Article 1    These Practice Directions are formulated in accordance with Article 22 of the Audit Law of  the People's Republic of China (hereinafter referred to as the Audit Law)  for the purpose of standardizing financial audit of state industry enterprises and ensuring the quality of such audit.

Article 2    The term "state industry enterprises" mentioned herein refers to those industry enterprises which are exclusively funded by the state or where the state dominates or predominates.

Article 3    The term "financial audit of state industry enterprises (hereinafter referred to as the enterprises)" mentioned herein refers to audit supervision conducted by audit institutions over the truthfulness, compliance and effectiveness of assets, liabilities, profits and losses of the enterprises.  The objective of such audit is to maintain financial and economic discipline and the state financial and economic order, promote the building of clean and honest governments and ensure healthy development of the national economy.

Article 4    When auditing accounting statements of the enterprises, audit institutions shall focus on the following aspects:
(1) Compliance of the category, format and preparation of accounting statements with relevant stipulations;  compliance of the selection of accounting treatments with the principle of consistency;
(2) Truthfulness, completeness, accuracy and timeliness of the information disclosed in the accounting statements and their attached notes;
(3) Compliance of the preparation of consolidated accounts with relevant stipulations and the principle of uniformity; compliance of the measurement units used in the consolidated accounts with the stipulated scopes; truthfulness of the contents of individual statements as the basis for consolidated accounts; whether such individual statements have been subject to audit;
(4) Whether accounting statements are prepared according to the books of account where records and postings are completely made and verified to be error-free;  whether books of account and accounting statements are consistent with each other;  whether figures in various statements which should be mutually compatible actually correspond to each other.

Audit institutions shall pay attention to the analysis of exceptional items in the accounting statements, examination of post balance sheet events whose occurrence has exerted significant impact on the concerned accounting items and determination of audit priorities or scopes with the use of professional judgment, audit experience and results of internal audit.

Article 5     When auditing books of account of the enterprises, audit institutions shall focus on the following aspects:
(1) Completeness and comprehensiveness of the establishment of books of account;
(2) Truthfulness, completeness and accuracy of the contents disclosed by the books of account, timeliness and clarity of the records and appropriateness of the corrective measures;
(3) Conformity of business transacts disclosed in the books of account with those recorded in relevant vouchers.

Article 6    When auditing accounting vouchers of the enterprises, audit institutions shall focus on the following aspects:
(1) Whether accounting vouchers are attached with all the reviewed historical vouchers;  whether the amounts thereof are consistent;
(2) Whether business transactions recorded by historical vouchers are true and regular;
(3) Whether separate postings are correctly made; whether extracts are clear and to the point; whether formats for filling vouchers are in accordance with relevant stipulations and requirements;
(4) Whether the review, transmission and filing of accounting vouchers are in compliance with relevant requirements.

Article 7    Audit conducted by audit institutions of the assets of the enterprises shall mainly cover the following items:  current assets, long-term investments, fixed assets and their accrued depreciations, works under construction, intangible assets, deferred assets and other assets.

Article 8     When auditing current assets of the enterprises, audit institutions shall focus on the following aspects:
(1) Actual existence of currency funds, short-term investments, debtors and prepayments and stocks as well as the enterprises' actual ownership of the above items;
(2) Compliance of various incomes and expenses or increase and decrease of business transacts as well as the completeness of their records;
(3) Correctness of stock pricing and consistency in the adoption of pricing methods;
(4) Appropriateness of the disclosure of items under current assets in the accounting statements.

Article 9     When auditing long-term investments of the enterprises, audit institutions shall focus on the following aspects:
(1) Whether long-term assets actually exist and are truly owned by the enterprises;
(2) Whether investments are in compliance with state stipulations and agreements; whether investment contracts impair interests of the state or the enterprises;  whether accounting treatments for pricing are made correctly;  whether timely and accurate accounting treatments are made for returns on investments;
(3) Whether long-term investments have achieved the pre-determined targets of return;
(4) Whether appropriate disclosures of long-term investments are made in the accounting statements.

Article 10     When auditing fixed assets and their accrued depreciations of the enterprises, audit institutions shall focus on the following aspects:
(1) Whether fixed assets actually exist and are truly owned by the enterprises;
(2) Whether timely and correct accounting treatments are made; whether pricings are correct;
(3) Whether the adoption of accounting policy for fixed asset depreciation is in compliance with relevant regulations; whether depreciations are accrued correctly;
(4) Whether appropriate disclosure of fixed assets and their accrued depreciations are made in the accounting statements.

Article 11     When auditing works under construction of the enterprises, audit institutions shall focus on the following aspects:
(1) Whether works under construction actually exist and are truly owned by the enterprises;
(2) Whether there are complete records of increase-decrease variations; whether accounting treatments are correct and regular; whether there are acts of encroaching upon or leaving out costs of works under construction;
(3) Whether completed works have timely undergone procedures of transfer for utilization; whether final accounts at completion of such works are correctly prepared;
(4) Whether figures representing closing balances of works under construction at the year-end are correct and appropriately disclosed in the accounting statements.

Article 12     When auditing intangible assets, deferred assets and other assets of the enterprises, audit institutions shall focus on the following aspects:
(2) Whether intangible assets such as patents, brands, non-patent know-hows, copyrights, rights to use land, concessions and goodwill actually exist and are truly owned by the enterprises; whether accounting treatments of the above items are made timely and accurately; whether relevant pricings are correct;  whether apportionment thereof is in compliance with relevant stipulations;
(2) Whether correct accounting treatments and reasonable apportionment are made for commencement costs, improvement expenses on leased fixed assets and other long-term apportionable expenses;
(3) Whether appropriate disclosures are made in the accounting statements for intangible assets, deferred assets and other assets.

Article 13    Audit conducted by audit institutions of the liabilities of the enterprises shall cover both current liabilities and long-term liabilities.

Article 14    When auditing current liabilities of the enterprises, audit institutions shall focus on the following aspects:
(1) Reasonableness and compliance of the formation of
short-term borrowings, bills of exchange payable, trade creditors, payments received on account, other payables, salaries payable, welfare payable, tax payable, profits for distribution and accruals and deferred incomes as well as the timeliness and compliance of the payment of such items and the completeness of their records;
(2) Verification of the accuracy of the balances of current liabilities and the sufficiency of their disclosure in the accounting statements.

Article 15     When auditing long-term liabilities of the enterprises, audit institutions shall focus on the following aspects:
(1) Reasonableness and compliance of the formation of
long-term borrowings, corporate bonds payable and long-term payables as well as the timeliness and compliance of the repayment of principals with interests and the completeness of their records;
(2) Achievement of the predicted returns with the use of long-term liabilities;
(3) Verification of the accuracy of the balances of long-term liabilities and the sufficiency of their disclosure in the accounting statements.

Article 16    Audit conducted by audit institutions of the owner's equity of the enterprises shall cover called-up share capital, capital reserves, profit reserves and undistributed profits.

Article 17    When auditing called-up share capital of the enterprises, audit institutions shall focus on the following aspects:
(1) Whether capital invested into the enterprises has undergone relevant verification tests; whether such capital is withdrawn prior to its maturity;
(2) Whether the proportion of input in the form of called-up share capital is reasonable and in compliance with relevant laws and regulations;
(3) Whether increase and decrease of called-up share capital are truthful and have undergone strict procedures of review and approval;
(4) Whether called-up share capital is appropriately disclosed in the accounting statements.

Article 18    When auditing capital reserves of the enterprises, audit institutions shall focus on the following aspects:
(1) Compliance of the sources of capital reserves, truthfulness of share premiums, revaluation surplus of assets and receipts of grants and donations;  correctness of the accounting treatments and completeness of the records about the above items;
(2) Appropriateness of the disclosure of capital reserves in the accounting statements.

Article 19    When auditing profit reserves of the enterprises, audit institutions shall focus on the following aspects:
(1) Whether allocation of after-tax profits into profit reserves is made according to relevant stipulations and in the correct amounts;
(2) Whether the use of profit reserves is in compliance with relevant laws and regulations;
(3) Whether accounting treatments for profit reserves are correctly made; whether relevant accounting records are complete and comprehensive;
(4) Whether appropriate disclosures of profit reserves are made in the accounting statements.

Article 20    When auditing undistributed profits of the enterprises, audit institutions shall focus on the following aspects:
(1) Truthfulness and compliance of undistributed profits and accuracy of their amounts;
(2) Appropriateness of the disclosure of undistributed profits in the accounting statements.

Article 21    Audit conducted by audit institutions of the profits and losses of the enterprises shall cover incomes, costs, expenses and profits.

Article 22      When auditing incomes of the enterprises, audit institutions shall focus on the following aspects:
(1) Truthfulness and compliance of the formation of sales revenues and other operating incomes as well as the completeness of their records;
(2)  Appropriateness of the disclosure of various incomes in the accounting statements.

Article 23    When auditing costs and expenses of the enterprises, audit institutions shall focus on the following aspects:
(1) Truthfulness and compliance of production costs, cost of sales, distribution costs, administrative expenses, financial charges and other operating charges as well as the correctness of their computation and completeness of their records;
(2) Completeness and accuracy of the records of income taxation, accuracy of the computation of tax payable, consistency in the adoption of accounting policies on tax payable and impact of tax paid; compliance of the determination, computation and carrying forwards and reversals of deferred taxation with relevant stipulations;
(3) Appropriateness of the disclosure of costs and expenses of the enterprises in the accounting statements.

Article 24    When auditing profits of the enterprises, audit institutions shall focus on the following aspects:
(1) Truthfulness and compliance of the formation of operating profits (including other business profits), net returns on investments, net non-operating profits or losses and prior year adjustments; accuracy of the computation of the above items and completeness of their records;
(2) Correctness of the determination of distributable profits and compliance of distributing profits to various investors with relevant state stipulations;
(3) Appropriateness of the disclosure of enterprise profits in the accounting statements.

Article 25    Audit institutions shall audit consumption funds of the enterprises such as remuneration packages (including those for the managing directors), pensions and unemployment benefits in accordance with state laws, regulations and policies on enterprise salaries and social securities funds.

Article 26    At the completion of audit, audit institutions shall analyze the enterprises' profitability, ability to repay debts, operating capacity and capital structure and shall thereafter evaluate the financial position and operating performance of the enterprises.

Article 27    Audit institutions may determine their audit priorities and conduct special audit or inter-trade audit in accordance with the state economic policies and audit requirements.

Article 28    Audit institutions have the power to require the audited bodies to supply the following information within the prescribed time limit:
(1) Accounting statements, books of account, vouchers and other relevant accounting information;
(2) Annual financial plans;
(3) Internal control systems of the enterprises;
(4) Operating statistics;
(5) Articles of association, authentications by legal representatives and other information related to enterprise registration;
(6) Other information about revenues and expenditures.

Article 29    Audit institutions shall, in accordance with relevant stipulations, prepare audit plans and related audit programs, compile audit working papers, obtain audit evidences, submit audit reports, produce audit opinions, make audit decisions, manage audit files and conduct special audit investigations.

Article 30    Where the enterprise have been audited in the past, audit institutions shall examine the implementation of the previous audit results.

Where necessary, the audit institutions shall arrange follow-up audit of the audited bodies.

Article 31    Audit institutions shall carry out regular planned audit of the enterprises which are crucial to the national economy and people's livelihood,  have received large amounts of subsidies from the public finance or have incurred serious losses as well as of other enterprises which are designated for such audit by the State Council or local people's governments.

Where public audit organizations are entrusted by the enterprises to perform relevant audit, the enterprises shall submit audit reports produced by such public audit organizations to the audit institutions with relevant jurisdiction.  Where necessary, the audit institutions may sample review such reports.

Where it is found that the audit reports produced by public audit organizations contain material inconsistency with the facts, the audit institutions shall have the power to require the concerned organizations to make corrections and impose appropriate sanctions or penalties according to relevant state stipulations.

Article 32    Audit institutions shall have the power to require the enterprises to submit, according to relevant stipulations, audit reports on their annual accounting statements which are produced by public audit organizations or certified public accountants.

Each year audit institutions shall sample review a certain number of audit reports on the annual accounting statements of the enterprises which are produced by public audit organizations or certified public accountants.

Where it is found that the audit reports on the annual accounting statements of the enterprises which are produced by public audit organizations or certified public accountants contain inconsistency with the facts or other violations, the audit institutions shall make relevant corrections according to the law and instruct The Association of Certified Accounts of P.R.China to impose appropriate sanctions or penalties upon concerned public audit organizations and responsible individuals.

Article 33    These Practice Directions shall be applicable on principle to financial audit of state enterprises engaged in communication, transportation and postal services.

Unless otherwise stipulated, financial audit of China's state stationed overseas may be conducted with reference to these Practice Directions.

Article 34    The authority to interpret these Practice Directions rests with the CNAO.

Article 35   These Practice Directions shall come into effect as of January 1, 1997.