AUDIT AND ASSURANCE

BASICS OF AUDITING

What is an Assurance Engagement? An assurance engagement is an engagement in which a practitioner obtains

evidence about evaluation of a subject matter against a suitable criterion
and expresses his conclusion to enhance the confidence of the intended
users.
What is Limited Assurance? It is a moderate level of assurance which is expressed in a negative form.
What is Reasonable Assurance? It is a high, but not absolute, level of assurance expressed in a positive form.
What are the Limitations of Audit? 1. Testing is performed on sampling basis due to time and cost limitations.
2. Fraud involving collusion and complex techniques is harder to detect.
3. Some accounts in financial statements involve estimates and
judgements which are difficult to calculate and verify.
4. Management may not provide complete information to the auditor.
5. Auditors do not have specific legal powers.
What is Applicable Financial Reporting It is the financial reporting framework adopted by the management
Framework? considering legal and regulatory requirements, nature of entity and
financial statements, and purpose of financial statements.
What are the Responsibilities of 1. Preparation and presentation of financial statements.
Management? 2. Designing and implementing necessary internal controls for fair
preparation of financial statements.
3. Providing unrestricted access to all relevant information necessary for
obtaining audit evidence.
What is Expectation Gap? It is the difference between the public perception and statutory role and
responsibilities of the external audit.
What is Professional Judgement? Professional Judgement is the application of knowledge, training and
experience in the context of accounting, audit and ethical standards to
reach an appropriate course of action.
What is Professional Skepticism? Professional skepticism is the use of a questioning mind, being alert to
conditions which may indicate a possible misstatement and critical
assessment of audit evidence.
What is Independence in the context Independence of an auditor means that the audit should be free from any
of an auditor? bias and influence to perform his duties.
What is Audit Evidence? Audit evidence is the information used by the auditor to arrive at a
conclusion on which the audit opinion is based. Audit evidence should be
sufficient and appropriate.
What is Sufficient and Appropriate Sufficiency deals with the quantity of the audit evidence. It is affected by
Evidence? factors such as:
- Materiality and complexity of an item;
- Assessed risk of material misstatement;
- Auditor’s knowledge and experience of the business;
- Quality of audit evidence; and
- Strength of internal controls
Appropriateness is the measure of quality of the audit evidence. It is
affected by the relevance and reliability of the information.

Relevance deals with the logical connection between the assertion and
procedure performed.
 Reliability deals with the source, nature and circumstances under which the
information is obtained. Examples include:
- Original documents over photocopies
- Documentary evidence over oral form
- Externally obtained evidence over internal evidence
- Directly obtained information over indirectly obtained evidence
What is an Audit Procedure? Audit procedures are methods and techniques used by the auditors to
obtain evidence. They include analytical procedures, external confirmation,
inquiry, inspection, observation, reperformance and recalculation.
What is/are:
1. Analytical Procedures Analytical procedures are the evaluation of financial information through
comparison and plausible relationships between financial and non-financial
data.
2. External Confirmation External confirmations are a process of obtaining information from third
parties through direct written communication.
3. Inquiry Inquiry is the seeking of information from knowledgeable persons within or
outside the entity.
4. Inspection Inspections involves examining records or documents or physical
verification of assets.
5. Observation Observation is the process of looking at a process or procedure being
performed by others.
6. Reperformance Reperformance is the independent performance of a process or procedure
that were originally performed by the entity as part of its internal controls.
7. Recalculation Recalculation consists of checking mathematical accuracy of documents or
records.
What are Risk Assessment Procedures? These are procedures performed by the auditor to obtain understanding of
the entity and its internal controls to assess the risk of misstatement at
assertion and financial statement level.
These include:
- Inquiries of management and others within the entity
- Observation and inspection of documents and procedures
- Analytical procedures
What is Risk at Financial Statement It is the risk that effects the financial statements pervasively and affects
Level? many assertions.
Examples: Risk of Fraud, Going Concern Issues, and Lack of Competence
and Integrity of management.
What is Risk at Assertion Level? It is the risk that affects specific identifiable assertions.
Examples: Risk that precious and portable assets may be misappropriated,
risk that complex transactions may not be accurately recorded and risk that
large transactions at year end may not have occurred.
How does an auditor address risk at Auditor designs and implements an overall response by:
financial statement level? - Increased level of professional skepticism
- Assigning more experienced and specialized staff
- Increased supervision and review of audit work
- Incorporating unpredictability in the nature, extent and timing of audit
procedures
- Performing more audit procedures at year end than at interim date
How does an auditor address risk at The auditor performs test of controls and substantive procedures to
assertion level? address such risk.
What are Tests of Controls? Tests of controls are procedures performed to confirm the operating
effectiveness of internal controls in preventing, detecting and correcting
misstatements at assertion level.
What are Substantive Procedures? Substantive procedures are procedures performed by the auditor to detect
material misstatement at assertion level
What are Assertions? Assertions are representations by management embodied in the financial
statements. These are used by the auditor to assess the different types of
misstatements that may occur. Two categories of assertions are ‘Account
balances’ and ‘Classes of Transactions’.
What are the assertions for Account 1. Existence
Balances? 2. Rights and obligations
3. Accuracy, Valuation and Allocation
4. Completeness
5. Classification and Presentation
What are the assertions for Classes of 1. Occurrence
Transactions and Events? 2. Accuracy
3. Cutoff
4. Completeness
5. Classification and Presentation
What is Audit Documentation? It is the written record of audit procedures performed, evidence obtained
and conclusions reached by an audit during an audit.
What is an Audit Report? An audit report is a document that contains an audit opinion on whether a
company's financial statements are presented fairly in all material aspects
as per IFRS or applicable law.
When is an audit report issued? An audit report is issued after the auditor has obtained sufficient and
appropriate evidence and the financial statements are approved by the
BOD.
Who signs an audit report? The auditor himself in case of an individual and a partner of a firm
What is Scope Limitation? Scope limitation is the difficulty imposed that disables the auditor to obtain
sufficient and appropriate evidence regarding a matter.
What is Materiality? Items are considered material if they, individually or in aggregate, could
reasonably be expected to influence the economic decisions of the users
taken on the basis of financial statements.
Define Pervasive. The term is used to describe the effects of misstatement and scope
limitation. The effects of such are not confined to specific elements of the
financial statements rather effect the financial statements as a whole.
Why is an Emphasis of Matter An Emphasis of Matter paragraph is included in the audit report if the
paragraph included in the audit auditor considers it necessary to draw attention of the users to a matter of
report? significance disclosed in the financial statements.
What are some examples of situations 1. Exceptional Litigation
in which an Emphasis of Matter 2. Early application of a new accounting standard
paragraph is included in the audit 3. Major disaster
report? 4. Significant subsequent event
5. Revision of financial statements/audit report after issuance
Why is an Other Matter paragraph An Other Matter paragraph is included in the audit report if the auditor
included in the audit report? considers it necessary to communicate a matter which is not required to be
disclosed in the financial statements but is relevant to the understanding of
the users.
What are some examples of situations 1. Different auditor for prior year’s financial statements
in which an Other Matter paragraph is 2. Auditor is reporting on more than one sets of financial statements
included in the audit report? 3. Auditor restricting the distribution of audit report
 PRELIMINARY ENGAGEMENT ACTIVITIES

What is the Tenure of the Auditors? The tenure of auditors is from the date of their appointment till the
conclusion of the next AGM.
How are auditors removed before Auditors can be removed before expiry of their tenure by members through
expiry of tenure? a special resolution.
When are First Auditors appointed? First auditors are appointed within 90 days from incorporation of a
company.
When are Subsequent Auditors Subsequent auditors are appointed at each AGM of the company.
appointed?
How are Subsequent Auditors Subsequent auditors are appointed by the members in an AGM.
appointed? The Board of directors recommend the incoming auditors along with the
notice of the AGM. Consent of the incoming auditors must be obtained
before such notice and the retiring auditors must be notified as well.
Registrar must be intimated within 14 days of appointment.
Members having shareholding of 10% or more can propose auditors after
sending a notice for the resolution 7 days before the AGM.
When are auditors appointed in case Casual vacancy is filled within 30 days by the directors of the company.
of a Casual Vacancy?
What are the Rights of the Retiring Retiring auditors have the right to make a representation in writing to the
Auditors? company at least 2 days before the AGM. Such representation must be read
out at the AGM before taking up the agenda for appointment of auditors.
What are the Responsibilities of the In case a representation is made to the company 2 days before the AGM,
Retiring Auditors? the retiring auditor is required to attend the AGM by himself or a person
authorized by him in writing. Furthermore, a copy of the representation
must be sent to ICAP as well.
What are the Statutory Rights of the Rights to Information:
Auditors? - Right of access to the company’s books, accounts and vouchers
- Right of access to copies of books and accounts of a branch
- Right to require information and explanation from a director, officer or
an employee of the company or its subsidiary
Rights with regard to General Meetings:
- Right to receive all notices of a general meeting
- Right to attend and speak at general meetings
- Right to make a representation if a change in auditors is proposed
Who is Qualified to act as an auditor? For a public company, its subsidiaries and a private company with paid up
capital of 3 million or above a Chartered Accountant with a valid certificate
of practice from ICAP is qualified to act as an auditor.
In any other case, a Chartered Accountant and Cost and Management
Accountant with valid certificates of practice may act as an auditor.
What is an Engagement Letter? An engagement letter is a written agreement between the auditor and
client which states the terms and conditions of the audit engagement.
What are the Contents of an Contents of the engagement letter include:
Engagement Letter? 1. Objective and scope of audit.
2. Responsibilities of the auditor.
3. Responsibilities of the management.
4. Identification of the applicable financial reporting framework.
5. Expected form and contents of report to be issued.
6. Inherent limitations of an audit and internal controls.
7. Fee or basis or fees.
8. Expectation that management will provide written representations.
 PLANNING OF AN AUDIT

What are the Benefits of Audit Planning helps to:

Planning? 1. Complete the engagement effectively and efficiently
2. Identify and resolve potential problems on timely basis
3. Pay attention to important areas of audit
4. Assist in selection of appropriate team
5. Perform direction, supervision and review of engagement team
6. Coordinate on timely basis with component auditor or experts
What is an Audit Plan? Audit plan includes nature, timing and extent of audit procedures to be
performed by engagement team members on each area of the financial
statements.
What is Interim Audit? An interim audit is that part of audit which takes place before the year end.
What is Final Audit? Final audit takes place after the year-end and concludes with the auditor
forming and expressing an opinion on financial statements for the whole year.
What is Performance Materiality? Performance materiality is an amount less than the level of overall materiality.
It is used to reduce the probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality for the financial statements as
a whole.
What are the Benchmarks of 1. Net Profit
Materiality? 2. Total Expenses
3. Total Revenue
4. Net Assets
5. Net Current Assets
What is Transaction-Based Audit? It is an approach for an audit under which no reliance is placed upon entity’s
internal controls. The auditor solely performs test of details.
What is System-Based Audit? If the internal controls are assessed as effective in the walk-through tests, the
auditor may rely on the internal controls and perform test of controls to
determine the level of substantive testing. This is a system-based audit.
What are Walk-Through Tests? It is a procedure performed by the auditor which traces a transaction step-by-
step through the accounting system from its inception to the final disposition.
What is Inherent Risk? It is the susceptibility of an assertion to a misstatement that could be material
before considering any related controls.
What is Control Risk? It is the risk that entity’s controls may not prevent, detect or correct material
misstatements.
What is Detection Risk? It is the risk that procedures performed by auditors will fail to detect a material
misstatement.
What is Audit Risk? It is the risk that the auditor will express an inappropriate opinion.
What is a Not-for-Profit It is an organization with an objective to provide services to the society. It does
Organization? not generate profits and no part of its income is distributed to its members,
directors or officers.
What are Internal Controls? Internal controls are processes and procedures implemented by the
management to ensure achievement of an organization's objectives in
operational effectiveness and efficiency, reliable financial reporting, and
compliance with laws and regulations.
What are the Limitations of Internal 1. Breakdown caused by human error
Controls? 2. Management override of controls and collusion
3. Lack of segregation of duties in small entities
4. Non routine transactions are not subject to internal controls
5. Judgements involved in implementation may be faulty
What are the Components of Internal 1. Control Environment
Controls? 2. Information Systems
3. Entity’s Risk Assessment Process
4. Control Activities (Authorization – Performance Reviews – Information
Processing Controls – Physical Controls – Segregation of Duties)
5. Monitoring of Controls
What is Segregation of Duties? Segregation of duties is division of work between multiple workers to
reduce the risk of error and fraud.
What is Management Letter? It is a document prepared by the auditor to communicate significant
deficiencies in internal controls to the management.
What is an Audit Trail? An audit trail is the ability of users to trace a transaction through all of its
processing stages.
What is a System Log? A system log is a record of events that take place in performance of system.
What is Encryption? Encryption is the conversion of data into coded form using a program to
make it unreadable to everyone except its intended users.
What are:
1. Preventive Controls Controls designed to stop errors or irregularities from occurring.
Examples: segregation of duties, authorization, restricting access through
passwords/firewalls
2. Detective Controls Controls designed to identify errors or irregularities that may occur.
Examples: reconciliations, periodic audits, exception reports, review of
system logs
3. Corrective Controls Controls designed to correct errors or irregularities that have been
detected.
Examples: backup and recovery procedures, disciplinary mechanisms
What is Check Digit? Check digit is a validation check on key numerical codes. It is calculated from
the original data and added to the end.
What is Audit Software? It is a computer program used by auditors to extract and interrogate
financial information in client’s IT system for use in audit work.
What is Test Data? It is a set of dummy transactions developed by an auditor and processed by
the client’s IT system.

PERFORMANCE OF AN AUDIT

What is Negative Confirmation? A negative confirmation request asks for a reply from a third party only if they
disagree with the information provided by the auditor.
What is Positive Confirmation? A positive confirmation request asks the confirming party to respond to the
auditor in all cases whether they agree or disagree with the information
provided.
What are Related Parties? Related parties are individuals or organizations that might have an undue
influence over the company being audited.
What is Sampling? Sampling is the application of audit procedures to less than 100% of the items
in a population.
What are the Sample Selection 1. Systematic Selection
Methods? 2. Random Selection
3. Haphazard Selection
4. Block Selection
What is Stratification? The process of dividing a population into subpopulations, each of which is a
group of sampling units with similar characteristics.
What is Sampling Risk? Sampling risk is the risk that auditor's conclusion based on the sample might
be different from the conclusion if the entire population was tested.
What is Tolerable Misstatement? It is the amount by which a financial statement line item can differ from its true
amount without impacting the fair presentation of the entire financial
statements.
What is Tolerable Rate of A rate of deviation from prescribed internal control procedures set by the
Deviation? auditor in respect of which the auditor seeks to obtain an appropriate level of
assurance that the rate set is not exceeded by the actual rate of deviation in
the population.
What is an Internal Audit? Internal audit is a part of the entity that is appointed by TCWG to assist them
in ensuring good governance of the entity.
What is an Auditor’s Expert? An expert is a person who has expertise in a field other than accounting or
auditing and is used by the auditor to obtain evidence.
When does an auditor use an An auditor uses an expert for the following:
Expert? 1. Actuarial Calculations
2. Engineering Data
3. Legal Opinions
4. IT Expertise
5. Valuations
What is an Error? An error is an unintentional misstatement.
What is Fraud? Fraud is a deliberate act by one or more individuals by use of deception to gain
an unfair personal or financial advantage.
What is Management Override of Management override of controls refers to the ability of management to
Controls? overrule the prescribed policies and procedures to prepare fraudulent
financial statements.

REPORTING AND POST REPORTING ISSUES

What are Written Representations? They are a written statements provided by management to confirm certain
matters or to support other audit evidence.
What is a Qualified Opinion A qualified opinion is expressed when the auditors obtain sufficient and
appropriate evidence that material misstatement or scope limitation exists but
is not pervasive to the financial statements. The auditor states in his report
that the financial statements are fairly presented, except for a specified issue.
What is an Adverse Opinion An adverse opinion is expressed when the auditors obtain sufficient and
appropriate evidence that a material and pervasive misstatement exists. The
auditor states in his report that the financial statements are not fairly
presented.
What is a Disclaimer of Opinion A disclaimer of opinion is expressed when the auditors are unable to obtain
sufficient and appropriate evidence due to scope limitation and conclude that
the effect of such is both material and pervasive to the financial statements.
The auditor states in his report that they were unable to obtain sufficient
appropriate evidence to form an opinion.
What are Key Audit Matters? Matters that, in the auditor’s judgment, were of most significance in the audit
of the financial statements are Key Audit Matters. These are selected from
matters communicated to Those Charged with Governance during the audit.
REVIEW AND RELATED SERVICES
What is an Audit? An audit is an independent examination of the financial statements. It is a
type of engagement is which reasonable assurance is provided.
What is a Review Engagement? A review is a type of assurance engagement in which limited assurance is
provided.
What are Compilations? In this engagement the practitioner assists the management in preparation
and presentation of historical financial information.
What are Agreed Upon Procedures? In Agreed Upon Procedures the auditor carries out procedures of audit
nature to report on factual findings. No assurance is provided in this case.
The procedures are mutually agreed between the entity, third parties and
auditor.
 COMPANY LAW
What is a Company? A company is an organization which is registered as a separate legal entity
under companies act or any other law relating to incorporation of companies.
What is Doctrine of Corporate Doctrine of corporate personality is that a company is considered as an
Personality? artificial person having separate legal status from its owners.
What is a Fiduciary Relationship in Fiduciary means an ethical or legal relationship of trust between parties.
context of the directors of a Directors and members have a fiduciary relationship as directors work in the
company? best interests of the company.
What is a Holding Company? A company which:
i. Holds 50% or more voting rights; or
ii. Controls the composition of the board of another company.
What is a Subsidiary Company? A company whose:
i. 50% or more voting rights; or
ii. composition of the board is controlled by another company.
What is Memorandum of It is the constitution of a company which includes its name, place, principal
Association? line of business, liability and capital clauses.
What are Articles of Association? Articles of association contain rules and regulation on internal affairs of a
company. They include rules regarding transfer of shares, proxies, general
meetings, dividends and reserves.
What is an Ordinary Resolution? Ordinary Resolution is a decision in a general meeting which is passed by a
simple majority of members present in person, or by proxy, or through postal
ballot.
What is a Special Resolution? A special resolution is a decision which is passed by a majority of 3/4 of the
members present in person, or by proxy, or through postal ballot and for
which a 21 days’ notice has been given.
What is Share Capital? It is the total amount invested by the members of a company.
What is:
1. Authorized Share Capital It is the maximum amount of share capital that can be issued. This amount is
mentioned in the Memorandum of Association and can only be changed
through a special resolution.
2. Issued Share Capital It is the amount of share capital that is issued to the shareholders. It cannot
exceed the authorized share capital.
3. Paid-Up Share Capital It is that part of issued share capital which is actually paid up.
What is an IPO? An Initial Public Offering (IPO) refers to the process of offering shares of a
company to the general public for the first time.
What is a Prospectus? A prospectus is a document which invites the general public for subscription
of securities (shares or debentures).
What are Debentures? Debentures are securities issued by a company to borrow money. They are
debt instruments and include bonds and term finance certificates.
What is:
1. Pledge It is the bailment of goods as a security for a debt. Goods are physically
transferred to the lender.
2. Mortgage It is an interest created on property of a borrower as security. The property
is not physically transferred but title documents are transferred to the
lender.
3. Charge It is a kind of security for a debt in which neither the property nor its title
documents are transferred to the lender.
What is a General Meeting? A general meeting is a meeting of those shareholders who are entitled to
attend and vote.
What is a Statutory Meeting? It is the first general meeting of a public company in which members approve
statutory report and discuss matters relating to formation of the company.
It should be held within 9 months of incorporation or 180 days from
commencement of business, whichever is earlier.
What is a Statutory Report? It is an indicative of financial startup of a company. It includes matters such
as:
- Number of shares allotted and cash received
- Summary of receipts and payments
- Particulars of directors, chief executive, auditors and legal advisors
- Overview of company’s affairs and its business plan
What is an Annual General Meeting? Every company holds a general meeting every year in which members discuss
ordinary business. This is an AGM.
Ordinary business includes consideration of Financial Statements, Directors
Report, Audit Report, approval of dividend, appointment of directors and
auditors.
When is an AGM conducted? Firm AGM is conducted within 16 months from date of incorporation and
subsequent AGMs are conducted within 120 days from the close of financial
year.
What is an Extraordinary General A company may hold a general meeting to discuss special business at any
Meeting? time during the year. This is an EOGM.
Special business includes alterations of MOA and AOA, Investments in
associates and removal of Chief Executive.
Quorum of a General Meeting of a:
1. Listed Company 10 members with 25% voting powers.
2. Unlisted Company 2 members with 25% voting powers.
3. Other companies As per their Articles of Association.
Minimum number of Directors in a:
1. Single Member Company One
2. Private Company Two
3. Unlisted Company Three
4. Listed Company Seven
How are Directors appointed? The first directors are appointed by subscribers to the Memorandum of
Association.
Subsequent directors are appointed by members in the general meetings.
In case of a casual vacancies the existing directors have to appoint a director
within 90 days.
What is the Tenure of Directors? The first directors hold office till the first AGM.
Subsequent directors hold office for a period of 3 years.
Directors appointed to fill casual vacancies hold office for the remainder of
the term of outgoing directors.
What are the procedures of 1. Directors of the company fix the number of directors to be appointed at
appointing directors in the General least 35 days before the General Meeting.
Meetings? 2. A notice is sent to the members for a general meeting at least 21 days
before the date of such meeting. The notice must include the number of
directors to be elected and the names of retiring directors.
3. Persons seeking to contest in the elections may file a notice in writing at
least 14 days before the general meeting.
4. All such notices are sent to the members and published in newspapers
(Daily English and Urdu with wide circulation) at least 7 days before the
meeting.
5. Directors are elected unopposed in case the number of candidates is
equal or less than the fixed number. If not, a poll for election is
conducted.
 6. Every member shall have total votes equal to:
Number of Shares X Number of directors to be elected
Candidates with the highest votes are declared as elected until the fixed
number of directors to be elected is reached.
What is the Quorum of a Board For a listed company the quorum is one-third of the total directors or 4,
Meeting? whichever is higher. For any other companies the quorum is as per the
Articles of Association.
What is the Frequency of Board The board of a public company shall meet at least once in each quarter of a
Meetings? year.
What is a Chief Executive? A chief executive is an individual who is given whole or substantial powers of
management of affairs of a company, subject to control and directions of the
directors. A chief executive is appointed by the directors.
What is an Independent Director? It is a director who is not involved in executive management of a company.
Such a director is expected to give an objective view in decision making of
the board.
What is an Associated Company? Associated Company means any legal entity of which a person or company
has direct or indirect control by:
- Common shareholding of 20% or more
- Common management/control
- Management of a Modaraba
What is Dividend? What are its Dividend is any payment by a company to its shareholders out of its
types? distributable profits.
Types of Dividends:
1. Interim Dividend: Paid before the year end. Approved/declared by
directors
2. Final Dividend: Paid after the year end. Proposed by directors and
approved by shareholders.
 TAXATION
What is Tax? Tax is a collection of a share of a person’s income by a government under
authority of law.
What is Direct Tax? A tax paid directly to the government by the person on which it was
imposed.
What is Indirect Tax? A tax levied on the production or consumption of goods and services.
What is Tax Avoidance? It is a legal use of the tax laws to one’s own advantage to reduce the
amount of tax payable.
What is Tax Evasion? It is an illegal practice of unlawfully avoiding payments of tax. It is an act of
intentional concealment of true state of affairs to tax authorities.
What is Minimum Tax Regime? Certain types of incomes are subject to minimum tax. The purpose is to
assure that a certain amount is paid by the tax payers regardless of their
taxable income. In this case tax is charged on the basis of turnover.
What is:
1. Normal Tax Year It is a period of 12 months ending on 30th June. It is denoted by the
calendar year in which the closing date falls.
2. Special Tax Year It is a period of 12 months different from the normal tax year. It is
denoted by the calendar year relevant to the normal tax year in which the
closing date falls.
3. Transitional Tax Year When a person changes their tax year, the period between the closing
date of last tax year prior to change and the opening date of the changed
tax year is known as a transitional tax year.
When are the following treated as a
Resident?
1. Individual An individual is a resident if he is:
- Present in Pakistan for an aggregate period of at least 183 days
- An employee of a Federal or Provincial Government
2. AOP An AOP is a resident if the control and management of its affairs is
situated wholly or partly in Pakistan at any time during the tax year.
3. Company A Company is a resident if:
- it is incorporated or formed under any law in force in Pakistan;
- the control and management of its affairs is situated wholly in
Pakistan any time during the tax year;
- it is a Provincial or Local Government.
What are the Heads of Income? 1. Income from Salary
2. Income from Business
3. Income from Property
4. Capital Gain
5. Income from Other Sources
What is a Capital Asset? Property of any kind held by a person, including jewelry, work of art,
antiques etc. but excluding:
- Stock-in-Trade
- Any property for which a depreciation/amortization deduction is
allowed under Income from Business
- Moveable property held for personal use
What is the tax treatment of a Limited An LLP is not treated as an AOP for tax purposes. Partners of an LLP are
Liability Partnership? taxed individually on their share from the profits of an LLP.
What is a Tax Credit? It is a type of concession that a taxpayer can subtract directly from the tax
payable.
 What are the Allowances available to a Allowances are available for the following:
person? 1. Zakat
2. Worker’s Welfare Fund
3. Worker’s Participation Fund
4. Profit on Debt
5. Educational expenses
6. Medical expenses
7. First year allowances on depreciation
What is a Wealth Statement? A Wealth statement is a statement of assets and liabilities of a person. It
includes:
1. All personal assets and liabilities of a person, his spouse, minor
children or other dependents
2. Any asset that is transferred by the person during the tax year
3. Total expenses incurred by the person, his spouse, minor children or
other dependents
4. The Reconciliation Statement of Wealth
Who is required to charge Sales Tax? Every person making taxable supplies is required to collect sales tax.
What is Input Tax? It is the tax paid by registered person on the taxable goods and services
purchased or acquired. This also includes the sales tax paid on imports.
What is Output Tax? It is the sales tax charged on the supply of goods or services on which
sales tax is leviable.

TAX RATES:

Corporate Tax Rate Tax Rate for Small Companies Tax Rate for Banking Companies
TY 2022 29% 21% 35%
TY 2023 and onwards 29% 20% 35%

FINANCIAL ACCOUNTING AND REPORTING

What is Accounting? Accounting is the process of recording financial transactions.

What is Matching Concept? Matching concept is an accounting concept which states that revenues
and their related expenses should be recognized in the same accounting
period they occur in.
What is Prudence Concept? It is an accounting concept that states that an entity must not overstate
its assets, revenues and profits, and must not understate its liabilities,
expenses and losses.
What is Going Concern? The going concern concept of accounting implies that the business entity
will continue its operations in the future and will not liquidate or be forced
to discontinue operations due to any reason.
What is an Asset? An asset is:
- a resource controlled by the entity;
- as a result of past events; and
- from which future economic benefits are expected to flow to the
entity.
What is Depreciation? The systematic allocation of the depreciable amount of an asset over its
useful life.
What is Impairment? An asset is said to be impaired when its recoverable amount is lower
than its carrying value.
What is NRV? Net realizable value is the value for which an asset can be sold, minus the
estimated costs of selling or discarding the asset.
What is Capital Expenditure? It is expenditure made to acquire or improve long term assets that are
used by the business for a number of years:
What is Revenue Expenditure? It is a short-term expenditure for operations in the current period.
What is Liability? A liability is:
 - a present obligation of an entity
- arising from past events
- the settlement of which is expected to result in an outflow of
resources that embody economic benefits.
What is Equity? Equity is the amount of capital invested in an entity. It represents the net
assets of the entity.
What is Negative Goodwill? When a company acquires another company or its assets for a
significantly lower price than its fair market value the balancing amount is
called negative goodwill. It is recorded as an income on date of
acquisition.
What is a Lease? A lease is an agreement to grant the right to use an asset for a specified
time against periodic rentals.
What is an Operating Lease? A lease that does not transfer substantially all the risks and rewards
incidental to ownership of an underlying asset.
What is a Finance Lease? A lease that transfers substantially all the risks and rewards incidental to
ownership of an underlying asset.
What is a Bad Debt? Bad debt refers to loans or outstanding balances owed that are no
longer deemed recoverable and must be written off.
What are the Five Steps for Revenue 1. Identify contract(s) with customer.
Recognition? 2. Identify separate performance obligations in the contract(s).
3. Determine the transaction price.
4. Allocate the transaction price between the performance obligations.
5. Recognize revenue as and when the performance obligations are
satisfied.

Muhammad Hamza Ayaz | Article-ship Interview Guide Link to Index

What is Deferred Tax? It is an accounting measure used to match the tax effects of transactions
with their accounting impact to produce less distorted results.
What is a Temporary Difference? It is the difference between the carrying amount of an asset/liability
within the Statement of Financial Position and its tax base.
Carrying Amount: As per IFRSs in Financial Statements
Tax Base: As per Tax Authorities
What is a Taxable Temporary A temporary difference that will yield amounts that are taxable in the
Difference? future when determining taxable profit or loss.
What is a Deferred Tax Liability? The amounts of income taxes payable in future periods in respect of
taxable temporary differences.
What is a Deductible Temporary A temporary difference that will yield amounts that are deductible in the
Difference? future when determining taxable profit or loss.
What is a Deferred Tax Asset? The amounts of income taxes recoverable in future periods in respect of
deductible temporary differences or unused tax losses and tax credits.
 ECONOMICS AND FINANCE
What is Finance? Finance is the management of money with the goal to increase wealth.
What is Capital? Capital is the wealth in a form of money or other assets held by a person or
organization.
What is Opportunity Cost? The cost of one economic decision expressed in terms of the next best
alternative foregone.
What is a:
1. Market Economy 1. An economic system in which production and prices are determined by
unrestricted competition between privately owned businesses.
2. Planned Economy 2. An economy in which production, investment, prices, and incomes are
determined centrally by the government.
3. Mixed Economy 3. An economic system combining private and state enterprise.
What is a Modaraba? Modaraba is a profit-sharing contractual arrangement between an investor and
a managing trustee.
What is a Giffen Good? A good where quantity demanded increases when price rises.
What is Price Elasticity of A measure of the extent of changes in the market demand for a good in
Demand? response to a change in price.
What are Economies of Scale? Factors which lead to the overall decrease in unit cost, as output increases.
These are usually costs which have similar characteristics to fixed costs, and can
be spread out amongst ever greater units, hence reducing the average cost.
What are Diseconomies of Factors which lead to the overall increase in unit cost, as output increases. These
Scale? are often a result of managers/staff losing control/motivation as
production gets greater.
What is a Monopoly? A market structure where there is just one firm supplying to the whole market.
What is Price Discrimination? The action of selling the same product to different groups of buyers at different
prices in order to maximise profits.
What is Collusion? Collusion is a non-competitive, secret, and sometimes illegal agreement
between rivals which attempts to disrupt the market's equilibrium. The aim is to
gain an unfair market advantage.
What is GDP? GDP stands for Gross Domestic Product. It is the total monetary value of all the
goods and services of a country produced and rendered within a specific period.
What is Inflation? A continuous increase in the general price level.
What is Deflation? A continuous fall in the general price level.
What is Economic Growth? Economic growth is a long-term expansion of a country’s production potential.
What is Fiscal Policy? Fiscal policy is government policy on taxation, spending and government
borrowing.
What is Monetary Policy? Monetary policy consists of the management of money supply and interest rates
to achieve macroeconomic objectives such as controlling inflation, consumption
and growth.
What is Balance of Payments? The balance of payments measures the financial transactions made
between consumers, businesses and the government in one country with
others.
What is a Capital Market? The financial market which is largely used to raise long-term finance and capital.
 MANAGERIAL ANALYSIS
What are the Environmental Factors? P – Political and legal factors
E – Economic factors
S – Social, cultural and demographic influences
T – Technological factors.
E – Ecological
L – Legal
What are Stakeholders? A stakeholder in an organization is a person who has an interest in what
the organization does, and who might therefore try to influence the
decisions and actions of the organization.
What is Outsourcing? Outsourcing is the business practice of hiring a party outside a company
to perform services and create goods.
What is a Virtual Company? It is an organization that uses computer and telecommunications
technologies to work routinely with outsourced employees or
contractors. It has no office, no substantial assets and a few full-time
employees.
What is Downsizing? Downsizing means the reduction in size of a business organization. It
means that its business activities are conducted by a smaller number of
people.
What is SWOT analysis? SWOT analysis is an analysis of strengths, weaknesses, opportunities and
threats. It is a simple but useful technique for analyzing strategic
position.
What are the Factors of Michael Porter’s 1. Threats from potential entrants
Five Forces Model? 2. Threats from substitute products or services
(Factors that determine 3. The bargaining power of suppliers
competitiveness) 4. The bargaining power of customers
5. Competitive rivalry within the industry or market.
What is a Value Chain? A value chain is a series of activities, each of which adds value. These
activities within and around an organization create a product or service.
What are Primary and Secondary Value Primary Value Chain activities: Secondary Value Chain activities:
Chain activities? 1. Inbound logistics 1. Purchasing
2. Operations 2. Technology support
3. Outbound Logistics 3. Corporate Services
4. Marketing and Sales 4. Human resource
5. Service
What is an Organization? An organization is a social arrangement for the controlled performance
of collective goals.
What is an Organizational Structure? An organizational structure is the formal arrangement within an
organization that defines how activities and tasks are formally divided
and how processes and information would flow within this structure.
What are the types of Organizational 1. Entrepreneurial – the entrepreneur is the sole decision maker
Structures? 2. Functional – Small to Medium Sized Organization – groups of people
performing similar tasks
3. Matrix – multiple commands systems - dual reporting relationships
4. Divisional – Large entities – Divisions of activities operating like a
standalone entity - Specific centralized tasks
What is a Team? A team is a group of people using shared resources in order to achieve
common goals.
What is a Workgroup? Workgroups are groups formed by individuals to perform a common
goal or promote similar thoughts and purpose.
What is Negotiation? A formal process that occurs when parties are trying to find a mutually
acceptable solution to a complex conflict.
What is an ERP? Enterprise resource planning (ERP) is a software that allows an
organization to use a system of integrated applications to manage the
business and automate many back-office functions related to
technology, services and human resources.
What is Corporate Social Responsibility? Corporate Social Responsibility is a management concept whereby
companies integrate social and environmental concerns in their business
operations and interactions with their stakeholders.
What is a Blockchain? It is a decentralized distributed ledger that records transactions between
two parties. It moves transactions from a centralized server-based
system to a transparent cryptographic network. The technology uses
peer-to-peer consensus to record and verify transactions, removing the
need for manual verification.
What are Economic Sanctions? Economic sanctions are commercial and financial penalties applied by
one or more countries against a targeted self-governing state, group, or
individual. They may be imposed due to economic circumstances as well
as a variety of political, military, and social issues.

CODE OF ETHICS FOR CHARTERED ACCOUNTANTS

Define:
1. Integrity A chartered accountant should be straight forward, honest and fair in his
professional dealings.
2. Objectivity A chartered accountant should not compromise his professional judgement
due to bias, undue influence or conflict of interests.
3. Confidentiality A chartered accountant acquiring confidential information should not:
i. Disclose such information to a third party
ii. Use the information for his or a third party’s personal
advantage
4. Professional Competence and A chartered accountant should attain and maintain professional knowledge
Due Care and skill at a required level to ensure clients receive a quality service.
Furthermore, he must act diligently with applicable standards and
requirements on timely basis.
5. Professional Behavior A chartered accountant should comply with relevant laws and regulations,
and avoid actions that may discredit the profession. He should always
behave with courtesy in professional dealings.
Define:
1. Self-Interest Threat A self-interest threat exists if the auditor holds a direct or indirect financial
interest in the company.
2. Self-Review Threat A self-review threat exists if the auditor is auditing his own work or work
that is done by others in the same firm.
3. Familiarity Threat It is a threat that an assurance team member will be too accepting of the
work of client because of a long or close relationship.
4. Intimidation Threat It is a threat that a chartered accountant will compromise his objectivity
due to threats and pressure of the client.
5. Advocacy Threat An advocacy threat exists if the auditor is involved in promoting the client
to the point where his objectivity is potentially compromised.