Brief facts of the enquiry

During the calendar year 2017, one of the creditors of a listed company filed a winding up petition for recovery of their outstanding dues. As a result of such petition, Lahore High Court through its order dated December 12, 2017, appointed a liquidator who took charge of management of the Company during February 2018 and trading in shares on PSE was also suspended. In 2021, we were appointed auditors of the Company by the liquidator for three years ending June 30, 2018, 2019 & 2020.

The Liquidator has not concluded the winding up till our appointment. Financial statements of the Company for years ended 30 June 2018, 2019 and 2020 are being prepared by liquidator in accordance with 4th Schedule on non-going concern basis.

We are in process of finalization of our audit for these 3 years so that same can be laid in AGM of the Company before conclusion of winding up proceedings in terms of Section 339(1)(d) of the Companies Act 2017.

We need your kind opinion on following matters:

1.Can we change standard format of audit report prescribed by SECP’s SRO of 2018 as in our view, it will have to be changed due to following two reasons:

(a)Standard audit report includes reporting on:

–statement of financial position

–the statement of profit & loss and other comprehensive income, (not receipt & payment account)

–the statement of changes in equity, and

–the statement of cash flows.

(b)Audit report also wants confirmation from us on preparation of accounts in accordance with accounting and reporting standards as applicable in Pakistan and whether accounts give the information required by the Companies Act, 2017 (XIX of 2017), in the manner so required and respectively give a true and fair view of the state of the Company’s affairs as at _______ and of the loss and other comprehensive income, the changes in equity and its cash flows for the year then ended.

There is currently no accounting & reporting standard which allow reporting on cash basis of accounting by companies (Section 225 of Act & 5th Schedule). Only trusts & societies are allowed to prepare accounts on cash receipt & payment basis in Pakistan on which ICÅP has already prescribed a format of audit report through ATR 17.

2.Can we use Form 101 for preparation of receipt & payment account for ÅGM purposes keeping in view following Extracts of Court Rules 1997 & Act 2017?

•Rule 270 of the Court Rules and Form 101 prescribes format of receipt & payment of account which will be filed in Court.

•In accordance with Section 339 (d) of Act 2017, accounts audited by us will be laid before members in ÅGM, not to be filed in Court.

•Section 415 of Act 2017 deals with liquidator accounts (format to be prescribed) along with audit report which will be filed in Court on every half yearly intervals.

The Auditing Standards and Ethics Committee’s comments and conclusion

1.The Committee based on the above information noted that under the Companies Act, 2017 (the Companies Act):

(a)the audit firm has been appointed as independent external auditor of a company that is under liquidation;

(b)the winding up process of the company has not been completed at the financial year end; and

(c)the independent external auditor is required to audit the accounts of the company under liquidation.

2.The Committee noted that the Companies Act in Part X ‘Winding Up’ specifies the requirements for the companies that are under liquidation.

In the context of the submitted enquiry, the Committee noted that the enquired matters involve interpretation of the provisions of the Companies Act relating to the preparation of accounts and information by a company that is under liquidation, and reports of auditor on the same.

3.The Committee observed that a company that is under liquidation, in order to comply with the requirements of the Companies Act is also required to comply with the ‘The Companies (Court) Rules, 1997’ (the Companies Court Rules).

4.As mentioned earlier, the enquired matter fundamentally requires interpretation of application of various provisions of the Companies Act.

The Committee, accordingly, engaged with SECP to seek a clarification on the provisions of the Companies Act that relate to the preparation and format of accounts and information of a company that is under liquidation, and also the specific requirements of the report of auditor on such accounts and information.

5.In response to the Committee’s request for clarification, SECP explained that:

“In terms of section 387 of the Companies Act, 2017 (“the Act”), a company under liquidation shall continue to be a company for all purposes till its final dissolution in accordance with provisions of the Act and, unless otherwise specified, all provisions and requirements of the Act relating to companies shall continue to apply mutatis mutandis in the case of companies being wound.

Further, the company under-liquidation shall, in addition to compliance with the requirements of the Act, also comply with the requirements of applicable rules of the Companies (Court) Rules, 1997 (“the Rules”). In this respect rule 250, 259, 260, 262, 263, 264 & 267 are more relevant to the accounts of a company under-liquidation.

A review of section 387 of the Act clarifies that only difference with regard to a company under liquidation is that from the date of commencement of winding up, instead of Board of directors, the liquidator or official liquidator, as the case may be, shall be deemed to have taken over the position of Board of Directors of the Company including chief executive officer. We could not find out any provision in the Act which provide for any kind of exemption to a company under-liquidation.”

6.The Committee, based on above-noted response of SECP and the submitted fact pattern of the enquiry, understands that the liquidator of a company that is under liquidation is required to prepare:

•statutory financial statements as required under the Companies Act. The Companies Act requires preparation of annual financial statements and interim financial statements (for specified companies).

For the preparation of the statutory financial statements the ‘Guideline on the basis of preparation of financial statements for companies that are not considered going concern’ issued by the Institute can be referred. This guidance provides explanations for the preparation of financial statements using the non-going concern basis of accounting (after initiating the liquidation process).

•a statement of financial position and receipt and payment accounts, as required under section 339 1(d) of the Companies Act. These would be prepared when winding up is not concluded within one year of the winding up order. It is noted that the format of the receipt and payment accounts is given in Form No. 101 (read with Rule 260) of the Companies Court Rules.

•information in accordance with the requirements of section 415 of the Companies Act. This information shall be prepared when winding up company is not concluded within one year after its commencement. This information would be submitted by liquidator on half yearly basis. For this information, the requirements prescribed in Rule 267 of the Companies Court Rules and related forms shall be considered.

7.The Committee understands that section 419 of the Companies Act explains the application of provisions relating to audit of a company that is being wound up. Section 419 specifies that all the provisions relating to audit of accounts, rights, powers, duties, liabilities and report of auditors of companies and the duties of companies and their officers as applicable to companies shall apply mutatis mutandis to the company being wound up.

Further section 387 of the Companies Act discusses status of a company that is being wound up.

8.The Committee, based on clarification provided by SECP and the submitted fact pattern of the enquiry, observed that:

•the independent auditor of a company that is under liquidation, will perform the audit of statutory financial statements / accounts / information prepared under sections 225, 339 1(d) and 415 of the Companies Act.

The independent auditor will issue auditor reports as per following framework:

–the auditor report, on statutory financial statements that are prepared in accordance with section 225 of the Companies Act, will be as per the ‘Auditors (Reporting Obligations) Regulations, 2018’.

–In case the auditor is required to audit and issue audit reports under section 339 or 415 of the Companies Act, then the auditor reports on the special purpose reporting (the accounts/information/statements prepared by company under liquidation to comply with the specific requirements of the Companies Act) will be in accordance with ISA 800 (Revised), ‘Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks’.

•the auditor’s report should be suitably amended for the liquidation situation such as replacement of the term ‘Board of director’s/ management’ with the ‘liquidator’ in the auditor’s report.

(Issued in February, 2022)