Internal Auditing for Banks _ Financial Institutions by Levone

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									         Audit
            of
   Provident Funds

    Session I: The Basics


     Presenter:
   Altaf Noor Ali
Chartered Accountant
                            1
 1st Session: 9.30 - 11 am = 90 min
1. Personal Introductions
2. Basic Accounting for p/f
3. Group Activity: The Right Questions
4. An overview of problem areas in audits of p/f
5. Basics [e.g., what is a Provident Fund? how p/f
   operates? what are its core activities? who are
   trustees? what are p/f Rules? what is a ‘Trust
   Deed’?]
6. New audit? Recurring audit? [New audit =
   communicate, Recurring audit = review file]
7. Initial meeting with the client and its minutes
8. Audit staffing and administration
                                                     2
 2nd Session: 11.30 -1pm = 90 min
1.    First day on the field work…what it should be like?
2.    Audit of Bank Accounts
     1.   Nature of Receipts and Payments
     2.   Audit Objectives and Program
     3.   Obtain bank statements and reconciliation
     4.   Scanning receipts and payments during the period
     5.   Send bank confirmations
3.    Audit of Current Account
     1.   Nature of Current Account
     2.   Audit Objectives and Program
     3.   Deduction of monthly contributions from employees [and salary
          reconciliations]
     4.   Receipts and payments made on behalf of provident fund [final
          settlements, withdrawals, recoveries of members’ loans, etc]
     5.   Reconciliation and adjusting entries [example: return on
          investments]
4.    Conclusion                                                          3
 3rd Session: 2 - 3.30 pm = 90 min
1.    Audit of Investments
     1.   Audit Objectives and Program
     2.   Review of Investment Policies and Procedures
     3.   SECP Rules on Investments for Provident Funds
     4.   Type of investments: Transactions, accounting and disclosure
     5.   Linking return on investments: issues in verification
2.    Audit of Transactions with Members
     1.   Audit Objectives and Program
     2.   Contributions
     3.   Permanent withdrawals
     4.   Final settlement
     5.   Profit allocation
     6.   Refreshing nomination of beneficiaries
     7.   Loan to Members
3.    Conclusion                                                         4
 Final Session: 4 - 5.30 pm = 90 min
1.  Audit documentation: What’s on working paper file?
2.  Final audit review and discussion with client
3.  Resolving matters arising out of audit
4.  Audit Report Format
5.  Financial statements / disclosures [accounting policies]
6.  End Process: Closing Accounts, Post-closing trial
    balance, Initialling accounts, approval by trustees,
    signing of audit report, disclosure in employer account
7. Management letter and discussion
8. Updating Working Paper File [index, timesheets, revised
    schedules, etc]. Memo note on matters for next year
9. Billing for audit fee and re-appointment
10. Final Word                                               5
Personal Introductions
      Instructor
      Audience


                         6
Your Presenter’s approach to
        this session.

   Knowledge is Power, gain as
    much of it as you can, and remember….
                   its deficiency is
              your constraint.
   And I PROMISE to present what I know in an
             interesting manner!
    Key: How can you benefit most from this session?
    ‘Ask, simplify, understand, remember, and apply’.   7
          Tell me:
 Who do you think would be a
        better auditor:
Mr. A - who was an accountant
     and now an auditor
 Or, Mr. Z – who has been an
     auditor throughout?
             Why?
                                8
         Bottom Line:
          Accounting
         comes before
           Auditing.
  Because audit begins only
 after an accountant finishes.
To do a better audit we must know how transactions
       are accounted for in a provident fund.
                                                 9
    Basic Accounting Equation



Asset = Liabilities + Equity

What will this be in case of a p/f?

                                      10
      P/F: Accounting Equation

Asset = Liabilities + Member Balances,

Or,

Assets – Liabilities = Member Balances

                                         11
   Provident Fund: Transactions
1. Receives cheque of monthly contribution of
   Rs. 100,000 from Employer
2. Invests Rs. 70,000
3. A member resigns from the company. His
   contribution is Rs. 5,000. Fund issues chq.
4. A member withdraws Rs. 10,000 permanently
5. Return on investment of Rs. 7,000 is
   deposited in bank
6. There are bank charges of Rs. 1,000
7. Income accrued on investment = Rs. 2,000
                                             12
Provident Fund: Problem Areas>>
1.   Applicable accounting standards and framework
       [Many take liberty in its interpretation!]
2.   Financial Statements
       [Inadequate disclosures, Cashflow statements are not
       prepared]
3.   Verification of member contribution
       [Organisations with high employee turnover]
4.   Complying with rules on interim closing
       [Many do not make half-yearly closing]
5.   Investment policy
       [Many do not have a formal investment policy]


                                                              13
>>Provident Fund: Problem Areas
6. Profit allocation for outgoing members
      [Outgoing members may not receive full
      distribution]
7. Low priority by Trustees
      [Result: Low quality of accounting. Affairs
      normally assigned and handled by a single person]
8. No elaborate set of Internal controls
      [Result: Affairs normally assigned and handled
      by a single person]

9. Low audit fee
      [Result: Untrained auditors]
                                                       14
        Provident Fund:
Frustration for a Trained Auditor
1. Financial statements show separate account
   of each member. Info compiled by auditor
2. Auditor may find a lot of things pending
   [Result: Waste of time]
3. There would be a number of adjustments in
   almost every area
      [Reason: Not enough care is taken in processing
      transactions, Result: Revised Trial Balances,
      change in income allocation, outdated audit
      documentation]
4. Demand for ‘start late, finish early’
      [Reason: Audit of p/f is the last thing]
                                                        15
       Provident Fund:
Advantages for a Trained Auditor
1. Computer-based accounting system
      [No chance of computation error, easy to read and
      edit]
2. Spread-sheet for making profit allocations
      [Let me explain the process]
3. Spread-sheet for doing accounts
      [The fact remains that auditors prepare accounts
      though it is the responsibility of Trustees]
4. Standard form of bank confirmation


                                                         16
Group Activity: Provident Fund Audit
    The Questions in Your Mind
        Duration: 5 minutes
Write questions in language of your choice that
    you have in your mind at this point of time
             relating to this session…
 the ones for which you are here to seek an
                      answer.


                                             17
            Provident Fund Audit:
               Key Questions
1.    What is the objective of audit of provident fund?
2.    Who are the major stakeholders in the audit of provident fund?
3.    How can an auditor ‘add value’ to the financial statements of
      the p/f he is auditing?
4.    What are the major technical, admin, and human-related issues
      in a p/f audit? Are we going to cover all major aspects in detail?
5.    What can an auditor do in individual capacity to improve his
      skill base?
6.    Would you show us the specimen accounts of a p/f?
7.    What is a defined contribution plan?
8.    Can a p/f invest its funds in real estate?
9.    What if an employee wishes to vary his contribution from
      month to month?
10.   What kind of software is available in market for p/f
      accounting?
                                                                      18
       Provident Fund Audit:
              Basics
1. What is a Provident Fund?
2. Why should a company have a recognised
   p/f?
3. How p/f operates?
4. What are routine financial transactions?
5. Who are trustees?
6. What are p/f Rules?
7. What is a Trust Deed?
                                          19
  Provident Fund Audit:
 What is a Provident Fund?

A p/f is a separate entity to
which employees, as
members, contribute out of
their salaries with matching
contribution from employer.
                             20
       Provident Funds:
Why should a company have a pf?
1. The Income Tax Ordinance permits companies
   to have a 'Provident Fund' to which both
   employees and employer make a matching
   contribution on monthly basis. The proceeds are
   then invested and return on it are distributed to
   the employees at the end of the year.
2. The income of a ‘recognised’ provident fund is
   exempt from income tax.

                                                   21
            Provident Funds:
     What is the process for getting a p/f
      recognised? How long it takes?
1. Hire a consultant to prepare Rules.
2. ‘Deed of Trust’ [also known as ‘trust deed’]
3. Finalise ‘Provident Fund Rules’
4. Application to the Commissioner of Income Tax
   [under fifth schedule]
5. Seek cooperation with the help of the Father of
   the Nation.
6. Letter of ‘recognition’ from the CIT.
                                                 22
                  Provident Funds:
     What is the difference between ‘Trust
     Deed’ and ‘Provident Fund Rules’?
1.    ‘Deed of Trust’ [also known as ‘trust deed’] is like a
      memorandum of association of a company, defining
      relationship with outsiders.
2.    Specimen headings:
     1.   Name and address
     2.   Objects
     3.   Board of Trustees
     4.   Chairman of the Board
     5.   Investure of Trustees
     6.   Miscellaneous [admission of member, forms, etc]
3.    ‘Provident Fund Rules’ primarily define the internal
      workings of the Fund.

                                                               23
                Provident Funds:
  What ‘Provident Fund Rules’ look like?
1.    Name
2.    Commencement
3.    Definitions
4.    Objects
5.    Membership
6.    Application of Rules
7.    Trustees
8.    Chairman
9.    Management
10.   Vesting of the Fund

                                           24
                Provident Funds:
  What ‘Provident Fund Rules’ look like?
11.   Liability of Trustees
12.   Investments
13.   Operation of Fund’s Bank Account
14.   Notice of Meeting
15.   Administration
16.   Member’s Contribution
17.   Company’s Contribution
18.   Contribution of Members on Leave
19.   Member’s Account
20.   Trustees powers to withdraw and raise loans

                                                    25
              Provident Funds:
  What ‘Provident Fund Rules’ look like?
21. Accretion of Income
22. Auditors
23. Payment from the Fund
24. Payment out of the Fund
25. Recoveries in case of misconduct etc
26. When full balance is payable
27. Forfeited contribution
28. Nominee
29. Payment in case of death of a member in absence of a
    nominee
30. Withdrawal from the Fund
                                                           26
                Provident Funds:
  What ‘Provident Fund Rules’ look like?
31.   Attachment
32.   Company’s paramount lien
33.   Discharge to the Fund and the Trustees
34.   Withdrawals
35.   When loans may be allowed
36.   Second withdrawals
37.   Repayment of amounts withdrawn
38.   Responsibility of Trustees
39.   Indemnification of Trustees
40.   Closing of the Fund

                                               27
           Provident Funds:
 What ‘Provident Fund Rules’ look like?

41. Change in the Valuation of the Fund
42. Retirement or resignation of Trustees
43. Decision on the Board of Trustees
44. Amendments
45. Matters requiring clarification
Witnesses        Trustees

                                            28
            Provident Funds:
            How pf operates?
1. The ‘Board of Trustees’ of a p/f are responsible
   for its operations.
2. Normally, the CEO and CFO of a Company are
   automatic ‘trustee’ alongwith additional ones as
   representatives of employees. There is no fixed
   number of trustees; it depends on Rules.
3. Issues: retirement and re-election, annual
   meetings, etc.

                                                  29
                Provident Funds:
     What are its routine financial activities?
1.    Induct eligible employees as members.
2.    Collect deductions from payroll alongwith company’s
      contribution.
3.    Invest funds
4.    Collect returns on investments
5.    Allocate profit to members according to their share in
      the Fund
6.    Allow members to withdraw respective balance on
      permanent basis
7.    Allow loans to members

                                                               30
              Provident Funds:
       What are its routine financial
               activities?
1.   Induct eligible employees as members.
2.   Collect deductions from payroll and company’s
     contribution.
3.   Invest funds
4.   Collect returns on investments
5.   Allocate profit to members according to their share in
     the Fund
6.   Allow members to withdraw respective balance on
     permanent basis
7.   Allow loans to members

                                                              31
             Provident Funds:
            Who are ‘Trustees’?
1.   The ‘Board of Trustees’ of a pf are responsible for its
     operations.
2.   They approve the transactions mentioned in the previous
     slide.
3.   In addition, trustees are responsible for observing pf
     Rules [and the related laws, regulations] while
     transacting business of the Fund.
4.   This includes financial record-keeping, preparing and
     presentation of annual accounts.
5.   Appoint auditors.

                                                           32
         Provident Funds:
        What are p/f ‘Rules’?
1. Pf ‘Rules’ is a collection of regulations
   under which a Fund is ‘recognised’.
2. ‘Rules’ may vary from one p/f to another.
3. There is a standard set of ‘Rules’ provided
   in the Income Tax Ordinance.



                                             33
          Provident Funds:
      New Audit = Communicate
1.   Auditor receives a letter from Trustees indicating their
     interest in appointing you as auditor.
2.   The Code of Ethics applicable to auditors require
     ‘written’ communication with the previous auditor
     before accepting appointment.
3.   In case there are ‘no professional reasons’, the auditor
     should proceed to accept the appointment.
4.   Professional reasons not to accept an appointment may
     include outstanding audit fee of previous auditor or some
     technical reason. In such cases, remove the cause.
5.   Before accepting a new appointment, latest financial
     statements should be obtained and reviewed.
6.   On acceptance, auditor sends an audit engagement letter.
     This remains effective till auditor is changed.
                                                            34
         Provident Funds:
     Recurring Audit = Review
1. Review permanent working paper file.
2. Review WPF of last audit.
  1. Matters arising out of audit of last year.
  2. Documents missing in the file.
3. Coordinate with client. Arrange meeting
This all should happen within a month from
   close of the year.
                                                  35
           Provident Funds:
     Pre-audit Meeting: Attend with
            Audit Incharge
1.    Overall View [voluntary separation scheme, expansion
      to new locations, income from new source].
2.    Status of Accounting Record.
     1.   Change in System
     2.   Change in staff
3.    Areas requiring attention / improvements.
     1.   Disclosures [cashflows on direct method]
     2.   Accounting Policy [investment income recognition]
4.    Administration [seating, availability of records, how
      long should it take?]
5.    Record minutes and send it out in a day or so.

                                                              36
               Provident Funds:
              Audit Administration
1.    Present practice = Grab File and Go!!
2.    Pre-audit Team briefing:
     1.   Review Accounts of latest period.
     2.   Review of individual areas.
     3.   Think what can go wrong.
3.    Finalise audit programs.
4.    Assign routine areas…and initial timelines
5.    Identify areas requiring special attention.
6.    Provide for study / unscheduled leaves.
7.    Who did what? Daily recording of voucher / diary.
8.    Exchange contact numbers.
                                                          37
Audit of Provident Funds




    End of Session One
       Thank You.



                           38

								
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