A CASE STUDY ON PROVIDENT FUND:

AUDIT PROCEDURES AND COMPLIANCE

Abstract: Provident fund audit is a special kind of audit conducted with a

view to expressing an opinion whether an organization’s information
relating to the fairness of Provident funds. In this paper, the authors would
like to focus on all areas of the Provident fund audit. Actually the auditors
conducted their audit in accordance with Bangladesh Standards on Auditing
(BSA). Those standards require that auditors plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit also includes assessing the accounting
principles used and significant estimate made by management, as well as
evaluating the overall financial statements presentation. The auditors believe
that their audit provides a reasonable basis of opinion. So in this study the
authors tried to explain the audit procedures for all the balance sheet items as
well as for all the revenue items considering the Provident fund of “X”
Company Limited as a case. More over the authors have focused on the BSA
compliance regarding that Provident fund audit.

Keywords: Provident fund, Provident fund audit, Bangladesh Accounting

Standards (BAS), Bangladesh Standards on Auditing (BSA), Provident fund
audit procedures, Provident fund audit compliance.

Introduction:
There is no denial that Provident plans exist to provide postretirement
benefit to employees at an organization. A Provident plan is really a number
of promises to pay people income after retirement. In a traditional "defined
benefit" Provident plan, the Providents are defined according to a formula
specified in the plan documents. This usually takes the form of a percentage
of the "best years" of salary. Provident fund is created to make the plan a
success. Audit of the Provident fund is very essential as the participants in
the Provident fund contribute money so that they can derive benefit from it
at the time of their separation from the company. Members in the Provident
fund have to rely on the audit regarding the due amount from the fund.
Auditors discharge their responsibility regarding the proper use of member’s
money through Provident fund audit. Through out the process of audit,
auditors have to comply with few standards. They basically look at whether
the money in the fund are being invested properly and if so whether the
investment gives due return or not.
Concept of Provident Fund:
Provident fund is a fund that is set to provide retirement and death benefit to
its member on the termination of his/her service with the company. Actually
Provident fund is an irrecoverable trust benefit scheme to provide retirement
and death benefits to such persons as may be admitted thereto and capable of
being approved by the National Board of Revenue (NBR) under the
provision of Income Tax Law relating to Superannuation funds. The
Provident fund is normally controlled and managed by Trustees who have
been vested all powers and authorities. Provident plans are usually
considered "patient capital" because of their long time horizon. Brockington,
R. (1993) defines Provident fund as, “A fund built up over a period of time
by contributors in order to provide subscribers with a Provident on
retirement. The purpose of the fund is to keep money belonging to the
prospective Provident Fund holder separate from that of the employing
company.” Christopher Nobes (2003) defined Provident fund as, “Assets set
aside for the eventual payment of Provident obligations. The term is
generally used when the assets have been irrecoverably set aside by an
employer, and handed over to trustees or to a financial institution.”
A Provident fund is an arrangement whereby employers provide benefits
(payments) to employees after they retire for services they provided while
they were working (Kieso, Weygandt & Warfield, 2005). The Provident
fund arrangement is contributed by both the employer and employee.
Provident funds were first established in the United States in 1959 to benefit
the widows and children of Church ministers. It was not until 1875 that the
American Express Company established the first corporation Provident fund.
By 1940, only 400 Provident funds were in existence, mainly for employees
in the railroad, banking and public utilities industries. Since then, the
industry boomed, so that currently over 700,000 Provident funds now exist
(Saunders & Cornett, 2004). The company or employer is the organization
sponsoring the Provident plan. It incurs the cost and makes contributions
form employer, administers the Provident assets and makes the benefit
payments to the Provident recipients (retired employees). The following
graph shows the three entities involved in a Provident fund and indicates the
flow of cash among them:

Figure: Resource flow of the Provident Fund:

Regardless of the manner in which Provident funds are contributed, the
funds must be managed until needed to pay benefits. Provident portfolios are
evenly invested in common stock, corporate bonds, stock and other credit
instruments. Provident fund management can be classified according to the
strategy used to manage the portfolio. With a matched funding strategy,
investment decisions are made with the objective of generating cash flows
that match planned outflow payments. An alternative strategy is projective
funding, which offers managers more flexibility in constructing a Provident
portfolio that can benefit from expected market and interest rate movements.
Some Provident funds segment their portfolios with part used for matched
funding and the rest for projective funding (Madura, 2006).

Provident Fund Accounting: The Provident fund should be a separate

legal and accounting entity for which a set of books is maintained and
financial statements are prepared. Provident accounting may be divided and
separately treated as accounting for employer and accounting for Provident
fund. Maintaining books and records and preparing financial statements for
the fund known as “Accounting for employees benefit plans or Accounting
for the Provident fund.” (Kieso, Weygandt & Warfield,)

Provident Fund Audit:

Provident fund audit is a special kind of audit conducted with a view to
expressing an opinion whether an organization’s information relating to the
fairness of Provident funds. In conducting this audit, some piece of
information are gathered in respect of trust deed, agreement, actuary, list of
eligible employee, fund, amount of Provident able salary, Provident able
service, approval, dependent child and so on. Moreover, loans and advances
given from the fund, the outstanding loan amount, the loan loss provision,
the interest on investment, the loan status etc. are also collected from the
corporate office of the respective company. This is the responsibility of the
trustees to prepare the financial statements of Provident fund and the
auditor’s responsibility is to express an independent opinion on these
financial statements based on their audit.
Literature Review
Till now a very few studies have been done in the area of Provident fund.
The audit procedures and compliance was also a new area of indication.
Whatever little has been attempted in this context is too scanty and wanting
in many respects. In Provident fund study, Linda Walker (1991) focused and
examined the public Provident fund audit. In her study, she cited that, “It is a
very big responsibility to proceed to the public fund audit”. Moreover, the
Association of Public Provident Fund Auditor (APPFA) has their regular
publications regarding the Provident fund audit. But all these are relating to
the concept of fund management and the procedures of audit maintained to a
public Provident fund. In this paper, the authors attempted to explain a
detailed audit procedures maintained by an international audit firm ‘RRH’
(KPMG).
Objective of the Study
The objective of the study can be broadly classified into two sections, which
are as follows:
General objective:
To have an understanding of Provident fund audit procedures and
compliance with Bangladesh Accounting Standards (BAS) of a particular
Company
Specific objectives:
1. To know about the Bangladesh Accounting Standards (BAS) applicable in
the preparation of financial statements of a Provident fund
2. To know about the rules that are generally followed by Provident fund
3. To examine the audit procedures followed in the audit of a Provident fund