Introduction about the Company:
The company which we have selected for our project is Haleeb foods ltd. It was incorporated on 9th April 1984 and is one of the fastest growing packaged food companies in Pakistan. The company started commercial production in 1987. It has two production facilities in Bhaipheru and Rahim yar Khan, initially it stated with small market share in liquid milk category, but due to consistently superior performance and high quality standards, it has tapped significant share in liquid packaged milk category and became a market leader.
Haleeb foods believe in bringing innovative ideas and play a model role that follows Islamic values. The brand portfolio of Haleeb includes Haleeb, Candia, and Tropico which covers a chain of products like Haleeb milk, Candia milk, Tropico Juices, Haleeb Tea max, Haleeb Good day and Candia Candy up. The company claims to be one of the very few local corporate, which is truly following the model adopted by globally successful corporations, with distinct roles for shareholders and the management team.
Mission Statement of Haleeb:
Build branded food business to improve quality of life by offering tasty, affordable and highly nutritional products to our customers while maximizing stakeholder’s value.
Vision Statement of Haleeb:
Most Innovative and Fastest growing food Company offering products enjoyed in "Every home every day"
Currently this company is performing in two types of business i.e.
Dairy business (i.e. it is producing tetra pack milk, custard etc)
Production business (i.e. it is producing juices etc)
As the dairy industry is exempt from taxes so this company file tax on purchases and products that are other than dairy.
This company is following income tax ordinance 2001 in order to calculate tax which comes under the direct taxation.
There are two types of supplies i.e.
Company mostly deals with income tax and sales tax on day to day basis. This company is currently paying a monthly sales tax of 16% which comes under indirect taxation (which is the second largest source of revenue for the government) and the tax which company pays on purchases and the sales tax that it gets on sales is the output tax and in case of exemption if there is input tax than the company cannot claim and in the case of taxable the company can claim and this difference is recorded in files on monthly basis.
The company than compares the input and the out put tax. If input tax is greater then the output tax than they refund claim and if out put tax is greater than the input tax than they pay.
Company files income tax return annually under Section 120 to FBR and the company has to follow a certain procedure in order to compute tax for a particular year.
Calculation of Taxable Income:
Since Haleeb foods Ltd is the business of production they shall be chargeable to tax under the head of income from business. Haleeb foods is declared as a company under the Companies Ordinance 1984 and is considered to be a body corporate formed by law in force.
The Company is currently practicing accrual basis of accounting and its net income/loss as per accrual basis is calculated to be Rs (132,113)/- (As per 2008 statements).
Haleeb Foods maintains there accounting records for a period of five years after the end of the tax year to which it relate.
Companies do not calculate tax on accounting profit. Tax is always calculated on taxable profit which is different from accounting profit. According to income tax laws we have to add and subtract few things from accounting profit in order to arrive at taxable profit. For example there are certain expenses that have been included in accounting profit but are not allowed by Tax law. There are many things that have to adjust but the major focus in on two adjustments:
1: For example in accounting profit rate of depreciation of fixed assets is different than the rate of profit in taxable profit, so accounting depreciation is added back and subtracted according to the rate that is allowed in taxable profit. It means calculation schedule is different for both. Similarly amortization rule is also different and calculation schedule of gain on disposal is also different.
2: For example companies pay lease on rental basis and it is added in company’s assets as lease assets. On the accounting side they charge total depreciation on leased assets in order to calculate accounting profit. But tax laws allow the company to charge
depreciation on rental basis. So in order to calculate accounting profit financial charges are added in financial statements. In order to calculate taxable profit financial charges on lease are added back and lease rentals paid are subtracted.
Reconciliation of Accounting and Taxable Profit:
Loss for the year as per accounts before tax- deferred tax working
amortization of computer software as per accounts
Gain on disposal of leased assets- As per tax rules
Gain on disposal of Fixed assets- As per tax rules
Financial chargers on lease
Depreciation as per tax rules
Amortization of computer software as tax law
Accounting gain on disposal of fixed assets
Lease rentals paid
Less: Workers welfare funds
Taxable loss to be carried forward
Tax issues Faced by the Company:
There are two types of issues faced by the company. They can be divided into two parts:
The internal issues involve the issues inside the company. Internally the main issue that the company has to face is between the tax manager and the other managers of the company. As the tax manager is answerable to the FBR so he has to go according to the certain laws, rules and regulations. For example if sales tax are higher than the management would want to reduce them, but the tax manager would not let them do that as it is against the laws.
Similarly if the tax management says that it wants to show higher profit so that different banks could give them loans than again an issue between the tax manager and the management arises because the tax manager will not let them show higher profits as than the company would have to pay higher taxes. Same is the case in the salaries of the employees. If management asks not to cut the taxes from the salaries of its employees and let the employee have more salary than again tax manager would go against that because it is against the law.
So basically both the management and the tax manager are thinking in favor of the company but in totally different ways because of which the issue between them takes place.
The external issues are the issues that the company is facing outside. The company had filed an appeal against the orders passed by the Commissioner of Income Tax for the assessment years 1997-98 and 1998-99. The commissioner vide his orders, upheld the add-backs aggregating Rs 1.535 million and Rs. 2.082 million made by the Assessing officer for the years 1997-98 and 1998-99. The hearing of the case is completed and the order is awaited.
There was an additional demand raised by the taxation officer under section 161 of the ordinance. There was additional tax that was being charged by the company. So the company against both the orders had filed appeal before the commissioner. Who rejected the appeal and confirmed the order of taxation officer. Now the company has gone against the order of the commissioner and has preferred an appeal before the income tax tribunal, which is still pending.
Types of Payments made by the Company:
The following mentioned are the major types of payments that are made by the company:
They make payments to the suppliers. Before paying they see the nature of the supply and they deduct the tax on that behalf and then they deposit the payments. On goods 3.5% of the tax is deducted while on services 6% of the tax is deducted. The company first deducts the amount and then pays to the suppliers. The company sends the deducted amount to the government treasury to regulate the economy.
The also make rental payments and there is no deduction of taxes on the rental payments.
They make mark up payments
They make payments on the supply of goods and services
Tax Calculation of one Employee of Haleeb Foods:
We are calculating the amount of tax payable of Mr. Shahzad Butt, Who is currently a middle manager at Haleeb foods. His monthly salary is 20,400.
Medical Expense Reimbursement
Total Tax Liability:
Tax rate on acquisition of Building:
Currently Haleeb foods is paying 5% of tax on the building that they have acquired on rent. It is in accordance with the law.
Status of Sales Tax:
As the current operations of the company is divided into two segments i.e.:
Other production business
As dairy business is exempt from tax, and the rate that is applicable is zero so Haleeb foods Ltd does not have to pay tax on it dairy products like tetra pack milk, custard etc but the company has to show it in its calculation. Where as on product such as juice they have to pay 16% of sales tax.
What is Auditing?
The word audit has been defined by many distinguished authors and every one of them has attempted to highlight one aspect or the other. Definitions of the word audit given by authorities on the subject are as follows:
"An audit may said to be such an examination of the books , accounts and vouchers of the business, which may enable the auditor to satisfy himself whether the balance sheet is properly drawn up so as to give a true and fair view of the state of affairs of the business, and that the profit and loss account gives a true and fair view of the profit and loss for the financial period , according to the best of his information and the explanations given to him as shown by the books ; and if not , in what respect he is not satisfied"
"An audit is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they purport to relate."
Audit Matters of the Company:
Basically the reason of having auditors in the company is for proper check and balance. As the directors do not rely on the department heads for their reports, instead they want a more authentic report which they get from the auditors of the company.
There are two types of auditing that is being done:
Under the internal auditing there are two jobs that the auditors of the company perform:
Special Assignment Auditing
In concurrent auditing the auditors look at the daily matters of the company. The matters like daily entries, Business transactions, check and balance etc. For evidence the internal auditors want the financial authority policies of the company. This means that how much strength does one manager of the company has.
For Example if a check of 10 million is to be issued to suppliers and according to the company’s policy a check of less than or equal to 10 million can be signed by the managers of the company and if it is greater than 10 million than it should be signed by the general manager of the company. And the duty of the auditor is to monitor that these checks are issued accordingly.
Other example of concurrent auditing is when a company does sales; some of the stocks are near its expiration date. So in order to sell those stocks the prices of the stocks are declined. The duty of the auditors is to see that why the price has been reduced. So they check it, gain approval from the directors and than they the stocks to be sold at the lower price.
In Special Assignment Auditing the internal auditors are assigned with an assignment. These assignments are assigned when the management sees issues in a department. For example if receivables exceed than a certain limit than it is dangerous for the company so the company hires special people to find out the reasons for it. The reasons for this could be that the payments are not recorded on time, or when cash is not received against a supply. So to solve these kinds of issues the company hires people to over come that issue.
Different tasks of the company have different strategy and every strategy have a different plan. For example if the audit needs to make in the sales department than the auditor should have all the knowledge of the sales. He should have knowledge like how the sales are generated, How do they receive orders from the customers and what is the criteria for shipment and what is the agreement of customer to receive cash or credit terms.
For example Makro has a credit term of 15 days, so first they have to make payments to the company and then after 15 days they get the supply. The auditor should have the hierarchy about what people are doing. He should also know the over all strategies, verification, vouching (vouching is basically when a transaction is done.)
The auditors see the financial authority policies. They see if the managers signs are enough or the signs of the GM are also required. They also check the upper internal control on the company’s transactions.
It follows three types of approaches to perform an audit:
Financial Statement --determines (a) whether an audited agency's financial statements present fairly the financial position, results of operations and cash flows or changes in financial position in accordance with generally accepted accounting principles or another comprehensive basis of accounting; and (b) whether the entity has complied with laws and regulations that may have a material effect on the financial statements.
Financial-Related -- determines (a) whether financial reports and related items such as elements, accounts or funds are fairly presented, (b) whether financial information is presented in accordance with established or stated criteria; and (c) whether the entity has adhered to specific financial compliance requirements.
Economy and Efficiency
Determines (a) whether the entity is acquiring, protecting and using its resources (such as personnel, property and space) economically and efficiently; (b) the causes of inefficiencies or uneconomical practices; and (c) whether the entity has complied with laws and regulations pertaining to economy and efficiency.
Determines (a) whether the desired results or benefits that the Legislature or other authorizing bodies establish are being achieved; and (b) the effectiveness of organizations, programs, activities or functions, and whether the entity has complied with laws and regulations applicable to the program.
Generally undertaken with a limited scope, these audits are designed to obtain information about a specific activity or action that has occurred or is contemplated
As far as companies are concerned, internal audit is not required by ISA or according to ordinance 1984 i.e. they do not force a company to perform an internal; audit. So the overall force is on the external audit. But in case of institutions such as banks, internal audit is important and under blame, if external auditor finds some problem. But in companies internal audit is not to be blamed if something wrong happens because companies always contain different departments which are under control of their heads. But still good companies try to perform an internal audit so that external audit issues are minimized. So the auditor performs the following functions:
An auditor always keeps an eye on the working and set up of the company.
An auditor duty is to pin point the problem that may occur in the future and to make the management aware of it.
An auditor also tries to make sure that overall working of the company should be right i.e. it should follow all the rules and regulations.
It also keeps an eye that every single person acts as a single head of account and should do what that person is required to do.
So according to auditor’s point of view these factors help the company to minimize external audit issues.
Audit Issues faced by the Company:
There are a lot of issues faced by an auditor against management of the company. So most of the time there is contradiction in the views of management and the auditor. As management always thinks that 2+2 should be equal to 22, mean to say that they must make much more what they should expect from the resources. But in the view of auditor 2+ should be equal to 4 only because for the auditor rules and regulation are more important than they self benefit of the company. But in spite of the difference in views most of the times the management has to agree with the auditor’s point of view. So some of the issues faced by an auditor are listed below:
Some times company wants to make profit but in actual the company cannot be in that position to earn what it wants to earn. As it may want to show higher profit i9n its statements, but actually that figure of profit does not reflect a true picture of where the company stands. Company do so in order to get more loans from banks and the auditor does not agree to show higher profit as he thinks that the company will have to pay greater tax which is not good for the company.
An auditor does not allow the management to take any step without proper approval either from higher management or from director of the company. Auditor always insists that all steps should be according to the financial policy. So the auditor does not let the company take any step without the approval and if the management takes any step then the issue arises.
Sometimes company wants to show lower profit instead of high profit so that it has to pay less dividends. Such types of activities are some times done by those companies which have a large base of share holders. So this fact may also be a reason of conflict between the manager and the auditor of the company.
Some times Haleeb foods may require its auditor to how its fixed assets on the market value. Which in turn increase profits and may help the company to obtain loans from banks easily. But by law fixed assets should be recorded on their cost value.
An auditor may face issues related to quality and quantity of the products i.e. quality should be up to the mark and there should be over stock of product which would increase the storage cost only. So over stock and issue on quality cannot be compromised by an auditor.
Another issue is that an auditor always keeps an eye on the banking issues faced by the company for example if credit risk raises an auditor cannot allow the company to take more debt. Similarly an auditor also keeps check on other risks faced by the company. Such as default risk, business risk etc.
Important Financial Ratios of Haleeb Foods Ltd:
Return on Assets (ROA)
Net income/total Assets
ROA represents return on total Assets. ROA in 2008 is decreasing as compared to 2007 because NI of the company was decreasing in 2008 where as total assets were increasing resulting in lower ROA for 2008.
ROA is also written as:
ROA= Net Margin*Asset Utilization
ROA in 2008 is decreasing because net margin is decreasing from 2.12% in 2007 (1.46%) in 2008. Similarly asset utilization is also falling in 2008, resulting in negative ROA.
Return on Equity (ROE)
Net income/total Equity
This ratio reflects the returns earned by the share holders on their investment. This Ratio is decreasing in 2008 as compared to 2007. This is because net income has decreased and equity has increased in 2008 resulting in lower ROE.
Similarly ROA is also decreasing in 2008 resulting in lower ROE in 2008 as compared to 2007.
Capital Adequacy Ratio:
Total Equity/Total Assets
This ratio is falling in 2008 because total equity in 2008 is decreasing but assets were increasing in 2008. So net result is decrease in this ratio in 2008.
Total Debt=Borrowing from Fin Ins+ Long term Finances
This ratio shows the percentage of debt against equity. It is bad if this ratio is increasing because it shows that the company is taking more debt. In 2008 this ratio is increasing because of the drastic increase in debt primarily short term finances. SO this ratio is increasing.
This ratio is decreasing in 2008 because earning before tax was negative also the financial charges were increasing but fall in EBIT was higher and this ratio is negative.
Cost-to-Total Net Revenue
Cost=admin, selling and other operating income
This ratio shows the percentage of non interest expense to total net revenue. This ratio is increasing in 2008. This means admin, selling and distribution expenses were increasing but net revenue was shrinking in 2008. So net result is increase in costs to total net revenue.
Gross Margin=Gross Profit/Sales
Gross margin tells whether how much profit is being earned from sales. The higher the ratio the better it is, but in the case of haleeb we can see that it has decreased from 11.30% to 12.74% which is not good.
Net Margin=Net income/Sales
It tells us about how much margin we have for sales higher it is the more better it is in terms of profitability. But in the case of Haleeb we can see that the net margin has declined in 2008 and is giving a negative figure which is not good.
Current Ratio=Current Assets/Current Liabilities
The current ratio is greater then 1 and it significantly shows that the company has strong asset background for one rupee of liability the company has 1.01 rupees of asset which is financially sound. But it is declining over time from 1.13 to 1.01 which is not good.
Quick Ratio=Current Assets-dep-Inv/Current Liabilities
Information/report provided by the management to auditors:
The requirements of auditors are different for different departments. For example in finance department they watch the accounts payable module, accounts receivable module, fixed assets module. The auditor does the audit on specific module demands. Those demands can be as follows:
Rights of employees meaning to say the rights of all the mangers, GM and CEO must be defined with the financial policy of the company.
While entering the transactions, they generate the entries, vouchers etc.
The company has 10 regions and on daily basis they get transactions from all the regions. So the auditor checks it and puts it in a soft ware, and the authentic evidence for the transaction that the auditor check is the deposit slip. Every thing should have proper documents and if the documents are not present than they issue claim.
The above mentioned documents were required by the internal auditors. Now documents that are required by the external auditors are as follows:
Financial statements of the company
Management provides the following documents to the auditor
Statements of banks
Statement of affair debt credit
Span of control
Exercise of power
Company discounts on purchases
Balance confirmation certificate from tetra pack Ltd directly addressed to the auditors.
Lawyer’s certificate regarding current status of pending litigations.
Board’s specific approval regarding bonus payable to managing diector
Authenticated certificate of transactions with the related parties during the year
Representation of letter duly signed by the Chief Executive
List of Documents Prepared by the Auditors:
Working papers are the connecting link between the client’s records and the audited accounts. These include all the evidence gathered by the auditor indicating what work has been done by him and the procedures he has followed in verifying a particular asset or a liability these provide a permanent historical record logically arrange in order, in which each item appears in the balance sheet. These also serve as a great guide to the staff to whom the work of audit has been assigned after the previous year audit. These would come to the help of the auditor in future in case the client files a suit against the auditor’s negligence.
How ever, the right of the auditor to retain the working papers must be distinguished from the right of the auditor to retain the books of accounts, if his fees were not paid. It has judiciary been held that the auditor has no right of lien on the books of the company in respect of the payment of there fees.
The auditor should document matters which are important in providing audit evidence to support the auditor’s opinion and evidence that the audit was carried out in accordance with ISAs.
Form and content of working papers
The auditor should record in the working papers the information on planning the audit , the nature, timing and extent of the audit procedures performed and the results there of , and the conclusions drawn from the audit evidence obtained. Working papers include the auditors reasoning on all significant matters which require
Exercise of judgment,
The extent of working papers is a matter of professional judgment since it is neither necessary nor practical to document every matter the auditor considers. in assessing the extent of working papers to be prepared and retained , it may be useful for the auditor to consider what would be necessary to provide another auditor who has no previous experience with the audit with an understanding of the work performed and the basis of the principal decisions taken but not the detailed aspects of the audit .that other auditor may only be able to obtain an understanding of detailed aspects of the audit by discussing them with the auditors who prepared the working papers .
The form and content of the working papers are affected by the matters such as a the following;
Nature of the engagement
Form of the auditors report
Nature, Size and Complexity of business
Nature and complexity of the entities internal control
Needs in a particular circumstances for direction, supervision and review of the work performed by assistants.
Benefits of Auditing of the Company:
The following are the benefits of auditing in a company:
It helps to identify the issues relating to any department
It helps to monitor the internal control
‘Internal audit helps to minimize the weak points for external audit
Reliance of company’s business transaction
It is one of the basic instruments for training the staff and can be used as a guide for the performance of the job
Progress of the work can be watched periodically.
It is a legal proof for the work done as initials of those who have performed a particular job are to be appended to it.
The responsibility for the negligence can be fixed.
It extends a useful help in supervising the work of the staff.
Auditors Recommendations on the performance of the Company:
According to the auditors of the company all the high alarming issues are being pin pointed by them and the company tries to resolve these issues. Like a few years back there was a ware house of the company which was doing direct sales in market, but was not profitable for the company. Instead, it was going under very high losses. When that ware house reached the alarming point, the auditors then went their and made a report on that warehouse and then the company had to close that ware house. So the auditors are very satisfied as the management takes actions against all the issues that is being made by the them.