Beruflich Dokumente
Kultur Dokumente
PART TITLE
I CHARTERED ACCOUNTANTS ORDINANCE, 1961 (X OF 1961)
II CHARTERED ACCOUNTANTS BYE-LAWS, 1983
III FORMS OF APPLICATIONS, CERTIFICATES, AGREEMENTS
ETC
IV DIRECTIVES & IMPORTANT DECISIONS OF THE COUNCIL
AND ITS COMMITTEES
V ACCOUNTING
SECTION
A STATEMENTS OF STANDARD ACCOUNTING PRACTICES
B STATEMENTS OF GUIDELINES ON ACCOUNTING
PRINCIPLES AND PRACTICE
C TECHNICAL RELEASES
VI AUDITING
SECTION
A STATEMENTS OF STANDARD AUDITING PRACTICES
B STATEMENTS OF AUDITING GUIDELINES
C TECHNICAL RELEASES
PART I
CHARTERED ACCOUNTANTS ORDINANCE, 1961
(X OF 1961)
AS AMENDED UP TO JUNE, 1983
I
CHARTERED ACCOUNTANTS ORDINANCE, 1961
(X OF 1961)
AS AMENDED UP TO JUNE, 1983
CONTENTS
CHAPTER I PRELIMINARY PAGE
SECTION PARTICULARS 1
1. Short title, extent and commencement 1
2. Definitions
CHAPTER II
THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF PAKISTAN
4
SECTION PARTICULARS
3. Incorporation of the Institute 4
4. Entry of names in Register 4
5. Associates and Fellows 5
6. Certificate of Practice 6
7. Members to be known as Chartered
Accountants
7
8. Disabilities 7
CHAPTER III COUNCIL OF THE INSTITUTE 9
SECTION PARTICULARS 9
9. Constitution of the Council of the Institute 9
10. Mode of election of the Council 10
11. Nomination in default of election 10
12. President and Vice-President or Vice-Presidents 11
13. Resignation of membership and casual
vacancies
12
14. Duration and dissolution of Council 12
15. Functions of the Council 13
16. Staff, remuneration and allowances 14
17. Finances of the Institute 15
II
CHARTERED ACCOUNTANTS ORDINANCE, 1961
(X OF 1961)
AS AMENDED UP TO JUNE, 1983
CONTENTS
SECTION PARTICULARS PAGE
CHAPTER IV REGISTER OF MEMBERS 16
18. Register 16
19. Removal from the Register 16
CHAPTER V REGIONAL COMMITTEES
SECTION PARTICULARS
20. Constitution and functions of Regional
Committees
18
CHAPTER VA MISCONDUCT 19
SECTION PARTICULARS
20A Facts, etc. to be laid before the Investigation
Committee
19
20B Enquiry by the Investigation Committee 21
20C Member or student not found guilty 21
20D Orders by the Council if member found guilty 21
20E Orders by the Council if student found guilty 22
20F Hearing of case by the High Court 22
20G Effect of inquiry 22
20H Council and Investigation Committee to have
powers of Civil Court
23
20I Publication of findings and decisions 23
20J Return of Certificate 23
20K Appeal and revision 23
CHAPTER VI PENALTIES 25
SECTION PARTICULARS
21. Penalty for falsely claiming to be a member, etc. 25
22. Penalty for using name of the Council,
awarding degree of Chartered Accountancy, etc.
25
III
CHARTERED ACCOUNTANTS ORDINANCE, 1961
(X OF 1961)
AS AMENDED UP TO JUNE, 1983
CONTENTS
CHAPTER VI PENALTIES PAGE
SECTION PARTICULARS
23. Companies not to engage in accountancy 26
24. Unqualified persons not to sign documents 26
25. Sanction to prosecute 26
CHAPTER VII MISCELLANEOUS 27
SECTION PARTICULARS
26. Maintenance of branch offices 27
27. Powers to make bye-laws 27
28. Powers of Federal Government to direct
bye-laws to be made or to make or amend
bye-laws
29
29. References to registered accountants, etc.
to be construed as references to Chartered
Accountants
30
30. Amendment of section 144 of the
Companies Act, 1913 (VII of 1913)
30
31. Savings 30
SCHEDULES
I
Part 1 Professional Misconduct in relation to
chartered accountants in practice
33
Part 2 Professional Misconduct in relation to
members engaged in management
consultancy
35
Part 3 Professional Misconduct in relation to
members of the Institute in service
38
IV
CHARTERED ACCOUNTANTS ORDINANCE, 1961
(X OF 1961)
AS AMENDED UP TO JUNE, 1983
CONTENTS
SECTION PARTICULARS PAGE
Part 4 Professional misconduct in relation to
members of the Institute generally
38
SCHEDULES
II
Part 1 Professional Misconduct in relation to
Chartered Accountants in practice requiring
action by a High Court
40
Part 2 Professional Misconduct in relation to
members engaged in Management
Consultancy requiring action by a High
Court
42
SCHEDULES
III
Professional Misconduct in relation to the
students of the Institute
42
1
THE CHARTERED ACCOUNTANTS ORDINANCE, 1961
(X OF 1961)
AN ORDINANCE
to make provision for the regulation of the professional Accountants
WHEREAS it is expedient to make provision for the regulation of the profession of
accountants and for that purpose to establish an Institute of Chartered
Accountants:
Now, THEREFORE, in pursuance of the Proclamation of the seventh day of
October, 1958 and in exercise of all powers enabling him in that behalf the
President is pleased to make and promulgate the following Ordinance:-
CHAPTER I
PRELIMINARY
1. Short title, extent and commencement.- (1) This Ordinance may be
called the Chartered Accountants Ordinance, 1961.
(2) It extends to the whole of Pakistan
See Definitions
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
72
290.118 The office in which the engagement partner practices in connection
with the financial statement audit is not necessarily the office to which
that partner is assigned. Accordingly, when the engagement partner is
located in a different office from that of the other members of the
assurance team, judgment should be used to determine in which office
the partner practices in connection with that audit.
290.119 If other partners and managerial employees who provide non-assurance
services to the financial statement audit client, except those whose
involvement is clearly insignificant, or their immediate family, hold a
direct financial interest or a material indirect financial interest in the
audit client, the self- interest threat created would be so significant no
safeguard could reduce the threat to an acceptable level. Accordingly,
such personnel or their immediate family should not hold any such
financial interests in such an audit client.
290.120 A financial interest in a financial statement audit client that is held by
an immediate family member of (a) a partner located in the office in
which the engagement partner practices in connection with the audit, or
(b) a partner or managerial employee who provides non-assurance
services to the audit client is not considered to create an unacceptable
threat provided it is received as a result of their employment rights
(e.g., pension rights or share options) and, where necessary, appropriate
safeguards are applied to reduce any threat to independence to an
acceptable level.
290.121 A self- interest threat may be created if the firm, or the network firm, or
a member of the assurance team has an interest in an entity and a
financial statement audit client, or a director, officer or controlling
owner thereof also has an investment in that entity. Independence is not
compromised with respect to the audit client if the respective interests
of the firm, the network firm, or member of the assurance team, and the
audit client, or director, officer or controlling owner thereof are both
immaterial and the audit client cannot exercise significant influence
over the entity. If an interest is material, to either the firm, the network
firm or the audit client, and the audit client can exercise significant
influence over the entity, no safeguards are available to reduce the
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
73
threat to an acceptable level and the firm, or the network firm, should
either dispose of the interest or decline the audit engagement. Any
member of the assurance team with such a material interest should
either:
(a) Dispose of the interest;
(b) Dispose of a sufficient amount of the interest so that the
remaining interest is no longer material; or
(c) Withdraw from the audit.
290.122 Chartered Accountants in practice should also keep in mind the
requirements of clause (d) of sub-section (3) of section 254 of the
Companies Ordinance, 1984 regarding their indebtedness to the financial
statement audit client.
Provisions Applicable to Non-Financial Statement Audit Assurance Clients
290.123 If a firm has a direct financial interest in an assurance client that is not a
financial statement audit client the self- interest threat created would be
so significant no safeguard could reduce the threat to an acceptable
level. Consequently, disposal of the financial interest would be the only
action appropriate to permit the firm to perform the engagement.
290.124 If a firm has a material indirect financial interest in an assurance client
that is not a financial statement audit client a self- interest threat is also
created. The only action appropriate to permit the firm to perform the
engagement would be for the firm to either dispose of the indirect
interest in total or to dispose of a sufficient amount of it so that the
remaining interest is no longer material.
290.125 If a firm has a material financial interest in an entity that has a
controlling interest in an assurance client that is not a financial
statement audit client, the self- interest threat created would be so
significant no safeguard could reduce the threat to an acceptable level.
The only action appropriate to permit the firm to perform the
engagement would be for the firm either to dispose of the financial
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
74
interest in total or to dispose of a sufficient amount of it so that the
remaining interest is no longer material.
290.126 When a restricted use report for an assurance engagement that is not a
financial statement audit engagement is issued, exceptions to the
provisions in paragraphs 290.106-290.110 and 290.123-290.125 are set
out in 290.19.
Loans and Guarantees
290.127 A loan, or a guarantee of a loan, to the firm from an assurance client
that is a bank or a similar institution, would not create a threat to
independence provided the loan, or guarantee, is made under normal
lending procedures, terms and requirements and the loan is immaterial
to both the firm and the assurance client. If the loan is material to the
assurance client or the firm it may be possible, through the application
of safeguards, to reduce the self- interest threat created to an acceptable
level. Such safeguards might include involving an additional chartered
accountant from outside the firm, or network firm, to review the work
performed.
290.128 A loan, or a guarantee of a loan, from an assurance client that is a bank
or a similar institution, to a member of the assurance team or their
immediate family would not create a threat to independence provided
the loan, or guarantee, is made under normal lending procedures, terms
and requirements. Examples of such loans include home mortgages,
bank overdrafts, car loans and credit card balances.
290.129 Similarly, deposits made by, or brokerage accounts of, a firm or a
member of the assurance team with an assurance client that is a bank,
broker or similar institution would not create a threat to independence
provided the deposit or account is held under normal commercial terms.
290.130 If the firm, or a member of the assurance team, makes a loan to an
assurance client, that is not a bank or similar institution, or guarantees
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
75
such an assurance clients borrowing, the self- interest threat created
would be so significant no safeguard could reduce the threat to an
acceptable level, unless the loan or guarantee is immaterial to both the
firm or the member of the assurance team and the assurance client.
290.131 Similarly, if the firm or a member of the assurance team accepts a loan
from, or has borrowing guaranteed by, an assurance client that is not a
bank or similar institution, the self- interest threat created would be so
significant no safeguard could reduce the threat to an acceptable level,
unless the loan or guarantee is immaterial to both the firm or the
member of the assurance team and the assurance client.
290.132 The examples in paragraphs 290.127-290.131 relate to loans and
guarantees between the firm and an assurance client. In the case of a
financial statement audit engagement, the provisions should be applied
to the firm, all network firms and the audit client.
Close Business Relationships with Assurance Clients
290.133 A close business relationship between a firm or a member of the
assurance team and the assurance client or its management, or between
the firm, a network firm and a financial statement audit client, will
involve a commercial or common financial interest and may create self-
interest and intimidation threats. The following are examples of such
relationships:
Having a material financial interest in a joint venture with the
assurance client or a controlling owner, director, officer or other
individual who performs senior managerial functions for that
client.
Arrangements to combine one or more services or products of
the firm with one or more services or products of the assurance
client and to market the package with reference to both parties.
Distribution or marketing arrangements under which the firm
acts as a distributor or marketer of the assurance clients
products or services, or the assurance client acts as the
distributor or marketer of the products or services of the firm.
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
76
In the case of a financial statement audit client, unless the financial
interest is immaterial and the relationship is clearly insignificant to the
firm, the network firm and the audit client, no safeguards could reduce
the threat to an acceptable level. In the case of an assurance client that is
not a financial statement audit client, unless the financial interest is
immaterial and the relationship is clearly insignificant to the firm and the
assurance client, no safeguards could reduce the threat to an acceptable
level. Consequently, in both these circumstances the only possible
courses of action are to:
(a) Terminate the business relationship;
(b) Reduce the magnitude of the relationship so that the financial
interest is immaterial and the relationship is clearly insignificant;
or
(c) Refuse to perform the assurance engagement.
Unless any such financial interest is immaterial and the relationship is
clearly insignificant to the member of the assurance team, the only
appropriate safeguard would be to remove the individual from the
assurance team.
290.134 In the case of a financial statement audit client, business relationships
involving an interest held by the firm, a network firm or a member of
the assurance team or their immediate family in a closely held entity
when the audit client or a director or officer of the audit client, or any
group thereof, also has an interest in that entity, do not create threats to
independence provided:
(a) The relationship is clearly insignificant to the firm, the network
firm and the audit client;
(b) The interest held is immaterial to the investor, or group of
investors; and
(c) The interest does not give the investor, or group of investors, the
ability to control the closely held entity.
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
77
290.135 The purchase of goods and services from an assurance client by the firm
(or from a financial statement audit client by a network firm) or a
member of the assurance team would not generally create a threat to
independence providing the transaction is in the normal course of
business and on an arms length basis. However, such transactions may
be of a nature or magnitude so as to create a self- interest threat. If the
threat created is other than clearly insignificant, safeguards should be
considered and applied as necessary to reduce the threat to an acceptable
level. Such safeguards might include:
Eliminating or reducing the magnitude of the transaction;
Removing the individual from the assurance team; or
Discussing the issue with those charged with governance, such
as the audit committee.
Family and Personal Relationships
290.136 Family and personal relationships between a member of the assurance
team and a director, an officer or certain employees, depending on their
role, of the assurance client, may create self- interest, familiarity or
intimidation threats. It is impracticable to attempt to describe in detail
the significance of the threats that such relationships may create. The
significance will depend upon a number of factors including the
individuals responsibilities on the assurance engagement, the closeness
of the relationship and the role of the family member or other
individual within the assurance client. Consequently, there is a wide
spectrum of circumstances that will need to be evaluated and
safeguards to be applied to reduce the threat to an acceptable level.
290.137 When an immediate family member of a member of the assurance team
is a director, an officer or an employee of the assurance client in a
position to exert direct and significant influence over the subject matter
information of the assurance engagement, or was in such a position
during any period covered by the engagement, the threats to
independence can only be reduced to an acceptable level by removing
the individual from the assurance team. The closeness of the
relationship is such that no other safeguard could reduce the threat to
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
78
independence to an acceptable level. If application of this safeguard is
not used, the only course of action is to withdraw from the assurance
engagement. For example, in the case of an audit of financial
statements, if the spouse of a member of the assurance team is an
employee in a position to exert direct and significant influence over the
preparation of the audit clients accounting records or financial
statements, the threat to independence could only be reduced to an
acceptable level by removing the individual from the assurance team.
290.138 When an immediate family member of a member the assurance team is
an employee in a position to exert direct and significant influence over
the subject matter of the engagement, threats to independence may be
created. The significance of the threats will depend on factors such as:
The position the immediate family member holds with the client;
and
The role of the professional on the assurance team.
The significance of the threat should be evaluated and, if the threat is
other than clearly insignificant, safeguards should be considered and
applied as necessary to reduce the threat to an acceptable level. Such
safeguards might include:
Removing the individual from the assurance team;
Where possible, structuring the responsibilities of the assurance
team so that the professional does not deal with matters that are
within the responsibility of the immediate family member; or
Policies and procedures to empower staff to communicate to
senior levels within the firm any issue of independence and
objectivity that concerns them.
290.139 When a close family member of a member of the assurance team is a
director, an officer, or an employee of the assurance client in a position
to exert direct and significant influence over the subject matter
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
79
information of the assurance engagement, threats to independence may
be created. The significance of the threats will depend on factors such
as:
The position the close family member holds with the client; and
The role of the professional on the assurance team.
The significance of the threat should be evaluated and, if the threat is
other than clearly insignificant, safeguards should be considered and
applied as necessary to reduce the threat to an acceptable level. Such
safeguards might include:
Removing the individual from the assurance team;
Where possible, structuring the responsibilities of the assurance
team so that the professional does not deal with matters that are
within the responsibility of the close family member; or
Policies and procedures to empower staff to communicate to
senior levels within the firm any issue of independence and
objectivity that concerns them.
290.140 In addition, self- interest, familiarity or intimidation threats may be
created when a person who is other than an immediate or close family
member of a member of the assurance team has a close relationship
with the member of the assurance team and is a director, an officer or
an employee of the assurance client in a position to exert direct and
significant influence over the subject matter information of the
assurance engagement. Therefore, members of the assurance team are
responsible for identifying any such persons and for consulting in
accordance with firm procedures. The evaluation of the significance of
any threat created and the safeguards appropriate to eliminate the threat
or reduce it to an acceptable level will include considering matters such
as the closeness of the relationship and the role of the individual within
the assurance client.
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
80
290.141 Consideration should be given to whether self- interest, familiarity or
intimidation threats may be created by a personal or family relationship
between a partner or employee of the firm who is not a member of the
assurance team and a director, an officer or an employee of the
assurance client in a position to exert direct and significant influence
over the subject matter information of the assurance engagement.
Therefore partners and employees of the firm are responsible for
identifying any such relationships and for consulting in accordance
with firm procedures. The evaluation of the significance of any threat
created and the safeguards appropriate to eliminate the threat or reduce
it to an acceptable level will include considering matters such as the
closeness of the relationship, the interaction of the firm professional
with the assurance team, the position held within the firm, and the role
of the individual within the assurance client.
290.142 An inadvertent violation of this section as it relates to family and
personal relationships would not impair the independence of a firm or a
member of the assurance team when:
(a) The firm has established policies and procedures that require all
professionals to report promptly to the firm any breaches
resulting from changes in the employment status of their
immediate or close family members or other personal
relationships that create threats to independence;
(b) Either the responsibilities of the assurance team are re-structured
so that the professional does not deal with matters that are
within the responsibility of the person with whom he or she is
related or has a personal relationship, or, if this is not possible,
the firm promptly removes the professional from the assurance
engagement; and
(c) Additional care is given to reviewing the work of the
professional.
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
81
290.143 When an inadvertent violation of this section relating to family and
personal relationships has occurred, the firm should consider whether
any safeguards should be applied. Such safeguards might include:
Involving an additional chartered accountant who did not take
part in the assurance engagement to review the work done by the
member of the assurance team; or
Excluding the individual from any substantive decision- making
concerning the assurance engagement.
Employment with Assurance Clients
290.144 A firm or a member of the assurance teams independence may be
threatened if a director, an officer or an employee of the assurance
client in a position to exert direct and significant influence over the
subject matter information of the assurance engagement has been a
member of the assurance team or partner of the firm. Such
circumstances may create self- interest, familiarity and intimidation
threats particularly when significant connections remain between the
individual and his or her former firm. Similarly, a member of the
assurance teams independence may be threatened when an individual
participates in the assurance engagement knowing, or having reason to
believe, that he or she is to, or may, join the assurance client some time
in the future.
290.145 If a member of the assurance team, partner or former partner of the firm
has joined the assurance client, the significance of the self- interest,
familiarity or intimidation threats created will depend upon the
following factors:
(a) The position the individual has taken at the assurance client.
(b) The amount of any involvement the individual will have with the
assurance team.
(c) The length of time that has passed since the individual was a
member of the assurance team or firm.
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
82
(d) The former position of the individual within the assurance team
or firm.
The significance of the threat should be evaluated and, if the threat is
other than clearly insignificant, safeguards should be considered and
applied as necessary to reduce the threat to an acceptable level. Such
safeguards might include:
Considering the appropriateness or necessity of modifying the
assurance plan for the assurance engagement;
Assigning an assurance team to the subsequent assurance
engagement that is of sufficient experience in relation to the
individual who has joined the assurance client;
Involving an additional chartered accountant who was not a
member of the assurance team to review the work done or
otherwise advise as necessary; or
Quality control review of the assurance engagement.
In all cases, all of the following safeguards are necessary to reduce the
threat to an acceptable level:
(a) The individual concerned is not entitled to any benefits or
payments from the firm unless these are made in accordance
with fixed pre-determined arrangements. In addition, any
amount owed to the individual should not be of such
significance to threaten the firms independence.
(b) The individual does not continue to participate or appear to
participate in the firms business or professional activities.
290.146 A self- interest threat is created when a member of the assurance team
participates in the assurance engagement while knowing, or having
reason to believe, that he or she is to, or may, join the assurance client
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
83
some time in the future. This threat can be reduced to an acceptable
level by the application of all of the following safeguards:
(a) Policies and procedures to require the individual to notify the
firm when entering serious employment negotiations with the
assurance client.
(b) Removal of the individual from the assurance engagement.
In addition, consideration should be given to performing an independent
review of any significant judgments made by that individual while on
the engagement.
290.147 In case of audit of listed companies, a chartered accountant in practice
should bear in mind the requirements of following clause (xlii) of the
Code of Corporate Governance:-
(xiii) No listed company shall appoint a person as the CEO, the CFO,
an internal auditor or a director of the listed company who was a
partner of the firm of its external auditors (or an employee
involved in the audit of the listed company) at any time during
the two years preceding such appointment or is a close relative,
i.e. spouse, parents, dependents and non-dependent children, of
such partner (or employee).
Recent Service with Assurance Clients
290.148 To have a former officer, director or employee of the assurance client
serve as a member of the assurance team may create self- interest,
selfreview and familiarity threats. This would be particularly true when
a member of the assurance team has to report on, for example, subject
matter information he or she had prepared or elements of the financial
statements he or she had valued while with the assurance client.
290.149 If, during the period covered by the assurance report, a member of the
assurance team had served as an officer or director of the assurance
client, or had been an employee in a position to exert direct and
significant influence over the subject matter information of the
assurance engagement, the threat created would be so significant no
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
84
safeguard could reduce the threat to an acceptable level. Consequently,
such individuals should not be assigned to the assurance team.
290.150 If, prior to the period covered by the assurance report, a member of the
assurance team had served as an officer or director of the assurance
client, or had been an employee in a position to exert direct and
significant influence over the subject matter information of the
assurance engagement, this may create self- interest, self-review and
familiarity threats. For example, such threats would be created if a
decision made or work performed by the individual in the prior period,
while employed by the assurance client, is to be evaluated in the current
period as part of the current assurance engagement. The significance of
the threats will depend upon factors such as:
The position the individual held with the assurance client;
The length of time that has passed since the individual left the
assurance client; and
The role the individual plays on the assurance team.
The significance of the threat should be evaluated and, if the threat is
other than clearly insignificant, safeguards should be considered and
applied as necessary to reduce the threat to an acceptable level. Such
safeguards might include:
Involving an additional chartered accountant to review the work
done by the individual as part of the assurance team or otherwise
advise as necessary; or
Discussing the issue with those charged with governance, such as
the audit committee.
Serving as an Officer or Director on the Board of Assurance Clients
290.151 If a partner or employee of the firm serves as an officer or as a director
on the board of an assurance client the self- review and self- interest
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
85
threats created would be so significant no safeguard could reduce the
threats to an acceptable level. Consequently, if such an individual were
to accept such a position the only course of action is to refuse to
perform, or to withdraw from the assurance engagement.
290.152 The position of Company Secretary has different implications in
different jurisdictions. The duties may range from administrative duties
such as personnel management and the maintenance of company
records and registers, to duties as diverse as ensuring that the company
complies with regulations or providing advice on corporate governance
matters. Generally this position is seen to imply a close degree of
association with the entity and may create self- review and advocacy
threats.
290.153 If a partner or employee of the firm or a network firm serves as
Company Secretary for a financial statement audit client the self- review
and advocacy threats created would generally be so significant, no
safeguard could reduce the threat to an acceptable level.
290.154 Routine administrative services to support a company secretarial
function or advisory work in relation to company secretarial
administration matters is generally not perceived to impair
independence, provided client management makes all relevant
decisions.
Long Association of Senior Personnel with Assurance Clients
General Provisions
290.155 Using the same senior personnel on an assurance engagement over a
long period of time may create a familiarity threat. The significance of
the threat will depend upon factors such as:
The length of time that the individual has been a member of the
assurance team;
The role of the individual on the assurance team;
The structure of the firm; and
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
86
The nature of the assurance engagement.
The significance of the threat should be evaluated and, if the threat is
other than clearly insignificant, safeguards should be considered and
applied to reduce the threat to an acceptable level. Such safeguards
might include:
Rotating the senior personnel off the assurance team;
Involving an additional chartered accountant who was not a
member of the assurance team to review the work done by the
senior personnel or otherwise advise as necessary; or
Independent internal quality reviews.
Financial Statement Audit Clients that are Listed Entities
290.156 Using the same engagement partner or the same individual responsible
for the engagement quality control review
on a financial statement
audit over a prolonged period may create a familiarity threat. This
threat is particularly relevant in the context of the financial statement
audit of a listed entity and safeguards should be applied in such
situations to reduce such threat to an acceptable level. Accordingly in
respect of the financial statement audit of listed entities the chartered
accountants in practice shall take cognizance of the following
requirement s of the Code of Corporate Governance:
(a) All banks DFIs are required to ensure that the external auditors
are rotated on expiration of five years. In case of banks / DFIs
having two audit firms jointly auditing their accounts and both of
them complete their five years period at the same time, one of
them will be rotated on completion of five years and the other
one in the next year.
(b) All listed companies in the financial sector shall change their
auditors every five years. Financial sector for this purpose means
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
87
Non-Banking Finance Companies (NBFCs), Modarabas and
Insurance Companies.
(c ) All listed companies other than those mentioned at (a) and (b)
shall at a minimum rotate the engagement partner after every
five years.
(d) A partner rotating after five years should not resume the lead
engagement partner role until a further period of time, normally
two years has elapsed.
Provision of Non-Assurance Services to Assurance Clients
290.157 Firms have traditionally provided to their assurance clients a range of
non-assurance services that are consistent with their skills and
expertise. Assurance clients value the benefits that derive from having
these firms, which have a good understanding of the business, bring
their knowledge and skill to bear in other areas. Furthermore, the
provision of such nonassurance services will often result in the
assurance team obtaining information regarding the assurance clients
business and operations that is helpful in relation to the assurance
engagement. The greater the knowledge of the assurance clients
business, the better the assurance team will understand the assurance
clients procedures and controls, and the business and financial risks
that it faces. The provision of nonassurance services may, however,
create threats to the independence of the firm, a network firm or the
members of the assurance team, particularly with respect to perceived
threats to independence. Consequently, it is necessary to evaluate the
significance of any threat created by the provision of such services. In
some cases it may be possible to eliminate or reduce the threat created
by application of safeguards. In other cases no safeguards are available
to reduce the threat to an acceptable level.
290.158 The following activities would generally create self- interest or self
review threats that are so significant that only avoidance of the activity
or refusal to perform the assurance engagement would reduce the
threats to an acceptable level:
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Authorizing, executing or consummating a transaction, or
otherwise exercising authority on behalf of the assurance client,
or having the authority to do so.
Determining which recommendation of the firm should be
implemented.
Reporting, in a management role, to those charged with
governance.
290.159 The examples set out in paragraphs 290.170-290.209 are addressed in
the context of the provision of non-assurance services to an assurance
client. The potential threats to independence will most frequently arise
when a non-assurance service is provided to a financial statement audit
client. The financial statements of an entity provide financial
information about a broad range of transactions and events that have
affected the entity. The subject matter information of other assurance
services, however, may be limited in nature. Threats to independence,
however, may also arise when a firm provides a non-assurance service
related to the subject matter information, of a non- financial statement
audit assurance engagement. In such cases, consideration should be
given to the significance of the firms involvement with the subject
matter information, of the engagement, whether any self- review threats
are created and whether any threats to independence could be reduced
to an acceptable level by application of safeguards, or whether the
engagement should be declined. When the non-assurance service is not
related to the subject matter information, of the non- financial statement
audit assurance engagement, the threats to independence will generally
be clearly insignificant.
290.160 The following activities may also create self-review or self- interest
threats:
Having custody of an assurance clients assets.
Supervising assurance client employees in the performance of
their normal recurring activities.
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Preparing source documents or originating data, in electronic or
other form, evidencing the occurrence of a transaction (for
example, purchase orders, payroll time records, and customer
orders).
The significance of any threat created should be evaluated and, if the
threat is other than clearly insignificant, safeguards should be considered
and applied as necessary to eliminate the threat or reduce it to an
acceptable level. Such safeguards might include:
Making arrangements so that personnel providing such services
do not participate in the assurance engagement;
Involving an additional chartered accountant to advise on the
potential impact of the activities on the independence of the firm
and the assurance team; or
Other relevant safeguards set out in national regulations.
290.161 New developments in business, the evolution of financial markets,
rapid changes in information technology, and the consequences for
management and control, make it impossible to draw up an all-
inclusive list of all situations when providing non-assurance services to
an assurance client might create threats to independence and of the
different safeguards that might eliminate these threats or reduce them to
an acceptable level. In general, however, a firm may provide services
beyond the assurance engagement provided any threats to
independence have been reduced to an acceptable level.
290.162 The following safeguards may be particularly relevant in reducing to an
acceptable level threats created by the provision of non-assurance
services to assurance clients:
Policies and procedures to prohibit professional staff from
making management decisions for the assurance client, or
assuming responsibility for such decisions.
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Discussing independence issues related to the provision of
nonassurance services with those charged with governance, such
as the audit committee.
Policies within the assurance client regarding the oversight
responsibility for provision of non-assurance services by the
firm.
Involving an additional chartered accountant to advise on the
potential impact of the non-assurance engagement on the
independence of the member of the assurance team and the firm.
Involving an additional chartered accountant outside of the firm
to provide assurance on a discrete aspect of the assurance
engagement.
Obtaining the assurance clients acknowledgement of
responsibility for the results of the work performed by the firm.
Disclosing to those charged with governance, such as the audit
committee, the nature and extent of fees charged.
Making arrangements so that personnel providing non-assurance
services do not participate in the assurance engagement.
290.163 Before the firm accepts an engagement to provide a non-assurance
service to an assurance client, consideration should be given to whether
the provision of such a service would create a threat to independence.
In situations when a threat created is other than clearly insignificant,
the non-assurance engagement should be declined unless appropriate
safeguards can be applied to eliminate the threat or reduce it to an
acceptable level.
290.164 The provision of certain non-assurance services to financial statement
audit clients may create threats to independence so significant that no
safeguard could eliminate the threat or reduce it to an acceptable level.
However, the provision of such services to a related entity, division or
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discrete financial statement item of such clients may be permissible
when any threats to the firms independence have been reduced to an
acceptable level by arrangements for that related entity, division or
discrete financial statement item to be audited by another firm or when
another firm reperforms the non-assurance service to the extent
necessary to enable it to take responsibility for that service.
Preparing Accounting Records and Financial Statements
290.165 Assisting a financial statement audit client in matters such as preparing
accounting records or financial statements may create a self- review
threat when the financial statements are subsequently audited by the
firm.
290.166 It is the responsibility of financial statement audit client management to
ensure that accounting records are kept and financial statements are
prepared, although they may request the firm to provide assistance. If
firm, or network firm, personnel providing such assistance make
management decisions, the self-review threat created could not be
reduced to an acceptable level by any safeguards. Consequently,
personnel should not make such decisions. Examples of such
managerial decisions include:
Determining or changing journal entries, or the classifications for
accounts or transaction or other accounting records without
obtaining the approval of the financial statement audit client;
Authorizing or approving transactions; and
Preparing source documents or originating data (including
decisions on valuation assumptions), or making changes to such
documents or data.
290.167 The audit process involves extensive dialogue between the firm and
management of the financial statement audit client. During this process,
management requests and receives significant input regarding such
matters as accounting principles and financial statement disclosure, the
appropriateness of controls and the methods used in determining the
stated amounts of assets and liabilities. Technical assistance of this
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nature and advice on accounting principles for financial statement audit
clients are an appropriate means to promote the fair presentation of the
financial statements. The provision of such advice does not generally
threaten the firms independence. Similarly, the financial statement
audit process may involve assisting an audit client in resolving account
reconciliation problems, analyzing and accumulating information for
regulatory reporting, assisting in the preparation of consolidated
financial statements (including the translation of local statutory
accounts to comply with group accounting policies and the transition to
a different reporting framework such as International Financial
Reporting Standards), drafting disclosure items, proposing adjusting
journal entries and providing assistance and advice in the preparation of
local statutory accounts of subsidiary entities. These services are
considered to be a normal part of the audit process and do not, under
normal circumstances, threaten independence.
General Provisions
290.168 The examples in paragraphs 290.174-290.177 indicate that self- review
threats may be created if the firm is involved in the preparation of
accounting records or financial statements and those financial
statements are subsequently the subject matter information of an audit
engagement of the firm. This notion may be equally applicable in
situations when the subject matter information of the assurance
engagement is not financial statements. For example, a self- review
threat would be created if the firm developed and prepared prospective
financial information and subsequently provided assurance on this
prospective financial information. Consequently, the firm should
evaluate the significance of any self-review threat created by the
provision of such services. If the self-review threat is other than clearly
insignificant safeguards should be considered and applied as necessary
to reduce the threat to an acceptable level.
Financial Statements Audit Clients that are Not Listed Entities
290.169 The firm, or a network firm, may provide a financial statement audit
client that is not a listed entity with accounting and bookkeeping
services, including payroll services, of a routine or mechanical nature,
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provided any self-review threat created is reduced to an acceptable
level. Examples of such services include:
Recording transactions for which the audit client has determined
or approved the appropriate account classification;
Posting coded transactions to the audit clients general ledger;
Preparing financial statements based on information in the trial
balance; and
Posting the audit client approved entries to the trial balance.
The significance of any threat created should be evaluated and, if the
threat is other than clearly insignificant, safeguards should be considered
and applied as necessary to reduce the threat to an acceptable level. Such
safeguards might include:
Making arrangements so such services are not performed by a
member of the assurance team;
Implementing policies and procedures to prohibit the individual
providing such services from making any managerial decisions
on behalf of the audit client;
Requiring the source data for the accounting entries to be
originated by the audit client;
Requiring the underlying assumptions to be originated and
approved by the audit client; or
Obtaining audit client approval for any proposed journal entries
or other changes affecting the financial statements.
Valuation Services
290.170 A valuation comprises the making of assumptions with regard to future
developments, the application of certain methodologies and techniques,
and the combination of both in order to compute a certain value, or
range of values, for an asset, a liability or for a business as a whole.
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290.171 A self-review threat may be created when a firm or network firm
performs a valuation for a financial statement audit client that is to be
incorporated into the clients financial statements.
290.172 If the valuation service involves the valuation of matters material to the
financial statements and the valuation involves a significant degree of
subjectivity, the self- review threat created could not be reduced to an
acceptable level by the application of any safeguard. Accordingly, such
valuation services should not be provided or, alternatively, the only
course of action would be to withdraw from the financial statement
audit engagement.
290.173 Performing valuation services for a financial statement audit client that
are neither separately, nor in the aggregate, material to the financial
statements, or that do not involve a significant degree of subjectivity,
may create a self- review threat that could be reduced to an acceptable
level by the application of safeguards. Such safeguards might include:
Involving an additional chartered accountant who was not a
member of the assurance team to review the work done or
otherwise advise as necessary;
Confirming with the audit client their understanding of the
underlying assumptions of the valuation and the methodology to
be used and obtaining approval for their use;
Obtaining the audit clients acknowledgement of responsibility
for the results of the work performed by the firm; and
Making arrangements so that personnel providing such services
do not participate in the audit engagement.
In determining whether the above safeguards would be effective,
consideration should be given to the following matters:
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(a) The extent of the audit clients knowledge, experience and
ability to evaluate the issues concerned, and the extent of their
involvement in determining and approving significant matters of
judgment.
(b) The degree to which established methodologies and professional
guidelines are applied when performing a particular valuation
service.
(c) For valuations involving standard or established methodologies,
the degree of subjectivity inherent in the item concerned.
(d) The reliability and extent of the underlying data.
(e) The degree of dependence on future events of a nature which
could create significant volatility inherent in the amounts
involved.
(f) The extent and clarity of the disclosures in the financial
statements.
290.174 When a firm, or a network firm, performs a valuation service for a
financial statement audit client for the purposes of making a filing or
return to a tax authority, computing an amount of tax due by the client,
or for the purpose of tax planning, this would not create a significant
threat to independence because such valuations are generally subject to
external review, for example by a tax authority.
290.175 When the firm performs a valuation that forms part of the subject
matter information of an assurance engagement that is not a financial
statement audit engagement, the firm should consider any self- review
threats. If the threat is other than clearly insignificant, safeguards
should be considered and applied as necessary to eliminate the threat or
reduce it to an acceptable level.
Provision of Taxation Services to Financial Statement Audit Clients
290.176 The firm may be asked to provide taxation services to a financial
statement audit client. Taxation services comprise a broad range of
services, including compliance, planning, provision of formal taxation
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opinions and assistance in the resolution of tax disputes. Such
assignments are generally not seen to create threats to independence.
Provision of Internal Audit Services to Financial Statement Audit Clients
290.177 A self- review threat may be created when a firm, or network firm,
provides internal audit services to a financial statement audit client.
Internal audit services may comprise an extension of the firms audit
service beyond requirements of generally accepted auditing standards,
assistance in the performance of a clients internal audit activities or
outsourcing of the activities. In evaluating any threats to independence,
the nature of the service will need to be considered. For this purpose,
internal audit services do not include operational internal audit services
unrelated to the internal accounting controls, financial systems or
financial statements.
290.178 Services involving an extension of the procedures required to conduct a
financial statement audit in accordance with International Standards on
Auditing would not be considered to impair independence with respect
to the audit client provided that the firms or network firms personnel
do not act or appear to act in a capacity equivalent to a member of audit
client management.
290.179 When the firm, or a network firm, provides assistance in the
performance of a financial statement audit clients internal audit
activities or undertakes the outsourcing of some of the activities, any
self-review threat created may be reduced to an acceptable level by
ensuring that there is a clear separation between the management and
control of the internal audit by client management and the internal audit
activities themselves.
290.180 Performing a significant portion of the financial statement audit clients
internal audit activities may create a self-review threat and a firm, or
network firm, should consider the threats and proceed with caution
before taking on such activities. Appropriate safeguards should be put
in place and the firm, or network firm, should, in particular, ensure that
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the audit client acknowledges its responsibilities for establishing,
maintaining and monitoring the system of internal controls.
290.181 Safeguards that should be applied in all circumstances to reduce any
threats created to an acceptable level include ensuring that:
(a) The audit client is responsible for internal audit activities and
acknowledges its responsibility for establishing, maintaining and
monitoring the system of internal controls;
(b) The audit client designates a competent employee, preferably
within senior management, to be responsible for internal audit
activities;
(c) The audit client, the audit committee or supervisory body
approves the scope, risk and frequency of internal audit work;
(d) The audit client is responsible for evaluating and determining
which recommendations of the firm should be implemented;
(e) The audit client evaluates the adequacy of the internal audit
procedures performed and the findings resulting from the
performance of those procedures by, among other things,
obtaining and acting on reports from the firm; and
(f) The findings and recommendations resulting from the internal
audit activities are reported appropriately to the audit committee
or supervisory body.
290.182 Consideration should also be given to whether such non-assurance
services should be provided only by personnel not involved in the
financial statement audit engagement and with different reporting lines
within the firm.
Provision of IT Systems Services to Financial Statement Audit Clients
290.183 The provision of services by a firm or network firm to a financial
statement audit client that involve the design and implementation of
financial information technology systems that are used to generate
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information forming part of a clients financial statements may create a
self-review threat.
290.184 The self- review threat is likely to be too significant to allow the
provision of such services to a financial statement audit client unless
appropriate safeguards are put in place ensuring that:
(a) The audit client acknowledges its responsibility for establishing
and monitoring a system of internal controls;
(b) The audit client designates a competent employee, preferably
within senior management, with the responsibility to make all
management decisions with respect to the design and
implementation of the hardware or software system;
(c) The audit client makes all management decisions with respect to
the design and implementation process;
(d) The audit client evaluates the adequacy and results of the design
and implementation of the system; and
(e) The audit client is responsible for the operation of the system
(hardware or software) and the data used or generated by the
system.
290.185 Consideration should also be given to whether such non-assurance
services should be provided only by personnel not involved in the
financial statement audit engagement and with different reporting lines
within the firm.
290.186 The provision of services by a firm, or network firm, to a financial
statement audit client which involve either the design or the
implementation of financial information technology systems that are
used to generate information forming part of a clients financial
statements may also create a self- review threat. The significance of the
threat, if any, should be evaluated and, if the threat is other than clearly
insignificant, safeguards should be considered and applied as necessary
to eliminate the threat or reduce it to an acceptable level.
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290.187 The provision of services in connection with the assessment, design and
implementation of internal accounting controls and risk management
controls are not considered to create a threat to independence provided
that firm or network firm personnel do not perform management
functions.
Temporary Staff Assignments to Financial Statement Audit Clients
290.188 The lending of staff by a firm, or network firm, to a financial statement
audit client may create a self-review threat when the individual is in a
position to influence the preparation of a clients accounts or financial
statements. In practice, such assistance may be given (particularly in
emergency situations) but only on the understanding that the firms or
network firms personnel will not be involved in:
(a) Making management decisions;
(b) Approving or signing agreements or other similar documents; or
(c) Exercising discretionary authority to commit the client.
Each situation should be carefully analyzed to identify whether any
threats are created and whether appropriate safeguards should be
implemented. Safeguards that should be applied in all circumstances to
reduce any threats to an acceptable level include:
The staff providing the assistance should not be given audit
responsibility for any function or activity that they performed or
supervised during their temporary staff assignment; and
The audit client should acknowledge its responsibility for
directing and supervising the activities of firm, or network firm,
personnel.
Provision of Litigation Support Services to Financial Statement Audit Clients
290.189 Litigation support services may include activities such as acting as an
expert witness, calculating estimated damages or other amounts that
might become receivable or payable as the result of litigation or other
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legal dispute, and assistance with document management and retrieval
in relation to a dispute or litigation.
290.190 A self-review threat may be created when the litigation support services
provided to a financial statement audit client include the estimation of
the possible outcome and thereby affects the amounts or disclosures to
be reflected in the financial statements. The significance of any threat
created will depend upon factors such as:
The materiality of the amounts involved;
The degree of subjectivity inherent in the matter concerned; and
The nature of the engagement.
The firm, or network firm, should evaluate the significance of any threat
created and, if the threat is other than clearly insignificant, safeguards
should be considered and applied as necessary to eliminate the threat or
reduce it to an acceptable level. Such safeguards might include:
Policies and procedures to prohibit individuals assisting the audit
client from making managerial decisions on behalf of the client;
Using professionals who are not members of the assurance team
to perform the service; or
The involvement of others, such as independent experts.
290.191 If the role undertaken by the firm or network firm involved making
managerial decisions on behalf of the financial statement audit client,
the threats created could not be reduced to an acceptable level by the
application of any safeguard. Therefore, the firm or network firm
should not perform this type of service for an audit client.
Provision of Legal Services to Financial Statement Audit Clients
290.192 Legal services are defined as any services for which the person
providing the services must either be admitted to practice before the
Courts of the jurisdiction in which such services are to be provided, or
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have the required legal training to practice law. Legal services
encompass a wide and diversified range of areas including both
corporate and commercial services to clients, such as contract support,
litigation, mergers and acquisition advice and support and the provision
of assistance to clients internal legal departments. The provision of
legal services by a firm, or network firm, to an entity that is a financial
statement audit client may create both self- review and advocacy
threats.
290.193 Threats to independence need to be considered depending on the nature
of the service to be provided, whether the service provider is separate
from the assurance team and the materiality of any matter in relation to
the entities financial statements. The safeguards set out in paragraph
290.162 may be appropriate in reducing any threats to independence to
an acceptable level. In circumstances when the threat to independence
cannot be reduced to an acceptable level the only available action is to
decline to provide such services or withdraw from the financial
statement audit engagement.
290.194 The provision of legal services to a financial statement audit client
which involve matters that would not be expected to have a material
effect on the financial statements are not considered to create an
unacceptable threat to independence.
290.195 There is a distinction between advocacy and advice. Legal services to
support a financial statement audit client in the execution of a
transaction (e.g., contract support, legal advice, legal due diligence and
restructuring) may create self-review threats; however, safeguards may
be available to reduce these threats to an acceptable level. Such a
service would not generally impair independence, provided that:
(a) Members of the assurance team are not involved in providing the
service; and
(b) In relation to the advice provided, the audit client makes the
ultimate decision or, in relation to the transactions, the service
involves the execution of what has been decided by the audit
client.
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290.196 Acting for a financial statement audit client in the resolution of a
dispute or litigation in such circumstances when the amounts involved
are material in relation to the financial statements of the audit client
would create advocacy and self-review threats so significant no
safeguard could reduce the threat to an acceptable level. Therefore, the
firm should not perform this type of service for a financial statement
audit client.
290.197 When a firm is asked to act in an advocacy role for a financial
statement audit client in the resolution of a dispute or litigation in
circumstances when the amounts involved are not material to the
financial statements of the audit client, the firm should evaluate the
significance of any advocacy and self-review threats created and, if the
threat is other than clearly insignificant, safeguards should be
considered and applied as necessary to eliminate the threat or reduce it
to an acceptable level. Such safeguards might include:
Policies and procedures to prohibit individuals assisting the audit
client from making managerial decisions on behalf of the client;
or
Using professionals who are not members of the assurance team
to perform the service.
290.198 The appointment of a partner or an employee of the firm or network
firm as General Counsel for legal affairs to a financial statement audit
client would create self-review and advocacy threats that are so
significant no safeguards could reduce the threats to an acceptable
level. The position of General Counsel is generally a senior
management position with broad responsibility for the legal affairs of a
company and consequently, no member of the firm or network firm
should accept such an appointment for a financial statement audit
client.
Recruiting Senior Management
290.199 The recruitment of senior management for an assurance client, such as
those in a position to affect the subject matter information of the
assurance engagement, may create current or future self- interest,
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familiarity and intimidation threats. The significance of the threat will
depend upon factors such as:
The role of the person to be recruited; and
The nature of the assistance sought.
The firm could generally provide such services as reviewing the
professional qualifications of a number of applicants and provide advice
on their suitability for the post. In addition, the firm could generally
produce a short- list of candidates for interview, provided it has been
drawn up using criteria specified by the assurance client.
The significance of the threat created should be evaluated and, if the
threat is other than clearly insignificant, safeguards should be considered
and applied as necessary to reduce the threat to an acceptable level. In
all cases, the firm should not make management decisions and the
decision as to whom to hire should be left to the client.
Corporate Finance and Similar Activities
290.200 The provision of corporate finance services, advice or assistance to an
assurance client may create advocacy and self-review threats. In the
case of certain corporate finance services, the independence threats
created would be so significant no safeguards could be applied to
reduce the threats to an acceptable level. For example, promoting,
dealing in, or underwriting of an assurance clients shares is not
compatible with providing assurance services. Moreover, committing
the assurance client to the terms of a transaction or consummating a
transaction on behalf of the client would create a threat to independence
so significant no safeguard could reduce the threat to an acceptable
level. In the case of a financial statement audit client the provision of
those corporate finance services referred to above by a firm or a
network firm would create a threat to independence so significant no
safeguard could reduce the threat to an acceptable level.
290.201 Other corporate finance services may create advocacy or self- review
threats; however, safeguards may be available to reduce these threats to
an acceptable level. Examples of such services include assisting a client
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in developing corporate strategies, assisting in identifying or
introducing a client to possible sources of capital that meet the client
specifications or criteria, and providing structuring advice and assisting
a client in analyzing the accounting effects of proposed transactions.
Safeguards that should be considered include:
Policies and procedures to prohibit individuals assisting the
assurance client from making managerial decisions on behalf of
the client;
Using professionals who are not members of the assurance team
to provide the services; and
Ensuring the firm does not commit the assurance client to the
terms of any transaction or consummate a transaction on behalf
of the client.
(For further guidance regarding provision of non-assurance services to listed
financial statement audit client refer to list of prohibited services given in the
Listing Regulations of Karachi, Lahore Islamabad Stock Exchanges)
Fees and Pricing
FeesRelative Size
290.202 When the total fees generated by an assurance client represent a large
proportion of a firms total fees, the dependence on that client or client
group and concern about the possibility of losing the client may create
a self- interest threat. The significance of the threat will depend upon
factors such as:
The structure of the firm; and
Whether the firm is well established or newly created.
The significance of the threat should be evaluated and, if the threat is
other than clearly insignificant, safeguards should be considered and
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applied as necessary to reduce the threat to an acceptable level. Such
safeguards might include:
Discussing the extent and nature of fees charged with the audit
committee, or others charged with governance;
Taking steps to reduce dependency on the client;
External quality control reviews; and
Consulting a third party, such as a professional regulatory body
or another chartered accountant.
290.203 A self- interest threat may also be created when the fees generated by
the assurance client represent a large proportion of the revenue of an
individual partner. The significance of the threat should be evaluated
and, if the threat is other than clearly insignificant, safeguards should
be considered and applied as necessary to reduce the threat to an
acceptable level. Such safeguards might include:
Policies and procedures to monitor and implement quality
control of assurance engagements; and
Involving an additional chartered accountant who was not a
member of the assurance team to review the work done or
otherwise advise as necessary.
FeesOverdue
290.204 A self- interest threat may be created if fees due from an assurance
client for professional services remain unpaid for a long time,
especially if a significant part is not paid before the issue of the
assurance report for the following year. Generally the payment of such
fees should be required before the report is issued. The following
safeguards may be applicable:
Discussing the level of outstanding fees with the audit
committee, or others charged with governance.
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Involving an additional chartered accountant who did not take
part in the assurance engagement to provide advice or review the
work performed.
The firm should also consider whether the overdue fees might be
regarded as being equivalent to a loan to the client and whether, because
of the significance of the overdue fees, it is appropriate for the firm to be
re-appointed.
Pricing
290.205 When a firm obtains an assurance engagement at lower fee level than
that charged by the predecessor firm, or quoted by other firms, the self-
interest threat created will not be reduced to an acceptable level:
(a) The firm is able to demonstrate that appropriate time and
qualified staff are assigned to the task; and
(b) All applicable assurance standards, guidelines and quality
control procedures are being complied with.
Contingent Fees
290.206 Contingent fees are fees calculated on a predetermined basis relating to
the outcome or result of a transaction or the result of the work
performed. For the purposes of this section, fees are not regarded as
being contingent if a court or other public authority has established
them.
290.207 A contingent fee charged by a firm in respect of both assurance and
non-assurance engagements creates self- interest and advocacy threats
that cannot be reduced to an acceptable level by the application of any
safeguard. Accordingly, a firm should not enter into any fee
arrangement for either assurance or non-assurance engagement under
which the amount of the fee is contingent on the result of the assurance
or non-assurance work or on items that are the subject matter
information of the assurance or non-assurance engagement.
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Gifts and Hospitality
290.208 Accepting gifts or hospitality from an assurance client may create
selfinterest and familiarity threats. When a firm or a member of the
assurance team accepts gifts or hospitality, unless the value is clearly
insignificant, the threats to independence cannot be reduced to an
acceptable level by the application of any safeguard. Consequently, a
firm or a member of the assurance team should not accept such gifts or
hospitality.
Actual or Threatened Litigation
290.209 When litigation takes place, or appears likely, between the firm or a
member of the assurance team and the assurance client, a self- interest
or intimidation threat may be created. The relationship between client
management and the members of the assurance team must be
characterized by complete candor and full disclosure regarding all
aspects of a clients business operations. The firm and the clients
management may be placed in adversarial positions by litigation,
affecting managements willingness to make complete disclosures and
the firm may face a self- interest threat. The significance of the threat
created will depend upon such factors as:
The materiality of the litigation;
The nature of the assurance engagement; and
Whether the litigation relates to a prior assurance engagement.
Once the significance of the threat has been evaluated the following
safeguards should be applied, if necessary, to reduce the threats to an
acceptable level:
(a) Disclosing to the audit committee, or others charged with
governance, the extent and nature of the litigation;
(b) If the litigation involves a member of the assurance team,
removing that individual from the assurance team; or
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(c) Involving an additional chartered accountant in the firm who
was not a member of the assurance team to review the work
done or otherwise advise as necessary.
If such safeguards do not reduce the threat to an appropriate
level, the only appropriate action is to withdraw from, or refuse
to accept, the assurance engagement.
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Section 290
Interpretation
The interpretation is directed towards the application of the Code of Ethics for
Chartered Accountants to the topics of the specific queries received.
Interpretation 2005-01
Application of Section 290 to Assurance Engagements that are Not Financial
Statement Audit Engagements
This interpretation provides guidance on the application of the independence
requirements contained in Section 290 to assurance engagements that are not
financial statement audit engagements.
This interpretation focuses on the application issues that are particular to
assurance engagements that are not financial statement audit engagements. There
are other matters noted in Section 290 that are relevant in the consideration of
independence requirements for all assurance engagements. For example,
paragraph 290.15 states that consideration should be given to any threats the firm
has reason to believe may be created by network firms interests and
relationships. Similarly, paragraph 290.21 states that for assurance clients, that are
other than listed entity financial statement audit clients, when the assurance team
has reason to believe that a related entity of such an assurance client is relevant to
the evaluation of the firms independence of the client, the assurance team should
consider that related entity when evaluating independence and applying
appropriate safeguards. These matters are not specifically addressed in this
interpretation.
As explained in the International Framework for Assurance Engagements issued
by the International Auditing and Assurance Standards Board, in an assurance
engagement, the professional accountant in public practice expresses a conclusion
designed to enhance the degree of confidence of the intended users other than the
responsible party about the outcome of the evaluation or measurement of a subject
matter against criteria.
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Assertion-Based Assurance Engagements
In an assertion-based assurance engagement, the evaluation or measurement of
the subject matter is performed by the responsible party, and the subject matter
information is in the form of an assertion by the responsible party that is made
available to the intended users.
In an assertion-based assurance engagement independence is required from the
responsible party, which is responsible for the subject matter information and may
be responsible for the subject matter.
In those assertion-based assurance engagements where the responsible party is
responsible for the subject matter information but not the subject matter,
independence is required from the responsible party. In addition, consideration
should be given to any threats the firm has reason to believe may be created by
interests and relationships between a member of the assurance team, the firm, a
network firm and the party responsible for the subject matter.
Direct Reporting Assurance Engagements
In a direct reporting assurance engagement, the professional accountant in public
practice either directly performs the evaluation or measurement of the subject
matter, or obtains a representation from the responsible party that has performed
the evaluation or measurement that is not available to the intended users. The
subject matter information is provided to the intended users in the assurance
report.
In a direct reporting assurance engagement independence is required from the
responsible party, which is responsible for the subject matter.
Multiple Responsible Parties
In both assertion-based assurance engagements and direct reporting assurance
engagements there may be several responsible parties. For example, a public
accountant in public practice may be asked to provide assurance on the monthly
circulation statistics of a number of independently owned newspapers. The
assignment could be an assertion based assurance engagement where each
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newspaper measures its circulation and the statistics are presented in an assertion
that is available to the intended users. Alternatively, the assignment could be a
direct reporting assurance engagement, where there is no assertion and there may
or may not be a written representation from the newspapers.
In such engagements, when determining whether it is necessary to apply the
provisions in Section 290 to each responsible party, the firm may take into
account whether an interest or relationship between the firm, or a member of the
assurance team, and a particular responsible party would create a threat to
independence that is other than clearly insignificant in the context of the subject
matter information. This will take into account:
The materiality of the subject matter information (or the subject matter)
for which the particular responsible party is responsible; and
The degree of public interest that is associated with the engagement.
If the firm determines that the threat to independence created by any such
relationships with a particular responsible party would be clearly insignificant it
may not be necessary to apply all of the provisions of this section to that
responsible party.
Example
The following example has been developed to demonstrate the application of
Section 290. It is assumed that the client is not also a financial statement audit
client of the firm, or a network firm.
A firm is engaged to provide assurance on the total proven oil reserves of
10 independent companies. Each company has conducted geographical
and engineering surveys to determine their reserves (subject matter). There
are established criteria to determine when a reserve may be considered to
be proven which the professional accountant in public practice determines
to be suitable criteria for the engagement.
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The proven reserves for each company as at December 31, 20X0 were as follows:
Proven oil reserves
thousands barrels
Company 1 5,200
Company 2 725
Company 3 3,260
Company 4 15,000
Company 5 6,700
Company 6 39,126
Company 7 345
Company 8 175
Company 9 24,135
Company 10 9,635
Total 104,301
The engagement could be structured in differing ways:
Assertion-Based Engagements
A1 Each company measures its reserves and provides an assertion to the firm and
to intended users.
A2 An entity other than the companies measures the reserves and provides an
assertion to the firm and to intended users.
Direct Reporting Engagements
D1 Each company measures the reserves and provides the firm with a written
representation that measures its reserves against the established criteria for
measuring proven reserves. The representation is not available to the intended
users.
D2 The firm directly measures the reserves of some of the companies.
Application of Approach
A1 Each company measures its reserves and provides an assertion to the firm and
to intended users.
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There are several responsible parties in this engagement (companies 1-10). When
determining whether it is necessary to apply the independence provisions to all of
the companies, the firm may take into account whether an interest or relationship
with a particular company would create a threat to independence that is other than
clearly insignificant. This will take into account factors such as:
The materiality of the companys proven reserves in relation to the total
reserves to be reported on; and
The degree of public interest associated with the engagement. (Paragraph
290.20.)
For example Company 8 accounts for 0.16% of the total reserves, therefore a
business relationship or interest with Company 8 would create less of a threat than
a similar relationship with Company 6, which accounts for approximately 37.5%
of the reserves.
Having determined those companies to which the independence requirements
apply, the assurance team and the firm are required to be independent of those
responsible parties which would be considered to be the assurance client
(paragraph 290.20).
A2 An entity other than the companies measures the reserves and provides an
assertion to the firm and to intended users.
The firm would be required to be independent of the entity that measures the
reserves and provides an assertion to the firm and to intended users (paragraph
290.17). That entity is not responsible for the subject matter and so consideration
should be given to any threats the firm has reason to believe may be created by
interests/relationships with the party responsible for the subject matter (paragraph
290.17). There are several parties responsible for subject matter in this
engagement (Companies 1-10) As discussed in example A1 above, the firm may
take into account whether an interest or relationship with a particular company
would create a threat to independence that is other than clearly insignificant.
D1 Each company provides the firm with a representation that measures its
reserves against the established criteria for measuring proven reserves. The
representation is not available to the intended users.
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There are several responsible parties in this engagement (Companies 1-10). When
determining whether it is necessary to apply the independence provisions to all of
the companies, the firm may take into account whether an interest or relationship
with a particular company would create a threat to independence that is other than
clearly insignificant. This will take into account factors such as:
The materiality of the companys proven reserves in relation to the total
reserves to be reported on; and
The degree of public interest associated with the engagement. (paragraph
290.20).
For example Company 8 accounts for 0.16% of the reserves, therefore a business
relationship or interest with Company 8 would create less of a threat than a
similar relationship with Company 6 that accounts for approximately 37.5% of the
reserves.
Having determined those companies to which the independence requirements
apply, the assurance team and the firm are required to be independent of those
responsible parties which would be considered to be the assurance client
(paragraph 290.20).
D2 The firm directly measures the reserves of some of the companies.
The application is the same as in example D1.
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PART C: CHARTERED ACCOUNTANTS IN BUSINESS
Section 300 Introduction
Section 310 Potential Conflicts
Section 320 Preparation and Reporting of Information
Section 330 Acting with Sufficient Expertise
Section 340 Financial Interests
Section 350 Inducements
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Section 300
Introduction
300.1 This Part of the Code illustrates how the conceptual framework
contained in Part A is to be applied by chartered accountants in
business.
300.2 Investors, creditors, employers and other sectors of the business
community, as well as governments and the public at large, all may rely
on the work of chartered accountants in business. Chartered
accountants in business may be solely or jointly responsible for the
preparation and reporting of financial and other information, which
both their employing organizations and third parties may rely on. They
may also be responsible for providing effective financial management
and competent advice on a variety of business-related matters.
300.3 A chartered accountant in business may be a salaried employee, a
partner, director (whether executive or non-executive), an owner
manager, a volunteer or another working for one or more employing
organization. The legal form of the relationship with the employing
organization, if any, has no bearing on the ethical responsibilities
incumbent on the chartered accountant in business.
300.4 A chartered accountant in business has a responsibility to further the
legitimate aims of their employing organization. This Code does not
seek to hinder a chartered accountant in business from properly
fulfilling that responsibility, but considers circumstances in which
conflicts may be created with the absolute duty to comply with the
fundamental principles.
300.5 A chartered accountant in business often holds a senior position within
an organization. The more senior the position, the greater will be the
ability and opportunity to influence events, practices and attitudes. A
chartered accountant in business is expected, therefore, to encourage an
ethics-based culture in an employing organization that emphasizes the
importance that senior management places on ethical behavior.
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300.6 The examples presented in the following sections are intended to
illustrate how the conceptual framework is to be applied and are not
intended to be, nor should they be interpreted as, an exhaustive list of
all circumstances experienced by a chartered accountant in business
that may create threats to compliance with the principles.
Consequently, it is not sufficient for a chartered accountant in business
merely to comply with the examples; rather, the framework should be
applied to the particular circumstances faced.
Threats and Safeguards
300.7 Compliance with the fundamental principles may potentially be
threatened by a broad range of circumstances. Many threats fall into the
following categories:
(a) Self- interest;
(b) Self-review;
(c) Advocacy;
(d) Familiarity; and
(e) Intimidation.
These threats are discussed further in Part A of this Code.
300.8 Examples of circumstances that may create self- interest threats for a
chartered accountant in business include, but are not limited to:
Financial interests, loans or guarantees.
Incentive compensation arrangements.
Inappropriate personal use of corporate assets.
Concern over employment security.
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Commercial pressure from outside the employing organization.
300.9 Circumstances that may create self-review threats include, but are not
limited to, business decisions or data being subject to review and
justification by the same chartered accountant in business responsible
for making those decisions or preparing that data.
300.10 When furthering the legitimate goals and objectives of their employing
organizations chartered accountants in business may promote the
organizations position, provided any statements made are neither false
nor misleading. Such actions generally would not create an advocacy
threat.
300.11 Examples of circumstances that may create familiarity threats include,
but are not limited to:
A chartered accountant in business in a position to influence
financial or non-financial reporting or business decisions having an
immediate or close family member who is in a position to benefit
from that influence.
Long association with business contacts influencing business
decisions.
Acceptance of a gift or preferential treatment, unless the value is
clearly insignificant.
300.12 Examples of circumstances that may create intimidation threats include,
but are not limited to:
Threat of dismissal or replacement of the chartered accountant in
business or a close or immediate family member over a
disagreement about the application of an accounting principle or
the way in which financial information is to be reported.
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A dominant personality attempting to influence the decision
making process, for example with regard to the awarding of
contracts or the application of an accounting principle.
300.13 Chartered accountants in business may also find that specific
circumstances give rise to unique threats to compliance with one or
more of the fundamental principles. Such unique threats obviously
cannot be categorized. In all professional and business relationships,
chartered accountants in business should always be on the alert for such
circumstances and threats.
300.14 Safeguards that may eliminate or reduce to an acceptable level the
threats faced by chartered accountants in business fall into two broad
categories:
(a) Safeguards created by the profession, legislation or regulation;
and
(b) Safeguards in the work environment.
300.15 Examples of safeguards created by the profession, legislation or
regulation are detailed in paragraph 100.12 of Part A of this Code.
300.16 Safeguards in the work environment include, but are not restricted to:
The employing organizations systems of corporate oversight or
other oversight structures.
The employing organizations ethics and conduct programs.
Recruitment procedures in the employing organization
emphasizing the importance of employing high caliber competent
staff.
Strong internal controls.
Appropriate disciplinary processes.
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Leadership that stresses the importance of ethical behavior and the
expectation that employees will act in an ethical manner.
Policies and procedures to implement and monitor the quality of
employee performance.
Timely communication of the employing organizations policies
and procedures, including any changes to them, to all employees
and appropriate training and education on such policies and
procedures.
Policies and procedures to empower and encourage employees to
communicate to senior levels within the employing organization
any ethical issues that concern them without fear of retribution.
Consultation with another appropriate chartered accountant.
300.17 In circumstances where a chartered accountant in business believes that
unethical behavior or actions by others will continue to occur within the
employing organization, the chartered accountant in business should
consider seeking legal advice. In those extreme situations where all
available safeguards have been exhausted and it is not possible to
reduce the threat to an acceptable level, a chartered accountant in
business may conclude that it is appropriate to resign from the
employing organization.
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Section 310
Potential Conflicts
310.1 A chartered accountant in business has a professional obligation to
comply with the fundamental principles. There may be times, however,
when their responsibilities to an employing organization and the
professional obligations to comply with the fundamental principles are
in conflict. Ordinarily, a chartered accountant in business should
support the legitimate and ethical objectives established by the
employer and the rules and procedures drawn up in support of those
objectives. Nevertheless, where compliance with the fundamental
principles is threatened, a chartered accountant in business must
consider a response to the circumstances.
310.2 As a consequence of responsibilities to an employing organization, a
chartered accountant in business may be under pressure to act or
behave in ways that could directly or indirectly threaten compliance
with the fundamental principles. Such pressure may be explicit or
implicit; it may come from a supervisor, manager, director or another
individual within the employing organization. A chartered accountant
in business may face pressure to:
Act contrary to law or regulation.
Act contrary to technical or professional standards.
Facilitate unethical or illegal earnings management strategies.
Lie to, or otherwise intentionally mislead (including misleading by
remaining silent) others, in particular:
- The auditors of the employing organization; or
- Regulators.
Issue, or otherwise be associated with, a financial or non- financial
report that materially misrepresents the facts, including statements
in connection with, for example:
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- The financial statements;
- Tax compliance;
- Legal compliance; or
- Reports required by securities regulators.
310.3. The significance of threats arising from such pressures, such as
intimidation threats, should be evaluated and, if they are other than
clearly insignificant, safeguards should be considered and applied as
necessary to eliminate them or reduce them to an acceptable level. Such
safeguards may include:
Obtaining advice where appropriate from within the employing
organization, an independent professional advisor or a relevant
professional body.
The existence of a formal dispute resolution process within the
employing organization.
Seeking legal advice.
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Section 320
Preparation and Reporting of Information
320.1 Chartered accountants in business are often involved in the preparation
and reporting of information that may either be made public or used by
others inside or outside the employing organization. Such information
may include financial or management information, for example,
forecasts and budgets, financial statements, management discussion and
analysis, and the management letter of representation provided to the
auditors as part of an audit of financial statements. A chartered
accountant in business should prepare or present such information
fairly, honestly and in accordance with relevant professional standards
so that the information will be understood in its context.
320.2 A chartered accountant in business who has responsibility for the
preparation or approval of the general purpose financial statements of
an employing organization should ensure that those financial
statements are presented in accordance with the applicable financial
reporting standards.
320.3 A chartered accountant in business should maintain information for
which the chartered accountant in business is responsible in a manner
that:
(a) Describes clearly the true nature of business transactions, assets
or liabilities;
(b) Classifies and records information in a timely and proper
manner; and
(c) Represents the facts accurately and completely in all material
respects.
320.4 Threats to compliance with the fundamental principles, for example
self- interest or intimidation threats to objectivity or professional
competence and due care, may be created where a chartered accountant
in business may be pressured (either externally or by the possibility of
personal gain) to become associated with misleading information or to
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become associated with misleading information through the actions of
others.
320.5 The significance of such threats will depend on factors such as the
source of the pressure and the degree to which the information is, or
may be, misleading. The significance of the threats should be evaluated
and, if they are other than clearly insignificant, safeguards should be
considered and applied as necessary to eliminate them or reduce them
to an acceptable level. Such safeguards may include consultation with
superiors within the employing organization, for example, the audit
committee or other body responsible for governance, or with a relevant
professional body.
320.6 Where it is not possible to reduce the threat to an acceptable level, a
chartered accountant in business should refuse to remain associated
with information they consider is or may be misleading. Should the
chartered accountant in business be aware that the issuance of
misleading information is either significant or persistent, the chartered
accountant in business should consider informing appropriate
authorities in line with the guidance in Section 140. The chartered
accountant in business may also wish to seek legal advice or resign.
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Section 330
Acting with Sufficient Expertise
330.1 The fundamental principle of professional competence and due care
requires that a chartered accountant in business should only undertake
significant tasks for which the chartered accountant in business has, or
can obtain, sufficient specific training or experience. A chartered
accountant in business should not intentionally mislead an employer as
to the level of expertise or experience possessed, nor should a chartered
accountant in business fail to seek appropriate expert advice and
assistance when required.
330.2 Circumstances that threaten the ability of a chartered accountant in
business to perform duties with the appropriate degree of professional
competence and due care include:
Insufficient time for properly performing or completing the
relevant duties.
Incomplete, restricted or otherwise inadequate information for
performing the duties properly.
Insufficient experience, training and/or education.
Inadequate resources for the proper performance of the duties.
330.3 The significance of such threats will depend on factors such as the
extent to which the chartered accountant in business is working with
others, relative seniority in the business and the level of supervision
and review applied to the work. The significance of the threats should
be evaluated and, if they are other than clearly insignificant, safeguards
should be considered and applied as necessary to eliminate them or
reduce them to an acceptable level. Safeguards that may be considered
include:
Obtaining additional advice or training.
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Ensuring that there is adequate time available for performing the
relevant duties.
Obtaining assistance from someone with the necessary expertise.
Consulting, where appropriate, with:
Superiors within the employing organization;
Independent experts; or
A relevant professional body.
330.4 Where threats cannot be eliminated or reduced to an acceptable level,
chartered accountants in business should consider whether to refuse to
perform the duties in question. If the chartered accountant in business
determines that refusal is appropriate the reasons for doing so should be
clearly communicated.
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Section 340
Financial Interests
340.1 Chartered accountants in business may have financial interests, or may
know of financial interests of immediate or close family members, that
could, in certain circumstances, give rise to threats to compliance with
the fundamental principles. For example, self- interest threats to
objectivity or confidentiality may be created through the existence of
the motive and opportunity to manipulate price sensitive information in
order to gain financially. Examples of circumstances that may create
self- interest threats include, but are not limited to situations where the
chartered accountant in business or an immediate or close family
member:
Holds a direct or indirect financial interest in the employing
organization and the value of that financial interest could be
directly affected by decisions made by the chartered accountant in
business;
Is eligible for a profit related bonus and the value of that bonus
could be directly affected by decisions made by the chartered
accountant in business;
Holds, directly or indirectly, share options in the employing
organization, the value of which could be directly affected by
decisions made by the chartered accountant in business;
Holds, directly or indirectly, share options in the employing
organization which are, or will soon be, eligible for conversion; or
May qualify for share options in the employing organization or
performance related bonuses if certain targets are achieved.
340.2 In evaluating the significance of such a threat, and the appropriate
safeguards to be applied to eliminate the threat or reduce it to an
acceptable level, chartered accountants in business must examine the
nature of the financial interest. This includes an evaluation of the
significance of the financial interest and whether it is direct or indirect.
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Clearly, what constitutes a significant or valuable stake in an
organization will vary from individual to individual, depending on
personal circumstances.
340.3 If threats are other than clearly insignificant, safeguards should be
considered and applied as necessary to eliminate or reduce them to an
acceptable level. Such safeguards may include:
Policies and procedures for a committee independent of
management to determine the level of form of remuneration of
senior management.
Disclosure of all relevant interests, and of any plans to trade in
relevant shares to those charged with the governance of the
employing organization, in accordance with any internal policies.
Consultation, where appropriate, with superiors within the
employing organization.
Consultation, where appropriate, with those charged with the
governance of the employing organization or relevant professional
bodies.
Internal and external audit procedures.
Up-to-date education on ethical issues and the legal restrictions
and other regulations around potential insider trading.
340.4 A chartered accountant in business should neither manipulate
information nor use confidential information for personal gain.
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Section 350
Inducements
Receiving Offers
350.1 A chartered accountant in business or an immediate or close family
member may be offered an inducement. Inducements may take various
forms, including gifts, hospitality, preferential treatment and
inappropriate appeals to friendship or loyalty.
350.2 Offers of inducements may create threats to compliance with the
fundamental principles. When a chartered accountant in business or an
immediate or close family member is offered an inducement, the
situation should be carefully considered. Self- interest threats to
objectivity or confidentiality are created where an inducement is made
in an attempt to unduly influence actions or decisions encourage illegal
or dishonest behavior or obtain confidential information. Intimidation
threats to objectivity or confidentiality are created if such an
inducement is accepted and it is followed by threats to make that offer
public and damage the reputation of either the chartered accountant in
business or an immediate or close family member.
350.3 The significance of such threats will depend on the nature, value and
intent behind the offer. If a reasonable and informed third party, having
knowledge of all relevant information, would consider the inducement
insignificant and not intended to encourage unethical behavior, then a
chartered accountant in business may conclude that the offer is made in
the normal course business and may generally conclude that there is no
significant threat to compliance with the fundamental principles.
350.4 If evaluated threats are other than clearly insignificant, safeguards
should be considered and applied as necessary to eliminate them or
reduce them to an acceptable level. When the threats cannot be
eliminated or reduced to an acceptable level through the application of
safeguards, a chartered accountant in business should not accept the
inducement. As the real or apparent threats to compliance with the
fundamental principles do not merely arise from acceptance of an
inducement but, sometimes, merely from the fact of the offer having
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been made, additional safeguards should be adopted. A chartered
accountant in business should assess the risk associated with all such
offers and consider whether the following actions should be taken:
(a) Where such offers have been made, immediately inform higher
levels of management or those charged with governance of the
employing organization;
(b) Inform third parties of the offer for example, a professional
body or the employer of the individual who made the offer; a
chartered accountant in business should, however, consider
seeking legal advice before taking such a step; and
(c) Advise immediate or close family members of relevant threats
and safeguards where they are potentially in positions that might
result in offers of inducements, for example as a result of their
employment situation; and
(d) Inform higher levels of management or those charged with
governance of the employing organization where immediate or
close family members are employed by competitors or potential
suppliers of that organization.
Making Offers
350.5 A chartered accountant in business may be in a situation where the
chartered accountant in business is expected to, or is under other
pressure to, offer inducements to subordinate the judgment of another
individual or organization, influence a decision- making process or
obtain confidential information.
350.6 Such pressure may come from within the employing organization, for
example, from a colleague or superior. It may also come from an
external individual or organization suggesting actions or business
decisions that would be advantageous to the employing organization
possibly influencing the chartered accountant in business improperly.
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350.7 A chartered accountant in business should not offer an inducement to
improperly influence professional judgment of a third party.
350.8 Where the pressure to offer an unethical inducement comes from within
the employing organization, the chartered accountant should follow the
principles and guidance regarding ethical conflict resolution set out in
Part A of this Code.
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DEFINITIONS
In this Code of Ethics for Chartered Accountants the following expressions have
the following meanings assigned to them:
Advertising The communication to the public of information as
to the services or skills provided by Chartered
Accountants in practice with a view to procuring
professional business.
Assurance
client
The responsible party that is the person (or persons)
who:
(a) In a direct reporting engagement, is responsible
for the subject matter; or
(b) In an assertion-based engagement, is
responsible for the subject matter information
and may be responsible for the subject matter.
(For an assurance client that is a financial statement
audit client see the definition of financial statement
audit client.)
Assurance
engagement
An engagement in which a Chartered Accountant in
practice expresses a conclusion designed to
enhance the degree of confidence of the intended
users other than the responsible party about the
outcome of the evaluation or measurement of a
subject matter against criteria.
(For guidance on assurance engagements see the
International Framework for Assurance
Engagements issued by the International Auditing
and Assurance Standards Board which describes
the elements and objectives of an assurance
engagement and identifies engagements to which
International Standards on Auditing (ISAs),
International Standards on Review Engagements
(ISREs) and International Standards on Assurance
Engagements (ISAEs) apply.)
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
133
Assurance
team
(a) All members of the engagement team for the
assurance engagement;
(b) All others within a firm who can directly
influence the outcome of the assurance
engagement, including:
(i) those who recommend the compensation
of, or who provide direct supervisory,
management or other oversight of the
assurance engagement partner in
connection with the performance of the
assurance engagement. For the purposes
of a financial statement audit engagement
this includes those at all successively
senior levels above the engagement
partner through the firms chief
executive;
(ii) those who provide consultation regarding
technical or industry specific issues,
transactions or events for the assurance
engagement; and
(iii) those who provide quality control for the
assurance engagement, including those
who perform the engagement quality
control review for the assurance
engagement; and
(c) For the purposes of a financial statement audit
client, all those within a network firm who can
directly influence the outcome of the financial
statement audit engagement.
Bye- Laws
The Chartered Accountants Bye-Laws, 1983 as
amended or added to from time to time.
Chartered
Accountant
A natural person who is a member.
Chartered
accountant in
A Chartered Accountant employed or engaged in
an executive or non-executive capacity in such
areas as commerce, industry, service, the public
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
134
business
sector, education, the not for profit sector,
regulatory bodies or professional bodies, or a
Chartered Accountant contracted by such
Chartered
Accountant In
Practice
A member shall be deemed "to be in
practice" when he engages himself in practice
as Chartered Accountant or Management
Consultant as the case may be.
A member of the Institute shall be deemed "to be in
practice" when individually or in partnership with
Chartered Accountants in practice, he in
consideration received or to be received:-
i. engages himself in the practice of accountancy;
or
ii. offers to perform or performs services
involving the auditing, or verification of
financial transactions, books, accounts, or
records or the preparation, verification or
certification of financial accounting and related
statements or holds himself out to the public as
an accountant; or
iii. renders professional services or assistance in or
about matters of principle or detail relating to
accounting procedure or the recording,
presentation or certification of financial facts
or data; or
iv. renders such other services in the field of
management consultancy; or
v. renders such services as, in the opinion of the
Council, are or may be rendered by a chartered
accountant in practice and the words "to be in
practice" with their grammatical variations and
cognate expression shall be construed
accordingly.
Clearly
insignificant
A matter that is deemed to be both trivial and
inconsequential.
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
135
Close family A parent, child or sibling, who is not an immediate
family member.
Code of
Corporate
Governance
As embodied in the Listing Regulations of the
Karachi, Lahore and Islamabad Stock Exchanges.
Company
Any entity or person(s), whether organized for
profit or not, including a parent company and all of
its subsidiaries.
Contingent
fee
A fee calculated on a predetermined basis relating
to the outcome or result of a transaction or the
result of the work performed. A fee that is
established by a court or other public authority is
not a contingent fee.
Direct
financial
interest
A financial interest:
Owned directly by and under the control of an
individual or entity (including those managed
on a discretionary basis by others); or
Beneficially owned through a collective
investment vehicle, estate, trust or other
intermediary over which the individual or entity
has control
Director or
officer
Those charged with the governance of an entity,
regardless of their title, which may vary from
country to country.
Engagement
partner
The partner or other person in the firm who is
responsible for the engagement and its
performance, and for the report that is issued on
behalf of the firm, and who, where required, has the
appropriate authority from a professional, legal or
regulatory body.
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
136
Engagement
quality
control review
A process designed to provide an objective
evaluation, before the report is issued, of the
significant judgments the engagement team made
and the conclusions they reached in formulating the
report.
Engagement
team
All personnel performing an engagement, including
any experts contracted by the firm in connection
with that engagement.
Existing
accountant
A Chartered Accountant in practice currently
holding an audit appointment or carrying out
accounting, taxation, consulting or similar
professional services for a client.
Financial
interest
An interest in an equity or other security,
debenture, loan or other debt instrument of an
entity, including rights and obligations to acquire
such an interest and derivatives directly related to
such interest.
Financial
statements
The balance sheets, income statements or profit and
loss accounts, statements of changes in financial
position (which may be presented in a variety of
ways, for example, as a statement of cash flows or a
statement of fund flows), notes and other
statements and explanatory material which are
identified as being part of the financial statements.
Financial
statement
audit client
An entity in respect of which a firm conducts a
financial statement audit engagement. When the
client is a listed entity, financial statement audit
client will always include its related entities.
Financial
statement
audit
engagement
A reasonable assurance engagement in which a
Chartered Accountant in practice expresses an
opinion whether financial statements are prepared
in all material respects in accordance with an
identified financial reporting framework, such as an
engagement conducted in accordance with the
International Standards on Auditing. This includes
a statutory audit, which is a financial statement
audit required by legislation or other regulation.
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
137
Firm (a) A sole practitioner, partnership or corporation of
Chartered Accountants;
(b) An entity that controls such parties; and
(c) An entity controlled by such parties.
Immediate
family
A spouse (or equivalent) or dependant.
Independence Independence is:
(a) Independence of mind the states of mind that
permits the provision of an opinion without
being affected by influences that compromise
professional judgment, allowing an individual
to act with integrity, and exercise objectivity
and professional judgment.
(b) Independence in appearance the avoidance of
facts and circumstances that are so significant a
reasonable and informed third party, having
knowledge of all relevant information,
including any safeguards applied, would
reasonably conclude a firms, or a member of
the assurance teams, integrity, objectivity or
professional skepticism had been
compromised.
Indirect
financial
Interest
A financial interest beneficially owned through a
collective investment vehicle, estate, trust or other
intermediary over which the individual or entity has
no control.
Institute
The Institute of Chartered Accountants of Pakistan
constituted under the Chartered Accountants
Ordinance, 1961.
Listed entity An entity whose shares, stock or debt are quoted or
listed on a recognized stock exchange, or are
marketed under the regulations of a recognized
stock exchange or other equivalent body.
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
138
Member A natural person whose name appears in the
Register for the time being.
Network firm An entity under common control, ownership or
management with the firm or any entity that a
reasonable and informed third party having
knowledge of all relevant information would
reasonably conclude as being part of the firm
nationally or internationally.
Ordinance
The Chartered Accountants Ordinance, 1961 as
amended or replaced from time to time
Office A distinct sub-group, whether organized on
geographical or practice lines.
Prescribed
Prescribed by the Bye- laws
Professional
services
Services requiring accountancy or related skills
performed by a Chartered Accountant including
accounting, auditing, taxation, management
consulting and financial management services.
Publicity
The communication to the public of facts about a
chartered accountant which are not designed for the
deliberate promotion of that chartered accountant
Register The Register of the Members of the Institute
maintained under the Chartered Accountants
Ordinance, 1961
Related entity An entity that has any of the following relationships
with the client:
(a) An entity that has direct or indirect control over
the client provided the client is material to such
entity;
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
139
(b) An entity with a direct financial interest in the
client provided that such entity has significant
influence over the client and the interest in the
client is material to such entity;
(c) An entity over which the client has direct or
indirect control;
(d) An entity in which the client, or an entity
related to the client under (c) above, has a
direct financial interest that gives it significant
influence over such entity and the interest is
material to the client and its related entity in
(c); and
(e) An entity which is under common control with
the client (hereinafter a sister entity)
provided the sister entity and the client are both
material to the entity that controls both the
client and sister entity.
Schedule
The Schedules annexed to the Chartered
Accountants Ordinance, 1961.
REVISED CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
140
EFFECTIVE DATE
The Code is effective on January 1, 2009. Section 290 is applicable to assurance
engagements when the assurance report is dated on or after January 1, 2009.
Earlier application is encouraged.
MEMBERS' HANDBOOK
PART IV
7. MEMBERS CONDUCT-GENERALLY
THE INSTITUTE OF
CHARTERED ACCOUNTANTS OF PAKISTAN
7.0 Members Conduct Generally
CONTENTS
7.01 Use of designations and designatory letters
7.02 Communicate change in address promptly
7.03 Compulsory admission as fellow members
7.04
Members permitted to mark Tick or Cross in Election Ballot
Papers
7.01
USE OF DESIGNATIONS AND DESIGNATORY LETTERS
"It was decided that there should be no objection to use any qualification and
designatory letters against the names of members provided these denoted the
qualifications of Universities and Institutes duly recognized by the
*
Central
Government or the Council of the Institute. The members were, however, advised to
use only highest degree in a particular time awarded by a University or an
Institute".
(1
st
meeting of Council - August 17, 1961)
Only designation 'Chartered Accountants' to be used, in accordance with Section
5 of the Ordinance, members of the Institute could put the words 'ACA' or 'FCA'
against their names. Section 7 of the Ordinance, however, provided that every
member of the Institute in practice shall and any other member may use the
designation of 'CHARTERED ACCOUNTANT' and no member using such
designation shall use any other designation, whether in addition thereto or in
substitution therefore, except as laid down in the proviso to that section by which
any such person was not prohibited from adding any other description or
designatory letters to his name, if entitled thereto the indicate membership of such
other Institute of Accountancy, whether in Pakistan or elsewhere, as may be
recognized in this behalf by the Council, or any other qualification that he may
possess. There is also nothing to prohibit a firm, all the partners of which are
members of the Institute and in practice, from being known by its firm name as
Chartered Accountants. Cases were brought to the notice of the Council where
members of firms of Chartered Accountants were styling themselves as Chartered
Accountants (England & Wales) and Chartered Accountants, (Pakistan). The use
of the words 'CHARTERED ACCOUNTANTS'(ENGLAND & WALES) with the
name of a firm was not considered desirable. The Council resolved that a general
directive may be issued to members that:
*
Now Federal Government
7.01
(a) a firm practicing in Pakistan may use the designation
'CHARTERED ACCOUNTANTS' but without any explanatory
words or letters.
(b) A member may add after his own name any description or
designatory letters to which he is entitled provided that his Pakistani
professional qualification shall appear first without any explanatory
word.
The Council reconsidered the question of allowing the use of designatory letters
against members' names and decided to issue the following revised directive to the
members:-
(a) only the designation 'Chartered Accountants' should be used
against the name of practicing firm in Pakistan. No explanatory
words or letters should be used after this designation.
(b) a member may add after this own name any description or
designatory letter to which he is entitled provided that his Pakistani
qualifications shall appear first 'without any explanatory words.
(c) Where a partner signs in his individual name on behalf of a firm
there would be no objection to his adding recognized foreign
qualifications or designatory letters to his personal name (not the
name of the firm) but such qualifications or designatory letters may
be added after Pakistani qualifications which will appear first
without the use of the word "Pakistan".
(4th meeting of Council August 25, 1962.
Re-affirmed in 7th meeting - August 30, 1963)
''The Council approved the qualification of the following organizations for
the purpose of Section 7 of the Chartered Accountants Ordinance, 1961 (X
of 1961):
7.01
(i) The Institute of Chartered Accountants in England &
Wales;
(ii) The Institute of Chartered Accountants in Ireland;
(iii) The Institute of Chartered Accountants in Scotland;
(iv) The Institute of Chartered Accountants in Australia; and
(v) The Canadian Institute of Chartered Accountants.
This means that only the qualifications of the above accountancy bodies can
be used against the names of the members in the manner as specified on
preceding page.
(7th meeting of Council - August 30, 1963)
Use of designatory letters ACMA, ACIS (UK), ACCA: "The Council allowed the
members to use designatory letters of their professional qualifications like
ACMA, ACIS (UK),' ACCA with their names. "
(64th meeting of Council - December 24, 1981)
7.02
COMMUNICATE CHANGE IN ADDRESS PROMPTLY
"Recently, there have been growing complaints about postal mishap and mis-
communication of Institute's circulars and notifications to members. In order to
serve better the members' interest by making available promptly all
communications dispatched from the Institute, the Secretariat will appreciate if the
members would keep the Institute informed in writing about any change in
addresses. Attention of the members is also invited to Bye-Law 7 of Chartered
Accountants Bye-Laws, 1961 which requires the members to inform the Institute of
any change of address of place or places of business or employment".
(Newsletter - December 1981)
7.03
COMPULSORY ADMISSION AS FELLOW MEMBERS
"The Institute wishes to draw the attention of the members to sub-section 3 of
Section 5 of the Chartered Accountants Ordinance, 1961 as amended which
provides as under: -
"An associate member who has been in practice for at least five
years or an associate member of the Institute for a period of not
less than 10 years shall, on payment of prescribed fee, have his
name transferred to the Register of Fellows of the Institute,
and on having his name transferred to the Register of Fellow,
he shall be entitled to use the letter FCA after his name to
indicate that he is a fellow member of the Institute".
It may be noted that an associate member who has completed the stipulated
period and fulfilled other conditions as set out above is required to have his
name transferred to the Register of Fellows of the Institute".
(74th meeting of the Council - December 27, 1984)
(Newsletter - January 1985)
7.04
Members permitted to mark 'Tick' or 'Cross' on election ballot papers
"The Election Committee appointed for Council's election held in January 1985 had
recommended that for future elections both 'CROSS and 'TICK' marks on the
Ballot papers should be acceptable against the existing 'CROSS' marks only. The
Council accepted the suggestion".
(75th meeting of the Council - February 12, 1985)
MEMBERS' HANDBOOK
PART IV
8. CONTINUING PROFESSIONAL DEVELOPMENT (CPD)
THE INSTITUTE OF
CHARTERED ACCOUNTANTS OF PAKISTAN
Directive 8.01
(Revised 2012)
8. CONTINUING PROFESSIONAL DEVELOPMENT (CPD)
CONTENTS
8.01 Continuing Professional Development (CPD) Revised 2012
8.02
Compulsory Attendance of Practicing Members in Seminars
on International Accounting Standards, International Standards
on Auditing and Quality Control
Directive 8.01
(Revised 2012)
CONTINUING PROFESSIONAL DEVELOPMENT (CPD)
CPD Committee
The Institute of Chartered Accountants of Pakistan
A Program of Continuing Development of Professional Competence and Lifelong Learning
Directive 8.01
(Revised 2012)
CONTINUING PROFESSIONAL DEVELOPMENT (CPD)
CONTENTS
Paragraphes
Preamble 2
Effective Date. 3
CPD Approach 3
Organization 4
Requirements4
Measurement of CPD Credit Hours..5
Exemption to CPD .. 7
Verification.. 8
Non-compliance... 8
Recording and Monitoring...8
CPD Reporting Form (Annexure)
1
Directive 8.01
(Revised 2012)
CONTINUING PROFESSIONAL DEVELOPMENT
Preamble
1. The International Federation of Accountants (IFAC) has made it
mandatory for its member bodies to design and implement a Continuing
Professional Development (CPD) mechanism in such a way that it
becomes a component of continued membership for the professional
accountants. In order to facilitate the CPD implementation, IFAC has
issued International Educational Standard for Professional Accountants
(IES-7) which is in effect from J anuary 01, 2006.
2. Continuing professional development refers to learning activities that
develop and maintain capabilities to enable professional accountants to
perform competently within their professional environments.
3. It is to be appreciated that the knowledge needed to function effectively as
a professional accountant in public practice, industry, commerce,
education and the public sector continues to expand and change at a rapid
rate with the changes in regulatory environment, international standards
and technology.
4. CPD, on its own, does not provide assurance that all members will provide
high quality professional service all the time. Doing so involves more than
maintaining professional competence; it involves applying knowledge
with professional judgment and an objective attitude. Also, there cannot be
assurance that every person who participates in a CPD programme will
obtain the full benefits of that programme, because of variances in
individual commitment and capacity to learn. Nevertheless, it is certain
that members who are not upto-date on current technical and general
knowledge pertinent to their work will not be able to provide professional
services competently. Therefore, despite the inherent limitations of any
CPD programme, a CPD requirement is important in preserving the
standard of the profession and also in maintaining public confidence.
5. It is the responsibility of the individual member to develop and maintain
professional competence necessary to provide high quality services to
2
Directive 8.01
(Revised 2012)
clients, employers and other stakeholders. Members are free to choose
from the opportunities both locally and internationally available, as
approved by the CPD Committee, to fulfill their relevant CPD needs.
6. This Directive prescribes that members:
a. foster a commitment to lifelong learning;
b. establish benchmarks for developing and maintaining the
professional competence necessary to protect the public interest; and
c. monitor and enforce the continuing development and maintenance of
professional competence.
Effective date:
7. This directive is effective from July 01, 2012.
CPD Approach
8. The IES-7 states that CPD can be achieved by at least three different
approaches:
a. In-put based approaches by establishing a set amount of learning
activity that is considered appropriate to develop and maintain
competence.
b. Out-put based approaches by requiring professional accountants
to demonstrate, by way of outcomes, that they develop and
maintain professional competence.
c. Combination approaches by effectively and efficiently
combining elements of the input and output based approaches,
setting the amount of learning activity required and measuring the
outcomes achieved.
9. The Institute has adopted a combination approach before moving towards
a comprehensive output-based system.
3
Directive 8.01
(Revised 2012)
Organization
10. The CPD Committee of the Institute has the responsibility for the
establishment of directive and overall coordination of CPD activities for
its members in Pakistan and abroad.
11. Regional Committees would coordinate with the CPD Committee in
constitution of the City CPD Sub-Committees and execution of CPD
activities.
Requirement
12. Every member is required to:
a. complete at least 120 hours or equivalent learning units of relevant
professional development activity in each rolling three-year period,
of which 60 hours or equivalent learning units should be verifiable;
b. complete at least 20 hours or equivalent learning units in each
year; and
c. track and measure learning activities to meet the above
requirements.
Rolling Period: Under this directive:
a. For those who are members as on J uly 1, 2012 the first rolling
period starts on J uly 1, 2012 and completes on J une 30, 2015.
b. On J uly 1, 2012 the
*
short fall in the CPD account maintained at
the Institute shall be deemed zero.
c. The excess hours as a J une 30, 2012 shall be carried forward to the
rolling period commencing on J uly 1, 2012.
**
d. For all other members, rolling period will commence on J uly 1 in
the year following the date of admission of a member. For any
incomplete first year of membership, member will be required to
complete 2 hours for each complete months.
e. The excess of CPD hours of one year may be carried forward to
the next year within a rolling period only. At the end of a rolling
* The words excess were deleted the Council in its 234
th
meeting held on J une 15 & 16, 2012
**Paragraph (c) under the head Rolling Period inserted by Council in its 234
th
meeting held on J une 15 & 16, 2012.
4
Directive 8.01
(Revised 2012)
period the excess hours shall be nullified, however, the members
will be required to complete their shortfall hours to avoid any
sanctions, as prescribed by the Council.
Measurement of CPD Credit Hours
13. The CPD credit hours are to be measured as follows:
S.
No.
Activity Evidence to be kept CPD Credit Hours
a. Participation in short courses,
seminars, conferences, lectures
and trainings.
Certificates of
attendance/course contents
in case it is a non-ICAP
course.
Actual classroom time.
For a full day session a
credit of 8 hours and
for a half-day session
4 hours.
b. Completing degree courses and
studying relevant professional
certifications.
Degree/ certification Professional
Qualifications
(ICAPs Diploma in
IFRS, ICAEWs ACA,
CIMA, ACMA,
ACCA, CISA, CIA,
CFA etc):
5 times of the
examination hours or
40 hours, whichever is
lower, in a CPD year.
Degree Courses
As accredited by the
HEC approved or
Foreign Institute/
University. For
example 3 credit hours
course will be
measured 3 hours long
for relevant subjects
only. However, the
maximum CPD hours
that can be given
under this head shall
be 40 hours for a year.
Award of CPD hours
shall be decided by the
Committee on a case
5
Directive 8.01
(Revised 2012)
to case basis.
c. Relevant research paper
published in a peer reviewed
journal
Original copy of the journal 8 hours
d. Contributing article/review or
any other relevant material
including material in ICAPs, or
other, local or international
publications
Original copy of the
publication
4 hours
e. Registered and evidence-based
E-learning courses from
recognized content providers.
Certification Actual time consumed
by the course/ training.
f. Presenter, participant or session
chairman in short courses,
seminars, conferences, trainings
and media including interviews
in print media.
To be declared on the
Reporting Form
Twice the actual time
of the presentation.
g. Teaching relevant professional
or degree courses
To be declared on the
Reporting Form
One and half the
actual time of the
session subject to
maximum of 20 hours
per annum.
h. Participation in council,
committees, working groups of
ICAP and other regulatory
bodies
To be declared on the
Reporting Form
Actual time of the
meeting
i. Writing of books on professional
interest, technical and reference
manuals including study pack
Copy of the publication 1 hour per page of
technical content.
Maximum 40 hours
per release.
6
Directive 8.01
(Revised 2012)
j. Watching videos/CDs of the
ICAP CPD programmes of the
Institute by a particular
geographical area(s) where there
is no CPD Committee of the
Institute. However, CPD hours
in respect of the above activity
are restricted to a maximum of
20 hours in a year. Further,
places where there are
established CPD Committees,
CPD hours in respect of the
above activity are restricted to a
maximum of 10 hours in a year
Members are encouraged to
obtain prior approval from
the CPD Committee.
Attendance/topic(s) to be
communicated to the CPD
Committee within 2 weeks
of watching such
programme.
Half of the actual
duration
k. General / self certified readings
(relevant to current or future
development needs) e.g. journal
articles, newspaper reports,
subscriptions etc
Details to be provided on
CPD Reporting Form:
Printed Material
Date of reading
Date of publication
Title of the
publication
Title of the specific
article
Web-based Material
in addition to above
information also include:
Retrieved/accessed
from: the full web
address.
Date/time of
retrieval/access
Actual reading time,
subject to maximum of
2 hours per article
subject to the
maximum of 10 hours
per annum
l. Visit to ICAP libraries The Librarian will provide
sign in and out time to the
CPD Directorate.
Actual time spent in
the library
Exemption to CPD
14. This directive does not apply to the members who fall in following
categories.
a. ill or incapacitated so that he/she cannot perform normal work
b. retired from whole time business.
c. career breaks.
7
Directive 8.01
(Revised 2012)
d. members holding public offices such as Federal Ministers,
Provincial Ministers, Advisors to Ministers, Senators, MNAs,
MPAs etc, during the currency of their offices.
Verification
15. A Verifiable CPD Activity undertaken by the member must be
supported by documentary evidences required to be maintained by the
member provided under paragraph 13(a) to 13(j) and 13(l) for one year
after the close of rolling period.
A Non-verifiable CPD Activity is an activity where a member is unable
to prove that the CPD learning activity has taken place. Ordinarily, non-
verifiable CPD does not have a defined learning outcome and is not
designed to address a specific learning need. General reading, as defined
in paragraph 13(k), is an example of non-verifiable CPD.
Non-compliance
16. For all members, non-compliance of this Directive will be reviewed by the
CPD Committee and if deemed appropriate the matter may be referred to
the Council.
Recording and Monitoring
17. Each member is responsible for maintaining and retaining his CPD
records. These records should demonstrate that the member understands
and complies with the Regulations. Additionally CPD records are to be
maintained by the CPD Directorate of the Institute as follows:
a. Where CPD activities are organized by the Institute or any of its
Regional or City Sub-Committee:
i. The Regional or City CPD Sub-committee will maintain a
register of attendance ; and
ii. Within two weeks of holding the activity, will send the
attendance sheet, to the CPD Directorate
b. Where a member participates in other CPD credit programmes:
i. On a periodic basis (a member may choose to send CPD
record annually) the member will complete a CPD
reporting form (annexure) summarizing the details of the
8
Directive 8.01
(Revised 2012)
CPD activities in which he participated based on the credit
hours measurement prescribed in paragraph 13.
ii. The CPD reporting form should be sent to the attention of
the CPD Directorate.
iii. Any CPD reporting form for a year (ending on J une 30)
must be received by the CPD Directorate by August 31 of
that year.
iv. The member will maintain evidence of the CPD activity
e.g. attendance confirmation/details of article published etc.
v. The evidence of the CPD activity shall be produced before
the Institute if so required.
c. The CPD Directorate will summarize the declarations and send a
summary to the CPD Committee for information.
d. The CPD Directorate will be responsible for maintaining record in
respect of members participating in CPD activities and uploading
latest CPD data on the website for members to review.
e. The CPD Directorate should send an Email reminder to all
members within two weeks of the close of year for reporting of all
activity along-with form.
(232
nd
meeting of the Council held on March 6, 2012 and
234th meeting of the Council held on June 15 and 16, 2012)
9
Directive 8.01
(Revised 2012)
Annexure
CPD REPORTING FORM
Name of Member:___________________________
Membership Number: ________________________
Reporting Year: _____________________________
Date: _____________________________________
S.
No.
Description of CPD
activity attended
Date Details of CPD activity
attended
Credit
Hours
Signature __________________________
10
________________________________
The Directive No. 8.01 before this revision reads as under:
Introduction
1. The International Federation of Accountants (IFAC) has made it mandatory for its member bodies to
design and implement a Continuing Professional Development (CPD) mechanism in such a way that
it becomes a component of continued membership for the professional accountants. In order to
facilitate the CPD implementation, IFAC has issued International Educational Standard for
Professional Accountants (IES-7) which is in effect from J anuary 01, 2006.
2. Continuing professional development refers to learning activities that develop and maintain
capabilities to enable professional accountants to perform competently within their professional
environments.
3. It is to be appreciated that the knowledge needed to function effectively as a professional accountant
in public practice, industry, commerce, education and the public sector continues to expand and
change at a rapid rate with the changes in regulatory environment, international standards and
technology.
4. CPD, on its own, does not provide assurance that all members will provide high quality professional
service all the time. Doing so involves more than maintaining professional competence; it involves
applying knowledge with professional judgment and an objective attitude. Also, there cannot be
assurance that every person who participates in a CPD programme will obtain the full benefits of
that programme, because of variances in individual commitment and capacity to learn. Nevertheless,
it is certain that members who are not upto-date on current technical and general knowledge
pertinent to their work will not be able to provide professional services competently. Therefore,
despite the inherent limitations of any CPD programme, a CPD requirement is important in
preserving the standard of the profession and also in maintaining public confidence.
5. It is the responsibility of the individual member to develop and maintain professional competence
necessary to provide high quality services to clients, employers and other stakeholders. Members are
free to choose from the opportunities both locally and internationally available, as approved by the
CPD Committee, to fulfill their relevant CPD needs.
6. This Directive prescribes that members:
a. foster a commitment to lifelong learning
b. establish benchmarks for developing and maintaining the
professional competence necessary to protect the public interest; and
c. monitor and enforce the continuing development and maintenance of
professional competence.
Effective date:
7. This directive is effective from July 01, 2007.
CPD Approach
8. The IES-7 states that CPD can be achieved by at least three different approaches:
(a) In-put based approaches by establishing a set amount of learning activity that is
considered appropriate to develop and maintain competence.
(b) Out-put based approaches by requiring professional accountants to demonstrate, by way
of outcomes, that they develop and maintain professional competence.
(c) Combination approaches by effectively and efficiently combining elements of the input
and output based approaches, setting the amount of learning activity required and measuring
the outcomes achieved.
9. The Institute has adopted a combination approach before moving towards a comprehensive output-based
system.
Organization
10. The CPD Committee of the Institute has the responsibility for the establishment of directive and overall
coordination of CPD activities for its members in Pakistan & abroad.
11. Regional Committees would coordinate with the CPD Committee in constitution of the City CPD
Sub-Committees and execution of CPD activities.
CPD Requirements
12. Every member is required to complete 40 hours in one year or 120 hours in every 3 years period with
a minimum of 20 hours in a year.
Measurement of CPD Credit Hours
13. The CPD credit hours are to be measured as follows:
S.
No.
Activity Evidence to be
attached
CPD Credit Hours
a Participation in short courses,
seminars, conferences, lectures
and trainings.
Copies of
certificates of
attendance/course
contents in case it is
a non-ICAP course.
Actual classroom
time. For a full day
session a credit of 8
hours and for a half-
day session 4 hours.
b Completing degree courses and
studying relevant professional
certifications.
Copy of
degree/certification
As accredited by the
HEC approved
Institute/ University.
For example 3 credit
hours course will be
measured 3 hours
long.
c Relevant research paper
published in a peer reviewed
journal
Original copy of the
journal
8 hours
d Contributing article/review or
any other relevant material
including material in ICAPs, or
other, local or international
publications
Original copy of the
publication
4 hours
e Registered and evidence-based
E-learning courses from
recognized content providers.
Copy of the
certification
Actual time consumed
by the course/
training.
f Presenter or Session Chairman
in short courses, seminars,
conferences and trainings.
To be declared on
the Reporting Form
Twice the actual time
of the presentation.
g Teaching relevant professional
or degree courses
To be declared on
the Reporting Form
One and half the
actual time of the
session subject to
maximum of 20 hours
per annum.
h Participation in council,
committees, working groups of
ICAP and other regulatory
bodies
To be declared on
the Reporting Form
Actual time of the
meeting
i Writing of books on
professional interest, technical
and reference manuals
including study pack
Copy of the
publication
1 hour per page of
technical content.
Maximum 20 hours
per release.
j Watching videos/CDs of the
ICAP CPD programmes of the
Institute by a particular
geographical area(s) where there
is no CPD Committee of the
Institute. However, CPD hours
in respect of the above activity
are restricted to a maximum of
20 hours in a year. Further,
Members are
encouraged to
obtain prior
approval from the
CPD Committee.
Attendance/topic(s)
to be communicated
to the CPD
Committee within 2
Half of the actual
duration
places where there are
established CPD Committees,
CPD hours in respect of the
above activity are restricted to a
maximum of 10 hours in a year
weeks of watching
such programme.
13.1 As a result of comments received from various stakeholders, the Institute has instituted an interim
arrangement with regards to the submission of self-certified readings which will count towards the
required number of CPD hours. For the first three year reporting cycle, members are permitted to
submit a maximum of 30 hours of self-certified readings over the three years, with a maximum of
10 hours in any one year. Self certified readings include, inter alia, relevant journal articles,
newspaper reports and subscriptions.
In order to self-certify, a member must maintain a schedule of all such reading material, specifying
the following:
date,
title of the publication,
the title of the specific article and
the number of CPD hours in respect of the reading.
The schedule must be self-certified on an annual basis and retained as part of their CPD records. It is also
recommended that the member make a copy of the relevant reading and certify that they have read it by
signing it off and retaining it with the annual reading schedule.
This interim arrangement will be reviewed at the end of the first three year cycle (2010).
Exemption to CPD
14. This directive does not apply to the members who fall in following categories.
a) ill or incapacitated so that he/she cannot perform normal work.
b) retired from whole time business.
c) career breaks.
d) members holding public offices such as Federal Ministers, Provincial
Ministers, Advisors to Ministers, Senators, MNAs, MPAs etc, during
the currency of their offices.
Verification
15. The measurement of learning activities prescribed be verifiable by documentary support duly
concurred by the CPD Committee.
Non-compliance
16. For all members, non-compliance of this Directive will be reviewed by the CPD Committee and if
deemed appropriate the matter may be referred to the Executive Committee.
Recording and Monitoring
17. CPD records are to be maintained by the CPD committee of the
Institute as follows:
a) Where CPD activities are organized by the Institute / CPD Sub-committees
i. The CPD Sub-committee will maintain a register of attendance at Institute
organized activities
ii. Within two weeks of holding the activity, the register details will be sent to the
CPD Committee
b) Where a member participates in other CPD credit programmes
i. On an annual basis the member will complete a CPD declaration form
(annexure) summarizing the details of the CPD activities in which they
participated based on the credit hours measurement prescribed in para 13
ii. The declaration should be sent to the attention of the CPD Committee.
iii. The above declaration along with supporting evidence must be received by the
CPD Committee annually by J uly 31
iv. The member will maintain evidence of the CPD activity e.g. attendance
confirmation / copy of article published
v. The evidence of the CPD activity will be attached to the declaration form
The CPD Committee will summarize the declarations and send a summary to
the CPD Directorate for updating of records
c) The CPD Directorate will be responsible for maintaining record in respect of
members participating in CPD activities and uploading latest CPD data on the
website for members to review.
(190th Council meeting, held on July 26, 2007)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
CPD REPORTING FORM
Name of Member:_____________________________
Membership Number: _____________
Reporting Year: ___________________
Date: _________________
____________________
Signature of member
Approved by:
_____________________
CPD Director
Date: ___/___/__
Serial No. Description of
Programme attended
Date Organized by Credit
Hours
8.02
.
COMPULSORY ATTENDANCE OF A PRACTISING
MEMBER INSEMINARS ON INTERNATIONAL
ACCOUNTING STANDARDS, INTERNATIONAL
STANDARDS ON AUDITING AND QUALITY CONTROL
On the recommendation of the Professional Standards & Technical Advisory
Committee, the Council in its 127
th
meeting held on July 5, 1998, has decided to
issue the following directive:-
With immediate effect there would be compulsory attendance of at least one
partner of practising firm or the sole proprietor himself or an employee
member of such firms, as the case may be, in the seminars/workshops on
International Accounting Standards, International Standards on Auditing and
Quality Control arranged by the CPD Committees or Quality Control Review
Committees of the Institute.
(127the meeting of the Council-July 5,1998)
PART V
ACCOUNTING
MEMBERS' HANDBOOK
THE INSTITUTE OF
CHARTERED ACCOUNTANTS OF PAKISTAN
MEMBERS HANDBOOK
INDEX
PART V
ACCOUNTING
CONTENTS
SECTION A
STATEMENTS OF STANDARD
ACCOUNTING PARCTICES
SECTION B
STATEMENTS OF GUIDELINES
ON ACCOUNTING PRINCIPLES
AND PRACTICE
SECTION C TECHNICAL RELEASES
THE INSTITUTE OF
CHARTERED ACCOUNTANTS OF PAKISTAN
MEMBERS' HANDBOOK
PART V
SECTION A
STATEMENTS OF
STANDARD ACCOUNTING PRACTICES
THE INSTITUTE OF
CHARTERED ACCOUNTANTS OF PAKISTAN
SECTIONAL INDEX
PART V
SECTIONS A STATEMENTS OF STANDARD ACCOUNTING PRACTICE
SSAP-1 Withdrawn-(Classification of Stores and Spares
Financial Statements)
SSAP-2 Withdrawn-(Consolidated Financial Information)
MEMBERS' HANDBOOK
PART V
SECTION B
STATEMENTS OF GUIDELINES ON
ACCOUNTING PRINCIPLES AND PRACTICES
THE INSTITUTE OF
CHARTERED ACCOUNTANTS OF PAKISTAN
MEMBERS' HANDBOOK
PART V
SECTION C
TECHNICAL RELEASES
THE INSTITUTE OF
CHARTERED ACCOUNTANTS OF PAKISTAN
SECTIONAL INDEX
PART I
SECTION C TECHNICAL RELEASES
TR-1 Withdrawn -(Capitalization of Interest on Loan)
TR-2
Withdrawn-(Financial Statement Presentation - Credit
Cards)
TR-3
Withdrawn-(Depreciation Treatment in Tax Holiday
Companies)
TR-4
Withdrawn-(Gratuity - Provision in the Accounts of
Company)
TR-5
IASB Standards-Council's Statement on Applicability
(Revised - 2006)
TR-6 Fixed Assets Inventory and Records (Revised 2012)
TR-7 Withdrawn-(Revaluation of Fixed Assets)
TR-8
Clarification Regarding Basis of Calculation of Workers'
Profit Participation Fund (Reformatted 2004)
TR-9
Withdrawn-(Treatment of Post-dated Cheques or
Promissory Notes )
TR-10 Withdrawn-(Deferred Taxation)
TR-11
Withdrawn - (Depreciation on Idle Property, Plant and
Equipment -Reformatted 2004)
TR-12 Withdrawn-(Debt Extinguishment)
TR-13 Withdrawn-(Accounting for Compensated Absences)
TR-14 Withdrawn-(Revaluation of Fixed Assets-Accounting
TR-15
Withdrawn - (Bonus Shares-Accounting Treatment
Reformatted 2004)
SECTIONAL INDEX
PART I
SECTION C TECHNICAL RELEASES
TR-16
Withdrawn-(Pending Litigation Settled in Favour of Client
After the Balance Sheet date).
TR-17
Withdrawn-(Finished Pieces of Equipment held by
Manufacturer for Customers)
TR-18 Withdrawn-(Good Accounting Software)
TR-19
Withdrawn -Excise Duty-Accounting Treatment
(Reformatted2000)
TR-20
Withdrawn -Accounting for Expenditure During
Construction Period
TR-21
Withdrawn - (Date of Commencement of Commercial
Production -Reformatted-2000)
TR-22 Book Value per Share (Revised - 2002)
TR-23
Withdrawn-(Investments Valuation -Application of Lower
of Cost and Market Value)
TR-24
Withdrawn - (Exchange Risk Fee-Accounting Treatment
Reformatted 2000)
TR-25 Withdrawn-(Prudential Regulations for Banks)
TR-26 Withdrawn-(Export Quota -Accounting Treatment)
TR-27 IAS 12, Income Taxes (Revised 2012)
TR-28 Withdrawn-(Accounting of Golden Handshake)
TR-29 Carry-Over-Transactions (COT)
TR-30 Withdrawn -(Final Tax Accounting)
TR-31 Withdrawn - (Annuity Method of Depreciation)
ACCOUNTING TR-5 (Revised 2006)
IASB STANDARDS-COUNCILS STATEMENT ON APPLICABILITY
1. THE ISSUE
The Institute has been a member body of the International Federation of
Accountants (IFAC) ever since its establishment in 1973. In 2004 IFAC issued
seven Statements of Membership Obligations (SMOs) and subject matter of
one of them i.e. SMO 7 is International Financial Reporting Standards
(IFRSs) issued by the International Accounting Standards Board (IASB). Being
a member body of IFAC it is the Institutes obligation to comply with this
statement which requires that all member bodies should use their best
endeavors:
(a) To incorporate the requirements of IFRSs in their national accounting
requirements, or where the responsibility for the development of
national accounting standards lies with third parties, to persuade those
responsible for developing those requirements that general purpose
financial statements should comply with IFRSs, or with local accounting
standards that are converged with IFRSs, and disclose the fact of such
compliance; and
(b) To assist with the implementation of IFRSs, or national accounting
standards that incorporate IFRSs.
To date, the IASB (formerly IASC) has issued eight IFRSs (IFRS 1 to 8) and it
has made changes to various International Accounting Standards (IASs) that
were issued by its predecessor body International Accounting Standards
Committee. In Pakistan, almost all of the IASs (except for IAS-29 and IAS-
41) have been adopted and notified by the SECP on the recommendation of the
Institute, while the remaining standards are in the process of adoption. The
Council has also decided to gradually adopt all IFRSs for the use of public
interest entities.
ACCOUNTING TR-5 (Revised 2006)
While the Institute has been pursuing the objective of adoption and use of
international standards for the preparation of general purpose financial
statements over the years, it is also cognizant of the difficulties faced by small
and medium entities (SMEs) for complying with full set of IFRSs that have been
made applicable for listed companies. In order to address the needs of the
SMEs, the Council of the Institute had initiated a project to develop a separate
set of standards for such entities in line with similar efforts in various other
countries. Based on the work conducted and recommendations made by
various committees working on this project for last two years, the Council is
pleased to lay down this framework of accounting standards, including the two
SME standards that should be complied with by the members of the Institute
while expressing an opinion on the financial statements of SMEs.
2. COUNCILS DIRECTIVE
2.1 The Council wishes to draw the attention of all members to paragraphs 5,
8 and 9 of the revised Preface to International Financial Reporting
Standards which read as under: -
5. All Standards and Interpretations issued under previous Constitutions
continue to be applicable unless and until they are amended or
withdrawn. The International Accounting Standards Board may amend
or withdraw International Accounting Standards and SIC
Interpretations issued under previous Constitutions of IASC as well as
issue new Standards and Interpretations.
When the term IFRSs is used in this Preface, it includes standards and
interpretations approved by the IASB, and International Accounting
Standards (IASs) and SIC Interpretations issued under previous
Constitutions.
ACCOUNTING TR-5 (Revised 2006)
8. IFRSs set out recognition, measurement, presentation and disclosure
requirements dealing with transactions and events that are important in
general purpose financial statements. They may also set out such
requirements for transactions and events that arise mainly in specific
industries. IFRSs are based on the Framework, which addresses the
concepts underlying the information presented in general purpose
financial statements. The objective of the Framework is to facilitate
the consistent and logical formulation of IFRSs. The Framework also
provides a basis for the use of judgement in resolving accounting
issues.
9. IFRSs are designed to apply to the general purpose financial
statements and other financial reporting of all profit-oriented entities.
Profit-oriented entities include those engaged in commercial, industrial,
financial and similar activities, whether organized in corporate or in
other forms. They include organizations such as mutual insurance
companies and other mutual cooperative entities that provide dividends
or other economic benefits directly and proportionately to their
owners, members or participants. Although IFRSs are not designed to
apply to not-for-profit activities in the private sector, public sector or
government, entities with such activities may find them appropriate.
2.2 The Council desires to direct all members to ensure that in accordance
with the obligations undertaken by the Institute the auditor, while
expressing an opinion on financial statements, should satisfy himself that
they do comply with IASs/IFRSs in all material respects and that in the
event of any departure from or inconsistency with such standards, the
auditors report should contain suitable qualification. It should however
be emphasized that IASs/ IFRSs do not override the local statutory
provisions under Companies Ordinance, 1984 and the disclosure
requirements under the Fourth and Fifth Schedules. Compliance with
IASs/IFRSs shall be mandatory in so far as such standards are not
inconsistent with local regulations or standards, directives or
pronouncements issued by this Institute.
ACCOUNTING TR-5 (Revised 2006)
2.3 The Council is conscious of the present set of circumstances prevailing in
Pakistan, in relation to compliance with some of the IASs / IFRSs and in
view thereof has decided that for auditors of all companies while
expressing an opinion on financial statements the compliance with the
following standards shall, until notified otherwise, not be deemed to be
mandatory:
IAS 29
IAS 41
IFRS 1, 4, 7 and 8
2.4 Applicability of Accounting and Financial Reporting Standards for
Medium-Sized Entities and Small-Sized Entities
2.4.1 The Institute has developed and the Council in its meeting held
on July 28, 2006 has approved two separate sets of accounting
and financial reporting standards for Medium-Sized Entities
(MSEs) and Small-Sized Entities (SSEs). These standards will
be called as Accounting and Financial Reporting Standards for
Medium-Sized Entities and Small Sized Entities.
2.4.2 The Institute directs its members that while expressing an
opinion on financial statements of MSEs or / SSEs (whichever
is applicable) they shall ensure compliance with the Accounting
and Financial Reporting Standards for MSEs or / SSEs.
2.4.3 Entities qualifying as MSE or SSE are defined below:
ACCOUNTING TR-5 (Revised 2006)
QUALIFYING ENTITIES
Medium-Sized Entity (MSE)
A Medium-Sized Entity (MSE) is an entity that:
a) is not a listed company or a subsidiary of a listed company;
b) has not filed, or is not in the process of filing, its financial
statements with the Securities and Exchange Commission of
Pakistan or other regulatory organisation for the purpose of
issuing any class of instruments in a public market;
c) does not hold assets in a fiduciary capacity for a broad group
of outsiders, such as a bank, insurance company, securities
broker/dealer, pension fund, mutual fund or investment banking
entity;
d) is not a public utility or similar entity that provides an essential
public service;
e) is not a economically significant entity on the basis of criteria as
defined below; and
f) is not a Small-Sized Entity (SSE) as defined below.
Economically Significant Entity
An entity is considered to be economically significant if it has:
(i) turnover in excess of Rs. 1 billion, excluding other income;
(ii) number of employees in excess of 750;
ACCOUNTING TR-5 (Revised 2006)
(iii) total borrowings (excluding trade creditors and accrued
liabilities) in excess of Rs. 500 million.
In order to be treated as economically significant any two of the
criteria mentioned in (i), (ii) and (iii) above have to be met. The
criteria followed will be based on the previous years audited
financial statements. Entities can be delisted from this category
where they do not fall under the aforementioned criteria for two
consecutive years.
Small-Sized Entity (SSE)
A Small-Sized Entity (SSE) is an entity that:
(i) has paid up capital plus undistributed reserves (total equity
after taking into account any dividend proposed for the
year) not exceeding Rs.25 million; and
(ii) has annual turnover not exceeding Rs.200 million, excluding
other income.
In order to qualify as a Small-Sized Entity, both of the above
mentioned-conditions must be satisfied.
Effective Date
2.4.4 Medium-Sized and Small-Sized Entities in respect of their
annual financial statements shall apply the Accounting and
Financial Reporting Standards for accounting periods beginning
on or after July 1, 2006.
2.5 The Institute further directs its members that while expressing an opinion
on financial statements of entities that do not qualify to be treated as MSE
or SSE as per the definition given in paragraphs 2.4.3 above (except for
public utility entities or similar entities
ACCOUNTING TR-5 (Revised 2006)
that provide an essential public service or regulatory agencies that do not
fall under the jurisdiction of Securities and Exchange Commission of
Pakistan (SECP), they shall ensure compliance with the International
Accounting Standards (IASs)/ International Financial Reporting
Standards (IFRSs) as adopted by the Council and notified by the SECP
under section 234(3) of the Companies Ordinance, 1984.
2.6 Furthermore, while expressing an opinion on financial statements of public
utility entities or similar entities that provide an essential public service or
regulatory agencies that do not fall under the regulatory jurisdiction of
SECP, such entities shall ensure that accounting frameworks as
prescribed in their relevant statutes are complied with. However, where
the relevant statute is silent or does not prescribe any accounting and
financial reporting framework or treatment, the Institute recommends that
such entity shall comply with IASs/IFRSs as applicable.
2.7 This statement is and shall be deemed to be a directive of the Council and
shall be applicable to any International Accounting Standard /International
Financial Reporting Standard which may be issued in future unless
otherwise specified by the Council. Non-compliance with this directive
shall be deemed to be a professional misconduct in terms of clause (3) of
Part 4 of Schedule I to the Chartered Accountants Ordinance, 1961.
(186
th
meeting of the Council November 8, 2006)
ACCOUNTING TR 6 (Revised 2012)
FIXED ASSETS INVENTORY AND RECORDS
1. THE ISSUE
Section 230 of the Companies Ordinance, 1984 requires every company to
keep proper books of accounts with respect to all assets of the company.
Usually fixed assets comprise a significant portion of a companys assets.
No guidance is available for companies as to how the fixed assets records
be maintained. Accordingly, it is felt that guidance may be given to our
members. Following are important aspects, which require maintenance of
proper records that help in preparation of Financial Statements:
(a) Periodic reconciliation of the underlying records of fixed assets with
the accounting records (General Ledger).
(b) Reconciliation of the periodic physical inventory of fixed assets with
fixed assets records.
(c) Determination of cost and accumulated depreciation of each item of
fixed assets at the time of retirement or disposal.
2. TECHNICAL COMMITTEE RECOMMENDATIONS
2.1 Fixed Assets records
Adequate itemized record of fixed assets should be maintained which at
minimum must indicate following particulars:
(a) detailed description of each item
(b) original cost of the item
(c) date of its acquisition
(d) classification of the item
(e) the location and/or the custodian of the item
(f) the rate of depreciation
(g) accumulated depreciation
(h) depreciation charge for the period
(i) the department / cost center / product to which the depreciation is
charged
ACCOUNTING TR 6 (Revised 2012)
(j) date of revaluation (if any)
(k) revalued amount (if any) of the items
(l) depreciation on revalued amount
(m) accumulated depreciation on the revalued amount
2.2 Physical inventory of fixed assets
Physical verification of fixed assets should be carried out on at
regular interval and should be reconciled with the fixed assets
records and adjusted accordingly.
This revised TR 6 (2012) supersedes the requirement as contained in TR
6 of 2004.
(230
th
meeting of the Council December 17, 2011)
The TR-6 before this revision reads as under:
ACCOUNTING TR-6 (Reformatted 2004)
FIXED ASSETS INVENTORY AND RECORDS
1. THE ISSUE
Section 230 of the Companies Ordinance, 1984 requires every company to keep proper books of
accounts with respect to all assets of the company. Usually fixed assets comprise a significant
portion of a companys assets. No guidance is available for companies as to how the fixed assets
records be maintained. Accordingly, it is felt that guidance may be given to our members.
Following are important aspects, which require maintenance of proper records that help in
preparation of Financial Statements:
(a) Periodic reconciliation of the underlying records of fixed assets with the accounting records
(General Ledger).
(b) Reconciliation of the periodic physical inventory of fixed assets with fixed assets records.
(c) Determination of cost and accumulated depreciation of each item of fixed assets at the time
of retirement or disposal.
2. TECHNICAL COMMITTEE RECOMMENDATIONS
1.1. Fixed Assets records
Adequate itemized record of fixed assets should be maintained which at minimum must
indicate following particulars:
(a) detailed description of each item
(b) original cost of the item
(c) date of its acquisition
(d) classification of the item
(e) the location and/or the custodian of the item
(f) the rate of depreciation
(g) accumulated depreciation
(h) depreciation charge for the period
(i) the department / cost center / product to which the depreciation is charged
(j) date of revaluation (if any)
(k) revalued amount (if any) of the items
(l) depreciation on revalued amount
(m) accumulated depreciation on the revalued amount
1.2. Physical inventory of fixed assets
Physical verification of fixed assets should be carried out on a cyclical basis (perpetual inventory)
according to a formal plan once in five year. The physical inventory should be reconciled with the
fixed assets records and adjusted accordingly.
(165
th
and 166
th
meeting of the Council July 30-31 and September 17-18, 2004)
ACCOUNTING TR-8 (Reformatted 2004)
CLARIFICATION REGARDING BASIS OF CALCULATION OF
WORKERS PROFITS PARTICIPATION FUND
1. THE ISSUE
Opinion was sought whether Workers Profit Participation Fund is to be
calculated after or before charging it against the profits of the year. For
illustration purposes an example is given here under:
a) Profit of the Company : Rs.250.00
WPPF @ 5% of Rs.250.00 : Rs. 12.50
b) Profit of the Company : Rs.250.00
WPPF @ 5/105 of Rs.250.00 : Rs. 11.90
2. TECHNICAL COMMITTEE RECOMMENDATION
I. Contribution to Workers Profit Participation Fund is to be made on the
basis of provision contained in clause (b) of sub-section (1) of section 3 of
Companies Profits (W.P.) Act, 1968. This provides that the amount
should be 5% of its profits before charging such WPPF, as per audited
accounts. If there are no profits no contribution is payable. Hence, this is in
the nature of an appropriation of profits.
II. Accordingly, method indicated in example (a) is correct and should be
followed.
(165
th
and 166
th
meeting of the Council J uly 30-31 and September 17-18, 2004)
ACCOUNTING TR-22 (Revised 2002)
BOOK VALUE PER SHARE
THE ISSUE
Different practices and policies are being used for computing book value (commonly
known as break-up value in Pakistan) of shares. For instance in some cases all the
assets including intangibles, deferred costs and fictitious assets are included in
considering the book value without regard to their recoverability. In some other cases,
intangibles are excluded from the shareholders equity. Practices also vary regarding
adjustment of contingent and other losses.
TECHNICAL COMMITTEE RECOMMENDATIONS
Book value per share in the equity capital of the company is the amount each share is
worth on the basis of carrying value per balance sheet, prepared in accordance with a
framework of recognized accounting standards. Such standards provide that:-
(a) An asset is a resource controlled by the enterprise as a result of past events and
from which future economic benefits are expected to flow to the enterprise.
(b) A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits.
Computation of Book Value Per Share
Book value per share is computed by dividing shareholders equity with the number of
shares issued. Shareholders equity includes:-
a) Paid up capital
b) Revenue reserves and retained earnings, (less accumulated losses if any).
ACCOUNTING TR-22 (Revised 2002)
c) Capital reserves
Where the auditors have issued a qualified report and the qualification has been
quantified in monetary terms, that amount should be deducted from equity.
Where the qualification is not quantified then the members issuing a certificate
regarding book value should mention this fact in the certificate.
d) Surplus created as a result of revaluation of fixed assets.
If the balance sheet of an entity includes balance of surplus on revaluation, the
book value per share should be computed separately both, including and
excluding such surplus, to enable comparability with those entities where fixed
assets have not been revalued.
The book value for any specific purposes in accordance with any statute would have to
be computed per requirements or criteria laid down in that respect by the concerned
regulatory agency or as set out in the relevant law.
(151
st
meeting of the Council April 26-27, 2002)
ACCOUNTING TR-27 (Revised 2012)
IAS-12, INCOME TAXES (REVISED 2000)
1.0 THE ISSUE
IAS-12, Income Taxes (Revised) issued by IASC has become effective for
the accounting periods beginning on or after J anuary 1, 2002. It is felt that
guidance is required on the applicability of deferred taxation where a
company has brought forward tax losses or its sources of income are
subject to deduction or collection of tax and the said deduction or
collection is treated as full and final tax liability for the purposes of
assessment under the Income Tax Ordinance 2001. It is therefore,
proposed to issue the following as a guidance to the members on the
applicability of IAS 12 (Revised) in Pakistan in relation to the afore-
mentioned situations.
TECHNICAL COMMITTEE RECOMMENDATIONS
2.0 DEFERRED TAXATION
2.1 The deferred tax accounting does not apply to those companies whose
entire income is subject to deduction of tax at source that is taken as a
final tax liability (under any provision of the Income Tax Ordinance,
2001), as there will be no temporary differences.
2.2 Difficulty arises in case of those companies that have a portion of income
subject to deduction or collection of tax and the said deduction or
collection is treated as full and final tax liability for the purposes of
assessment under the Income Tax Ordinance 2001 while the remaining
portion of the income attracts assessment under normal provisions of the
Income Tax Ordinance, 2001. For instance, temporary differences are
likely to arise on that portion of profit, which represents non-supplies. If
the ratio between supplies remains the same year after year, it would be
easy to calculate effect of temporary differences but since this ratio is not
expected to be the same year after year, effect of temporary differences
cannot be calculated with accuracy. In such instance, a reasonable
estimate for sales relating to non-supplies should be made for the future
years and the deferred tax liability provided accordingly.
ACCOUNTING TR-27 (Revised 2012)
2.3 However, if it is not practicable to develop a reasonable estimate for
calculation of deferred tax liability / asset then an entity should evaluate
the expectation of future turnover by taking into consideration the
turnover trend of at-least three years (including the current year) and
recognize and provide deferred tax liability accordingly. If the pattern of
supplies and non-supplies remains same in the future also then the
company should recognize and provide deferred tax for all temporary
differences that could be attributed to non-supplies
2.4 A practical example on the application of Deferred Tax is enclosed
assuming that the ratio between non-supplies and supplies is 4:6.
3.0 TAX LOSSES
3.1 In case in a particular year, current tax liability is calculated under
provisions of Section 113 due to taxable loss the effect of temporary
differences should be calculated and deferred tax liability/ asset should be
recognized.
3.2 In Pakistan, normally the tax losses are assessed months or even years
after the balance sheet date. While ascertaining the deferred tax asset on
the balance sheet date, the loss for the current year
3.3 A deferred tax asset should be recognized for the carry forward of unused
tax losses and unused tax credits (as allowed under the provisions of the
Income Tax Ordinance, 2001) to the extent that it is probable that future
taxable profit will be available against which the unused tax losses and
unused tax credits can be utilized.
ACCOUNTING TR-27 (Revised 2012)
4.0 EXAMPLE
Equipment costing Rs.2,000,000 was purchased during 20A. Capital
expenditure budget reflects following additions:
20B 700,000
20C 800,000
20D 900,000
20E 1,000,000
Entity's revenue includes 60% sales that are subject to collection/
deduction of tax.
Tax Rate 35%
Tax Depreciation 25%
WDV Life 10 Years
Depreciation Policy Straight Line
4.1 ACCOUNTING NBV
Year Cost Depreciation NBV
Beginning Additions End of Beginning For the End of
Of Year Year of Year Year Year
20A 2,000,000 2000,000 200,000 200,000 1,800,000
20B 2,000,000 700,000 2700,000 200,000 270,000 470,000 2,230,000
20C 2,700,000 800,000 3500,000 470,000 350,000 820,000 2680,000
20D 3,500,000 900,000 4400,000 820,000 440,000 1,260,000 3140,000
20E 4400,000 1000,000 5400,000 1260,000 540,000 1,800,000 3600,000
ACCOUNTING TR-27 (Revised 2012)
4.2 DEPRECIATION PER ACCOUNTS
Year
On
Original On On On On Total
Cost Additions Additions Additions Additions
20B 20C 20D 20E
2000,000 700,000 800,000 900,000 1000,000 5,400,000
20A 200,000 200,000
20B 200,000 70,000 270,000
20C 200,000 70,000 80,000 350,000
20D 200,000 70,000 80,000 90,000 440,000
20E 200,000 70,000 80,000 90,000 100,000 540,000
4.3 TAX WDV
Year Cost Depreciation
Beginning Addition End of BeginningFor the End of NBV
Of year Year Of year Year Year
20A 2,000,000 2,000,000- 500,000500,000 1,500,000
20B 2,000,000 700,000 2,700,000500,000 550,0001,050,000 1,650,000
20C 2,700,000 800,000 3,500,0001,050,000 612,5001,662,500 1,837,500
20D 3,500,000 900,000 4,400,0001,662,500 684,3752,346,875 2,053,125
20E 4,400,000 1,000,0005,400,0002,346,875 763,2813,110,156 2,289,844
4.4 TAX DEPRECIATION
Year
On
Original On On On On
Cost Additions Additions Additions Additions Total
20B 20C 20D 20E
2,000,000 700,000 800,000 900,000 1,000,000 5,400,000
20A 500,000 500,000
20B 375,000 175,000 550,000
20C 281,250 131,250 200,000 612,500
20D 210,938 98,437 150,000 225,000 684,375
20E 158,203 73,828 112,500 168,750 250,000 763,281
ACCOUNTING TR-27 (Revised 2012)
4.5 TEMPORARY DIFFERENCES
Year NBV per
Tax
WDV Cumulative Increase
Non-
Supplies Provision Cumulative
Accounts Temporary
In
Temporary Temporary @ 35% Provision
Difference Difference Difference
@ 40%
20A 1,800,000 1,500,000 300,000 300,000 120,000 42,000 42,000
20B 2,230,000 1,650,000 580,000 280,000 112,000 39,200 81,200
20C 2,680,000 1,837,500 842,500 262,500 105,000 36,750 117,950
20D 3,140,000 2,053,125 1,086,875 244,375 97,750 34,213 152,163
20E 3,600,000 2,289,844 1,310,156 223,281 89,312 31,259 183,422
4.6 As per the Revised IAS 12, deferred taxation should be recognized each
year using the balance sheet liability method i.e. a provision of Rs. 42,000
(being 35% of 40% Rs.300,000) would be required at the end of 20A and
so on. A total of Rs. 183,422 would be recognized as deferred tax liability
from year 20A to year 20E assuming that there would be no reversals
during this period.
(230
th
meeting of the Council held on December 17, 2011)
The R-27 before this revision reads as under:
ACCOUNTING TR-27 (REVISED 2003)
IAS-12, INCOME TAXES
1.0 IAS-12, Income Taxes (Revised) issued by IASC has become effective for the accounting periods
beginning on or after J anuary 1, 2002. It is felt that guidance is required on the applicability of
deferred taxation where a company has brought forward tax losses or its sources of income are
subject to deduction or collection of tax and the said deduction or collection is treated as full and
final tax liability for the purposes of assessment under the Income Tax Ordinance 2001. It is
therefore, proposed to issue the following as a guidance to the members on the applicability of IAS
12 (Revised) in Pakistan in relation to the afore-mentioned situations.
2.0 APPLICATION OF DEFERRED TAXATION
2.1 The deferred tax accounting does not apply to those companies whose entire income is
subject to deduction of tax at source that is taken as a final tax liability (under any
provision of the Income Tax Ordinance, 2001), as there will be no temporary differences.
2.2 Difficulty arises in case of those companies that have a portion of income subject to
deduction or collection of tax and the said deduction or collection is treated as full and
final tax liability for the purposes of assessment under the Income Tax Ordinance 2001
while the remaining portion of the income attracts assessment under normal provisions of
the Income Tax Ordinance, 2001.
For instance, temporary differences are likely to arise on that portion of profit, which
represents non-supplies. If the ratio between supplies remains the same year after year, it
would be easy to calculate effect of temporary differences but since this ratio is not
expected to be the same year after year, effect of temporary differences cannot be
calculated with accuracy. In such instance, a reasonable estimate for sales relating to
non-supplies should be made for the future years and the deferred tax liability provided
accordingly.
2.3 However, if it is not practicable to develop a reasonable estimate for calculation of
deferred tax liability / asset then an entity should evaluate the expectation of future
turnover by taking into consideration the turnover trend of at-least three years (including
the current year) and recognize and provide deferred tax liability accordingly. If the
pattern of supplies and non-supplies remains same in the future also then the company
should recognize and provide deferred tax for all temporary differences that could be
attributed to non-supplies.
2.4 A practical example on the application of Deferred Tax is enclosed assuming that the
ratio between non-supplies and supplies is 4:6.
ACCOUNTING TR-27 (REVISED 2003)
3.0 TAX LOSSES
3.1 In case in a particular year, current tax liability is calculated under provisions of Section
113 due to taxable loss the effect of temporary differences should be calculated and
deferred tax liability/ asset should be recognized.
3.2 In Pakistan, normally the tax losses are assessed months or even years after the balance
sheet date. While ascertaining the deferred tax asset on the balance sheet date, the loss
for the current year should be based on the estimated amount of loss that is likely to be
assessed by the tax authorities.
3.3 A deferred tax asset should be recognized for the carry forward of unused tax losses and
unused tax credits (as allowed under the provisions of the Income Tax Ordinance, 2001)
to the extent that it is probable that future taxable profit will be available against which
the unused tax losses and unused tax credits can be utilized.
4.0 EXAMPLE
Equipment costing Rs.2,000,000 was purchased during 20A. Capital expenditure budget reflects
following additions:
20B 700,000
20C 800,000
20D 900,000
20E 1,000,000
Entity's revenue include 60% sales that are subject to collection/ deduction of tax.
Tax Rate 35%
Tax Depreciation 25% WDV
Life 10 Years
Depreciation Policy Straight Line
ACCOUNTING NBV
Year Cost Depreciation NBV
Beginning Additions End of Beginning For the End of
of Year Year of Year Year Year
20A 2,000,000 2000,000 200,000 200,000 1,800,000
20B 2,000,000 700,000 2700,000 200,000 270,000 470,000 2,230,000
20C 2,700,000 800,000 3500,000 470,000 350,000 820,000 2680,000
20D 3,500,000 900,000 4400,000 820,000 440,000 1,260,000 3140,000
20E 4400,000 1000,000 5400,000 1260,000 540,000 1,800,000 3600,000
ACCOUNTING TR-27 (REVISED 2003
DEPRECIATION PER ACCOUNTS
Year On Original On On On On Total
Cost Additions Additions Additions Additions
20B 20C 20D 20E
2000,000 700,000 800,000 900,000 1000,000 5,400,000
20A 200,000 200,000
20B 200,000 70,000 270,000
20C 200,000 70,000 80,000 350,000
20D 200,000 70,000 80,000 90,000 440,000
20E 200,000 70,000 80,000 90,000 100,000 540,000
X WDV
Year Cost Depreciation
Beginning Addition End of Beginning For the End of NBV
of year Year of year Year Year
20A 2,000,000 2,000,000 - 500,000 500,000 1,500,000
20B 2,000,000 700,000 2,700,000 500,000 550,000 1,050,000 1,650,000
20C 2,700,000 800,000 3,500,000 1,050,000 612,500 1,662,500 1,837,500
20D 3,500,000 900,000 4,400,000 1,662,500 684,375 2,346,875 2,053,125
20E 4,400,000 1,000,000 5,400,000 2,346,875 763,281 3,110,156 2,289,844
TAX DEPRECIATION
Year On Original On On On On
Cost Additions Additions Additions Additions Total
20B 20C 20D 20E
2,000,000 700,000 800,000 900,000 1,000,000 5,400,000
20A 500,000 500,000
20B 375,000 175,000 550,000
20C 281,250 131,250 200,000 612,500
20D 210,938 98,437 150,000 225,000 684,375
20E 158,203 73,828 112,500 168,750 250,000 763,281
ACCOUNTING TR-27 (REVISED 2003
TEMPORARY DIFFERENCES
Year NBV per Tax WDV Cumulative Increase
Non-
Supplies Provision Cumulative
Accounts Temporary In Temporary Temporary @ 35% Provision
Difference Difference Difference
@ 40%
20A 1,800,000 1,500,000 300,000 300,000 120,000 42,000 42,000
20B 2,230,000 1,650,000 580,000 280,000 112,000 39,200 81,200
20C 2,680,000 1,837,500 842,500 262,500 105,000 36,750 117,950
20D 3,140,000 2,053,125 1,086,875 244,375 97,750 34,213 152,163
20E 3,600,000 2,289,844 1,310,156 223,281 89,312 31,259 183,422
As per the Revised IAS 12, deferred taxation should be recognized each year using the balance
sheet liability method i.e. a provision of Rs. 42,000 (being 35% of 40% Rs.300,000) would be
required at the end of 20A and so on. A total of Rs. 183,422 would be recognized as deferred tax
liability from year 20A to year 20E assuming that there would be no reversals during this period.
5.0 DEFERRED TAX RELATING TO LEASING COMPANIES
Another issue relates to leasing companies only. SECP Circular No. 16 of 1999 required leasing
companies to transfer to a capital reserve, amounts equivalent to their deferred tax liability during
the period 1 J uly 1998 to 30 J une 2003. The circular was issued to ensure compliance with IAS 12
by the time it became applicable. However, the circular has not specified the treatment of this
capital reserve so created when IAS 12 becomes applicable.
Appropriate treatment would be to treat it as a change in accounting policy in accordance with IAS
8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies. In
preparation of financial statements beginning on or after 1 J uly 2003.
This would require:
recognition of deferred tax liability as at J une 30, 2002 as an adjustment of opening
retained earnings;
charge of deferred tax liability for 2002-2003 to 2003-2004 financial statements (i.e. to
restate comparative figures) presented for comparison purposes and charge deferred tax
liability for 2003-04 to profit and loss account ; and
transfer capital reserve for deferred tax to retained earnings in 2003-2004 financial
statements.
ACCOUNTING TR-29
CARRY-OVER-TRANSACTIONS (COT)
THE ISSUE
The Karachi Stock Exchange (Guarantee) Limited (KSE) had enforced Carry-Over
Transactions Regulations (the Regulations) with effect from 11 January 1993. These
regulations were introduced to enhance the stock market liquidity and parallel
regulations were also enforced by the other stock exchanges of the country. Following
paragraphs summarise the mechanism of COT along with its accounting treatment
generally being followed.
1. Carry over transaction, as defined in section 2(e) of the Regulations, means the
combination of two transactions taking place simultaneously and settled in two
clearings in sequence. According to section 4(iii) of the Regulations, the buyer
of shares in current clearing period (the first transaction) would become seller
of the same shares in the immediate next clearing period (the second
transaction) and the seller of shares in current clearing period (the first
transaction) would become buyer of the same shares in the immediate next
clearing period (the second transaction).
2. Buyer / Seller enters into the first transaction on Friday after normal trading
hours and its settlement takes place on succeeding Wednesday through Clearing
House of KSE along with settlements of normal transactions. Simultaneously,
seller / buyer enters into the second transaction on the same Friday and its
settlement takes place through Clearing House but on succeeding second
Wednesday. However, the contract ticket of the second transaction (which is
prepared on Friday) bears the date of succeeding Monday, not of Friday.
Share Price of the second transaction is marked-up and generally does not
match with the prevailing market quotes of the succeeding Monday. The
marking-up of second transaction is dependent on demand and supply of funds
in the Carry-Over Market.
ACCOUNTING TR-29
3. Paragraph 10 of International Accounting Standard 39 Financial Instruments:
Recognition and Measurement defines repurchase agreement (Repo) as an
agreement to transfer a financial asset to another party in exchange for
cash or other consideration and a concurrent obligation to reacquire the
financial asset at a future date for an amount equal to the cash or other
consideration exchanged plus interest. If we consider the series of above
two Carry-Over-Transactions as a whole, its commercial effect takes form of a
Repo in which lending / borrowing of funds against pledge of shares takes place
for one week i.e. from Wednesday to Wednesday.
4. Paragraph 13 of the IAS 18 Revenue states that the revenue recognition
criteria are applied to two or more transactions together when they are
linked in such a way that the commercial effect cannot be understood
without reference to the series of transactions as a whole. Paragraph 13
further gives an example of an enterprise that may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a
later date thus negating the substantive effect of the transaction; in such
a case the two transactions are dealt with together. However, dealing with
first and second transactions separately, revenue / expense from COT is
generally accounted for as capital gain / loss and not as interest income /
expense.
5. Paragraph 27 of IAS 39 states that an enterprise should recognise a
financial asset or financial liability on its balance sheet when, and only
when, it becomes a party to the contractual provisions of the instrument.
In the case of first transaction COT, generally the buyer recognises purchase of
shares as investment in its balance sheet (and not recognise a lending) without
considering the second transaction. However, simultaneousness of the second
transaction of COT does not constitute the buyer in substance a party to the
contractual provisions of the equity instrument.
ACCOUNTING TR-29
6. Paragraph 35 of IAS 39 states that an enterprise should derecognise a
financial asset or a portion of a financial asset when, and only when,
the enterprise loses control of the contractual rights that comprise the
financial asset (or a portion of the financial asset). Further, paragraphs 38
& 39 state that a transferor has not lost control of a transferred financial asset
and, therefore the asset is not derecognised if the transferor has the right to
reacquire the transferred asset unless either (i) the asset is readily obtainable in
the market or (ii) the reacquisition price is fair value at the time of reacquisition.
In the case of first transaction of COT, generally the seller de-recognises the
investment in shares from its balance sheet (and not recognising a borrowing)
without considering the second transaction. However, simultaneousness of the
second transaction of COT gives the seller a right to repurchase the shares at a
fixed price. Further, the respective shares are not readily obtainable in the
market on succeeding Monday because their prices are fixed in advance i.e. on
Friday.
Keeping in view the above practice and the form as well as substance of COT a
question has arisen whether COT is a Repo or not?
TECHNICAL COMMITTEE RECOMMENDATIONS
The appropriate Committee of the Institute has examined all aspects of the query
regarding Carry-Over-Transactions (COT) and is of the opinion that a Carry-Over-
Transaction is a Repo transaction as the substance of the transaction and not its form
should be considered and accordingly it should be treated as a financing transaction. in
the books of accounts.
The aforesaid clarification provides the accounting treatment for Carry-Over-
Transactions under International Accounting Standards. However for the purposes of
other statutes, the transaction would have the effect according to the relevant provisions
of that law.
(152
nd
meeting of the Council J uly 19-20, 2002)
PART VI
AUDITING
MEMBERS' HANDBOOK
THE INSTITUTE OF
CHARTERED ACCOUNTANTS OF PAKISTAN
MEMBERS HANDBOOK
INDEX
PART VI
AUDITING
CONTENTS
SECTION A
STATEMENTS OF STANDARD
AUDITING PARCTICES
SECTION B
STATEMENTS OF AUDITING
GUIDELINES
SECTION C TECHNICAL RELEASES
THE INSTITUTE OF
CHARTERED ACCOUNTANTS OF PAKISTAN
MEMBERS' HANDBOOK
PART VI
SECTION A
STATEMENTS OF
STANDARD AUDITING PRACTICES
THE INSTITUTE OF
CHARTERED ACCOUNTANTS OF PAKISTAN
SECTIONAL INDEX
PART VI
SECTION A STATEMENTS OF STANDARD ACCOUNTING PRACTICE
SAP-1
Withdrawn-(Bank Reports for Audit Purposes)
SAP-2 Withdrawn-(Auditors Report and Qualification)
SAP-3 Withdrawn-(Verification of Inventories)
SAP-4 Withdrawn-(Audit Working Papers)
SAP-5
Withdrawn-(Verification of Debtors Balances-
Confirmation by Direct Communication)
THE INSTITUTE OF
CHARTERED ACCOUNTANTS OF PAKISTAN
MEMBERS' HANDBOOK
PART VI
SECTION B
STATEMENTS OF AUDITING GUIDELINES
THE INSTITUTE OF
CHARTERED ACCOUNTANTS OF PAKISTAN
SECTIONAL INDEX
PART VI
SECTIONS B STATEMENTS OF AUDITING GULDELINES
Revised Statement of Auditing Guideline No. 1 (Withdrawn)
MEMBERS' HANDBOOK
PART VI
SECTION C
TECHNICAL RELEASES
THE INSTITUTE OF
CHARTERED ACCOUNTANTS OF PAKISTAN
SECTIONAL INDEX
PART VI
SECTION C TECHNICAL RELEASES
ATR-1 Withdrawn - Only Members to sign audit documents
ATR-2
Withdrawn - (Communication - Statement on the
explanation and its clarification of the word)
ATR-3
Withdrawn - (Incoming auditors to help in clearing the
professional dues of retiring member)
ATR-4 Withdrawn - (Audit of government corporations)
ATR-5 Withdrawn - (Replying to enquiries for audit jobs)
ATR-6 Withdrawn - (Audit by ex-employees)
ATR-7
Withdrawn - (Some glaring omissions by the auditors
pointed out by Corporate Law Authority)
ATR-8
Withdrawn - (Preparation of accounts from incomplete
records and report thereon as auditors - Reformatted
2002)
ATR-9
Withdrawn - (Signing of correspondence and financial
statements by Members)
ATR-10
Withdrawn - (Communication of consent by incoming
auditors)
ATR-11
Withdrawn - (Appointment of auditors-1- Reformatted
2002)
ATR-12 Withdrawn - (Appointment of auditors-II)
ATR-13
Lien or books of accounts due to non-payment of
professional dues
ATR-14
Minimum Hourly Charge Out Rates and Minimum Fee
for Audit Work by Practicing Members (Revised 2008)
ATR-15
Withdrawn - (Qualification in auditor's report - going
concern assumption for organization formed with a
limited life)
SECTIONAL INDEX
PART VI
SECTION C TECHNICAL RELEASES
ATR-16
Acceptance of Audit Assignments by New Auditor(s) when
audit fee of existing auditor(s) is outstanding
ATR-17
Auditors' Report to the Trustees/Board of Governors/
Management Committee (Revised 2012)
ATR-18 Bank Report for audit purposes (Revised 2012)
ATR-19
Identification of Audit Engagement Partner in the Auditors'
Report on Financial Statements (Revised 2012)
ATR-20
Auditor's Reporting Responsibilities in respect of Non
Compliances with Laws or Regulations (Revised 2012)
AUDITING ATR-13
LIEN ON BOOKS OF ACCOUNTS DUE TO NON-PAYMENT OF
PROFESSIONAL DUES
Opinion was sought on the proper course of action in the following
circumstances:-
We were appointed auditors of M/s................. for the year ended 30th June,
1984. We conducted the audit for the year 30th June 1984. We also took up the
stock taking for the year ended 30-6-1984 & 1985.
In the meantime due to non cooperation of responsible staff of M/s................. we
have communicated our inability to carry on the audit. We have incurred self cost
of Rs. 5,500/- for the time consumed on this job. In the meantime due to
mismanagement, Government has appointed an Administrator to investigate
affairs of M/s......................................
We have in our possession some books of accounts of M/s......................... we
have asked the Administrator to reimburse our out of pocket expenses. According
to law we have no lien over the books of accounts of M/s................. Whereas we
fear that if the books are returned our outstanding amount will not be paid by
them.
We shall be obliged if you please advise us the proper course to be adopted.
The following opinion was given:
Since there is no lien on books, books should be returned. Legal remedies may be
tried for the recovery of the dues.
Dated: 18-9-1985
AUDITING ATR-14 (Revised-2008)
MINIMUM HOURLY CHARGE OUT RATES AND MINIMUM FEE FOR
AUDIT ENGAGEMENTS
1. The audit engagements carry immense responsibility and which has
increased manifold in recent years. To meet the expectations of various
stakeholders, stringent regulatory requirements and ever increasing
demand to increase the level of due care, the members need to perform the
audit exercising very high degree of professional competence. Such work
is also required to be properly documented to support the opinion
expressed by the auditors.
2. The Council of the Institute of Chartered Accountants of Pakistan (ICAP)
has recently issued a notification making it mandatory, for the firms doing
audit of listed and public sector entities, to observe from 1 July 2009 ISQC
1, Quality Control for Firms that Perform Audits and Reviews of
Historical Financial Information and Other Assurance and Related
Services Engagements, issued by IFAC and has also notified, ISA 220
Quality Control for Audits of Historical Financial Information, ISA 230
Audit Documentation etc. These standards require extensive
documentation of audit procedures and recruitment of qualified staff.
Furthermore the minimum stipend rate for audit trainees have also
significantly increased. Hence, the cost to perform audit by the firms has
significantly increased to ensure that quality control procedures are
adequately complied with by the firms.
3. The Council of the ICAP periodically reviews and prescribes minimum
hourly rates, which it considers reasonable and compatible with the
increase in the cost to complete the engagements and quality of
professional standards to be observed by the practicing members of the
Institute. The current minimum chargeable rates as prescribed by the
Council of the Institute are shown below:
AUDITING ATR-14 (Revised-2008)
Rupees
Per man-hour
Partner 7,500
Qualified Support Staff:
Above 8 years
4 to 8 years
Below 4 years
5,000
4,000
3,000
Supervisor 2,000
Senior 1,000
Semi-Senior 750
Junior 500
4. The level of fee is to be mutually agreed between the auditor and his
client, which largely depends upon the volume of work involved and
estimated time to be incurred on the audit engagement. The Council whilst
recognizing this principle is however, of the view that there has to be a
minimum threshold of audit fee. To achieve the desired objective, the
following minimum audit fee is prescribed (which may be increased by
consent having regard to specific circumstances of an audit engagement).
Schedule of Minimum Audit Fee:
Type of entity
Minimum
Fee Rupees
Listed companies
Turnover up to 500 million
250,000
Turnover over 500 million up to 1 billion 300,000
Turnover over 1 billion up to 5 billion 500,000
Turnover above 5 billion 1,000,000
Economically Significant Entities
Turnover up to 1 billion 250,000
Turnover over 1 billion up to 5 billion 400,000
Turnover above 5 billion 800,000
Medium Sized Entities 125,000
Small Sized Entities 75,000
AUDITING ATR-14 (Revised-2008)
Notes:
i) The terms Economically Significant Entities (ESE), Medium Sized
Entities(MSE) and Small Sized Entities (SSE) shall have the same
meaning as defined in S.R.O.859(I)/2007 dated 21 August 2007 issued
by the Securities and Exchange Commission of Pakistan pursuant to
Section 234 of the Companies Ordinance, 1984.
ii) Considering the practical difficulties being faced by various practicing
members in the determination of audit fee, the Council has decided
that the prescribed minimum audit fee shall be charged without any
exception. However, in case of an existing audit client, the present
audit fee shall be enhanced to the aforesaid prescribed level over a
period of two years with mutual consent provided it is not less than
75% of the prescribed minimum in the first year. Nevertheless, in case
of acceptance of an audit client by a practicing member for the first
time the prescribed fee levels shall be strictly observed.
5. Minimum Audit Fee in Certain Circumstances
For audit engagements of clients in the pre- incorporation / pre-operation
stages or in case of sickness of the project or closed operations or
discontinuation of business, the prescribed minimum audit fee chargeable
by the practicing members shall be as under:
Listed Companies/
ESEs
MSEs SSEs
Minimum audit fee:
Rs.75,000
Rs.50,000 Rs. 30,000
The exception in paragraph 4(ii) above shall apply mutatis mutandis to the above
paragraph 5.
6. The minimum audit fee prescribed in paragraph 4 and 5 above is exclusive of
the below mentioned additional services to be rendered by a statutory auditor
under the Code of Corporate Governance and for any other certifications and
the professional fee for such services shall be charged separately by mutual
consent.
AUDITING ATR-14 (Revised-2008)
Attend the Audit Committee Meetings of clients
Issue a Review Report on Statement of Compliance with Best Practices
of Corporate Governance
Issue Review Report on half yearly financial statements
Special certification required by regulators over and above normal
scope of audit
7. The minimum audit fee determined in accordance with this ATR shall not
be less than the present audit fee of an existing client.
8. In case of joint audits, fee may be shared among the auditors as may be
mutually agreed between them.
9. The fee may be reviewed annually to cover inflationary effects in costs.
10. The hourly rates and fee are exclusive of traveling and hotel expenses, out
of pocket expenses and other incidental costs which would be
reimbursable to auditors at actual.
11. In case of a religious or charitable institution or a company not for
profit, the practicing members may undertake to do the audit on a token
fee or on an honorary basis.
12. At the time of quality control review, the reviewer will ensure the
compliance of this ATR.
This Directive supersedes ATR-14 (Revised) issued pursuant to the Councils
decision of 30 March, 2007 and would apply to all audit appointments made after
August 31, 2008.
(197
th
meeting of the Council held on J uly 25, 2008)
AUDITING ATR-16
ACCEPTANCE OF AUDIT ASSIGNMENTS BY NEW AUDITOR(S)
WHEN AUDIT FEE OF EXISTING AUDITOR(S) IS OUTSTANDING
THE ISSUE
Whether new auditor should accept the assignments in case the statutory audit fee
of the retiring auditor is outstanding?
THE TECHNICAL ADVISORY COMMITTEE RECOMMENDATION
A member of the Institute in practice shall be deemed to be guilty of professional
misconduct, if he accepts the appointment as auditor of an entity in case the
undisputed audit fee of another Chartered Accountant for carrying out the
statutory audit under the Companies Ordinance, 1984 or under other statutes has
not been paid.
Undisputed audit fee means the amount which has been agreed to and provided
for in the financial statements.
Members are, therefore, advised to keep the above directive of the Council in
view while accepting new assignments of audit.
(145
th
meeting of the Council - July 30, 2001)
AUDITING ATR 17(Revised-2012)
AUDITORS REPORT TO THE TRUSTEES/BOARD OF GOVERNORS/
MANAGEMENT COMMITTEE
The Issue
What should be the format of the auditors report regarding audits of Societies,
NGOs and charity organisations?
Recommendations of the Technical Advisory Committee
As a standard format for an auditors report relating to audits of Societies, NGOs
and charity organisations is not prescribed in any law and as there is no provision
for maintenance of accounts and the audit of such entities either in the Trust Act,
1882 or the Societies Registration Act, 1860 therefore the Council has approved
the enclosed formats of auditors reports as applicable, for use in this respect.
Members are advised to follow the following formats, whichever is relevant,
according to the applicable financial reporting framework, while reporting on the
financial statements of such entities. The commonly used financial reporting
frameworks are as follows:
a) preparation of financial statements in accordance with the requirements of
the approved accounting standards as applicable in Pakistan (i.e. the
International Financial Reporting Standards); and
b) preparation of statements in accordance with another comprehensive basis
of accounting such as:
i) Receipts and disbursements basis of accounting
under the receipts and disbursements basis of accounting, revenue is
recognised when received rather than when earned, and expenses are
recognised when payments are made rather than when incurred.
ii) Receipts and expenditure basis where a receipt and expenditure
account is prepared
AUDITING ATR 17(Revised-2012)
under the receipts and expenditure basis of accounting, revenue is
recognised when received rather than when earned, and expenses are
recognised when incurred i.e. on an accrual basis.
iii) Receipts and expenditure basis where a balance sheet is prepared
under the receipts and expenditure basis of accounting, revenue is
recognised when received rather than when earned, and expenses are
recognised when incurred i.e. on an accrual basis.
Independent auditors report to the trustees / board of governors /
management committee (under the financial reporting framework as in (a)
above)
We have audited the annexed balance sheet of the ------------------- as at ------------
----and the related income and expenditure account and cash flow statement
together with the notes forming part thereof (here-in-after referred to as the
financial statements for the ------ months period ended ----------/ year then ended).
It is the responsibility of the trustees / board of governors / management
committee (or other as appropriate) to establish and maintain a system of internal
control, and prepare and present the financial statements in conformity with the
approved accounting standards as applicable in Pakistan. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the auditing standards as applicable in
Pakistan. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting policies used and significant estimates made by the
management, as well as, evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our opinion.
AUDITING ATR 17(Revised-2012)
In our opinion the financial statements present fairly in all material respects the
financial position of the ------------------ as at ----------------------- and of its
surplus/deficit and cash flows for the year/--------- months period then ended in
accordance with the approved accounting standards as applicable in Pakistan.
Independent auditors report to the trustees / board of governors /
management committee (under the financial reporting framework as in (b)
(i) and (ii) above)
We have audited the annexed receipts and disbursements account / receipts and
expenditure account of the as at .. together with the
notes forming part thereof (here-in-after referred to as the statement for the -------
period ended -------- / year then ended). It is the responsibility of the trustees /
board of governors / management committee (or other as appropriate) to establish
and maintain a system of internal control, and prepare and present the statement in
conformity with the cash receipts and disbursements / cash receipts and
expenditure incurred basis as described in note X to the statement. Our
responsibility is to express an opinion on these statements based on our audit.
We conducted our audit in accordance with the auditing standards as applicable in
Pakistan. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing the
accounting policies used and significant estimates made by the management, as
well as evaluating the overall presentation of the statement. We believe that our
audit provides a reasonable basis for our opinion.
As described in note X, the statement has been prepared on the (cash receipts and
disbursements basis / cash receipts and expenditure basis) of accounting, which is
a comprehensive basis of accounting other than the generally accepted accounting
principles.
In our opinion the statement presents fairly, in all material respects, the cash
receipts and disbursement/cash receipts and expenditure of the -----------------------
for the year ended ---------------------- on the basis of accounting as described in
note X to thestatement.
AUDITING ATR 17(Revised-2012)
Independent auditors report to the trustees / board of governors /
management committee (under the financial reporting framework as in (b)
(iii) above)
We have audited the annexed balance sheet of the as at
.. and the related income and expenditure account and cash flow
statement together with the notes forming part thereof (here-in-after referred to as
the financial statements), for the ------- period ended -------- / year then ended). It
is the responsibility of the trustees / board of governors / management committee
(or other as appropriate) to establish and maintain a system of internal control,
and prepare and present the financial statements in conformity with the cash
receipts and expenditure incurred basis of preparation as described in note X to
the annexed financial statements. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the auditing standards as applicable in
Pakistan. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting policies used and significant estimates made by the
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our opinion.
As described in note X, the financial statements have been prepared on the cash
receipts and expenditure basis of accounting, which is a comprehensive basis of
accounting other than the generally accepted accounting principles. In our opinion
the financial statements present fairly, in all material respects, the cash receipts
and expenditure of the ----------------------- for the year ended ----------------------
on the basis of accounting as described in note X to thestatements.
This revised ATR 17 (2012) supersedes the requirements as contained in
revised ATR 17 (2004) and is applicable for audits of financial
statement/statements for periods beginning on or after July 1, 2011.
However, earlier application is encouraged.
(230
th
Meeting of the Council December 17, 2011)
The ATR-17 before this revision reads as under:
AUDITING ATR 17(Revised-2004)
AUDITORS REPORT TO THE TRUSTEES / BOARD OF GOVERNORS / MANAGEMENT
COMMITTEE
The Issue
What should be the format of the auditors report in case of audit of Societies, NGOs & Charity
Organizations?
Technical Advisory Committee Recommendations
As there is no standard format of auditors report and also there is no provision for maintenance of accounts
and audit of these societies either in the Trust Act, 1882 or Societies Registration Act, 1860 the Council has
approved the enclosed format of auditors report.
Members are advised to follow the following formats whichever is applicable while reporting on the financial
statements of such organizations: -
AUDITORS REPORT TO THE
1
TRUSTEES / BOARD OF GOVERNORS / MANAGEMENT
COMMITTEE
(ACCRUAL BASIS OF ACCOUNTING)
We have audited the annexed balance sheet of the ------------------- as at ----------------and the related income
and expenditure account and cash flow statement together with the notes forming part thereof (here-in-after
referred to as the financial statements for the year then ended).
It is the responsibility of the trustees / board of governors / management committee to establish and maintain
a system of internal control, and prepare and present the financial statements in conformity with the approved
accounting standards as applicable in Pakistan. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting policies used and
significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our opinion.
In our opinion the financial statements present fairly in all material respects the financial position of the ------
------------ as at ----------------------- and of its surplus/deficit and cash flow for the year then ended in
accordance with the approved accounting standards as applicable in Pakistan.
Date _____________ Signature
[Name(s) of Auditors]
Place _____________
Note: 1. Select wherever is appropriate.
AUDITING ATR-17 (Revised-2004)
AUDITORS REPORT TO THE
1
TRUSTEES / BOARD OF GOVERNORS / MANAGEMENT
COMMITTEE
(OTHER THAN ACCRUAL BASIS OF ACCOUNTING)
We have audited the annexed the receipt and disbursement account / receipt and expenditure account of the
as at .. together with the notes forming part thereof (here-in-after referred to as
the statement(s) for the year then ended).
It is the responsibility of the trustees / board of governors / management committee to establish and maintain
a system of internal control, and prepare and present the statement(s) in conformity with the cash receipt and
disbursement / cash receipt and expenditure incurred basis as described in Note X to the accounts. Our
responsibility is to express an opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the statements are free of
material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and
disclosures in the statements. An audit also includes assessing the accounting policies used and
significant estimates made by management, as well as evaluating the overall presentation of the
statements. We believe that our audit provides a reasonable basis for our opinion.
As described in Note X, the statement(s) have been prepared on the (cash receipts and disbursements basis /
cash receipt and expenditure basis, etc.) of accounting, which is a comprehensive basis of accounting other
than generally accepted accounting principles.
In our opinion the statement(s) present(s) fairly, in all material respect(s), the cash receipt and disbursement
or cash receipt and expenditure, etc. of the ----------------------- for the year ended ---------------------- on the
basis of accounting described in Note X to the statement.
Date ______________
Signature
[Name(s) of Auditors]
Place .___________
Note: 1. Select wherever is appropriate.
(163
rd
meeting of the Council held on April 29-30 and May 14,2004)
AUDITING ATR 18(Revised-2012)
BANK REPORTS FOR AUDIT PURPOSES
1.0 The Issue
1.1 To seek standardisation of auditing practice when approaching banks for
information required for audit purposes.
2.0 Explanation
2.1 This release deals with request by auditors to bankers of the client for
confirmation of balances and providing other information and prescribing
a standard letter of request.
2.2 The practice of obtaining independent confirmations or reports from banks
is essential for the proper discharge of auditors' responsibilities. Bank
reports assist auditors to verify existence of liabilities and the existence,
ownership and proper custody of assets; they also provide other
information relevant to the audit of financial statements.
3.0 Technical Committee Recommendation
3.1 The Committee recommends the following standard format for the letter
of request to be sent to banks and also the appropriate guidance in this
regard to be used by the auditors while verifying the bank balances.
Standard Letter of Request
3.2 The information which is usually required from banks and financial
institutions for audit purposes is substantially the same for most audits and
can be obtained in a standard letter of request which would facilitate a
prompt response from banks and financial institutions. The use of such a
letter, designed to cover all normal banking activities and to facilitate
extraction of information from banking records should enable prompt
response to these requests. It should also enable auditors to make further
enquiries from banks if the replies received require a clarification.
AUDITING ATR 18(Revised-2012)
3.3 This technical release, therefore, requires auditors to adopt the practice of
requesting information from banks and financial institutions in the form of
a standard letter as set out in Appendix-I. It also requires that the standard
letter of request should be used in accordance with the procedures laid
down in paragraph 5 below. Appendix-II to this release sets out
explanations of items that are incorporated in, or specifically excluded
from, the standard letter. It is stressed that this standard letter is for audit
purposes only.
4.0 Authority to Disclose
Banks and financial institutions will require explicit written authority of
their customers to disclose information requested by auditors. For the sake
of convenience, it is proposed that the authority should be evidenced by
the customer's counter signature on the standard letter of request. In the
case of joint accounts, the authority must be given in the standard letter of
request by all parties to the account. In the case of security lodged by a
third party, its authority for disclosure will also have to be obtained and
produced to the bank.
5.0 Procedures
5.1 The following procedures should be adopted by the auditors in connection
with the standard letter of request for a bank report:
a) The standard letter as set out in Appendix-I to this release should be
sent on each occasion by the auditor on his own letterhead to the
Manager of each branch of a bank with which it is known that the
client holds an account or has dealt with since the end of the previous
accounting period.
b) The client's authority to permit disclosure should be obtained on the
standard letter of request itself before the letter is sent out.
c) The standard letter of request should preferably reach the branch
manager on or before the date of the client's financial year/period end.
AUDITING ATR 18(Revised-2012)
d) The dates to be entered on the standard letter are normally the closing
dates of:
i) The client's accounting reference period for which the report is
requested; and
ii) the client's previous accounting reference period for which full
bank report was compiled. If, exceptionally, audited financial
statements are produced other than for an accounting reference
period, alternative dates should be substituted.
e) In reviewing the bank's reply, it is important for auditors to check that
the bank has answered all questions in full.
f) It will be necessary to obtain confirmation as to the authenticity of any
letter not received directly from the bank branch concerned and of any
letter received from a bank without a request having previously been
made. It is essential that in both cases, the auditors obtain confirmation
from the branch concerned that the report has been prepared in
compliance with the terms of the standard letter.
g) If no reply is received from a bank within two weeks after the original
request was made or two weeks after the closing of the year whichever
is earlier, the auditor should send a "First Reminder" so marked on the
standard letter of request.
h) After the expiry of a further period of one week from the date of
sending out the "First Reminder", if no reply is received, the auditor
may consider sending a "Second Reminder" so marked on the standard
letter of request if deemed appropriate by him.
5.2 The Standard letter should be used in its complete form for all audit
requests and in accordance with the above procedures in respect of
financial statements for the relevant period and should not be altered to
reduce the minimum contents prescribed. In certain circumstances,
supplementary requests for additional information may be required for
audit purposes. The letter containing such supplementary requests should
be submitted to the bank, as far as possible, at the same time as the
standard letter.
AUDITING ATR 18(Revised-2012)
5.3 The auditor should require the banks to send responses to the
confirmations, directly to the auditor address.
5.4 If the responses by bank to the confirmations sent to them are received via
e-mail or facsimile, a telephone call shall be made to verify these
responses. Documentation of the telephone call should, depending on the
circumstances, ordinarily indicate:
the name of the person spoken with;
the name of the person who completed the confirmation;
that such person was authorised and knowledgeable to respond;
that there were no changes to the confirmations since the date they
were provided electronically/via facsimile;
verification of certain key client-specific information contained in the
response; and
conclusion that the source and contents of the response were verified
without exception and that the response was received from an
authorised individual.
This revised ATR 18 (2012) supersedes the requirement as contained in
ATR 18 and is applicable for audits of financial statement/statements for
periods beginning on or after J uly 1, 2011. However, earlier application is
encouraged.
(230
th
meeting of the Council held on December 17, 2011)
AUDITING ATR 18(Revised-2012)
APPENDIX-I
The Manager
(Bank)
(Branch)
Dear Sir,
(Clients's Name)
STANDARD REQUEST FOR BANK REPORT FOR AUDIT PURPOSES
In accordance with your above-named customer's instructions given hereon,
please send DIRECT to us at the above address, as auditors of your customer, the
following information relating to their affairs at your branch as at the close of
business on and, in the case of items 2, 4 and 12 during the period since the end of
the previous accounting period.
Please state against each item any factors which may limit the completeness of
your reply; if there is nothing to report, state 'None'.
It is understood that any replies given are in strict confidence, for the purposes of
audit.
Information Requested
BANK ACCOUNTS
(1) Full titles of all accounts together with the account numbers and balances
therein, including NIL balances:
(a) where your customer's name is the sole name in the title;
(b) where your customer's name is joined with that of other parties;
(c) where the account is in a trade name.
AUDITING ATR 18(Revised-2012)
NOTES
(i) Where the amount is subject to any restriction (e.g. a garnishee order or
arrestment) or exchange control considerations (e.g. 'blocked account')
information regarding nature and extent of the restriction should be stated.
(ii) where the authority upon which you are providing this information does
not cover any amounts held jointly with other parties, please refer to your
customer in order to obtain the requisite authority of the other parties with
a copy to us.
(2) Full titles and dates of closure of all accounts closed during the period.
(3) The separate amounts accrued but not charged or credited as at the above date,
of
(a) markup/interest; and
(b) provisional charges (including commitment fees)
(4) The amount of markup/interest charged during the period if not specified
separately in the customer's statement of account.
(5) Particulars (i.e. date, type of document and accounts covered) of any written
acknowledgement of set-off, either by specific letter of set-off, or incorporated
in some other document or security.
FACILITIES
(6) Details of leasing facilities, loans, overdrafts, cash credit facilities (including
standby facilities), and associated guarantees / indemnities specifying agreed
limits, unused facilities, markup/interest terms, overdue rentals / installments
and in the case of term loans, date for repayment or review.
SECURITIES
(7) (a) In respect of facilities, contingent liabilities and derivatives and
commodity trading, please give:
AUDITING ATR 18(Revised-2012)
(i) Details of any security formally charged in favour of the bank,
including the date and type of charge, (e.g. pledge, hypothecation etc.)
(ii) Particulars of any undertaking to assign any assets to the bank. If a
security is limited to any borrowing, or if there is a prior, pari passu or
subordinate charge, please indicate.
(iii) Whether the security supports facilities granted by the bank to the
customer or to another party.
(iv) For any arrangements for set off of balances or compensating
balances e.g. back to back loans, give particulars of any
acknowledgement of set off (i.e. date, type of document and accounts
covered).
CUSTODIES
(b) Investments, bills of exchange, documents of title or other assets held but
not charged.
Please give details.
(8) Nature, currency, amount and extent of any facilities limits and details of
period of availability of agreed facility of all contingent liabilities, viz:-
(a) Total of bills discounted with recourse to the customer or any subsidiary
or related party of the customer;
(b) Details of any guarantees, comfort letters, letter of undertakings, bonds,
endorsements or indemnities given to you by the customer in favour of
third parties (separately specifying any such items in favour of any
subsidiary or related party of the customer);
(c) Details of any guarantees, bonds or indemnities given by you, on your
customer's behalf, stating where there is recourse to your customer and/or
to its holding, parent or any other company within the group;
AUDITING ATR 18(Revised-2012)
(d) Total of acceptances;
(e) Total of outstanding liabilities under documentary credits;
(f) Others (please give details).
ASSETS
(9) Details specifying the nature, amount and maturity date of the assets
covered under Islamic mode of finance (e.g. morabaha, musharika,
modaraba etc.) or any other mode of finance including leasing:-
(a) Asset repurchase agreement;
(b) Asset resale agreement;
(c) Options outstanding at the relevant date.
DERIVATIVES AND COMMODITY TRADING
(10) Details of all outstanding contracts specifying the number, deal date,
maturity or value date, price at which the deal was transacted and currency
of the contract bought and sold for:-
(a) Total of foreign exchange contracts;
(b) Bullions;
(c) Securities;
(d) Others
(11) Information in respect of any letter of comfort obtained by the bank from the
parent or any other associated concern of the company.
ADDITIONAL BANKING RELATIONSHIPS
(12) A list of other banks, or branches of your bank, where you are aware that a
relationship has been established during the period.
AUDITING ATR 18(Revised-2012)
(13) OTHER INFORMATION
Yours faithfully,
DISCLOSURE AUTHORISED
For and on behalf of
(CUSTOMER'S NAME)
Signed in accordance with the terms and conditions for the conduct of the
customer's bank account.
AUDITING ATR 18(Revised-2012)
APPENDIX-II
NOTES ON THE STANDARD LETTER
(This Appendix contains explanations of item numbers referred to in the Standard
letter)
(1) BANK ACCOUNTS:
The phrase 'all accounts' includes details of all current, deposit loan and
foreign currency accounts and other advances or facilities, money held on
deposit receipt and account numbers.
(4) ANALYSIS OF CHARGES:
The details of the rate of markup/interest applicable to any
markup/interest-bearing account shall be required.
(5) Auditors will need to have an understanding of the principles governing
set-off, but it should not normally be necessary to make enquiries beyond
the question as put in the standard letter. Details should be available from
the relevant documents. A right to set-off may exist even when there are
no written arrangements.
(7) CUSTOMER'S ASSETS:
a) Security includes details of charge, mortgage or other claims or
security or security registered (e.g. debenture, memorandum of
deposit); assets charged and where appropriate cross reference to
facility specifically secured.
b) Assets include bonds, stock and share certificates, investments, bearer
or other securities; title deeds relating to freehold, leasehold or other
property; bills of exchange or other negotiable instruments receivable
(other than cheques); deposit receipts (as distinct from any account
represented by the deposit receipt); the names of persons who are able
to obtain release of the assets should be ascertained from the customer
and are usually covered by the bank mandate.
AUDITING ATR 18(Revised-2012)
c) Lien: Auditors should be aware that any assets held by the bank other
than those specifically charged, may be subject to some form of
banker's lien, although this may only operate under particular
conditions. It should be necessary to enquire only in exceptional
circumstances.
d) Bearer securities: detailed enquiries on bearer securities should be
made of the bank only when evidence cannot be obtained from the
customer or his banking records.
(8) CONTINGENT LIABILITIES:
The liabilities under indemnities/ guarantees given in respect of shipping
documents relating to imports do not have an expiry date. From time to
time the banks take a view on old liabilities and remove some of them
from their records. Certain of these old liabilities may not therefore be
shown in the figure quoted by the bank, but it cannot be guaranteed that no
claim will be incurred subsequently.
(13) OTHER INFORMATION:
Banks are often asked for introductions to other branches or banks for the
purpose of establishing new sources of finance. The provision of any
available information relating to introductions or new accounts will assist
auditors to satisfy themselves that they have information about all of their
client's banking relationship.
AUDITING ATR 18(Revised-2012)
SUGGESTED FORMAT OF LETTER FOR DEBTOR'S
CONFIRMATION BY DIRECT COMMUNICATION
(TO BE TYPED ON CLIENT'S LETTERHEAD)
DEBTOR'S NAME AND ADDRESS
Dear Sir,
As part of their normal audit procedures, we have been requested by our auditors
______________ of _________________ to ask you to confirm direct to them
your indebtedness to us of Rs. ___________ as at ________________.
If the amount is in agreement with your records, please sign in the space provided
below and return this letter directly to our auditors.
If the amount is not in agreement with your records please notify our auditors
directly of the amount shown by your records and, if possible, send them full
particulars of the difference.
For your reply to be of assistance to our auditors please give this request your
early attention. *We enclose a prepaid envelope for your convenience.
Please do not send remittances to the auditors along with the confirmation.
Yours faithfully,
CLIENT'S AUTHORISED SIGNATORY
PLEASE DO NOT DETACH
(CLIENT'S NAME)
DEBTOR'S NAME:
NO:
The amount shown above of Rs. ___________ due from us *is/ [is not] in
agreement with our records at ___________________. *The details of
discrepancies are annexed.
Authorized Signature & Stamp
Title of Position
Delete as appropriate (stamped self-addressed return envelope by the
auditor's should be enclosed)
AUDITING ATR 18(Revised-2012)
SUGGESTIONS FOR IMPROVING THE RATE OF FEEDBACK FOR
DEBTORS' CONFIRMATIONS
The efficiency of the audit procedure of debtor's confirmation through direct
communication is influenced by both the willingness and ability of debtor to
respond accurately to the information presented on the letter of confirmation.
Improving confirmation feedback rate may reduce the extent of other audit
procedures that the auditor may have planned to undertake. Some suggestions for
improving the rate of feedback are as follows:-
(a) Preliminary notification
The use of a brief letter, post card, or telephone call by the client immediately
before posting the letter generally tends to increase responses as the debtor is less
likely to ignore the letter having been previously notified.
(b) Request for information that the debtor is able to confirm
The confirmation request should include all the relevant information required for
a response by the debtor.
(c) Use clear wording
The confirmation request should avoid technical jargon and should be written in
simple language to facilitate an early and effective reply (including Urdu or
vernacular, where considered necessary).
(d) Set deadlines
The confirmation should state deadlines e.g. REPLY REQUESTED WITHIN 5
DAYS.
(e) Provide return envelopes
Return envelopes that have the firm's name and address printed in bold are likely
to draw attention to confirmations and are likely to encourage debtors to respond
early.
AUDITING ATR 18(Revised-2012)
(f) Provide prepaid postage
To facilitate responses, auditors normally include a stamped self-addressed return
envelope along with each confirmation.
(g) Send follow-up reminders/second requests
Sending reminders/second request soon after sending the initial letter are likely to
increase feedback rates.
The ATR-18 before this revision reads as under:
AUDITING ATR 18
BANK REPORTS FOR AUDIT PURPOSES
1.0 THE ISSUE
1.1 To seek standardization of auditing practice when approaching banks for audit information.
2.0 EXPLANATION
2.1 This release deals with request by auditors to client's bankers for confirmation of balances and
other information and prescribing a standard letter of request.
2.2 The practice of obtaining independent confirmations or reports from banks is essential to the proper
discharge of auditors responsibilities. Bank reports assist auditors to verify existence of liabilities
and the existence, ownership and proper custody of assets; they also provide other information
relevant to the audit of accounts.
3.0 TECHNICAL COMMITTEE RECOMMENDATION
3.1 The Committee suggests the following standard format for the letter of request for bank
confirmation and also the appropriate guidance in this regard to be used by the auditors while
verifying the bank balances.
STANDARD LETTER OF REQUEST
3.2 The information which is usually required from banks and financial institutions for audit purposes
is substantially the same for most audits and can be obtained in a standard letter of request which
would facilitate prompt response from banks and financial institutions. The use of such letter,
designed to cover all normal banking activities and to facilitate extraction of information from
banking records should enable prompt response to these requests. It should also enable auditors to
make further enquiries from banks if the replies received call for further clarification.
3.3 This technical release, therefore, requires auditors to adopt the practice of requesting information
from banks and financial institutions in the form of standard letter set out in Appendix-I. It also
requires that the standard letter of request should be used in accordance with the procedures laid
down in paragraph 5 below. Appendix-II to this release sets out explanations of items that are
incorporated in, or specifically excluded from, the standard letter. It is stressed that this standard
letter is for audit purposes only.
4.0 AUTHORITY TO DISCLOSE
Banks and financial institutions will require explicit written authority of their customers to disclose
information requested by auditors. For convenience sake, it has been decided that the authority
shall be evidenced by the customer's counter signature on the standard letter of request. In the case
of joint accounts, the authority must be given in the standard letter of request by all parties to the
account. In the case of security lodged by third party, its authority for disclosure will also have to
be obtained and produced to the bank.
AUDITING ATR 18
5.0 PROCEDURES
5.1 The following procedures should be adopted by the auditors in connection with the standard letter
of request for bank report:
a) The standard letter set out in Appendix-I to this release should be sent on each occasion by the
auditor on his own letterhead to the Manager of each bank branch with which it is known that the
client holds an account or has dealt since the end of the previous accounting period.
b) The client's authority to permit disclosure should be obtained on the standard letter of request itself
before the letter is sent out.
c) The standard letter of request should preferably reach the branch manager on or before the date of
the client's financial year-end.
d) The dates to be entered on the standard letter are normally the closing dates of:
i) the client's accounting reference period for which the report is requested; and
ii) the client's previous accounting reference period for which full bank report was compiled.
If, exceptionally, audited financial statements are produced other than for an accounting
reference period, alternative dates should be substituted.
e) In reviewing the bank's reply, it is important for auditors to check that bank has answered all
questions in full.
f) It will be necessary to obtain confirmation as to the authenticity of any letter not received directly
from the bank branch concerned and of any letter received from a bank without a request having
previously been made. It is essential that in both cases, the auditors obtain confirmation from the
branch concerned that the report has been prepared in compliance with the terms of the standard
letter.
g) If no reply is received from the banks within two weeks after the original request was made or two
weeks after the closing of the year which ever is earlier, the auditor should send a "First Reminder"
so marked on the standard letter of request.
h) After the expiry of a further period of one week from the date of sending out the "First Reminder",
if no reply is received, the auditor may consider sending a "Second Reminder" so marked on the
standard letter of request if deemed appropriate by him.
5.2 The Standard letter should be used in its complete form for all audit requests and in accordance
with the above procedures in respect of financial statements for the relevant period and should not
be altered to reduce the minimum contents prescribed. In certain circumstances, supplementary
requests for additional information may be required for audit purposes. The letter containing such
supplementary requests should be submitted to the bank, as far as possible, at the same time as the
standard letter.
(179
th
meeting of the Council held on March 7, 2006)
AUDITING ATR 18
APPENDIX-I
The Manager
(Bank)
(Branch)
Dear Sir,
(Clients's Name)
STANDARD REQUEST FOR BANK REPORT FOR AUDIT PURPOSES
In accordance with your above-named customer's instructions given hereon, please send DIRECT to us at the
above address, as auditors of your customer, the following information relating to their affairs at your branch
as at the close of business on and, in the case of items 2,4 and 12 during the period since the end of the
previous accounting period.
Please state against each item any factors which may limit the completeness of your reply; if there is nothing
to report, state 'None'.
It is understood that any replies given are in strict confidence, for the purposes of audit.
Information Requested Response
BANK ACCOUNTS
(1) Full titles of all accounts together with the account numbers
and balances therein, including NIL balances:
(a) where your customer's name is the sole name in
the title;
(b) where your customer's name is joined with that of
other parties;
(c) where the account is in a trade name.
NOTES
(i) Where the amount is subject to any restriction
(e.g. a garnishee order or arrestment) or exchange
control considerations (e.g. 'blocked account')
information regarding nature and extent of the
restriction should be stated.
(ii) where the authority upon which you are
providing this information does not cover any
amounts held jointly with other parties, please
refer to your customer in order to obtain the
requisite authority of the other parties with a copy
to us.
(2) Full titles and dates of closure of all accounts closed during
the period.
AUDITING ATR 18
Information Requested Response
(3) The separate amounts accrued but not charged or credited
as at the above date, of
(a) markup/interest; and
(b) provisional charges (including commitment fees)
(4) The amount of markup/interest charged during the period if
not specified separately in the customer's statement of
account.
(5) Particulars (i.e. date, type of document and accounts
covered) of any written acknowledgement of set-off, either
by specific letter of set-off, or incorporated in some other
document or security.
FACILITIES
(6) Details of leasing facilities, loans, overdrafts, cash credit
facilities (including standby facilities), and associated
guarantees / indemnities specifying agreed limits, unused
facilities, markup/interest terms, over due rentals /
installments and in the case of term loans, date for
repayment or review.
SECURITIES
(7) (a) In respect of facilities, contingent liabilities and
derivatives and commodity trading, please give:
(i) details of any security formally charged in favour
of the bank, including the date and type of
charge, (e.g. pledge, hypothecation etc.)
Information Requested
(ii) particulars of any undertaking to assign any
assets to the bank.
If a security is limited to any borrowing, or if
there is a prior, pari passu or subordinate charge,
please indicate.
(iii) Whether the security supports facilities granted
by the bank to the customer or to another party.
(iv) For any arrangements for set off of balances or
compensating balances e.g. back to back loans,
give particulars of any acknowledgement of set
off (i.e. date, type of document and accounts
covered).
AUDITING ATR 18
Information Requested Response
CUSTODIES
(b) Investments, bills of exchange, documents of title
or other assets held but not charged. Please give
details.
CONTINGENT LIABILITIES
(8) Nature, currency, amount and extent of any facilities limits
and details of period of availability of agreed facility of all
contingent liabilities, viz:-
(a) Total of bills discounted with recourse to the
customer or any subsidiary or related party of the
customer;
(b) Details of any guarantees, comfort letters, letter
of undertakings, bonds, endorsements or
indemnities given to you by the customer in
favour of third parties (separately specifying any
such items in favour of any subsidiary or related
party of the customer);
(c) Details of any guarantees, bonds or indemnities
given by you, on your customer's behalf, stating
where there is recourse to your customer and/or
to its holding, parent or any other company
within the group;
(d) Total of acceptances;
(e) Total of outstanding liabilities under
documentary credits;
(f) Others (please give details).
ASSETS
(9) Details specifying the nature, amount and maturity date of
the assets covered under Islamic mode of finance (e.g.
morabaha, musharika, modaraba etc.) or any other mode of
finance including leasing:-
(a) Asset repurchase agreement;
(b) Asset resale agreement;
(c) Options outstanding at the relevant date.
AUDITING ATR 18
Information Requested Response
DERIVATIVES AND COMMODITY
TRADING
(10) Details of all outstanding contracts specifying the number,
deal date, maturity or value date, price at which the deal
was transacted and currency of the contract bought and sold
for:-
(a) Total of foreign exchange contracts;
(b) Bullions;
(c) Securities;
(d) Others
(11) Information in respect of any letter of comfort obtained by
the bank from the 7parent or any other associated concern
of the company.
ADDITIONAL BANKING
RELATIONSHIPS
(12) A list of other banks, or branches of your bank, where you
are aware that a relationship has been established during
the period.
(13) OTHER INFORMATION
Yours faithfully,
DISCLOSURE AUTHORISED
For and on behalf of
(CUSTOMER'S NAME)
Signed in accordance with the terms and conditions for the
conduct of the customer's bank account.
AUDITING ATR 18
APPENDIX-II
NOTES ON THE STANDARD LETTER
(This Appendix contains explanations of item numbers referred to in the Standard letter)
(1) BANK ACCOUNTS:
The phrase 'all accounts' includes details of all current, deposit loan and foreign currency accounts
and other advances or facilities, money held on deposit receipt and account numbers.
(4) ANALYSIS OF CHARGES:
The details of the rate of markup/interest applicable to any markup/interest-bearing account shall be required.
(5) Auditors will need to have an understanding of the principles governing set-off, but it should not
normally be necessary to make enquiries beyond the question as put in the standard letter. Details should be
available from the relevant documents. A right to set-off may exist even when there are no written
arrangements.
(7) CUSTOMER'S ASSETS:
a) Security includes details of charge, mortgage or other claims or security or security registered (e.g.
debenture, memorandum of deposit); assets charged and where appropriate cross reference to facility
specifically secured.
b) Assets include bonds, stock and share certificates, investments, bearer or other securities; title
deeds relating to freehold, leasehold or other property; bills of exchange or other negotiable instruments
receivable (other than cheques); deposit receipts (as distinct from any account represented by the deposit
receipt); the names of persons who are able to obtain release of the assets should be ascertained from the
customer and are usually covered by the bank mandate.
c) Lien: Auditors should be aware that any assets held by the bank other than those specifically
charged, may be subject to some form of banker's lien, although this may only operate under particular
conditions. It should be necessary to enquire only in exceptional circumstances.
APPENDIX-II
d) Bearer securities: detailed enquiries on bearer securities should be made of the bank only when
evidence cannot be obtained from the customer or his banking records.
(8) CONTINGENT LIABILITIES:
The liabilities under indemnities/ guarantees given in respect of shipping documents relating to imports do
not have an expiry date. From time to time the banks take a view on old liabilities and remove some of them
from their records. Certain of these old liabilities may not therefore be shown in the figure quoted by the
bank, but it cannot be guaranteed that no claim will be incurred subsequently.
AUDITING ATR 18
Information Requested Response
(13) OTHER INFORMATION:
Banks are often asked for introductions to other branches or banks for the purpose of establishing new
sources of finance. The provision of any available information relating to introductions or new accounts will
assist auditors to satisfy themselves that they have information about all of their client's banking relationship.
SUGGESTED FORMAT OF LETTER FOR DEBTORS
CONFIRMATION BY DIRECT COMMUNICATION
(TO BE TYPED ON CLIENTS LETTERHEAD)
DEBTORS NAME AND ADDRESS
Dear Sir,
As part of their normal audit procedures, we have been requested by our auditors ______________ of
_________________ to ask you to confirm direct to them your indebtedness to us of Rs. ___________ as at
________________.
If the amount is in agreement with your records, please sign in the space provided below and return this letter
directly to our auditors.
If the amount is not in agreement with your records please notify our auditors directly of the amount shown
by your records and, if possible, send them full particulars of the difference.
For your reply to be of assistance to our auditors please give this request your early attention. *We enclose a
prepaid envelope for your convenience.
Please do not send remittances to the auditors along with the confirmation.
Yours faithfully,
CLIENTS AUTHORISED SIGNATORY
PLEASE DO NOT DETACH
(CLIENTS NAME)
DEBTORS NAME:
NO:
The amount shown above of Rs. ___________ due from us *is/ [is not] in agreement with our records at
___________________. *The details of discrepancies are annexed.
Authorized Signature & Stamp
Title of Position
* Delete as appropriate (stamped self-addressed return envelope by the auditors should be enclosed)
AUDITING ATR 18
SUGGESTIONS FOR IMPROVING RATE OF FEEDBACK FOR DEBTORS CONFIRMATIONS
The efficiency of the audit procedure of debtors confirmation through direct communication is influenced by
both the willingness and ability of debtor to respond accurately to the information presented on the letter of
confirmation. Improving confirmation feedback rate may reduce the extent of other audit procedures that the
auditor may have planned to undertake. The following are some suggestions for improving feedback rates:-
(a) Use of preliminary notification
The use of a brief letter, post card, or telephone call by the client immediately before posting the letter
generally tends to increase responses as the debtor is less likely to ignore the letter having been previously
notified.
(b) Request information the debtor is able to confirm
The confirmation request should include all the relevant detailed information required for response by the
debtor.
(c) Use clear wording
The confirmation request should avoid technical jargon and should be written in simple language to facilitate
an early and effective reply. (including Urdu or vernacular).
(d) Set deadlines
The confirmation should state deadlines e.g. URGENT or REPLY REQUESTED WITHIN 5 DAYS.
(e) Provide return envelopes
Return envelopes that have the firms name and address printed in bold are likely to draw attention to
confirmations and are likely to encourage debtors to respond.
(f) Provide prepaid postage
To facilitate responses, auditors normally include a stamped self-addressed return envelope along with each
confirmation.
(g) Send follow-up reminders/second requests
Sending reminders/second request soon after sending the initial letter are likely to increase feedback rates.
AUDITING ATR-19(Revised 2012)
IDENTIFICATION OF THE ENGAGEMENT PARTNER IN THE
AUDITORS REPORT ON THE FINANCIAL STATEMENTS / INTERIM
FINANCIAL INFORMATION
The Council wishes to draw attention of all practicing members about the
prevalent practice of signing audit and review reports in the name and style of the
firm where the individuals responsibility for signing the audit and review reports
is not identified for personal responsibility and accountability. This practice,
based on the decisions taken nearly half a century ago, required a reassessment
according to the current international practices prevalent in the profession.
Paragraph 8 of ISA 220 (re-drafted) Quality Control for an audit of financial
statement states as follows:
The engagement partner shall take responsibility for the overall quality on
each audit engagement to which that partner is assigned.
In its paragraph 30, ISQC 1 (Re-drafted) Quality control for firms that perform
audits and reviews of financial statements, and other assurance and related
services engagements, states as follows:
The firm shall assign responsibility for each engagement to an engagement
partner and shall establish policies and procedures requiring that:
(a) The identity and role of the engagement partner are
communicated to key members of client management and those
charged with governance;
(b) The engagement partner has the appropriate competence,
capabilities, and authority to perform the role; and
(c) The responsibilities of the engagement partner are clearly defined
and communicated to that partner.
Further, attention is drawn to paragraph A 37 of ISA 700 (re-drafted) Forming an
opinion and reporting on financial statements which states as follows:
AUDITING ATR-19(Revised 2012)
The auditor's signature is either in the name of the audit firm, the personal
name of the auditor or both, as appropriate for the particular jurisdiction. In
addition to the auditor's signature, in certain jurisdictions, the auditor may be
required to declare in the auditor's report the auditor's professional
accountancy designation or the fact that the auditor or firm, as appropriate, has
been recognized by the appropriate licensing authority in that jurisdiction.
ISA 220 (re-drafted) defines an engagement partner as the partner or other
person in the firm who is responsible for the audit engagement and its
performance, and for the auditors report that is issued on behalf of the firm, and
who, where required, has the appropriate authority from a professional, legal or
regulatory body.
For purpose of clarity it may be noted that the opinion on each audit and review
engagement is the collective responsibility of the firm appointed as the
auditor/reviewer and the opinion is the result of consultation with other partners.
However, by signing in his/her own name alongwith the name of the firm the
engagement partner is properly identified who is the person responsible for the
audit or thereview engagement.
In view of the above it has been decided by the Council that where the auditors
report on the financial statements or the interim financial information is signed in
the firms name, the name of the engagement partner shall be identified.
The above shall be applicable on all audit appointments made on or after J uly 1,
2011
However, with respect to audit appointments made prior to J uly 1, 2011, the
requirements as contained in ATR -19 (Revised 2008) shall prevail.
(230
th
Meeting of the Council December 17, 2011)
AUDITING ATR-19(Revised 2012)
Correspondence with ICAP
All correspondence related to policy matters from a firm to the Institute should be
signed by a partner in the case of a partnership concerns and by the sole-
proprietor in the case of a sole-proprietary concern, in his/her name along with the
name of the firm. Routine correspondence may be signed by any other person
authorized in this behalf by the firm.
The statement is issued as a directive of the Council and supersedes ATR 1 and 9.
Any contravention thereof shall be deemed to be an act of misconduct liable to
punitive action in terms of clause 3 of Part 4 of Schedule I of the Chartered
Accountants Ordinance, 1961 and is required to be followed by all practicing
members of the Institute.
The ATR-19 before this revision reads as under:
AUDITING ATR-19(Revised 2008)
IDENTIFICATION OF AUDIT ENGAGEMENT PARTNER IN THE AUDITORS REPORT ON
THE FINANCIAL STATEMENTS
The Council wishes to draw attention of all practicing members about the prevalent practice of signing audit
report in the name and style of the firm where the individuals responsibility for signing the audit report is not
identified for personal responsibility and accountability. This practice, based on the decisions taken nearly
half a century ago, needed a change according to the current international practices and environment in the
profession.
Reference is made to Paragraph 6 of the ISA 220 Quality Control for Audits of Historical Financial
Information, according to which The engagement partner should take responsibility for the overall quality
on each audit engagement to which that partner is assigned.
ISQC 1 Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and
Other Assurance and Related Services Engagements, which is in the process of adoption by the Institute, in
its paragraph 42, states that The firm should assign responsibility for each engagement to an engagement
partner. The firm should establish policies and procedures requiring that:
(a) The identity and role of the engagement partner are communicated to key members of
client management and those charged with governance;
(b) The engagement partner has the appropriate capabilities, competence, authority and time
to perform the role; and
(c) The responsibilities of the engagement partner are clearly defined and communicated to
that partner.
Further attention is drawn to Paragraph 51 of ISA 700 (revised) according to which The auditors signature
is either in the name of the audit firm, the personal name of the auditor or both, as appropriate for the
particular jurisdiction. In addition to the auditors signature, in certain jurisdictions, the auditor may be
required to declare the auditors professional accountancy designation or the fact that the auditor or firm as
appropriate, has been recognized by the appropriate licensing authority in that jurisdiction.
ISA 220 defines Engagement partner as the partner or other person in the firm who is responsible for the
audit engagement and its performance, and for the auditors report that is issued on behalf of the firm, and
who, where required, has the appropriate authority from a professional, legal or regulatory body.
For purpose of clarity it may be noted that the audit opinion on each audit engagement is the collective
responsibility of the firm appointed as auditor and the opinion is the result of consultation with other partners.
However, signing in his/her own name along-with name of the firm provides the identification of engagement
partner who is the person responsible for the audit engagement.
In the backdrop of the situation, it has been decided that where the auditors report on financial statements is
signed in the firms name, the name of the engagement partner shall be identified.
The above shall be applicable on all audit appointments made on or after J uly 1, 2008.
AUDITING ATR-19(Revised 2008)
Correspondence with ICAP
All correspondence related to policy matters froma firmto the Institute should be signed by a partner in the case of
partnership concerns and by the sole-proprietor in the case of a sole-proprietary concern, in his/her name along
with the name of the firm. Routine correspondence may be signed by any other person authorized in this behalf
by the firm.
The statement is issued as a directive of the Council and supersedes ATR 1 and 9. Any contravention thereof
shall be deemed to be an act of misconduct liable to punitive action in terms of clause 3 of Part 4 of Schedule I
of the Chartered Accountants Ordinance, 1961 and is required to be followed by all practicing members of
the Institute.
(197
th
Meeting of the Council July 25, 2008)
AUDITING ATR-20(Revised 2012)
AUDITORS REPORTING RESPONSIBILITIES WITH RESPECT TO
NON COMPLIANCES WITH LAWS OR REGULATIONS
1. The statutory audit of financial statements in Pakistan is required to be
conducted in accordance with the requirements of the International
Standards on Auditing (ISAs) as have been adopted by the Institute of
Chartered Accountants of Pakistan. The said standards should, therefore,
be the primary basis for determining the auditors reporting
responsibilities in case of an entitys non-compliance with the applicable
laws or regulations including with respect to the provisions of sections 195
or 208 of the Companies Ordinance, 1984 (the Ordinance).
2. In relation to the above, ISA 250 (re-drafted) Consideration of laws and
regulations in an audit of financial statements prescribes as under:
18. If the auditor becomes aware of information concerning an
instance of non-compliance or suspected non-compliance with laws
and regulations, the auditor shall obtain:
(a) An understanding of the nature of the act and the circumstances
in which it has occurred; and
(b) Further information to evaluate the possible effect on the financial
statements.
25. If the auditor concludes that the non-compliance has a material
effect on the financial statements, and has not been adequately
reflected in the financial statements, the auditor shall, in
accordance with ISA 705 (Revised and Redrafted), express a
qualified or adverse opinion on the financial statements.
3. It follows from the above that the basic objective of an auditor when
confronted with instances of infraction of laws or regulations including
with respect to the provisions of section 195 or 208 of the Ordinance, is to
asses the impact of the same on the financial statements in terms of any
monetary adjustments or requirements of disclosures.
AUDITING ATR-20(Revised 2012)
4. It should be noted that the provisions of sections 195 or 208 of the
Ordinance do not deal with the determination of amounts that are to be
included in the financial statements nor prescribe the form and content of
disclosures in a companys financial statements, instead, the said
provisions prohibit the board of directors (BoD) of a company from
undertaking certain specified transactions or require that approval from the
shareholders be obtained before making investments in associates. Hence,
any contravention of the said provisions of the Ordinance by the BoD of
the company, although may be regarded as undertaking of transaction
beyond the powers of the BoD, but the same cannot be deemed as being
beyond the powers of the company. An act which is ultra vires the powers
of the BoD would still be valid if it is intra vires the powers of the
company having been permitted by its constitution. What is more
important is to understand that such contraventions do not result in a
misstatement in the financial statements if the transaction has been
properly accounted for and disclosed in these financial statements.
Accordingly, in such circumstances, a modification in the auditors
opinion is not mandated by the ISAs.
5. It should also be noted that it is not the purpose of the audit nor the
responsibility of the auditor to highlight any contraventions of corporate
and other laws by the company or its management.
6. However, notwithstanding the above, in some instances, the transactions
subject to non compliance with the provisions of sections 195 or 208 of
the Ordinance may be so significant in the context of the overall financial
statements, that a non disclosure of the matter in the financial statements
may impair the users ability to understand the state of affairs of a
company. Therefore, in such a situation, the auditor is not precluded from
adding an emphasis of matter paragraph in his report to highlight the
subject non compliance.
7. Additionally, where a non compliance with the laws and regulations does
occur and is in the knowledge of the auditor, ISA 250 (re-drafted) also
requires the auditor to report the same to members of the management
charged with governance. ISA 250 (re-drafted) states as follows in this
respect:
AUDITING ATR-20(Revised 2012)
22. Unless all of those charged with governance are involved in
management of the entity, and therefore are aware of matters
involving identified or suspected non-compliance already
communicated by the auditor, the auditor shall communicate with
those charged with governance matters involving non-compliance
with laws and regulations that come to the auditor's attention
during the course of the audit, other than when the matters are
clearly inconsequential.
23. If, in the auditor's judgment, the non-compliance referred to in
paragraph 22 is believed to be intentional and material, the
auditor shall communicate the matter to those charged with
governance as soon as practicable.
24. If the auditor suspects that management or those charged with
governance are involved in non-compliance, the auditor shall
communicate the matter to the next higher level of authority at the
entity, if it exists, such as an audit committee or supervisory
board. Where no higher authority exists, or if the auditor believes
that the communication may not be acted upon or is unsure as to
the person to whom to report, the auditor shall consider the need
to obtain legal advice.
8. In view of the above matters it is concluded that an infraction of laws or
regulations, the financial implication of which is not material to the
financial statements does not require a modification in the auditors
opinion. However, the auditor should follow the guidance referred to in
paragraphs 6 and 7 above.
This revised ATR-20 (2012) supersedes the requirements as contained in ATR-20
and is applicable for audits of financial statements for periods beginning on or
after J uly 1, 2011. However earlier application is encouraged.
(230
th
meeting of the Council December 17, 2011)
The ATR-20 before this revision reads as under:
AUDITING ATR -20
AUDITORS REPORTING RESPONSIBILITIES IN RESPECT OF NON COMPLIANCES WITH
LAWS OR REGULATIONS
1. The statutory audit of financial statements in Pakistan is required to be conducted in accordance
with the requirements of the International Standards on Auditing (ISAs) as have been adopted by
the Institute of Chartered Accountants of Pakistan. The said standards should, therefore, be the
primary basis for determining auditors reporting responsibilities in case of an entitys non-
compliance with the applicable laws or regulations including with respect to the provisions of
Section 195 or 208 of the Companies Ordinance, 1984 (the Ordinance).
2. In relation to the above, the ISA 250 Consideration of Laws and Regulations in an Audit of
Financial Statements prescribes as under:
26. When the auditor becomes aware of information concerning a possible
instance of noncompliance, the auditor should obtain an understanding of the
nature of the act and the circumstances in which it has occurred, and sufficient
other information to evaluate the possible effect on the financial statements.
35. If the auditor concludes that the noncompliance has a material
effect on the financial statements, and has not been properly reflected in the
financial statements, the auditor should express a qualified or an adverse
opinion(emphasis ours)
3. It follows from the above that the basic objective of an auditor when confronted with instances of
infraction of laws or regulation including with respect to the provisions of Section 195 or 208 of the
Ordinance, is to asses the impact of the same on the financial statements in terms of any monetary
adjustments or requirements of disclosures.
4. It should be noted that the provisions of Section 195 or 208 of the Ordinance do not deal with the
determination of amounts that are to be included in the financial statements nor prescribe the form
and content of disclosures in a companys financial statements, instead, the said provisions prohibit
the Board of Director (BOD) of a company fromundertaking certain specified transactions or
require shareholders approval before making investments in associates. Hence, any contravention
of the said provisions of the Ordinance by the BOD of the company, although may be regarded as
undertaking of transactions beyond the powers of the BOD, the same cannot be deemed as being
beyond the powers of the company. An act which is ultra vires the powers of the BOD would still
be valid if it is intra vires the powers of the company having been permitted by its constitution.
What is more important is to understand that the such contraventions do not result in a
misstatement in the financial statements if the transaction has been properly accounted for and
disclosed in the financial statements. Accordingly, in such circumstances, the modification of the
auditors opinion is not mandated by the ISAs.
5. It should also be noted that it is not the purpose of the audit nor the responsibility of the auditor to
highlight the contraventions of corporate and other laws.
6. However, notwithstanding the above, in some cases, the transactions subject to non compliance
with the provisions of Section 195 or 208 of the Ordinance may be so significant in the context of
the overall financial statements, that non disclosure of the matter in the financial statements may
impair the users ability to understand the state of affairs of a company. As an additional step, the
auditor is not precluded from adding an emphasis of matter paragraph in his report to highlight the
non compliance.
AUDITING ATR -20
7. Additionally, in case of non compliance with laws and regulations, the ISA 250 also requires the
auditor to report the same to members of management charged with governance. The standard lays
down the following in this respect:
32. The auditor should, as soon as practicable, either communicate with those
charged with governance, or obtain audit evidence that they are appropriately
informed, regarding noncompliance that comes to the auditor's attention.
However, the auditor need not do so for matters that are clearly inconsequential
or trivial and may reach agreement in advance on the nature of such matters to
be communicated.
33. If in the auditor's judgment the noncompliance is believed to be intentional
and material, the auditor should communicate the finding without delay.
34 If the auditor suspects that members of senior management, including members
of the board of directors, are involved in noncompliance, the auditor should
report the matter to the next higher level of authority at the entity, if it exists,
such as an audit committee or a supervisory board. Where no higher authority
exists, or if the auditor believes that the report may not be acted upon or is
unsure as to the person to whom to report, the auditor would consider seeking
legal advice.
8. Hence it is concluded that an infraction of laws or regulations, the financial implication of which is
not material to the financial statement do not require the modification of the auditors opinion. The
auditor should follow the guidance given in paragraphs 6 and 7 above.
(204
th
meeting of the Council January 23, 2009)