By: Muhammad Yasir Shaikh

Faruq Ali & Company

Chartered Accountants
 WHAT IS PROVIDENT FUND AND WHY A
COMPANY CREATES IT?

WHAT?
 Provident Fund(PF) is a kind of retirement benefit given from the Company to
its employees.
 It consists of a fix monthly amount deducted from employee’s salary and a
matching amount contributed by the employer.
 The PF is treated as a separate entity and it earns its profits through investment
of contribution in various saving schemes.
WHY?
 The Income Tax Ordinance permits companies to have a recognized* PF into
which both employer and employee contribute and proceeds are invested and
return on it are distributed to employees at the end of the Year.
 Income Tax Ordinance also allows the contributions by employee to a
recognized PF as an expense in their profit.
 Income earned by a recognized PF is also exempt from tax.

A recognized PF means it is registered with SECP under Income Tax Ordinance, 2001.
 COMPANY

Full n Final MEMBERS’

Settlement
FUND

INVESTMENTS
e.g. TFCs, DSCs
EXPENSES
etc.
 BASIC ASPECTS OF PROVIDENT FUND

 PF is created by making a Trust Deed, which acts as a Memorandum of

Association for the PF, defining relationship with outsiders.
 Usually, the CEO and CFO of a company are assigned as trustees along with
additional ones as representatives of employees. Number of trustees is
governed PF Rules as there is no limit by Law.
 The internal workings of a PF is governed by ‘Provident Fund Rules’. They are
the collection of regulations under which the fund is recognized.
 The Board of Trustees of a PF is responsible for the operation of its activities,
observation of PF rules, financial record-keeping, presentation of annual
accounts and appointment of auditors.
PROVIDENT FUND ORGANOGRAM

There is no limit to the

PROVIDENT FUND number of Trustees in a
EMPLOYER COMPANY Provident Fund

Trustee Trustee Trustee

Treasurer

Clerical Clerical
Staff Staff
 RELEVANT TERMS AND DEFINITIONS

 Provident Fund: A fund in which subscriptions of employees are received and

held in their individual accounts and includes their contributions and interest on
such contributions under the rules of the Fund .
 Members: Employees who are part of the Provident Fund and therefore a
particular amount is deducted from their salary.
 Contribution: Any amount credited into a provident fund by any authority
administering the fund i.e. Trustee or PF management. It’s the same amount of two
types:
 Member’s Contribution (deducted from the Member’s Salary)
 Company’s Contribution (contributed by the Employer)
 Dependent: In case of death of any member of the PF, the people who can
claim his/her PF balance includes spouse, parent, child, minor brother, unmarried
sister and a deceased son’s widow and child, and, where no parent of the subscriber
or depositor is alive, a paternal grand-parent.

Definitions are taken from Provident Fund Act 1925 and are simplified for understanding.
 LEGAL ASPECTS OF PROVIDENT FUND

 The company who created Provident Fund trust cannot use its balance other than
the payment on termination of a member’s contract of employment as per section
227*.
 As per Section 227, the company creating the Provident Fund is responsible to
deposit the contribution(deducted from the salaries of its employees) into a
separate bank account(opened in the name of PF) within 15 days of the next
month.
 Companies usually create a trust with respect to Provident Fund. Therefore,
subsection (3) of the Section 227 puts the responsibility of depositing the
contribution on Trustees if company fails to do so.
 Section 227 also mentions the schemes and securities in which Provident Fund
balance can be invested but SRO 80/2014 now governs the rules of investment in
detail.

*The Companies Ordinance 1984.

 LEGAL RULES REGARDING INVESTMENT

SRO 80/2014 issued by SECP laid down the rules regarding investment of
Provident Fund. Key points are summarized in the table below :
Investment Type Limit Of Investment Other Criteria

Investment scheme i.e. mutual >70% of the PF balance

funds
Listed securities i.e. shares, >30% of the PF balance •Operation record for last 3 years.
debentures, mutual fund units •ROI* = +50 basis points

Listed securities > 50 Million
or more than 20% of PF
balance
Listed debt securities i.e.
debentures
Same as above •Hire an investment advisor for
Provident Fund.
Same as above •Company must be rated “AA” by a
registered credit rating firm.

Listed Collective Investment Same as above •ROI equal or more than the
Scheme prevailing risk free rate

In a particular company in the > 10% of PF balance •Shares < 5% of paid up capital.
form of shares and debentures •Debentures < 5% of the issue.
 LEGAL RULES REGARDING INVESTMENT
Investment Type Limit Of Other Criteria
Investment
Investment in associated Less than 10%
companies and undertakings of PF balance.
Collective investment scheme 10% of PF
other than money market balance.
Collective money market 30% of PF
investment scheme balance.
Investment in Initial Public Offer 5% of PF 1. In a single IPO, investment must be lower of :
(IPO) balance (every • 1% of paid up capital of that company
six month) • 2% of PF balance.
2. Shall be made in companies having a
profitable record of at least 3 years
3. Must not be underwritten, co-underwritten or
sub-underwritten by group or associated
companies.

 Investment can not be made in a listed security if issuer of the security has defaulted or rescheduled any of his
financial obligations.
 PF must maintain investment policies explaining Investment limit, investment avenues and risk appetite.
SUMMARY OF ACCOUNTING POLICY RELATED
TO PROVIDENT FUND
IAS 26(Employee Retirement Benefit Plans) governs the measurement and disclosure principles
for the reports of retirement benefit plans.

 Statement of net assets available for benefit, showing:

 Assets at the end of the period
 Basis of valuation
 Details of any single investment exceeding 5% of net assets or 5% of any category of investment
 Details of investment in the employer
 Liabilities other than the actuarial present value of plan benefits
 Statement of changes in net assets available for benefits, showing:
 Employer contributions
 Employee contributions
 Investment income
 Other income
 Benefits paid
 Administrative expenses
 Other expenses
 Income taxes
 Profit or loss on disposal of investments
 Changes in fair value of investments
 Transfers to/from other plans
SUMMARY OF ACCOUNTING POLICY RELATED
TO PROVIDENT FUND
 Description of Fund policy
General Provident Fund Policy in the form of Provident Fund Rules registered through SECP.
 Other details about the plan
Any other details found material to the Provident Fund Accounts.
 Summary of significant accounting policies
Summary of accounting policies just like presented in annual audits of various entities.
 Description of the fund plan and of the effect of any changes in the fund plan during the period
Any significant change in the policy from the previous years which has a material effect on the Provident Fund.
 DISCLOSURE REQUIREMENTS AS PER
COMPANIES ORDINANCE 1984
The Clause 4 of Part III of The Fifth Schedule of the Companies Ordinance 1984 governs
the disclosure requirement of Provident Fund Accounts. Its states as follows:

i. In the case of provident fund/provident fund trust:

a. Disclosure with regards to provident fund/trust:
i. size of the fund/trust;
ii. cost of the investment made;
iii. percentage of the investments made; and
iv. fair value of investments.
b. Break-up of investment (in terms of amount and percentage of the size of the fund/trust) in
categories as provided in section 227 of the ordinance and rules formulated for this purpose.
c. A statement that investments out of provident fund/trust have been made in accordance with
the provisions of section 227 of the companies ordinance and the rules formulated for this
purpose.
AN EXAMPLE OF PROVIDENT FUND ACCOUNTS
AN EXAMPLE OF PROVIDENT FUND ACCOUNTS
 APPROACH TO PROVIDENT FUND AUDIT

As you have seen that Provident Fund Accounts are some what different than
annual accounts of a company. So a confusion arises as to how to start audit
procedures on PF. Here is a solution:
1. Cash & Bank
2. Receivables from company
3. Investments
4. Return On Investment(ROI
5. Members’ Account
6. Payables
7. Expenses

This order is not mandatory and you can audit in any way that suits you best.
 CASH AND BANK BALANCES

 Ask if any Bank A/c is closed or opened during the year or any other changes
happened related to this particular head. After enquiry, send bank
confirmations to all the bank accounts of PF.
 Obtain
 Cash and Bank Ledgers
 Bank Statement
 Cash and Bank Receipt and payment vouchers
 Match balance of bank ledger with that of bank statement. If they do not match,
ask for reconciliation.
 Scan Ledgers to make sure there are no unexplained entries.
 BPVs and BRVs have been recorded into proper accounts and are adequately
authorized and supported.
 All transactions done in this head are not beyond applicable rules and
regulations.
 Cheques deposited to the Bank after reporting date have been cleared
subsequently.
 Unpresented cheques have been encashed.
 Bank charges occurring in the period have been recorded properly.
 RECIEVABLES FROM COMPANY

 Make sure employer maintain a separate account of

PF in its books. This account is a mirror image* of
‘Receivable from Company’ account of PF. Obtain
the ledger of that account from employer.
 Match both balances and prepare a reconciliation if
necessary and locate the reasons for differences.
 Check clearance of cut off cheques.
 INVESTMENTS

 Classify investments under three categories namely:

 Investments held for trading: Held to get profit from short term fluctuation in prices.
Any surplus(deficit) is directly taken into P&L.
 Investment available for sale: Held for indefinite period but may be sold to
resolve liquidity. Surplus(deficit) is shown separately below Members’ Fund.
 Investments held till maturity: Held till maturity with positive intent.
 Re-measurement of Investments to be done properly.
 All returns on investments have been recorded and reflected properly.
 Verify investments physically(DSCs) or obtain CDC Statement(TFCs,
Shares).
 Compute its Fair Value on the basis of investment schedule by using period
rates mentioned thereon.
 Check out for proper disclosures and classification in books of accounts.
 In case of shares, obtain ledger from broker and match it with that of client.
Check all sale and purchase transactions and make sure all transactions are
routed through control account.
 INCOME ON INVESTMENTS

 Income on SSC, DSC, TFC is recognized on accrual

basis(part of which is taken into Accrued Income), so
do your own calculations of income on these
instruments with the help of schedules provided,
then match with client’s working.
 Dividend is often recognized on receipt basis. Make
sure its recognized on accrual basis to avoid
over/under statement of income.
 MEMBERS’ FUND

 Obtain monthly contribution sheets of all the members and check it

thoroughly:
 Make sure every member’s contribution is rightly posted in his account.
 Check for similar names and compare their contributions.
 Reconcile Payroll with contribution sheets and obtain reasons for all differences.
 Compare Bank amounts and contribution amounts and document all reasons
pertaining to differences.
 If possible, make a comprehensive sheet including opening
balances, monthly contributions, closing balances, withdrawals,
settlements and profit distributions. It takes time to make one, but
it saves you from checking all above mentioned items again and
again for a particular query.
 Verify permanent withdrawals and full and final settlements. Check
settlement evidence and reasons for permanent withdrawals.
 Verify weighted allocation of profit to all members.
 PAYABLES & EXPENSES

 Just like ordinary audit I guess!

 LAST TIPS

 Don’t feel down if you get a PF audit. Its often the

best way to learn workings about investments and
other areas you seldom touch in annual audit of
other entities.