Basic Concepts of Taxation

1. Purpose of Taxation

 Revenue generation for the government to fund education, healthcare, infrastructure,

defense, etc.
 Redistribution of wealth through progressive taxation.
 Regulation of economic activities (e.g., sin taxes on tobacco).
 Encouragement of investment and savings through tax incentives.

2. Types of Taxes Administered by FBR

There are two main types of taxes:

A. Direct Taxes

 Paid directly by individuals or businesses to the government.

 Examples:
o Income Tax: Charged on salary, business profits, rental income, etc.
o Corporate Tax: Charged on profits of companies.
o Capital Gains Tax: On profit from sale of property or shares.

B. Indirect Taxes

 Collected indirectly through the purchase of goods and services.

 Examples:
o Sales Tax: Applied on the sale of goods and services.
o Federal Excise Duty (FED): On production or sale of specific goods (like
cigarettes, beverages).
o Customs Duty: On imports and some exports.

3. Taxpayer Categories

 Individual
 Association of Persons (AOP)
 Company (Corporate entities)
 Non-residents (for income earned in Pakistan)
4. Tax Registration

 Taxpayers must register with FBR by obtaining a National Tax Number (NTN) or
STRN (Sales Tax Registration Number).

5. Filing Tax Returns

 Individuals and businesses must file annual tax returns declaring their income,
deductions, and taxes paid.
 Withholding tax deducted at source (e.g., banks, employers) is adjusted in returns.

6. FBR Systems and Tools

 IRIS Portal: Online system for registration, filing returns, and correspondence.
 Track and Trace: For monitoring tax evasion in sectors like tobacco and sugar.
 POS (Point of Sale) System: Linked with retailers to monitor real-time sales.

7. Penalties and Audits

 Failure to file or under-reporting can lead to penalties, fines, or audit assessments by

FBR.

🔷 Federal Board of Revenue (FBR) – Overview

✅ What is FBR?

The Federal Board of Revenue (FBR) is the government agency responsible for collecting
taxes and duties in Pakistan. It operates under the Ministry of Finance and plays a key role in
generating revenue for the federal government.

🔷 Key Responsibilities of FBR

1. Tax Collection
o Collects Direct Taxes (Income Tax, Corporate Tax, etc.)
o Collects Indirect Taxes (Sales Tax, Federal Excise Duty, Customs Duty)
 2. Taxpayer Services
o Provides platforms and tools for taxpayer registration, return filing, and
compliance.
o Maintains and updates taxpayer records and profiles.
3. Tax Enforcement
o Conducts audits and investigations.
o Tracks and penalizes tax evasion.
o Enforces tax laws and recovers unpaid taxes.
4. Policy Implementation
o Implements fiscal policies set by the government.
o Proposes changes in tax laws and regulations.

🔷 Organizational Structure

 Chairman FBR: Head of the organization.

 Two main wings:
1. Inland Revenue (IR): Manages income tax, sales tax, and excise duties.
2. Customs Wing: Manages import/export duties and customs enforcement.
 FBR operates through:
o Regional Tax Offices (RTOs)
o Large Taxpayer Units (LTUs)
o Collectorates of Customs

🔷 Major Taxes Under FBR

1. Income Tax

 Paid by individuals, companies, and AOPs on income or profits.

 Administered under the Income Tax Ordinance, 2001.

2. Sales Tax

 Applied on the sale and purchase of goods and some services.

 Governed by the Sales Tax Act, 1990.

3. Federal Excise Duty (FED)

 Levied on manufacturing and sale of specific goods like sugar, cement, tobacco, etc.

4. Customs Duty

 Charged on goods imported into Pakistan.

  Regulated by the Customs Act, 1969.

🔷 Online Platforms of FBR

 IRIS Portal: Used for e-filing tax returns and registration.

 WEBOC: Customs clearance system for importers/exporters.
 TAX ASAAN App: Mobile app for simplified return filing and tax services.
 POS Integration: For real-time retail sales tracking (mostly in tier-1 retailers).

🔷 Taxpayer Registration

 Individuals and businesses must register to obtain:

o NTN (National Tax Number) for income tax.
o STRN (Sales Tax Registration Number) for sales tax.

🔷 Return Filing & Compliance

 Taxpayers are required to:

o File Annual Income Tax Returns
o File Monthly Sales Tax Returns (if registered)
o Maintain accounting records and documents
o Deduct and deposit withholding taxes (if applicable)

🔷 Enforcement & Penalties

 FBR can:
o Audit accounts
o Issue tax notices
o Impose fines/penalties
o Freeze bank accounts in case of non-compliance
📘 Concepts of Auditing & Accounting

🔹 Accounting Concepts

Accounting is the process of recording, summarizing, and reporting financial transactions.

Key Principles:

1. Accrual Principle – Record revenues and expenses when they are incurred, not when
cash is exchanged.
2. Going Concern – Assume the business will continue operating indefinitely.
3. Consistency – Apply accounting methods consistently over time.
4. Materiality – Focus on information that could influence decisions.
5. Prudence (Conservatism) – Avoid overstatement of assets or income.

Types of Accounting:

 Financial Accounting – Prepares financial statements for external users.

 Management Accounting – Internal reports for decision-making.
 Cost Accounting – Analyzes production costs to control and reduce them.

🔹 Auditing Concepts

Auditing is an independent examination of financial statements to ensure they are free from
material misstatements.

Types of Audits:

1. Statutory Audit – Mandatory by law for certain companies.

2. Internal Audit – Conducted by internal staff for internal control improvement.
3. External Audit – Performed by independent auditors.

Objectives of Auditing:

 Verify the accuracy of financial records.

 Ensure compliance with laws and regulations.
 Detect and prevent fraud or errors.

Auditing Principles:

 Integrity, Objectivity & Independence

 Evidence-based Examination
 Confidentiality
  Professional Skepticism

💰 Financial Management Basics

Financial Management involves planning, organizing, and controlling financial resources to

achieve organizational goals.

🔹 Key Objectives:

1. Profit Maximization
2. Wealth Maximization (Shareholder Value)
3. Liquidity Management
4. Risk Management

🔹 Major Functions:

1. Investment Decisions (Capital Budgeting):

o Evaluate long-term investment opportunities.
o Use tools like Net Present Value (NPV), Internal Rate of Return (IRR).
2. Financing Decisions:
o Decide the mix of debt and equity financing.
o Consider cost of capital, risk, and control.
3. Dividend Decisions:
o Determine dividend payout or retention for reinvestment.
4. Working Capital Management:
o Manage short-term assets and liabilities (e.g., cash, receivables, inventory).

🔹 Key Financial Concepts:

 Time Value of Money – Money today is worth more than the same amount in the future.
 Cost of Capital – Minimum return a company must earn to satisfy its investors.
 Leverage – Use of borrowed funds to increase return on equity.

Would you like a PDF summary, presentation slides, or deeper coverage on any of these areas
(e.g., capital budgeting, types of audit reports, or accounting standards)?

You said:
Pakistan Customs
ChatGPT said:

Here’s a brief yet comprehensive overview of Pakistan Customs:

🇵🇰 Pakistan Customs: An Overview

🔹 What is Pakistan Customs?

Pakistan Customs is a division of the Federal Board of Revenue (FBR), responsible for
regulating and facilitating international trade, collecting customs duties and other taxes, and
enforcing import/export regulations.

🔹 Main Functions of Pakistan Customs

1. Revenue Collection
o Collects customs duties, sales tax, withholding tax, and federal excise duty at
import/export stage.
2. Trade Facilitation
o Ensures smooth flow of goods while enforcing trade policies and protecting
national interest.
3. Border Control & Anti-Smuggling
o Prevents illegal import/export (e.g., drugs, weapons, counterfeit goods).
o Operates at seaports, airports, dry ports, and border posts.
4. Enforcement of International Trade Laws
o Ensures compliance with WTO, WCO, and international treaties (like the
Kyoto Convention).
5. Valuation and Classification of Goods
o Uses the Harmonized System (HS) Codes for correct classification and duty
calculation.

🔹 Key Components of Pakistan Customs

Component Description

Customs Act, 1969 Primary legal framework governing customs procedures in Pakistan.
 Component Description

WEBOC System Web-Based One Customs – Pakistan’s online customs clearance system.

HS Code Harmonized System Code used for identifying goods during trade.

SROs (Statutory Regulatory

Issued to grant tax exemptions or changes in duty/tariff structure.
Orders)

Pakistan Customs Tariff (PCT) based on the Harmonized Commodity

Tariff
Description and Coding System.

🔹 Common Duties & Taxes on Imports

1. Customs Duty (CD)

2. Sales Tax (GST) – 18% standard, can vary.
3. Additional Customs Duty (ACD)
4. Income Tax (Withholding)
5. Regulatory Duty (RD) – Imposed on specific items.
6. Federal Excise Duty (FED) – On specific luxury or harmful goods.

🔹 Recent Reforms & Developments

 Digitalization: Expansion of WEBOC and E-payment systems.

 AEO Program: Authorized Economic Operator for trusted traders.
 Green Channel: For fast-track clearance of trusted importers/exporters.
 Single Window: Pakistan Single Window (PSW) streamlines cross-border trade by
integrating all regulatory bodies.

🔹 Important Institutions Working with Pakistan Customs

 FBR (Federal Board of Revenue)

 State Bank of Pakistan
 Ministry of Commerce
 Trade Development Authority of Pakistan (TDAP)
 Pakistan National Shipping Corporation (PNSC)
� Sales Tax in Pakistan
✅ Overview:

Sales Tax is a value-added tax levied on the sale and import of goods and certain services in
Pakistan. It is administered by the Federal Board of Revenue (FBR) under the Sales Tax Act,
1990.

📌 Key Points:

 Standard Rate: 18% (as of 2024–25 budget)

 Reduced Rates:
o 17%, 12%, 10%, or even 0% for certain goods/services.
o Zero-rated (0%) for exports and specific sectors (e.g., textiles, pharmaceuticals).
 Exemptions: Basic food items, education services, unprocessed agricultural products,
etc., under the Sixth Schedule of the Sales Tax Act.
 Who Pays: Businesses registered under the sales tax regime charge it to consumers and
remit it to FBR.

� On Imports:

Sales tax is charged on CIF value + customs duty + other duties, not just the item’s base
price.
Example:
If an item costs Rs 1,000, and customs & other duties = Rs 300, then:

Sales Tax = 18% of Rs 1,300 = Rs 234

� Federal Excise Duty (FED)

✅ Overview:
FED is a duty imposed on the manufacture, sale, or import of specific goods and services,
often luxury or non-essential items. It’s governed by the Federal Excise Act, 2005.

📌 Key FED Items:

Item/Service FED Rate

Cigarettes & tobacco Rs per 1,000 sticks (fixed + %age)

Soft drinks / energy drinks 20% – 25%

Cement Rs 2/kg (or ~1.5%)

Imported vehicles 5% – 25% (varies by engine capacity)

Telecom services 15%

Air travel (business class) Rs 50,000/ticket

Sugar-sweetened beverages (new) 20% (introduced in 2023–24)

Luxury items (perfumes, cosmetics) 10% – 25%

FED can be:

 In percentage of retail/assessed value

 Or a fixed amount per unit

🔁 Sales Tax vs. FED — Key Differences

Aspect Sales Tax FED

Purpose Broad-based consumption tax Targeted tax on specific goods/services

Scope Most goods & services Select goods/services (luxury or harmful)

Rates Generally 18% Varies: % or fixed (Rs/unit)

Law Sales Tax Act, 1990 Federal Excise Act, 2005

Refundable? Yes, if registered Sometimes, but not always

Collected at Each point of sale/supply Manufacturing/import/service point

📣 2024–25 Budget Highlights

 Sales Tax expanded to previously exempt services (IT freelancing above a certain
income threshold).
 Increased FED on sugary drinks, tobacco, and luxury vehicles.
 Exemptions/zero-rating for exporters of IT services, renewable energy products, and
educational tools.

If you need:

 The latest SROs listing updated rates

 A duty/tax calculator
 Sector-specific analysis (e.g., cars, telecom, real estate)
 📘 Basic Economic Concepts

Term Definition
The study of how people, businesses, and governments allocate scarce
Economics
resources.
Scarcity Limited availability of resources vs. unlimited human wants.
Opportunity
The value of the next best alternative foregone.
Cost
Incentives Rewards or penalties that influence behavior.
Trade-off Choosing one thing over another due to limited resources.

 📈 Microeconomics Terms

Term Definition
Demand Quantity of a good consumers are willing to buy at a given price.
Supply Quantity of a good producers are willing to sell at a given price.
Equilibrium Price The price where demand equals supply.
Elasticity Measures how much demand or supply responds to price changes.
Marginal Utility Extra satisfaction from consuming one more unit of a good.
Market Failure When markets fail to allocate resources efficiently (e.g., pollution).
Monopoly A market with one seller dominating supply.
Perfect A market with many buyers and sellers, and no single one can influence
Competition price.

 💰 Macroeconomics Terms
 Term Definition
GDP (Gross Domestic Total value of goods and services produced in a country in a given
Product) time.
Inflation The rate at which general price levels rise.
Deflation A fall in general price levels.
Unemployment Rate Percentage of people willing to work but unable to find jobs.
Government spending and taxation decisions to influence the
Fiscal Policy
economy.
Central bank actions (like interest rate changes) to control inflation
Monetary Policy
and stabilize currency.
Interest Rate Cost of borrowing money, or the return on savings.
Budget Deficit When government spending exceeds revenue.
Record of all economic transactions between a country and the
Balance of Payments
world.

 🌍 International Economics

Term Definition
Exchange Rate The value of one currency in terms of another.
Trade Deficit When a country imports more than it exports.
Tariff A tax on imported goods.
Quota A limit on the amount of a good that can be imported.
Comparative When a country can produce a good at a lower opportunity cost than
Advantage another.

 🏦 Finance & Banking Terms

Term Definition
Institution (like the State Bank of Pakistan) managing money supply and
Central Bank
interest rates.
Liquidity How quickly assets can be converted into cash.
Inflation Targeting Central bank's strategy to keep inflation within a certain range.
Currency
A deliberate reduction in the value of a country’s currency.
Devaluation

 📊 Development & Welfare Economics

Term Definition
Human Development Index Composite measure of life expectancy, education, and
(HDI) income.
 Term Definition
Poverty Line Minimum level of income deemed adequate in a country.
Financial aid from the government to reduce cost of
Subsidy
goods/services.
Progressive Taxation Higher income earners pay a larger percentage in taxes.
Measures income inequality (0 = perfect equality, 1 = total
Gini Coefficient
inequality).

✅ Tax Administration & Reforms (Pakistan –

FBR Focused)

📘 What is Tax Administration?

Tax administration refers to the system, rules, departments, and processes used by the
government (mainly FBR) to collect, manage, and enforce taxes.

🔹 Main Functions of FBR (Tax Administration):

Function Description

✅ Tax Collection Collect income tax, sales tax, customs duty, FED

✅ Taxpayer Registration Issuance of NTN & STRN

✅ Assessment of Tax Evaluating how much tax a person/business must pay

✅ Tax Audit Verifying tax returns for correctness

✅ Enforcement Taking action against defaulters and evaders

✅ Appeals Handling Managing tax-related disputes & appeals

✅ Monitoring Imports/Exports Through Pakistan Customs

📌 Important Departments in FBR:

 1. Inland Revenue Service (IRS)
o Handles Income Tax, Sales Tax & FED collection.
2. Pakistan Customs
o Manages import/export duties and border controls.

📘 Major Tax Reforms in Pakistan

To improve efficiency and transparency, FBR has taken many tax reforms, including:

✅ 1. Automation and Digitization:

 IRIS system: Online tax return filing

 WeBOC: Customs clearance software
 Online NTN & STRN generation
 E-filing and E-payments

✅ 2. Broadening the Tax Base (BTB):

 Encouraging non-filers to become filers

 Linking databases (NADRA, banks, utility bills) to trace tax evaders
 Monitoring real estate, luxury vehicles, and bank transactions

✅ 3. Simplification of Tax Laws:

 Reducing complexity in Income Tax Ordinance 2001

 Single-page returns for small traders
 Fixed tax schemes for small businesses

✅ 4. Introduction of CNIC-based Invoicing:

 CNIC required on purchases over a specific limit

 Reduces fake/fraudulent transactions
✅ 5. POS (Point of Sale) System:

 For retailers, especially big stores

 POS data directly integrated with FBR
 Tracks real-time sales and tax collection

✅ 6. Taxpayer Facilitation:

 FBR Tax Asaan App for mobile users

 Regional Tax Offices (RTOs) and facilitation centers
 Tax education campaigns

� Example MCQs for Practice:

Q1: What is the name of the FBR’s income tax e-filing system?
A: IRIS

Q2: Which department deals with customs duty in Pakistan?

A: Pakistan Customs

Q3: Which app is used by FBR for mobile tax services?

A: Tax Asaan App

Q4: What does BTB stand for in tax reforms?

A: Broadening the Tax Base

Q5: Which system is used for automated customs clearance?

A: WeBOC

✅ Income Tax Ordinance 2001 – Summary

for FBR Test

📘 What is the Income Tax Ordinance, 2001?

The Income Tax Ordinance, 2001 is the main law in Pakistan that governs the assessment,
collection, and enforcement of income tax on individuals and businesses.
It replaced the Income Tax Ordinance, 1979 and came into force on 1st July 2002.

🔹 Key Features of ITO 2001:

Feature Explanation

✅ Self-Assessment Scheme Taxpayers file returns themselves

✅ Universal Self Assessment Applies to all categories of taxpayers

✅ E-Filing Returns can be submitted online via IRIS

✅ Tax Year From 1st July to 30th June

✅ Filer / Non-Filer Filer = Registered taxpayer, Non-filer = Higher withholding tax

� Major Sections / Parts of the Ordinance:

1. ✅ Section 2 – Definitions

 Defines important terms like:

o Person, Company, Association of Persons (AOP)
o Resident / Non-Resident
o Total Income, Taxable Income, etc.

2. ✅ Section 11 – Heads of Income

Pakistan’s taxable income is divided into 5 heads:

Head Example

Salary Monthly job income

Business Income Profit from business

Capital Gains Profit on sale of shares, land

Income from Property House rent, etc.

Income from Other Sources Dividend, prize bond winnings, etc.

3. ✅ Section 114 – Return of Income

 Every person whose income exceeds the taxable limit must file a return of income.

4. ✅ Section 118 – Filing Deadlines

 Salaried Person: 30th September

 Business Individual / AOP: 31st October
 Company: 31st December

5. ✅ Section 149 – Salary Tax Deduction

 Employers must deduct tax at source from employee salary and deposit to FBR.

📌 Who Has to Pay Income Tax?

 Every resident individual earning above taxable limit (set yearly in Finance Act)
 Companies, AOPs, partnership firms
 Non-residents on income sourced from Pakistan

🔐 Important Terms:
Term Explanation

Filer A person who files income tax return

Non-Filer Does not file tax return, faces higher tax rates

Withholding Tax Tax deducted at source (salary, bank profit)

Tax Credit Tax relief allowed (e.g. investment, donations)

Exempt Income Income not subject to tax (e.g., agriculture income in some cases)

💡 Relevance to FBR Jobs:

As a Sub-Inspector, you may be involved in:

  Checking whether returns are filed
 Verifying source of income
 Reporting tax evasion
 Helping in audits or field checks

📝 Sample MCQs:

Q1: How many heads of income are defined in ITO 2001?

A: Five

Q2: What is Section 114 about?

A: Return of Income

Q3: What is the tax year in Pakistan?

A: 1st July to 30th June

Q4: What is a "Filer"?

A: A person who submits a tax return

Q5: What is Section 149 related to?

A: Salary tax deduction at source

✅ Sales Tax Act, 1990 – For FBR Test

Preparation

📘 What is Sales Tax?

Sales Tax is a value-added tax (VAT) charged on the sale and purchase of goods and some
services in Pakistan.

 It is an indirect tax — paid by the consumer but collected by businesses and deposited to
the FBR.
 Governed under the Sales Tax Act, 1990
🔹 Key Features of Sales Tax Act, 1990:
Feature Description

✅ Administered by FBR (Inland Revenue)

✅ Standard Rate 18% (as of latest Finance Act – subject to change)

✅ Registration Required If turnover exceeds a specific limit

✅ Taxpayer Portal Sales tax returns are filed via IRIS

✅ Input Tax Adjustment Allowed for registered taxpayers

� Important Sections of the Act (Exam-Relevant):

1. ✅ Section 2 – Definitions

Important terms defined:

 Goods = Every kind of movable property

 Supply = Sale, lease, or transfer of goods
 Taxable Activity = Any business that sells taxable goods
 Registered Person = Person registered with FBR for sales tax
 Input Tax = Tax paid on purchases
 Output Tax = Tax collected on sales

2. ✅ Section 3 – Scope of Tax

 Sales tax is charged on every taxable supply made in Pakistan

 Also includes imported goods
 Export is zero-rated (0%)

3. ✅ Section 6 – Time of Supply

Tax becomes payable when:

 Goods are delivered OR

 Payment is received — whichever is earlier
4. ✅ Section 7 – Input Tax Credit

 Registered taxpayers can adjust the tax they paid on purchases against the tax they
collect on sales.

Example:
If you collect Rs. 18,000 in sales tax but paid Rs. 5,000 on purchases, you deposit only Rs.
13,000.

5. ✅ Section 26 – Filing of Returns

 Monthly return due by 15th of every month

 Filed electronically via IRIS system

6. ✅ Section 33 – Penalties

 Penalty for not registering, not filing, or false reporting

 Can include fines and imprisonment

📌 Zero-Rated vs Exempt Goods:

Term Meaning

Zero-Rated Tax rate is 0%, but input tax can be claimed (e.g., Exports)

Exempt No tax is charged, and input tax cannot be claimed (e.g., Milk, Books)

💡 Common Examples of Taxable Goods:

 Electronics, mobiles, clothes, cosmetics, home appliances, fuel, etc.

📝 Sample MCQs for Practice:

Q1: Under which Act is Sales Tax collected in Pakistan?

A: Sales Tax Act, 1990
Q2: What is the standard rate of Sales Tax in Pakistan?
A: 18%

Q3: What is meant by Input Tax?

A: Tax paid on purchases that can be adjusted

Q4: When is a sales tax return due?

A: 15th of every month

Q5: Is export of goods taxable?

A: No, it's zero-rated

✅ Federal Excise Act, 2005 – For FBR

Test
📘 What is Federal Excise Duty (FED)?

Federal Excise Duty (FED) is a tax imposed on the production, sale, or consumption of
specific goods and services within Pakistan.

 It is an indirect tax, collected by manufacturers or service providers and deposited to the

FBR.
 Governed under the Federal Excise Act, 2005 and Federal Excise Rules, 2005.

🔹 Key Features of the Federal Excise Act, 2005:

Feature Description

✅ Administered by FBR (Inland Revenue)

✅ Applicable on Specific goods and services (luxury or harmful items)

✅ Nature Indirect tax

✅ Rates Fixed or percentage-based (as per schedules)

✅ Collected at Manufacturing stage or import

� Important Sections – Exam Focus:

1. ✅ Section 2 – Definitions

Defines key terms:

 Excise Duty
 Manufacture
 Goods
 Person
 Supply
 Service

2. ✅ Section 3 – Duties of Excise

 Excise duty shall be levied on:

o Goods manufactured or produced in Pakistan
o Goods imported
o Certain services (e.g., telecom, insurance, franchise)

3. ✅ Section 4 – Zero Rating

 Duty is 0% for:
o Exports
o Diplomatic supplies

4. ✅ Section 6 – Adjustment of Duties

 Input duty can be adjusted against output duty (similar to sales tax)

5. ✅ Section 9 – Filing of Return

 Monthly return due by 15th of every month

 Filed via IRIS (FBR online portal)
6. ✅ Section 19 – Offences and Penalties

 Penalties for:
o Non-filing of return
o Understatement of duty
o Non-registration
o False documents

📌 Common Goods under Federal Excise:

Product/Service Excise Duty

Cigarettes % + fixed rate

Sugar-sweetened beverages Fixed per liter

Cement Per metric ton

Telecommunication services % of charges

Air travel (Business/1st class) Fixed per ticket

(Rates change every year via Finance Act – check FBR updates)

📘 Comparison: Sales Tax vs Excise Duty

Feature Sales Tax Excise Duty

Applies on Most goods Select goods/services

Law Sales Tax Act 1990 Federal Excise Act 2005

Collected at Sale stage Manufacturing or import stage

Input Adjustment Yes Yes

📝 Sample MCQs:

Q1: Which law governs Federal Excise Duty in Pakistan?

A: Federal Excise Act, 2005
Q2: Is excise duty a direct or indirect tax?
A: Indirect tax

Q3: What is the due date for filing excise return?

A: 15th of every month

Q4: Which service is covered under excise law?

A: Telecom services

Q5: What does Section 6 of the Act deal with?

A: Adjustment of duties

✅ Concepts of Auditing & Accounting (For

FBR Test)

� A. Auditing – Basic Concepts

🔹 What is Auditing?

Auditing is the examination of financial records to ensure they are true, accurate, and fair
according to accounting standards and legal rules.

🔑 Key Terms in Auditing:

Term Explanation

Auditor A person who checks financial records

Internal Audit Conducted by a company's internal staff

External Audit Conducted by an independent audit firm

Vouching Checking the original documents (bills, receipts)

Verification Confirming physical existence of assets

 Term Explanation

Audit Report Final written opinion of the auditor

Materiality Importance of information for decision making

Independence Auditor must be unbiased and neutral

Audit Evidence Documents and data used to support the audit

True & Fair View Final accounts should reflect reality

📘 Types of Audits:

1. Statutory Audit – Required by law

2. Tax Audit – To check tax records
3. Performance Audit – To measure efficiency
4. Forensic Audit – Used to detect fraud

📒 B. Accounting – Basic Concepts

🔹 What is Accounting?

Accounting is the process of recording, classifying, and summarizing financial transactions to

show a business's financial position.

🔑 Basic Accounting Terms:

Term Explanation

Transaction Any business activity involving money

Journal First book of entry

Ledger Book for each account's balance

Trial Balance A list of all ledger balances

Income Statement Shows profit or loss

 Term Explanation

Balance Sheet Shows assets, liabilities, and capital

Debit & Credit Left and right sides of accounts

Assets What business owns (cash, building)

Liabilities What business owes (loan, creditors)

Owner's Equity Owner’s money in the business

📘 Accounting Equation:
ini
CopyEdit
Assets = Liabilities + Owner’s Equity

📌 Accounting Principles (GAAP):

 Going Concern – Business will continue in future

 Consistency – Same method every year
 Accrual Basis – Record income/expenses when they happen, not when cash is
received/paid
 Matching Principle – Match expenses with related income

🎯 Practice Questions Examples:

Q1: What is the purpose of an audit?

A: To check whether financial statements show a true and fair view.

Q2: Which document is first used in recording transactions?

A: Journal

Q3: Assets = Liabilities + ?

A: Owner’s Equity

Q4: Checking bills and invoices in audit is called?

A: Vouching
✅ Financial Management
Basics
📘 Definition:

Financial Management is the process of planning, organizing, controlling, and monitoring

financial resources to achieve business goals efficiently.

🔹 Main Objectives of Financial Management:

Objective Explanation

✅ Profit Maximization Earning maximum profit for the business

✅ Wealth Maximization Increasing the value of shareholders' investment

✅ Efficient Resource Use Best use of available funds

✅ Financial Control Monitoring budget, cost, and income

📊 Core Concepts in Financial Management:

1. ✅ Capital Budgeting

 Long-term investment decisions

 Example: Buying new machinery or launching a new product line
 Methods:
o NPV (Net Present Value)
o IRR (Internal Rate of Return)

2. ✅ Working Capital Management

 Managing short-term assets and liabilities

  Ensures smooth daily operations
 Formula:
Working Capital = Current Assets - Current Liabilities

3. ✅ Time Value of Money (TVM)

 Money today is worth more than the same amount in future

 Tools: Present Value (PV), Future Value (FV)
 Used in investment decisions

4. ✅ Cost of Capital

 The minimum return a company must earn to satisfy its investors

 Includes cost of debt and cost of equity

5. ✅ Leverage

 Using borrowed money (debt) to increase return

 Financial Leverage: More debt = More risk, but possibly more profit

6. ✅ Liquidity

 Ability to pay short-term obligations

 Key ratios:
o Current Ratio = Current Assets ÷ Current Liabilities
o Quick Ratio = (Current Assets − Inventory) ÷ Current Liabilities

� Important Financial Ratios:

Ratio Formula Meaning

ROE (Return on Equity) Net Income ÷ Equity Profitability for shareholders

Debt-to-Equity Total Debt ÷ Equity Financial risk

Net Profit Margin Net Profit ÷ Sales Profit per rupee of sale
 Ratio Formula Meaning

Current Ratio Current Assets ÷ Current Liabilities Liquidity measure

📌 Budgeting in Financial Management:

 Planning future income and expenses

 Helps control overspending
 Types:
o Cash Budget
o Operating Budget
o Capital Budget

📝 Practice MCQ Example:

Q1: What is the goal of financial management?

A: Maximize wealth of shareholders

Q2: Which concept says money today is more valuable than in the future?
A: Time Value of Money

Q3: Working capital = ?

A: Current Assets – Current Liabilities

Q4: What does a high debt-to-equity ratio mean?

A: More financial risk

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