AUDIT PROGRAM
CLIENT: ______E/AP/2
PERIOD: ______
SUBJECT: SHORT-TERM LOANS AND ADVANCES
Est. Hrs. / Phase/Level /Procedures
/ W/P Ref. / By / Comments/ExplanationsAUDIT OBJECTIVES
To determine whether :
A. / Loans and advances represent all amounts that can reasonably be expected to be realized through future operations or otherwise and are properly recorded.
B. / Interest on loans and advances, if any, has been properly calculated and recorded.
C. / Loans and advances are properly described and classified, and adequate disclosure with respect to these amounts have been made.
D. / Allowances for doubtful debts are adequate.
SUBSTANTIVE PROCEDURES
1. Overall Analytical Review
1.1 / Have the client prepare a detailed schedule of loans and advances.
1.2 / Compare current year balance(s) with prior year and investigate major fluctuation.
2. Circularization
2.1 / Select a sample of loans receivable from the detailed trial balances for confirmation. Particularly include any identified related party without exemption.
2.2 / Have the client prepare confirmation requests. Obtain requests and prepare confirmation control. Send first requests. Retain copies.
2.3 / Follow-up on confirmation requests and send second and third requests as required.
2.4 / Upon receiving confirmation replies, update the confirmation control and file the replies as clean; clean, with gratuitous comments; and exceptions.
2.5 / Prepare confirmation summary.
2.6 / Have client reconcile exceptions (consider using Standard Reconciliation Form). Verify the clerical accuracy of the reconciliations and review for completeness. Examine support for reconciling items, (Scope/Sample:______).
2.7 / Consider covering in covering letter if the significant amounts are not confirmed.
3. Subsequent realisation and other tests
3.1 / For non-replies, RPOs (returned by post office) perform procedures in lieu of circularization.
3.2 / Have the client list subsequent cash collections for all loans over Rs.____. Trace subsequent collections to the cash receipts records. (Scope/Sample:______). Ensure that receipts are not against subsequent advances.
3.3 / Verify closing balances and movements during the period by examining critical forms and documents and ensure that all transactions are properly supported. Obtain confirmations of all significant outstanding balances.
3.4 / Scan general ledger for any unusual transactions and loans granted and recovered during the period. Select a sample of transaction from the general ledger (Scope/Sample:_____) to ensure proper compliance of the Companies policies and laws and regulations.
3.5 / For employee loans ensure employees are valid employees of the company by ensuring they are included on the latest available payroll listing.
3.6 / In respect of the `advance for expenses’ review the listing for unusual items, and investigate as appropriate. Ensure that advance for expenses are supported by authorized subsequent invoices and that the services obtained relate to the period.
3.7 / In respect of the employee loans, vouch balances to the loan agreement. For each balance ensure, by review of personnel records, cash books and loan agreements, that the employee is making repayment in accordance with the loan agreement.
4. Terms and Conditions
4.1 / For all loans and advances, obtain loan agreements and review the adequacy of the documentation and make extracts, and ensure that they are in accordance with the Company’s policies.
4.2 / Check whether the terms and conditions of the loans are softer than those generally prevalent in the trade. If so, then inquire the reasons from the management and obtain a written representation from the management specifying the reasons for the softer terms of the loans and ensure that proper disclosure in the financial statement is made as per the requirements of the Companies Ordinance, 1984.
4.3 / For loans/advances to directors, chief executives, managing agents and employees of the Company ensure that the loan and the terms and conditions are in agreement with the rules and regulations of the Company. Ensure that proper disclosures are made.
4.4 / Ensure compliance of section 208 and 195 of the Companies Ordinance, 1984.
4.5 / For loans to subsidiaries, Directors and Executives scan general ledger to determine the maximum amount outstanding at any month end.
4.6 / Determine whether the amounts are of a short-term nature and are properly classified in the financial statements.
4.7 / Ensure that requirements of SRO 66 dated January 22, 2003 issued by SECP have been complied with.
5. Disbursements
5.1 / Check approval of appropriate level of management.
5.2 / Check that all formalities necessary before disbursement of loans have been fulfilled by the party.
5.3 / Check disbursements of funds with disbursement register and bank statement.
6. Repayments
6.1 / Check amount of repayment from repayment schedule or agreement.
6.2 / Check receipt of funds with receipt records and bank statement.
6.3 / Trace deductions from salary with the payroll records.
7. Aging and Provisioning
7.1 / Have the client prepare an age analysis. Review and scrutinize the age analysis for outstanding balances and investigate reasons for overdue receivables.
7.2 / Consider realisability of overdue/over aged balances and consider provisioning thereagainst.
7.3 / Have client identify any balances doubtful of recovery and consider appropriate provisioning thereagainst.
8. Interest Income
8.1 / Verify rate of interest from agreement.
8.2 / Check the number of days for which interest is to be charged.
8.3 / Recompute interest income on test basis.
9. Exercise of Powers by the Board
9.1 / Ensure that the following powers are exercised by the Board of Directors on behalf of the Company and decisions on material transactions or significant matters are documented by a resolution passed at a meeting of the Board:
· determination of the nature of loans and advances made by the company and fixing a monetary limit thereof;
· write-off of bad debts, advances and receivables and determination of a reasonable provision for doubtful debts; and
· write-off of other assets.
9.2 / Investment and disinvestments of funds where the maturity period of such investments is six months or more, except in the case of banking companies, trusts, mutual funds and insurance companies.
9.3 / Write-off of inventories and other assets; and
9.4 / Determination of the terms of and the circumstances in which a law suit may be compromised and a claim/right in favour of the company may be waived, released, extinguished or relinquished.
10. Foreign currency balances
10.1 / Ensure that all receivables in foreign currencies are re-translated at the exchange rate prevailing on the balance sheet date.
10.2 / Ensure that hedge accounting practices in accordance with IAS-39 have been followed with regard to any balances covered under forward exchange contracts.
10.3 / Have the client prepare a schedule of re-translation, from rate at initial recognition and at balance sheet date, of all receivables. Cross-refer exchange differences with financial charges/other income.
10.4 / Where the company uses forward exchange contracts, such contracts should be accounted for as assets and liabilities. Gains and losses on such financial instruments used for hedging of foreign currency transactions should be recognized as income and expense on the same basis as the corresponding hedged item. Foreign exchange contracts are translated at exchange rates prevailing at the balance sheet date (representing their fair value).
11. Related Party Balances
11.1 / Identify receivables from officers, directors and principal shareholders and determine whether they arise from routine transactions, such as regularly settled travel advances, or are related-party transactions.
11.2 / If related-party transactions, cross-refer it to the listing of such transactions obtained in the Related Party section of the Financial Reporting work.
11.3 / Review transactions in the accounts carefully to determine they have been properly authorized and are actually what they purport to be. Check credit postings to the accounts for propriety.
11.4 / Consider the need to consult legal counsel to determine the legality of loans and advances.
11.5 / Consider the collectibility of receivables from officers, directors, principal shareholders and other related parties during the review of the adequacy of the allowance for doubtful accounts.
11.6 / Consider the need to disclose the transactions and balances. Propose disclosure points, as appropriate.
11.7 / Obtain an understanding of the nature of the inter-company receivables, including the following:
- How they arose.
- How they are being or are to be liquidated.
- What security exists.
- What the funds were used for.
- What the tax implications are.
11.8 / If the transactions are other than routine transfers of goods and services, inspect supporting critical forms and documents ( ). Scope / Sample : ( )
11.9 / Tie amounts to the inter-company payables reflected in the audit working papers for the affiliates. If the inter-company accounts are not in balance, have client personnel prepare reconciliations. Examine support for significant or unusual reconciling items. Propose adjustments for unrecorded transactions, if appropriate.
11.10 / Ensure that requirements, with respect to related party balances, of SRO 66 dated January 22, 2003 issued by SECP have been complied with.
Other tests as deemed necessary
Management Letter
Prepare management letter points including:
· Internal control weaknesses;
· Business improvement opportunities;· Legal non-compliance;
· Accounting system deficiencies; and
· Errors and irregularities not material at the financial statements level.
Disclosure
Ensure appropriate disclosure in accordance with the reporting framework and fill relevant portion of FSDCL.Supervision, review and conclusion
1. / Perform Senior review and supervision.2. / Resolve Senior review points.
3. / Resolve Partner and Manager review points.
4. / Conclude response to the audit objectives.
Audit conclusion
Based on the substantive test procedures, I/we performed as outlined above, it is my/our opinion that the audit objectives set forth at the beginning of this audit program have been achieved, except as follows:
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