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1. Introduction
The name VIP emerged on the prospect of Pakistan soon after its inception in the
year 1984. The start was modest with limited space to work and meager resources
to cater, but devotion and dedication blended along untiring honest efforts soon
flourished to bear the fruits. An honest approach in dealing, with customers, vendors
and related agencies, took the group a step ahead and is a vital contributing to its
success today.
VIP Group of Companies is one of the esteemed manufacturers and private
accredited exporter of Fashion wear, Motor bike wears in Pakistan having assets of
worth more than PKR 1.5 billion. The total area of the subjected premises consists of
112 Kanals.
VIP Group of Industries captures a wide market and its products are appreciably
accepted throughout the Pakistan most popular Leather Jackets and Leather Shoes
are its major products, contributing towards the national economy, export figures
range from 20 to 25 billion US dollars annually.
It specializes in producing high class Leather product made of superior quality
materials and possesses state production facilities in made ups and products for
various consumer needs. The company makes use of the latest technical equipment
to make sure that each product is original in style and shows exquisite
craftsmanship. This is an industry believes in originality as character and quality as
foundation. The entrepreneurial spirit of the company seeks constant development,
steady progress and outstanding performance.


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2 Overview of the organization
2.1 Brief History

2.1.1 Establishment
The name of VIP Group of Industries emerged on the horizon of Pakistans Leather
industry in 1984, A modest limited financial and other resources available, soon
flourished to bear full owing to the determination and dedication of its workers, An
honest approach in dealing, with customers, vendors and related agencies, took the
group a step ahead and is a vital contributing to its success today. At the moment
VIP Group of Industries is the leading industrial group of Pakistan, owing assets
more than PKR 1.5 billion. The VIP Group of Industries deals in Textile, Leather
wear, Fashion wear, Motor Bike wear and Gloves.
2.1.2 Development
With a balanced, efficient and competitive structure, VIP Group of Industries
explores and exploits indigenous resources for optimum production of Leather and
Fashion wear, besides seeking opportunities abroad. Services of the Companys
highly qualified and skilled expertise in the fields of Leather and Fashion wear are
frequently availed by the local and foreign companies. During the last 20 years VIP
Group of Industries has grown into a technically and commercially viable
organization.
2.1.3 Name of Chief Executive Officer (C.E.O)
Mr. Imtiaz-ud-Din Dar (Managing Director)
2.1.4 Names of Directors
Mr. Usman Dar
Mr. Umer Dar
Mr. Amir Dar
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Mr. Imran Dar
2.2. Nature of the organization
VIP Group of Industries leather wears fashion wear and textile as well with tender
care and dyed in the brilliant shades of nature adds elegance and magnificence to
this world.
VIP Group of Industries is a manufacturer of such fabulous products: products that
speaks of unparalleled quality and unmatched comfort. VIP Group of Industries
specializes in producing high class Leather and fashion wear product made of
superior quality materials and possesses state production facilities in made ups and
products for various consumer needs. The company makes use of the latest
technical equipment to make sure that each product is original in style and shows
exquisite craftsmanship. VIP Group of Industries is a company believes in originality
as character and quality as foundation too. The entrepreneurial spirit of the company
seeks constant development, steady progress and outstanding performance.
2.3. Business Volume, reward honors & success stories etc.
during last 5 years
VIP Group of Industries is using the modern technology for improving its ability to
discover the Leather and Fashion wears potential in the country. A number of major
institutional reforms and improvements have been implemented in all areas of
operations enabling the company to take up the challenge of making the
organization much efficient.
VIP Group of Industries financial performance has been consistently improving with
sustainable growth since the time it became a self-financing Company. Its business
volume for the last five years has shown a steady growth as indicated in the
schedules given on next page:

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Business Volume for last Five Years (Quantities)
Product

Measurement
Scale
2008-09 2009-10 2010-11 2011-
12
2012-
13
Fashion
Wear
Suites 120,456 154,870 212,900 215,445 224,876
Leather
Wear
Pieces

161,534 217,927 245,537 274,006 277,408
Motor Bike
Wear
Suites

92,004 77,412 93,236 90,314 101,322
Gloves Pairs

83,445 86,670 93,234 91,889 92,917
Textile Bundles 11,038 11,998 10,989 10,859 11,890







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Business Volume for last Five Years (US $)


The Net sales & other revenues for the last five years are as under:
(In million US $)
YEARS 2008-09 2009-10 2010-11 2011-12 2012-13
Net Sales
Revenue

76.65

85.05

100.4

105.6

111
Product

Measurement
Scale
2008-09 2009-10 2010-11 2011-12 2012-13
Fashion
Wear
Suites 60,22,800 80,53,240 117,09,500 118,49,475 128,17,932
Leather
Wear
Pieces

323,06,800 435,85,400 491,07,400 548,01,200 554,81,600
Motor
Bike
Wear
Suites

276,01,200 232,23,600 279,70,800 270,94,200 303,96,600
Gloves Pairs

62,58,375 65,86,920 70,85,784 71,67,342 72,47,526
Textile Bundles 44,15,200 47,99,200 46,15,380 46,15,075 50,53,250
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Product Line
In the product line of VIP Group of Industries, the following are its products by which
it is earning profits:

2.4.1 Leather Jackets
Leather jackets of the organization are very fine quality which
is demanded all over the world immensely. Its demand is
greater in Europe and America.
2.4.2 Leather Glove
Leather gloves are average used but these are very useful to
many sectors such as Gardening, Strong electric wires cutting,
weight lifting etc. It helps to keep safe hands skin which is badly
harmed by using these instruments in these fields without using
gloves.

2.4.3 Rexene Gloves
Rexene gloves are the highly used in nowadays. It used for the bike driving, to keep
hands warm in winter and also for fashion use. Rexene gloves are less costly hence
its demand is greater.




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2.4.4 Track Suites
Track Suites are widely used in the world. People
use it for their teams to demonstrate themselves
from other, also use for jogging and some people
consider it as night dress.
2.4.5 Motor Bike Dresses
Motor bike dresses are used for the purpose of racing which held in foreign
countries. These dresses protect the driver/racer from injury which sometimes
occurs due to accidents.
2.4.6 Leather Shoes
Leather shoes are very important accessory in some industries. These are widely
used in chemical industry because it helps to keep feet safe from any accident or
disaster.
2.4.7 Casual Shoes
Casual shoes are also known as fashion shoes. Todays youth is
too much interested in these shoes. These shoes are produce to
fulfill the demand of youth.
2.4.8 Fashion Wears
It is the world of fashion. Everyone wants to look stylish and try to demonstrate
himself from others. For this purpose fashion wears are produced and its demand is
very high.
3.2. Number of Employees
VIP Group of Industries in Pakistan was having 3 factories but now it has established
one more so the number of total factories in Pakistan has increased from 3 to 4. It
has a huge number of employees now. According to my information that I could get
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this organization have now almost 4,500 employees. This number was not that big
before establishing new factory.
3.3. Main Offices
Head Office, Rahim PurKhichian, Saydpur Road Sialkot. Pakistan
Zonal Office, Plot No. 384, Sector 7/A, Industrial Area, Karachi,
Pakistan
Capital Road, GhoreywaliKhangah, Sialkot, Pakistan
New York Office, 82-96 Country Pointe Circle, NY-11427, USA
Beside of these above it also have some sub units in Sialkot and premises of Sialkot.
3.4. Introduction of all departments
VIP Group of Industries have 8 main departments which include Admin, HR
department, Marketing department, Account & Finance department, Information
Technology department, Production department, Export & Import department,
Security department. Sample merchandising, leather procurement, leather cutting,
lining cutting, leather matching, screen printing, fusing, gloves unit, touching,
alteration, spray, finishing, packing etc. are the sub departments of production
department.
4. How to Audit Balance Sheet
To audit balance sheet is one of major work of auditor. In balance sheet auditing, he
has to check and to verify different assets and liabilities. Following are main steps of
Balance Sheet Audit used in Vip Wears.


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1st Step : Audit of Current Assets

First of all CA has to audit current assets and sees whether these are correct or not.

a) Cash and Bank Balance Audit
CA has to check cash balance with its physical existence. For checking bank
balance, he has to take the help of bank statement. If there difference cash
book and bank statement balance, he should check bank reconciliation
statement of company to know the real reasons behind this. If there is any
error in it, he should note which will be the part of audit report.

b) Account Receivable Audit
CA also checks account receivables. He has to see bad debts account and
provision for doubtful debt account and its accounting treatment in balance
sheet.

2nd Step : Fixed Assets Audit
In this audit, CA must check the depreciation on each asset. Asset's sale value and
its profit or loss and balance value which has been shown in balance sheet.
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3rd Step: Investment Audit
In investment audit, he should audit the sources of the investments. He also should
check different investment schemes.

4th Step: Audit of Liabilities
Charted accountant has checked the solvency ability of company by liabilities audit.
He has also audit account payable, bank loans, outstanding liabilities. His eye has to
be total payment to creditors and what is recorded in the books. If he examines the
difference between both, it may be mistake or fraud and it should be noted. He also
examines any misconduct of accounting department relating to paying liabilities. He
also tries to know the reasons of delay in the payment of interest, long term loan and
other outstanding expenses.

Main Topic
5. How to Audit the Liabilities and Shareholder Equity
In the Vip Wears (Pvt) ltd. there are different procedure to used audit in the balance
sheet but finally follow the standard format which is used to reporting the external
persons of the company. Our topic is how to audit the liability side of the balance so
we discussed only the liability side in the prescribed format:

Balance Sheet Liability side
Liability & Shareholder Equity
Authorized Capital
Share capital
Reserves
Long term liabilities:
Bank loan
Mortgage loan
%Debentures
Long term capital lease obligation
xxxxx
xxxx
xxx

xxxx
xxx
xxxx
xxxx
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Pension fund liability

Current liabilities:
Bank indebtness
Bank loan
Trade & other payables
Notes payable
Sundry creditors
Account payables
Accrued liabilities
Un earned revenue
Current portion of long term debt
Current portion of capital lease obligation
Provision for tax
Staff provident fund
xxxx

xxxx
xxxx
xxxx
xxxx
xxx
xxx
xxx
xxx
xxxx
xxx
xxx
xxxx


Let us discussed them one by one how to audit and what instruments are used to
audit the liability side of balance sheet:

Total Liabilities
Liabilities have the same classifications as assets: current and long term.

Current liabilities - These are debts that are due to be paid within one year or the
operating cycle, whichever is longer. Such obligations will typically involve the use of
current assets, the creation of another current liability or the providing of some
service.

Usually included in this section are:
Bank indebtedness - This amount is owed to the bank in the short term,
such as a bank line of credit.
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Accounts payable - This amount is owed to suppliers for products and
services that are delivered but not paid for.
Wages payable (salaries), rent, tax and utilities - This amount is payable to
employees, landlords, government and others.
Accrued liabilities (accrued expenses) - These liabilities arise because an
expense occurs in a period prior to the related cash payment. This accounting
term is usually used as an all-encompassing term that includes customer
prepayments, dividends payables and wages payables, among others.
Notes payable (short-term loans) - This is an amount that the company
owes to a creditor, and it usually carries an interest expense.
Unearned revenues (customer prepayments) - These are payments
received by customers for products and services the company has not
delivered or for which the company has not yet started to incur any cost for
delivery.
Dividends payable - This occurs as a company declares a dividend but has
not yet paid it out to its owners.
Current portion of long-term debt - The currently maturing portion of the
long-term debt is classified as a current liability. Theoretically, any related
premium or discount should also be reclassified as a current liability.
Current portion of capital-lease obligation - This is the portion of a long-
term capital lease that is due within the next year.
Long-term Liabilities - These are obligations that are reasonably expected to be
liquidated at some date beyond one year or one operating cycle. Long-term
obligations are reported as the present value of all future cash payments. Usually
included are:
Long-term debt (bonds payable) - This is long-term debt net of current
portion.
Deferred income tax liability - GAAP allows management to use different
accounting principles and/or methods for reporting purposes than it uses for
corporate tax fillings to the IRS. Deferred tax liabilities are taxes due in the
future (future cash outflow for taxes payable) on income that has already been
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recognized for the books. In effect, although the company has already
recognized the income on its books, the IRS lets it pay the taxes later due to
the timing difference. If a company's tax expense is greater than its tax
payable, then the company has created a future tax liability (the inverse would
be accounted for as a deferred tax asset).
Pension fund liability - This is a company's obligation to pay its past and
current employees' post-retirement benefits; they are expected to materialize
when the employees take their retirement for structures like a defined-benefit
plan. This amount is valued by actuaries and represents the estimated
present value of future pension expense, compared to the current value of the
pension fund. The pension fund liability represents the additional amount the
company will have to contribute to the current pension fund to meet future
obligations.
Long-term capital-lease obligation - This is a written agreement under
which a property owner allows a tenant to use and rent the property for a
specified period of time. Long-term capital-lease obligations are net of current
portion.
Now I explained that how audit the liability side of balance sheet follow the following
standard in the Vip Wears (pvt) ltd.
The following is the text of the Guidance Note on Audit of Liabilities by the Auditing
Practices Committee of the Council of the Institute of Chartered Accountants. This
Guidance Note should be in conjunction with the Statements on Standard Auditing
Practices issued by the Institute.
1. Para 2.1 of the Preface to the Statements on Standard Auditing Practices issued
by the Institute of Chartered Accountants that the "main function of the APC is to
review the existing auditing practices and to develop Statements on Standard
Auditing Practices (SAPs) so that these maybe issued by the Council of the
Institute." Para 2.4 of the Preface states that the "APC will issue Guidance Notes on
the issues arising from the SAPs wherever necessary."
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2. The Auditing Practices Committee has also taken up the task of reviewing the
Statements on auditing matters issued prior to the formation of the Committee. It is
intended to issue, in due course of time, SAPs or Guidance Notes, as appropriate,
on the matters covered by such Statements which would then stand withdrawn. With
the issuance of this Guidance Note on Audit of liabilities.
So auditor check the following procedure one by one to audit liability sides
CHECK INTERNAL CONTROL EVALUATION
The auditor should study and evaluate the system of internal control relating to
liabilities to determine the nature, timing and extent of his other audit procedures. He
should particularly review the following aspects of the internal control relating to
liabilities.
(a) In respect of loans and borrowings (including advances and deposits)
As far as possible, the following should be clearly specified:
- the borrowing powers and limits;
- persons authorised and competent to borrow;
- terms of borrowings;
-procedure for ensuring compliance with relevant legal requirements/internal
regulations.
Any variations in the terms of loans and borrowings should be duly
approved/ratified in writing by competent authority.
Security offered against loans and borrowings should be properly recorded
and periodically reviewed.
The records and documents should be kept in proper custody and reviewed
periodically.
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The system should bring out all cases of non-compliance with terms and
conditions including amounts of principal and/or interest which have become
overdue.
Confirmation of balances should be obtained at periodic intervals and the
discrepancies, if any, should be duly investigated and reconciled.
There should be a proper procedure for year-end valuation of loans and
borrowings, especially for those designated in foreign currencies.
(b) In respect of trade creditors
The procedure should ensure proper recording& transactions and facilitate the
linking of payments with outstanding.
The payments made to creditors should be in line with the approved policies
of the entity.
There should be specific procedures for payments against duplicate invoices
or other duplicate records as well as for payments against accounts which
have remained unclaimed for quite some time.
There should be a procedure for preparation of schedules of trade creditors at
periodic intervals; this should be reviewed by a responsible person and
necessary action initiated on overdue accounts.
Statements of account should be called for from creditors at periodic intervals
and the discrepancies, if any, should be duly investigated and reconciled.
All adjustments in the creditors' accounts such as those relating to claims for
returns, defectives, short receipts of goods, rebates, allowances and
commissions etc., should require approval of competent authority. Similarly,
any write-back of creditors' balances and escalation claims should be
approved by competent authority.
There should be appropriate cut-off procedures in relation to transactions
affecting the creditor accounts.


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VERIFICATION
Verification of liabilities may be can by employing the following procedures:
(a) examination of records;
(b) direct confirmation procedure;
(c) examination of disclosure;
(d) analytical review procedures;
(e) obtaining management representations.
The nature, timing and extent of substantive procedures to be performed is,however,
a matter of professional judgment of the auditor which is based, inter alia, on the
auditor's evaluation of the effectiveness of the related internal controls.
EXAMINATION OF RECORDS
Loans and borrowings
The auditor should satisfy himself that the loans obtained are within the
borrowing powers of the entity.
The auditor should carry out an examination of the relevant records to judge
the validity and accuracy of the loans.
In respect of loans and advances from banks, financial institutions and others,
the auditor should examine that the book balances agree with the statements
of the lenders. He should also examine the reconciliation statements, if any,
prepared by the entity in this regard.
The auditor should examine the important terms in the loan agreements and
the documents, if any, evidencing charge in respect of such loans and
advances. He should particularly examine whether the requirements of the
applicable statute regarding creation and registration of charges have been
complied with.
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Provisions
The term 'provision' means amounts retained by way of providing for depreciation or
diminution in value of assets or retained by way of providing for any known liability,
the amount of which cannot be determined with substantial accuracy. Provisions
include those in respect of depreciation or diminution in the value of assets, product
warranties, service contracts and guarantees, taxes and levies, gratuity, proposed
dividend etc). This Guidance Note, however, does not deal with provisions for
depreciation or diminution in the value of assets. The audit of provisions primarily
involves examining the reasonableness and adequacy of the amounts provided for.
The auditor should also examine that the provisions made are not in excess of what
is reasonably required.
Provisions for Taxes and Duties
The adequacy of the provision for taxation for the year should be examined. The
position regarding the overall outstanding liability of the entity as at the date of
balance sheet should be reviewed. In respect of assessments completed, revised or
rectified during the year, the auditor should examine whether suitable adjustments
have been made in respect of additional demands or refunds, as the case may be.
Similarly, he should examine whether excess provisions or refunds have been
properly adjusted. The relevant orders received up to the time of audit should be
considered and, on this basis, it should be examined whether any short pr visions
have been made good. If there is a material tax liability for which no provision is
made in the accounts, the auditor should qualify his report in this respect even if the
reserves are adequate to cover the liability and also check another provision is
mentioned or not:
Provision for gratuity
Provision for bonus
Provision for dividend
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Contingent Liabilities
38. The term 'contingent liabilities' refers to obligations relating to past transactions
or other events or conditions that may arise in consequence of one or more future
events which are presently deemed possible but not probable. Contingent liabilities
may or may not crystallize into actual liabilities. If they do become actual liabilities,
they give rise to a loss or an expense. The uncertainty as to whether there will be
any legal obligation differentiates a contingent liability from a liability that has
crystallized. Contingent liabilities should also be distinguished from those
contingencies which are likely to result in a loss (i.e., a loss is not merely possible
but probable) and which, therefore, require an adjustment of relevant assets or
liabilities. Some of the instances giving rise to contingent liabilities is:
law suits, disputes and claims against the entity not acknowledged as debts;
membership of a company limited by guarantee.
The following general procedures may be useful in verifying contingent liabilities.
Review of minutes of the meetings of board of directors/committees of board
of directors/other similar body.
Review of contracts, agreements and arrangements.
Review of list of pending legal cases, correspondence relating to taxes,
duties, etc.
Review of terms and conditions of grants and subsidies availed under various
schemes.
Review of records relating to contingent liabilities maintained by the entity.
Enquiry of and discussions with, the management and senior officials of the
entity.
Representations from the management.


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DIRECT CONFIRMATION PROCEDURE
The verification of balances by direct communication with creditors is theoretically
the best method of ascertaining whether the balances are genuine, accurately stated
and undisputed, particularly where the internal control system is weak. However, the
utility of this procedure depends to a large extent on receiving adequate response to
confirmation requests. Therefore, in situations where the auditor has reasons to
believe, based on his past experience or other factors, that it is unlikely that
adequate response would be received from the creditors, he may limit his reliance on
direct confirmation procedure and place greater reliance on the other auditing
procedures.
EXAMINATION OF DISCLOSURE
The auditor should satisfy himself that the liabilities have been disclosed
properly in the financial statements. Where the relevant statute lays down any
disclosure requirements in this behalf, the auditor should examine whether the
same have been complied with.
In some cases, loans are guaranteed by third parties in whose favour the
assets of the entity are charged. The auditor should examine whether the
disclosures concerning such loans are appropriate, e.g. they may be
classified as secured with disclosure of the fact that the assets of the entity
have been charged in favour of third parties which, in turn, have given
guarantees to parties from whom loans have been obtained.
The auditor should recommend to the entity to disclose, in parentheses or in
footnotes, the instalments of term loans, if any, falling due for repayment
within the next twelve months.
The auditor should examine that the following have been disclosed in respect
of contingent liabilities:
Nature of each contingent liability;
The uncertainties which may affect the future outcome;
An estimate of the financial effect or a statement that such estimate
cannot be made.

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ANALYTICAL REVIEW PROCEDURES
In addition to the audit procedures discussed above, the following analytical review
procedures may often be helpful as a means of obtaining audit evidence regarding
the various assertions:
comparison of closing balances of loans and borrowings, creditors, etc. with
the corresponding figures for the previous year;
comparison of the relationship between current year creditor balances and the
current year purchases with the corresponding figures for the previous year;
comparison of actual closing balances of loans and borrowings, creditors, etc.
with the corresponding budgeted figures, if available;
comparison of current year's aging schedule of creditors with the
corresponding figures for the previous year;
comparison of significant ratios relating to loans and borrowings, creditors,
etc. with the similar ratios for other firms in the same industry, if available;
Comparison of significant ratios relating to loans and borrowings, creditors,
etc. with the industry norms, if available.
It may be clarified that the foregoing is only an illustrative list of analytical review
procedures which an auditor may employ in carrying out an audit of liabilities. The
exact nature of analytical review procedures to be applied in a specific situation is a
matter of professional judgment of the auditor.
MANAGEMENT REPRESENTATIONS
The auditor should obtain from the management of the entity a written statement that
all known liabilities have been recorded in the books and that all contingent liabilities
have been properly disclosed. While such a representation letter serves as a formal
acknowledgement of the management's responsibilities for proper accounting and
disclosure of the relevant items, it does not relieve the auditor of his responsibility for
performing audit procedures to obtain sufficient appropriate audit evidence to form
the basis for the expression of his opinion on the financial statements. A sample
management representation letter regarding liabilities and contingent liabilities is
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given in Appendix III to this Guidance Note. It may be mentioned that the
representations made in the letter can alternatively be included, in the composite
representation letter usually issued by the management to the auditor.
DOCUMENTATION
The auditor should maintain adequate working papers regarding audit of liabilities
and contingent liabilities. Among others, he should maintain on his audit file the
confirmations received as well as any undelivered letters of request for confirmation.
The management representation letter concerning liabilities and contingent liabilities
should also be maintained on the audit file.














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Conclusion:
It is concluded that VIP group of industries is private industry so it is working
effectively according to the standards, to avoid chances of errors and frauds. Its
management is stable, but its focus on management must be more so that it will
become world class organization. As our main topic is the audit of liability &
shareholders equity, so we observed that, VIP is working according to the said
policies and standards. It keeps validity in all accounting records, it also classify cut
off points properly and give proper disclosure of record. Mostly auditors relay on the
provided assurance given by VIP group of industries. One drawback of Vip That we
observed was that employees hire there are not fully aware of the advance usage of
information technology.

Suggestions:
VIP must make its management more efficient so that it will enable to become
world class competitive industry.
In VIP employees must be rewarded time to time, their wages must be paid
on time, so that chances of materiality become low.
Evidential matters must be clear, reliable and not be objected, by the auditor
so for this VIP must provide reliable information.
Internal control must be strong more so that chances of risk becomes low,
chances of inherent, management risk will only be low if internal control will be
strong.
Documentation of each transaction must be kept, discipline must be
maintained. Here discipline in the sense of maintenance in the transactions.
Monitoring of performances must be the regular activity of VIP.
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The auditor should maintain adequate working papers regarding audit of
liabilities and contingent liabilities. Among others, he should maintain on his
audit file the confirmations received as well as any undelivered letters of
request for confirmation. The management representation letter concerning
liabilities and contingent liabilities should also be maintained on the audit file.