Auditing Practices Committee has also taken up the task of reviewing the

Statements on auditing matters issued prior to the formation of the Committee. It is

intended to issue, in due course of time, SAPs or Guidance Notes, as appropriate,

on the matters covered by such Statements which would then stand withdrawn. With

the issuance of this Guidance Note on Audit of liabilities.

So auditor check the following procedure one by one to audit liability sides

CHECK INTERNAL CONTROL EVALUATION

The auditor should study and evaluate the system of internal control relating toliabilities to determine the nature, timing and extent of his other audit procedures. He

should particularly review the following aspects of the internal control relating to

liabilities.

(a) In respect of loans and borrowings (including advances and deposits)

As far as possible, the following should be clearly specified:

- the borrowing powers and limits;

- persons authorised and competent to borrow;

- terms of borrowings;

-procedure for ensuring compliance with relevant legal requirements/internal

regulations.

Any variations in the terms of loans and borrowings should be duly

approved/ratified in writing by competent authority.

Security offered against loans and borrowings should be properly recorded

and periodically reviewed.

The records and documents should be kept in proper custody and reviewed

periodically.


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The system should bring out all cases of non-compliance with terms and

conditions including amounts of principal and/or interest which have become

overdue.

Confirmation of balances should be obtained at periodic intervals and the

discrepancies, if any, should be duly investigated and reconciled.

There should be a proper procedure for year-end valuation of loans and

borrowings, especially for those designated in foreign currencies.

(b) In respect of trade creditors

The procedure should ensure proper recording& transactions and facilitate the

linking of payments with outstanding.

The payments made to creditors should be in line with the approved policies

of the entity.

There should be specific procedures for payments against duplicate invoices

or other duplicate records as well as for payments against accounts which

have remained unclaimed for quite some time.

There should be a procedure for preparation of schedules of trade creditors at

periodic intervals; this should be reviewed by a responsible person and

necessary action initiated on overdue accounts.

Statements of account should be called for from creditors at periodic intervals

and the discrepancies, if any, should be duly investigated and reconciled.

All adjustments in the creditors' accounts such as those relating to claims for

returns, defectives, short receipts of goods, rebates, allowances and

commissions etc., should require approval of competent authority. Similarly,any write-back of creditors' balances and escalation claims should be

approved by competent authority.

There should be appropriate cut-off procedures in relation to transactions

affecting the creditor accounts.


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Provisions

The term 'provision' means amounts retained by way of providing for depreciation or

diminution in value of assets or retained by way of providing for any known liability,

the amount of which cannot be determined with substantial accuracy. Provisions

include those in respect of depreciation or diminution in the value of assets, product

warranties, service contracts and guarantees, taxes and levies, gratuity, proposed

dividend etc). This Guidance Note, however, does not deal with provisions for

depreciation or diminution in the value of assets. The audit of provisions primarily

involves examining the reasonableness and adequacy of the amounts provided for.

The auditor should also examine that the provisions made are not in excess of what

is reasonably required.

Provisions for Taxes and Duties

The adequacy of the provision for taxation for the year should be examined. The

position regarding the overall outstanding liability of the entity as at the date of

balance sheet should be reviewed. In respect of assessments completed, revised or

rectified during the year, the auditor should examine whether suitable adjustments

have been made in respect of additional demands or refunds, as the case may be.

Similarly, he should examine whether excess provisions or refunds have been

properly adjusted. The relevant orders received up to the time of audit should be

considered and, on this basis, it should be examined whether any short pr visions

have been made good. If there is a material tax liability for which no provision is

made in the accounts, the auditor should qualify his report in this respect even if the

reserves are adequate to cover the liability and also check another provision is

mentioned or not:

Provision for gratuity

Provision for bonus

Provision for dividend


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Contingent Liabilities

38. The term 'contingent liabilities' refers to obligations relating to past transactionsor other events or conditions that may arise in consequence of one or more future

events which are presently deemed possible but not probable. Contingent liabilities

may or may not crystallize into actual liabilities. If they do become actual liabilities,

they give rise to a loss or an expense. The uncertainty as to whether there will be

any legal obligation differentiates a contingent liability from a liability that has

crystallized. Contingent liabilities should also be distinguished from those

contingencies which are likely to result in a loss (i.e., a loss is not merely possible

but probable) and which, therefore, require an adjustment of relevant assets or

liabilities. Some of the instances giving rise to contingent liabilities is:

law suits, disputes and claims against the entity not acknowledged as debts;

membership of a company limited by guarantee.

The following general procedures may be useful in verifying contingent liabilities.

Review of minutes of the meetings of board of directors/committees of board

of directors/other similar body.

Review of contracts, agreements and arrangements.

Review of list of pending legal cases, correspondence relating to taxes,

duties, etc.

Review of terms and conditions of grants and subsidies availed under various

schemes.

Review of records relating to contingent liabilities maintained by the entity.

Enquiry of and discussions with, the management and senior officials of the

entity.

Representations from the management.


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DIRECT CONFIRMATION PROCEDURE

The verification of balances by direct communication with creditors is theoreticallythe best method of ascertaining whether the balances are genuine, accurately stated

and undisputed, particularly where the internal control system is weak. However, the

utility of this procedure depends to a large extent on receiving adequate response to

confirmation requests. Therefore, in situations where the auditor has reasons to

believe, based on his past experience or other factors, that it is unlikely that

adequate response would be received from the creditors, he may limit his reliance on

direct confirmation procedure and place greater reliance on the other auditing

procedures.

EXAMINATION OF DISCLOSURE

The auditor should satisfy himself that the liabilities have been disclosed

properly in the financial statements. Where the relevant statute lays down any

disclosure requirements in this behalf, the auditor should examine whether the

same have been complied with.

In some cases, loans are guaranteed by third parties in whose favour the

assets of the entity are charged. The auditor should examine whether the

disclosures concerning such loans are appropriate, e.g. they may be

classified as secured with disclosure of the fact that the assets of the entity

have been charged in favour of third parties which, in turn, have given

guarantees to parties from whom loans have been obtained.

The auditor should recommend to the entity to disclose, in parentheses or in

footnotes, the instalments of term loans, if any, falling due for repaymentwithin the next twelve months.

The auditor should examine that the following have been disclosed in respect

of contingent liabilities:

Nature of each contingent liability;

The uncertainties which may affect the future outcome;

An estimate of the financial effect or a statement that such estimate

cannot be made.


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ANALYTICAL REVIEW PROCEDURES

In addition to the audit procedures discussed above, the following analytical reviewprocedures may often be helpful as a means of obtaining audit evidence regarding

the various assertions:

comparison of closing balances of loans and borrowings, creditors, etc. with

the corresponding figures for the previous year;

comparison of the relationship between current year creditor balances and the

current year purchases with the corresponding figures for the previous year;

comparison of actual closing balances of loans and borrowings, creditors, etc.

with the corresponding budgeted figures, if available;

comparison of current year's aging schedule of creditors with the

corresponding figures for the previous year;

comparison of significant ratios relating to loans and borrowings, creditors,

etc. with the similar ratios for other firms in the same industry, if available;

Comparison of significant ratios relating to loans and borrowings, creditors,

etc. with the industry norms, if available.

It may be clarified that the foregoing is only an illustrative list of analytical review

procedures which an auditor may employ in carrying out an audit of liabilities. The

exact nature of analytical review procedures to be applied in a specific situation is a

matter of professional judgment of the auditor.

MANAGEMENT REPRESENTATIONS

The auditor should obtain from the management of the entity a written statement that

all known liabilities have been recorded in the books and that all contingent liabilities

have been properly disclosed. While such a representation letter serves as a formal

acknowledgement of the management's responsibilities for proper accounting and

disclosure of the relevant items, it does not relieve the auditor of his responsibility for

performing audit procedures to obtain sufficient appropriate audit evidence to form

the basis for the expression of his opinion on the financial statements. A sample

management representation letter regarding liabilities and contingent liabilities is


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given in Appendix III to this Guidance Note. It may be mentioned that the

representations made in the letter can alternatively be included, in the composite

representation letter usually issued by the management to the auditor.

DOCUMENTATION

The auditor should maintain adequate working papers regarding audit of liabilities

and contingent liabilities. Among others, he should maintain on his audit file the

confirmations received as well as any undelivered letters of request for confirmation.

The management representation letter concerning liabilities and contingent liabilities

should also be maintained on the audit file.


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Conclusion:

It is concluded that VIP group of industries is private industry so it is working

effectively according to the standards, to avoid chances of errors and frauds. Its

management is stable, but its focus on management must be more so that it will

become world class organization. As our main topic is the audit of liability &

shareholders equity, so we observed that, VIP is working according to the said

policies and standards. It keeps validity in all accounting records, it also classify cut

off points properly and give proper disclosure of record. Mostly auditors relay on the

provided assurance given by VIP group of industries. One drawback of Vip That we

observed was that employees hire there are not fully aware of the advance usage of

information technology.

Suggestions:

VIP must make its management more efficient so that it will enable to become

world class competitive industry.

In VIP employees must be rewarded time to time, their wages must be paid

on time, so that chances of materiality become low.

Evidential matters must be clear, reliable and not be objected, by the auditor

so for this VIP must provide reliable information. Internal control must be strong more so that chances of risk becomes low,

chances of inherent, management risk will only be low if internal control will be

strong.

Documentation of each transaction must be kept, discipline must be

maintained. Here discipline in the sense of maintenance in the transactions.

Monitoring of performances must be the regular activity of VIP.


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The auditor should maintain adequate working papers regarding audit of

liabilities and contingent liabilities. Among others, he should maintain on his

audit file the confirmations received as well as any undelivered letters of

request for confirmation. The management representation letter concerning

liabilities and contingent liabilities should also be maintained on the audit file.

auditing project.2

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