WHAT IS CHARTERED ACCOUNTANCY

Chartered Accountancy is one of those fields that have evolved significantly over a period of short time and changed its scope from just accountancy to a lot more so as to offer jobs to individuals in diverse field like auditing, business advisory, managerial posts, key finance positions, risk managers, tax consultants, company secretaries etc. The field offers a lot of career opportunities and chances for further growth in other related fields.

It is highly probable that most of the company secretaries, CFOs, CEOs, managers, corporate tax consultants, company directors, internal auditors and bankers holding high positions that you see around you are Chartered Accountants. All external auditors (AUDITORS are individuals who inspect the annual or semi annual financial reports issued by companies, NGOs, etc. and certify to the correctness of information presented in them) are, by provision of law, Chartered Accountants in Pakistan. Auditors of government entities of Pakistan are not necessarily CAs. They are individuals who pass the competitive exams necessary for posting in a government institute and may just have a B.Com background. Government auditors work under the instructions of Auditor General of Pakistan (AGP) and Accountant General Pakistan Revenues (AGPR).

“THE WORLD IS WITHIN YOUR REACH, BECOME A CHARTERED ACCOUNTANT AND SPREAD YOUR WINGS”

This is the message of Institute of Chartered Accountants of Pakistan (ICAP) for potential students who would like to pursue a career in Chartered Accountancy (CA). I must agree that there is very much truth in it.

ACCOUNTANCY

Accountancy has evolved to be a field that is concerned with accumulating, classifying and then presenting financial information of an entity so as to communicate the financial and economic position of the entity to the owners and other interested third parties. Accountancy developed a concept of double entry around 15th century. This concept says that every transaction related to the entity has two effects, a debit and a credit (Equity = Assets - Liabilities TO KEEP THE BALANCE, THE TRANSACTION WOULD AFFECT BOTH SIDES OF THE EQUATION). In accountancy things are classified into different accounts like:

ACCOUNT HEAD	DESCRIPTION
Cash and bank balance	Showing total balance of cash and bank
Prepayments	Rent paid in advance, advance payment made to a supplier etc.
Property, plant & equipment	All tangible & intangible long term assets
Trade debts	Amount given as loan to other entities
Inventory	Stock of trading goods like cigarettes and other raw materials for a Tobacco company
Trade payables	Amount payable to suppliers for material purchased on credit
Income tax payable	Tax payable to income tax authorities

These are only few accounts mentioned for beginner's understanding.  Now lets take a very simple example in order to understand how double entry system works. Let's assume that a tobacco company which manufactures cigarettes purchases raw tobacco (amounting to Rs. 1,000,000) for production of cigarettes. The company may do so by paying cash or through a credit arrangement with the supplier. Double entry would be as follows in each situation:

SITUATION 1: WHEN COMPANY PAYS CASH FOR THE INVENTORY

DOUBLE EFFECT	ACCOUNT HEAD	AMOUNT
Debit	Inventory (Raw material)	1,000,000
Credit	Cash	1,000,000

SITUATION 2: WHEN COMPANY BUYS THE INVENTORY ON CREDIT

DOUBLE EFFECT	ACCOUNT HEAD	AMOUNT
Debit	Inventory (Raw material)	1,000,000
Credit	Trade payable	1,000,000

This double entry does not imbalance the accounting equation:

SITUATION 1:

Equity = (Assets + 1,000,000 - 1,000,000) - Liabilities

( Assets [Inventory] increase by 1million and assets [cash] decrease by 1million: thus null effect on equation)

SITUATION 2:

Equity = (Assets + 1,000,000) - (Liabilities + 1,000,000)

( Assets [Inventory] increase by 1million and liabilities [trade payables] also increase by 1million: thus null effect on equation)

Record of all transactions is kept in the above manner and then at the year, half year or month end statements showing the financial position of the entity are prepared to show the position and progress of the entity.

The above double entry is just the basics ( like ABC of accountancy) and real work of accountants of today is much more sophisticated, professional and academic in nature like management at a high level, strategic decision making, critical analysis of situations facing the entity, advisory on legal and tax issues, designing code of ethics and governance and taking key decisions for their implementation etc.

AUDIT

A corporate entity, in today's environment, is owned by many individuals (Just to give a hint a company may be owned by 5,000 people or more than that). This means that all the individuals, who partially own the company or will partially own it in the future by buying its shares in the stock market, are affected by the financial report given by the company (The financial report would show the position and progress of the company at the year end and during the year). In such a situation where owners are in thousands and are not skilled people (they may just be layman investors in the company) management of the company is handled by different people than the owners. There is lack of trust between management (preparing the financial reports) and owners or interested outside parties (that would invest or give loans to company after looking at the financial position presented in the financial report). This lack of trust is due to the fact that management cannot be trusted to have fairly presented the financial position (the report shows their progress and they would want to show it brilliant even it is not that good - technically speaking there is a conflict of interest). In order to cover this trust deficit a third party is invited to certify that the financial reports are free from any material misstatements that would materially affect the business (for owners) or affect the decision of outside users taken on the basis of the said report. This third party is called auditor and the process of certifying is called audit. Financial auditors for listed entities (listed on stock exchange) must be Chartered Accountants in Pakistan, as necessitated by law in Pakistan.

As mentioned earlier, scope of chartered accountancy is much beyond just audit and accountancy today and ICAP is justified in saying that:

“THE WORLD IS WITHIN YOUR REACH, BECOME A CHARTERED ACCOUNTANT AND SPREAD YOUR WINGS”