Contents of Balance Sheet

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Fundamentals of Auditing ACC 311

Lesson 10

BOOKS OF ACCOUNT & FINANCIAL STATEMENTS

Books of Account to be kept by Company [Section-230]

1.1

A company should keep proper books of account in respect of:

e) Cash received and expended by the company;

f) Sales and purchases of goods by the company;

g) All Assets and liabilities of the company; and

h) In case of a company engaged in production, processing, manufacturing, or mining activities, a

production record as may be required by the Commission through a general or special order;

1.2

Books of account should be preserved for ten years;

1.3

Books of account are to be kept at the registered office of the company. If kept at any other place,

the registrar should be informed;

1.4

Books of account should give a true and fair view of the state of affairs of the company and should

contain explanation of transactions.

1.5

Directors can inspect the books of account during the business hours.

1.6

If company fails to comply with the above provisions a director, including chief executive and chief

accountant:

(a) of listed company is liable to imprisonment for one year and a fine of not less than Rs. 20,000

not more than Rs. 50,000, and a further fine of Rs. 5000 per day during which the default

continues; or

(b) of other companies is liable to imprisonment for six months and with a fine, which may extend

to Rs. 10,000

Annual Accounts and Balance Sheet [Section 233]

2.1

First annual accounts of a company must be presented before the AGM within eighteen months

from the date of incorporation.

2.2

A subsequent annual accounts should be presented once at least in every calendar year before an

AGM. In other words, the accounts should be presented in the AGM within three months of the

date of balance sheet. However, in the case of a listed company the Commission and in other cases

the registrar can extend this period for a term not exceeding two months.

2.3

The accounts should be made up, in the case of first accounts, from the date of incorporation, and

in the case of subsequent accounts, from the date of the preceding accounts to a date not earlier

than the date of the meeting by more than four months.

2.4

The accounts shall be prepared for a period not exceeding 12 months, except in case where

permission is granted by the registrar for preparation of accounts for a longer period.

2.5

Profit and Loss account and Balance Sheet shall be audited by the auditor and auditor's report

should be attached thereto.

2.6

Copy of accounts, auditor's report and directors' report should be sent to every member at least

twenty-one days before the Annual General Meeting (AGM).

2.7

Listed companies are required to send five copies of their audited accounts to the registrar, the

Commission and the stock exchange within 30 days.

Contents of Balance Sheet [Section 234]

General:

3.1

a) Balance Sheet and Profit & Loss Account should give a true and fair view of the state of the

company's affairs and of the profit or loss of the company.

b) An item of expenditure fairly chargeable to income shall be brought into account.

c) Any expenditure which in fairness can be distributed over several years but is incurred in one

year should be so distributed and reasons for doing so should be given.

3.2

For Listed Companies and Private or Non Listed Public Companies Which is a Subsidiary

of a Listed Company:

Balance Sheet and profit and loss account should be prepared in accordance with Fourth

Schedule;

Fundamentals of Auditing ACC 311

A statement of changes in equity and cash flow statement.

Accounting policies should be stated and, where there is any change in accounting polices

the auditor shall report whether he agrees with the change.

International Financial Reporting Standards as adopted by SECP should be followed in

preparation of accounts.

For Other Companies:

3.3

Balance Sheet and profit and loss account shall be prepared in accordance with the

Fifth Schedule;

A statement of changes in equity and cash flow statement.

Accounting policies should be stated and, where there is any change in accounting

polices the auditor shall report whether he agrees with the change.

International Financial Reporting Standards as adopted by SECP should be

followed in preparation of accounts.

Limited Liability Company

Balance Sheet

As on December 31, 2006

Rs.

Assets

Non Current Assets

Fixed Assets

Tangible Assets

***

Intangible Assets

***

Long Term Investments

***

Long Term Advances, Deposits & Prepayments

***

Deferred Cost

***

Current Assets

***

Current Liabilities

(***)

Capital Employed

***

Financed By

Owners' Equity

Ordinary Share Capital

***

Reserves

Capital Reserves

***

Revenue Reserves

***

Non Current Liabilities

Loan Stocks/Term Finance Certificates

***

Loan from financial institutions

***

Finance lease liability

***

***

Director

Chief Executive

Fundamentals of Auditing ACC 311

Limited Liability Company

Income Statement

For the Year ended December 31, 2006

Rs.

Sales

***

Cost of goods sold

(***)

Gross profit

***

Operating expenses

Administrative expense

***

Selling & Marketing expenses

***

Profit from operations

***

Other income

***

Financial expenses

***

Profit before tax

***

Income tax expense

***

Profit after tax

***

Limited Liability Company

Statement of changes in equity

For the year ended December 31, 2006

Rs.

Retained profits b/f

***

Profit after tax

***

Dividend paid

***

(***)

Transfer to reserves

***

Retained profits c/f

***

Director

Chief Executive

Fundamentals of Auditing ACC 311

4. Treatment of Surplus Arising on Revaluation of Fixed Assets [Section 235]

4.1

Any surplus on revaluation of fixed assets should be transferred to an account named "Surplus on

revaluation of fixed assets account".

4.2

This account should be shown in the balance sheet after capital and reserves;

4.3

Surplus on revaluation shall not be set off or reduced except:

For setting of any decrease in revaluation of asset; or

When revalued asset is disposed of, surplus relating to it can be adjusted or set off.

4.4

Depreciation on assets which are revalued shall be determined with reference to the value assigned

to such assets on revaluation and depreciation charge for the period shall be taken to the Profit and

Loss Account;

4.5

An amount equal to incremental depreciation for the period shall be transferred from "Surplus on

Revaluation of Fixed Assets Account" to un-appropriated profit / accumulated loss through

Statement of Changes in Equity to record realization of surplus to the extent of the incremental

depreciation charge for the period;

4.6

An amount equal to incremental depreciation charged in previous years may be transferred from

"Surplus on Revaluation of Fixed Assets Account" to un-appropriated profit / accumulated loss

through Statement of Changes Equity.

Director's Report [Section 236]

5.1

Director's report shall be attached to the Balance Sheet.

5.2

It shall state business affairs, proposed dividend, if any, amounts set aside to reserve, if any.

5.3

In the case of a public company or a private company which is a subsidiary of a public company

director's report shall also include:-

Disclosure of any material changes and commitments affecting the financial position which

have occurred between the year end and the date of report;

Disclosure of any material changes in the nature of business etc., which have occurred

during the year, if the disclosure is necessary for understanding the state of the company's

affairs.

Explanation to any qualification in auditor's report.

Pattern of holding of shares (percentage of shares held by the parties).

Name and country of incorporation of holding company if any, where such holding

company is established outside Pakistan.

The earning per share.

Reasons for incurring loss and reasonable indication of future prospects of profit, if any.

Information about defaults in payment of debts, if any, and reasons thereof.

5.4

The directors of a holding company required to prepare consolidated financial statements under

section 237 shall make out and attach to consolidated financial statements, a report with respect to

the state of group's affairs and all provisions of subsection (2), (3) and (4) shall apply to such

report.

5.5

Director's Report shall be signed by the chairman or the chief executive, if so authorized by the

directors; otherwise by the chief executive and a director.

Balance Sheet of Holding Companies [Section 237]

6.1

Consolidated Financial Statements

(1)

There shall be attached to the financial statements of a holding company having a

subsidiary or subsidiaries, at the end of the financial year at which the holding company's

financial statements are made out, consolidated financial statements of the group presented

as those of a single enterprise and such consolidated financial statements shall comply with

the disclosure requirement of the Fourth Schedule and International Accounting Standards

notified under sub-section (3) of section 234.

(2)

Where the financial year of a subsidiary precedes the day on which the holding company's

financial year ends by more than three months, such subsidiary shall make an interim

closing on the day on which the holding company's financial year ends, and prepare

financial statements for consolidation purposes.

Fundamentals of Auditing ACC 311

(3)

Every auditor of a holding company appointed under section 252 shall also report on

consolidated financial statements and exercise all such powers and duties as are vested in

him under section 255.

(4)

All interim financial statements of a subsidiary as required under sub-section (3) shall be

reviewed by the auditors of that subsidiary appointed under section 252 who shall report

on such financial statements in the prescribed form.

(5)

There shall be disclosed in the consolidated financial statements,-

(a) any qualifications contained in the auditors' reports on the accounts of subsidiary or

subsidiaries for the financial year ending with or during the financial year of the

holding company; and

(b) any material note or explanation on a qualification, regarding to but not covered in the

financials statements of a parent company.

(6)

Every consolidated financial statement shall be signed by the same persons by whom the

individual balance sheet and the profit and loss account or income and expenditure

account of the holding company are required to be signed under section 241.

(7)

All provisions of sections 233, 242, 243, 244 and 245 shall apply to a holding company

required to prepare consolidated financial statements under this section as if for the word

"company" appearing in these section, the words "holding company" were substituted.

(8)

The Commission may, on an application or with the consent of the directors of a holding

company, direct that in relation to any subsidiary, the provisions of this section shall not

apply to such extent only as may be specified in the direction.

(9)

If a holding company fails to comply with any requirement of this section, every officer of

the holding company shall be punishable with fine which may extend to fifty thousand

rupees in respect of each offense unless he shows that he took all reasonable steps for

securing compliance by the holding company of such requirements and that the non-

compliance or default on his part was not willful and intentional".

6.2

The directors shall ensure that year-end of the holding and its subsidiary companies shall coincide

except where there are good reasons against it. The SECP shall facilitate the companies in this

regard by allowing them to prepare accounts of extended period, hold AGM accordingly and file

annual return after the holding of extended AGM. [Section 238]

Balance Sheet of Modaraba Company [Section 240]

Modaraba companies are required to attach financial statements and other reports circulated to

Modaraba certificate holders with their financial statements.

Authentication of Balance Sheet [Section- 241]

8.1

Accounts should be approved by the Board of Directors.

8.2

Balance Sheet shall be signed by the chief executive and one director. If chief executive is out of

Pakistan for the time being then it shall be signed by two directors and a statement shall be given by

the directors explaining reasons thereof.

Copy of Balance Sheet to be forwarded to the Registrar (Section 242)

9.1

Three copies of listed company's audited accounts and the auditor's report duly signed by the

management and auditors should be filed with the registrar within thirty days from the AGM.

9.2

In other cases two copies are required.

9.3

Private Companies are not required to file their accounts with the registrar.

10.

Right of Members/Debenture-Holders of Company to Copy of the Accounts and the

Auditor's Report [Section-243 & 247]

Members have the right to get copy of annual accounts etc. of company on payment. The same

rights are available to debenture-holders or trustees for debenture-holders.

11.

Quarterly Accounts of Listed Companies [Section (245)]

All listed companies shall within one month of the close of every quarter of their year of account,

prepare and transmit to the members and the stock exchange(s) on which their shares are listed, a

Fundamentals of Auditing ACC 311

profit and loss account for, and balance sheet as at the end of that quarter, whether audited or

otherwise. They shall file with the registrar and the Commission three copies thereof.

Quarterly accounts shall be circulated for the 1st, 2nd and 3rd quarter within one month of the close

of that quarter.

Approval of the board of directors will be mandatory for circulation of the quarterly accounts.

If a company fails to comply with any of the requirements of this section, every director including

chief executive and chief accountant of the company who has knowingly by his act or omission

been the cause of such default shall be liable to a fine of not exceeding one hundred thousand

rupees and to a further fine of not exceeding one thousand rupees per day during which default

continues.

12.

Additional Statement of Accounts and Reports [Section 246]

12.1

The SECP may by general or special order, require companies, or a class of companies or any

particular company, to prepare and send to the members, the registrar, the SECP, a stock exchange

and any other person such periodical statements of accounts, information or other reports in such

form and manner and within such time, as may be specified in the order.

12.2

The Securities and Exchange Commission of Pakistan vide circular No. 23/2005, has directed to all

listed companies and their subsidiaries to provide: -

a) Other Information contained in their annual report, as such term is defined in International

Standard on Auditing 720 (Other Information in the Documents Containing Audited Financial

Statements), to their external auditor (s); and

b) Sufficient time to their external auditor (s) to review and comment upon any "material

inconsistencies" found in such Other Information where the other information may contradict the

information contained in the audited financial statements. Listed companies and their subsidiaries

are required to comply with this directive from the period commencing 1st January 2006.

Auditor's interest in the statutory books

The auditor is interested in the statutory books because:

They are directly concerned with the Accounts

They are audit evidence to be used in verifying detailed items in the accounts; for example the

total share capital shown by the sum of the individual share holdings in the register of members

must agree with the share capital recorded in the books of accounts

Failure to maintain proper records of any sort casts doubt upon the accuracy and reliability of

the records generally.

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