Presentation of financial statements The auditor’s review Presented by: Tahmeen Ahmad (ACA)

Purpose of Financial Statements Financial statements are: “Structured representation of the financial position and financial performance of an entity.” Objective: To provide information about: –the financial position, – financial performance, and –cash flows of an entity that is useful to a wide range of users in making economic decisions.

The Framework The International Financial Reporting Standards (IFRS), in particular guidance on presentation and disclosure Local statutory requirements –The Companies’ Ordinance, 1984, in particular the Fourth/ Fifth Schedule for presentation purposes –Directives of the regulatory bodies –Industry specific legislation –Generally accepted accounting principles

Amendments of the Finance Bill The AGM must now be held after three months of the end of the accounting year. (previously 4 months) Power of FG to require additional matters in the auditors’ report now vested in Commission NBFCs to comply with minimum equity requirements rather than minimum capital requirement for incorporation Penalty for failure to comply with NBFC laws enhanced from Rs 5 m to Rs 50 m Mandatory for listed Co to have independent share registrar Substantial share holder (12.5%) can apply for re election of directors in the case of a listed company

Amendments of the Finance Bill (Contd.) Power of FG to specify business of banking companies now vests in the SBP Perpetual non cumulative preference shares included in definition of share capital of Banking Company Additional conditions for eligibility to pay dividends by banking company Additional provisions for auditors: all significant matters to be reported to SBP, SBP may revoke the appointment of auditors New Act ‘Payment System for Electronic Fund Transfer 2007’ introduced Contract worker now entitled to benefits under the Companies Profits (worker Participation) Act 1968, and amount of profit no longer subject to audit adjustments

Responsibility for Financial Statements Final responsibility for fair presentation of financial statements rests with the BoD. Companies’ Ordinance 1984: directors to present in the AGM annual accounts that give a true and fair view of state of affairs and Profit and loss of the Company (u/s 233 & 234)

The Auditor’s Responsibility “To express an opinion on financial statements based on their audit” Audit is a statutory requirement for all companies. Auditor to be Chartered Accountant for the following: –Public Cos., –Private Co that is a subsidiary of a public company, and –Private Co having paid up share capital of Rs 3m or more Auditors also issue reports on: –Review of interim f/s (listed Cos.) –Report on consolidated financial statements –Report on changes in accounting policies (listed Cos.)

The Auditor’s Responsibility (contd.) –Review of compliance with Best Practices of Code of Corporate Governance (Listed Cos.) –Assets, liabilities, profits and losses, share capital and its breakup value for prospectus (Schedule II) –Certification of financial information in statutory report (for Co limited by shares etc) –Significant issues identified during audits (listed Cos) –Industry specific reports (basel II, profit rate verification, credit review reports etc)

Components of Financial Statements General purpose financial statements comprise of: –Balance Sheet –Profit and loss account –Statement of changes in equity –Cash flow statement –Notes to the financial statements

Components of Financial Statements (contd.) Listed Cos. –Balance sheet –Profit and loss –Statement of changes in equity –Cash flow –Notes 4 th schedule applies This includes private companies and public non-listed companies that are subsidiaries of listed companies Non Listed Cos. –Balance sheet –Profit and loss –Notes 5 th schedule applies

The Annual Report – other information TYPE OF REPORTREQUIREMENT OF: Director’s reportCompanies’ Ordinance 1984 Statement of Compliance with Code of corporate governance Listing regulations Company information including financial progress reports, management structure etc –Other information includes the following: –The auditor may review the information in relation to the accounts under audit

Review of the Financial Statements Variation in presentation may arise from difference in: –Nature of business of the entity –Type of Company (listed, non-listed public, private) –Consolidated or unconsolidated accounts –Management judgement on matters not specified by statute / standards

Review of the Financial Statements (Contd.) Identification of each f/s component Name of reporting entity Specified if accounts related to group entity Balance sheet date/period of account Presentation currency Level of rounding used in presenting amounts Comparatives F/s amounts supported by adequate notes Each F/s component signed by director and chief executive.

Review of Balance Sheet Presentation Please review the sample balance sheet: Our discussion will follow the line items: ASSETS Fixed Assets Long term investments Long term loans and advances Long term deposits and prepayments Current assets –Stores and spares –Stock in trade –Trade debts –Loans and advances –Trade deposits, prepayments –Interest accrued –Other receivables –Financial assets –Tax refunds –Cash and bank balances

Balance Sheet (Contd.) SHARE CAPITAL & RESERVES ●Share capital ●Capital reserves ●Revenue reserves ●Surplus on revaluation of fixed assets NON CURRENT LIABILITIES ●Long term financing ●Debentures ●Liabilities against assets subject to finance lease ●Long term Murabaha ●Long term Deposits ●Deferred Liabilities

Balance Sheet (Contd.) CURRENT LIABILITIES Trade and other payables Interest, profit, markup accrued Short term borrowings Current portion of long term borrowings Current portion of long term murabaha Provisions for taxation CONTINGENCIES AND COMMITMENTS

Review of Income Statement Presentation Please review the sample profit and loss account Line wise discussion follows: TURNOVER EXPENSES Cost of sales Distribution cost Administrative expenses Other operating expenses Finance cost OTHER OPERATING INCOME Income from financial assets Income from investments/debts of related parties Income from assets other than financial assets

Review of Cash Flow Presentation Please review sample cash flow statements Cash flows may be prepared under the indirect or direct method. These methods affect the method of arriving at operating cash flows only Discussion will follow the line items of the sample cash flow: –from operating activities –from investing activities –from financing activities –cash& equivalents Cash flows are prepared in accordance with the requirements of IAS 7

Review of Statement of Changes in Equity Please review sample statements of changes in equity Statement may either show: –All changes in equity –Changes other than transactions with equity holders

Variations for Industries Variations can be seen in presentation & disclosures of f/s for different industries, eg: –Banking Companies –Manufacturing companies –Telecom industry –Petroleum exploration and production –Funds –Insurance companies –Leasing Companies and other NBFCs