ramsha-hameed-audit-report (2).docx

Audit Internship Report

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Ramsha Hameed

2017-11-03118/28/2015

AUDIT INTERNSHIP RAMSHA HAMEED

Introduction

Grant Thornton Anjum Rehman (GTAR) is the Pakistan member of Grant Thornton

International, one of the world’s leading groups of independent audit, tax and advisory firms.

Grant Thornton International dates back to 1904, when Thornton & Thornton was formed in

Oxford, UK. In addition to providing domestic services, Thornton and Thornton also delivered

international audit services before the Second World War. In 1924, a senior accountant,

Alexander Richardson Grant established Alexander Grant and Co in Chicago, US. In 1979, Grant

Thornton became a global organization when the UK and US firms set up a new international

organization. The original member firms, including India, Singapore, Costa Rica and Jamaica

also remained a part of the global organization. Over several decades, as progress augmented,

new member firms from dozens of countries joined and in 1986, the UK and US firms changed

their name to Grant Thornton and they went international in 1997. Firms operate in 133 countries

in 521 offices worldwide. All Grant Thornton International members have a responsibility to

provide the same high quality service regardless of where they choose to do business. Each

member firm is an independent legal, financial and administrative entity, bound by the local laws

where each operates. They are locally owned, operated and managed and are liable to

themselves. They have established the International Business Center (IBC) which Grant

Thornton uses to service international work. These IBCs are locally owned and draw on local

and international expertise to ensure its clientele receives top of the line services, wherever they

are.

Founded in 1986, Grant Thornton Anjum Rehman (GTAR) has increasingly expanded into a

professional services’ organization. Their professional and industrial knowledge, experiences


and resources help them to provide quality services to their clientele. These IBCs are located in

all commercial centers worldwide and they act as a gateway to the international service

capabilities of all Grant Thornton firms. Their core services include:

Tax

Audit and assurance

To take over and maintain financial and statutory records, so as to help clients focus on

other parts of the business.

Services provided by Grant Thornton International include:

Advisory

Assurance

Tax

Corporate accounting and outsourcing

Major clients of GTAR for external audit include: CDC, East West Insurance Limited, Searle

Pharma. The list of clients for internal audit include: Cyan, Lakson Investments, Jahangir

Siddiqui and Co. Ltd: and Gul Ahmed. GTAR specializes in providing audit services to different

industries, to verify their financial statements and their operational efficiency. They concentrate

on specific sectors for both internal as well as internal audit such as manufacturing, non-banking

Financial Companies, Development Financial Institution and Insurance.

The client that GTAR assigned me was The Lakson Group of Companies and we were allotted to

conduct the internal audit for Lakson Investments for the quarter June 2015. The Lakson Group


is one of the largest and most well-diversified companies in Pakistan and has a wide range of

foreign affiliations that include Kraft foods, Colgate-Palmolive, Tetley Tea.

About the Client

The Lakson Group was founded by Mr. Hasan Ali Karabahi in 1954. Lakson’s portfolio consists

of detergents & soaps, investments, internet services & data networking, surgical instruments,

tea, toothpaste and textiles, and so on.

In 1984, it started as a licensed manufacturer of Colgate-Palmolive products in Pakistan and in

1990, Colgate-Palmolive Inc. (USA) joined as a 30% equity partner. Clover Pakistan ltd was

incorporated in 1986 and its listen on the Karachi Stock Exchange. It has a license arrangement

with Kraft Foods (USA) and markets and manufacture products under its name. Lakson Group

also established the Cyber.Net Internet services (PVT.) Ltd, the largest data network operator

and internet service provider in Pakistan. Furthermore, Lakson Business Solutions Ltd offers

web application development, software development, etc and has affiliations with IBM,

Microsoft and other software companies. In 2004, a joint venture was also formed between

Tetley UK & Lakson Group and caters to the masses that drink black tea in Pakistan.

Lakson Investments limited, licensed by the Securities and Exchange Commission of Pakistan,

provides asset management and investment advisory services under the Non Banking Financial

Companies Rules and Notified Entities Regulations. It manages six unique funds, three of which

are domestic funds and the rest international, which makes it the only Asset management

Company in Pakistan to accomplish this. The local funds include: Lakson Equity Fund (LEF),

the Lakson Money Market Fund (LMMF), the Lakson Income Fund (LIF) and its international


funds include: Lakson Asset Allocation Emerging Markets Fund (LAAEMF), the Lakson Asset

Allocation Developed Markets Fund (LAADMF) and the Lakson Asset Allocation Global

Commodities Fund (LAAGCF).

Lakson Investments is categorized as a stable AMC Company. According to Mutual Fund

associations of Pakistan under NAV returns performance report, Lakson Investment competes

well with same industry competitors according to its growth and investment in Pakistan.

Although still growing, it has made great performance measures especially under the Money

Market Fund where LI makes an annualized return of 8.10 while the highest is 10.11 of PICIC

Fund. Similarly, under income fund and Equity fund, LI’s performance is stable while showing a

decreasing annualized return in the International funds as the movement of cash has been

deteriorated recently under international fund. When discussed with management for the reason,

it was known that clients prefer to invest locally for a high risk high return fund like equity or

other domestic funds as compared to international funds.

Lakson Investment has been recently upgraded to “AM2-“ from “AM3+” from The Pakistan

Credit Rating Agency Program with its high investment standards and performance based on

benchmarks of similar industry competitors. Lakson Investments has captured a reasonable size

of the market within a short duration of time even though it is still a growing company. LI has

developed a good infrastructure to cater to its clients and it provides good services whilst

incorporating feedback from its clients. The establishment of sound quality systems and

processes with a strengthened investor services platform distinguishes LI from other AMCs. LI

has also upgraded its technology and is in the process of integration and up-scaling of its

business platform. Before any decision, the research teams develops a research model portfolio

(RMA) after detailed scenario analysis and evaluations of specific industries where it intends to


invest and, parallel to the fund manager’s portfolios, provide challenges to the investment

committee members of all the risk involved and its growth before finalizing on a decision.

The AMC is an unlisted public company and funds are open-ended and listed on the Lahore

Stock Exchange. The funds-wise holding include The Lakson Income fund of Rs.119 million,

The Lakson Money Market Fund of Rs.250 million, the Lakson Equity Fund of Rs.101 million

and The Lakson Asset Allocation Global Commodities of Rs.104 million. The Lakson Group has

over 25% holding in funds and its associates include companies like Tetley, Mc Donald’s, Titan

and many others. Moreover, the open-ended funds do not book any expenses; it is done by the

AMC. Major expenses of the AMC include salaries and benefits, advertisement and business

promotions, and depreciation.

Audit Approach

A firm’s audit methodology or the specific sets of processes and procedures used to assess a

company’s financial and business risk differs from client to client. The scope of work for Lakson

Investments (LI), for the internal audit of areas, encompasses of the following:

obtaining an understanding of the business cycle including end-to-end processes;

performing walkthrough of the transactions including identification of potential risks relating

to the processes along with any controls established to mitigate those risks;


performing a design gap analysis to identify deficiencies in the existing processes and gaps

therein along with non-mitigated risks;

selecting a sample of transactions and checking whether the control procedures established

by the Company have been duly applied and yielded effective and efficient results; and

Identifying, assessing and communicating deficiencies in the internal control system of the

Company and recommending solutions for improvements.

Since we were conducting the internal audit for the quarter ended June 2015, there was no need

to start the audit process from the beginning. Risks and controls need not be identified; however,

they were updated through inquiry only.

GTAR sent an audit team of six members to conduct the internal audit of Lakson Investments

(LI) for the quarter ended June, 2015. The client gave us access to a personal computer and a

WIFI router. The team brought their own personal laptops due to lack of computers provided by

the client. No other use of information technology was needed as most of the work done was on

paper back and the client gave access to the data through the server. Major drawbacks observed

were that the client failed to provide additional laptops or PCs and the team, which comprised of

six individuals, had to take turns to complete their work. This caused a lot of time wastage.

Secondly, access to the internet was limited and the team felt handicapped since they weren’t

able to use basic services like emails, access to the stock exchange website, and other such

websites that needed constant access. The internet was also shared with auditors of other firms


and this cause a hassle. Lastly, the client failed to provide data on time and was storing data on

the server in parts only, leading to inefficiency and time wastage.

The annual internal audit plan (AIAP) is prepared to determine the time schedules of quarterly

internal audits of Lakson Investments Limited (AMC) and Funds under its management (Lakson

Money Market Fund, Lakson Income Fund, Lakson Equity Fund, Lakson Asset Allocation

Emerging Markets Fund, Lakson Asset Allocation Developed Markets Fund and Lakson Asset

Allocation Global Commodities Fund) for the year that is ending. The audit plan also consists of a

time schedule that show the tentative period that is to be covered for each quarterly audit. Prior to the

preparation of AIAP, the team obtains an understanding of all operational and supporting

activities of the AMC and funds under its management and identifies the risks associated

therewith. The risks so identified have to then be assessed with a view to determine the high,

moderate and low risk activities of the AMC and funds under its management. The audit

emphasis to each activity of the AMC and Funds under its management has been given in

accordance with its assessed risk in the following manner:

High risk activities In each quarter

Moderate risk activities In each alternate quarter

Low risk activities Once in a year or once in every two years

The risk assessment of the AMC and Funds under its management has to be carried out with a

view to ensure that audit resources are allocated to important areas and audits are completed

expeditiously. The audit scope also covers a review of overall internal control system of the


AMC and Funds under its management which the team performs using the internationally

accepted best practice on internal controls, i.e. “Integrated Framework on Internal Control”

issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. It

broadly defines internal control as a process affected by an entity’s Board of Directors,

management or other personnel, designed to provide reasonable assurance regarding the

achievement of objectives in the following categories:

Effectiveness and efficiency of operations

Reliability of financial reporting

Compliance with applicable laws and regulations

Similarly, if any risks that the team comes across and which have not been identified and

covered in the audit plan but are material and pervasive, then these risks require a change in

either the scope of the audit or the time schedule.

The draft audit findings will be discussed with management of the AMC and their comments will

be obtained in writing before finalizing the report for submission to the Audit Committee. The

internal audit report will be based on the following three characteristics:

Classification/Overall Evaluation

Business Importance Code/Rating

COSO Objectives

1. Classification/Overall Evaluation: After evaluating audit findings on the assessed risks,

the internal audit report will be classified in the following manner.


Controlled: The control structure is strong but may include some improvement opportunities.

Satisfactory: The control structure is adequate and there are no important control deficiencies,

but there are a number of recommendations that should be addressed.

Requires Improvement: The control structure contains one or more important control

deficiencies, or the number of recommendations is considered to be high. The deficiencies

should be addressed immediately. The results of the audit are brought to the attention of upper

management to ensure that adequate resources are provided to address the situation on a timely

basis.

Unsatisfactory: The control structure is unacceptable with major control deficiencies. Immediate

action on the part of upper management to address critical weaknesses is required.

2. Audit issue risk rating

Each audit finding will be assigned a priority rating to establish its criticality. High: These issues

involve a substantial and direct exposure to loss of assets, loss of revenue and/or substantially

negative impact on operating efficiency and/or effectiveness. Medium: These issues involve

moderate exposure to loss of assets or revenue and/or negative impact on operating efficiency

and/or effectiveness. Low: These issues do not appear to have a substantially negative impact on

operations or the control environment, but have been brought to management's attention for

information purposes and consideration.

3. Risk category

Each audit finding in the report will be evaluated on one of the following two components of

control effectiveness:


Design effectiveness Refers to whether controls are properly designed to achieve

control objectives if they operate as defined.

Operating effectiveness Refers to whether controls consistently operate as designed.

Follow-up for implementation of audit recommendations that are agreed by management will be

carried out in each alternate quarterly audit. Afterwards, a detailed list is made to identify risks in

key areas. In the case of Lakson Investments, the list includes: Investments and placements, fees

and remunerations, Unit holder funds, Net asset Value calculation, Compliances with applicable

Laws, Rules and Regulations, risk and management, cash and bank balances, taxation and so on.

When these risks are identified in detail, a table is made that ensures that the specific risks pass

though their related controls. For example, I was assigned to check the controls for Cash and

Bank. The risks identified were:

Bank reconciliation statements may not be properly and timely prepared.

Long outstanding reconciling items may not be followed up on a timely basis.

Lack of segregation of duties between person doing reconciliation and signing cheque /

handling /recording cash.

After identification, these risks under the head of Cash and Bank, along with other heads, were

put under the “Areas coverage Matrix” table that shows the coverage of activities of the four

quarters with respect to AMC and funds under its management. Moreover, a time schedule table

is prepared that shows the time it took for each team to complete the internal audit work for the

quarter which includes planning days, field work, number of working days for field work,


reporting and, lastly, the submission of draft report. A memo is sent to the client, which includes

the detail of all the data that is required by the auditor to conduct his audit. This data consists of

all the detailed information in the form of files, transaction invoices, data sheets, etc that are

needed to check the degree of controls placed on the risks indentified and whether they are

adequate. This memo was discussed with LI at the beginning of the period as well as was the

overall process of the audit. The audit team then assigns different heads to its members and work

is divided up. Cash and Bank was the main head I was assigned during my internship period. The

client provided us with the following details for the internal audit activity related to cash/bank:

List of bank accounts opened and closed during the period along with nature and reason

for opening such accounts.

List of authorized signatories of respective banks.

Bank reconciliations along with bank statements of all bank accounts.

Evidence of surprise cash count, if any.

After the client provided all the data, I started my work by checking if any new bank accounts

had been opened in the quarter ending June. This was done by checking the Board meeting

minutes of March, April, and May to see if the board had approved the opening of any new bank

accounts for Lakson Investments (LI). It was concluded that no new accounts had been opened;

however, a new branch account of Askari Bank Ltd had been opened in May 2015. The next step

was to check the general ledger accounts of each fund separately and start work on checking

controls placed. This was done by taking samples of accounts from each fund and checking

controls placed on them separately. Each fund’s general ledger was checked for the month ended

June, and under the Profit & Loss sharing accounts, the end balances of each account was

checked. Samples were drawn to check for specific controls. Samples were randomly drawn


from accounts that constituted of a high balance. Test of details was used when sampling

accounts for funds. For example, taking the Lakson Income Fund and taking samples of four or

five accounts, depending on the total accounts in that fund, and choosing those banks that

displayed the highest closing balances. The next step was to make an excel sheet, where each

sheet was made for each of the six funds. Samples with the highest amounts were taken and

entered into the sheet. Afterwards, each amount was checked and tallied with the amounts in the

bank reconciliation statements and the monthly ending balances of general ledgers of each

account. Controls placed on the bank statements and general ledger was checked by verifying the

signatures of the individuals who prepared, checked and verified these documents. Any

discrepancies or errors found were noted and entered into the excel sheet. Later, these were

discussed with the finance department and compliance officer. Another control checked was

whether there were any outstanding cheques or unpresented cheques whose maturity was greater

than six months. There were some statements that had no signatures on them, neither of the

preparer nor of the checker. Another error discovered was of an amount that had been incorrectly

entered into the bank statements. Both of these errors were shown and discussed with the finance

manager and compliance officer and entered into the auditor’s final report.

It should be noted that the Funds are required to invest certain percentage of their Net Assets in

cash and near cash instruments. According to the circular no. 3/2015:

“At least 25% of the Net assets shall be invested in cash and near cash instruments. This

includes cash in bank account (excluding TDR’s) and treasury bills not exceeding 90 days

maturity. However income schemes which invest at least 70% of their net assets in government

securities in accordance with the investment policy stipulated in their constitutive document shall


maintain at least 10% of the Net assets in cash and near cash instruments which include cash in

bank (excluding TDR’s) and treasury bills not excluding 90 days maturity.”

However, while ensuring compliance with laws, regulations and circulars, we observed that the

minimum investment required in cash and near cash instruments as provided in the circular was

not maintained on April 08, 2015 which was 5.88%. This implies that it is a non-compliance of

the above mentioned circular no. 3/2015. Also, it may attract penalties to be stipulated by SECP.

It was recommended that the management should ensure compliance with the circulars and

notifications issued by SECP to avoid penalties. Based on these findings, the client also

commented and stated that the management changed its strategy for a short period of time and

reduced the exposure in cash and cash equivalent. However; the matter was clarified by SECP

and thus the management stopped following the change in strategy. The overall work done and

performed on cash and bank is best summed up as:

Inquired whether the policies and procedures have been formulated that address the

matters of opening and closing of bank accounts, bank reconciliations, petty cash,

surprise cash counts;

Inquired about the changes in existing process flows and the controls thereon;

Performed TOC on bank payments and receipts, petty cash expenses and replenishment,

and bank reconciliations to ensure the following:

o Payments and receipts (bank and petty cash) have been made as per the policies and

procedures established by the Company;

o Petty cash is replenished after a specific limit, if any; and


o the petty cash as per the records is reconciled with the physical cash available.

o Performed analytical procedures over the Cash and Bank balances.

Lessons learned

Management skills:

The team I was assigned to displayed a very laid back attitude. I would say that the supervisor in

charge of the team had a laissez-free management style, where after delegating all the work, he

left it up to the team members to do their jobs, whichever way they preferred, as long as the

deadline was met. It should also be noted that the head in-charge was very skilled at his work

and very interactive and helpful. I learnt that interaction and an extroverted personality were

needed, since the supervisor had to constantly monitor the work of his subordinates and clear any

confusion that the members had.

Interpersonal skills:

Since an audit requires a great deal of interaction, my supervisor had advised me on how to

approach the client to discuss any queries or problems I would face. Interacting with the client

was a daily business so heed was taken when approaching and communicating with them. There

were instances when the client was being unreasonable and on one such occasion, a member

from the client’s finance department held me responsible, on false premises, for losing a file.

However, I learned how to deal with false accusations and continued my work. Afterwards, the

individual in-charge of those files refused to give me any more documents and told me to

complete my work in his office. Even though it was completely unfair and my team realized this,


I learned the art of compromise from the above situation. It was later found that the missing file

was the fault of another firm’s auditors who were conducting the external audit of LI.

Presentation skills:

Looking at the work done by my team members, I learned that accurate documentation is

required with a suitable format to represent all the data and results found during the audit work

period. I made the document on Cash and Bank and my fellow team member checked it thrice to

find any errors before conducting my review. Care was also needed when entering the amounts

from the client’s documents to our own files as it were to go in our permanent records. We were

also required to dress formally as we represented GTAR to the client.

Organization behavior:

It should be noted that I came into contact with the client and my team members only, not with

GTAR or its operations. The overall workplace attitude at the client’s firm was quite reserved as

their employees considered auditors to be ‘outsiders’, be it my own team or other firms’ auditors.

It was also noted that the client displayed a rather laid-back attitude and were slow in delivering

the required data to us which is the reason why our audit work was delayed by two weeks. What

was to end at the end of the month of July was actually dragged till mid of august. My team was

highly interactive and encouraged me to ask questions. It was also a norm for us to have our

lunch together.

Time management skills:


The client failed to provide data on time, delaying it by two weeks after the memo which was

sent asking for access to server and documents. Due to this reason, we had no work for the first

two weeks and had to miss our deadline of 31st July. The audit work was completed in the last

two weeks when all the data had been released. Work was also done in a hassle but quality was

not compromised. Punctuality was not a primary goal as long as work was done efficiently and

on time.


Work cited:

Gtpak.com,. 'Grant Thornton International'. N.p., 2015. Web. 28 Aug. 2015.

ramsha-hameed-audit-report (2).docx

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