CORPORATE & BUSINESS LAW

ROLE OF AUDITOR WITH-IN A COMPANY

Audit
Audit involves with the task of the verification of accounting data and with determining the accuracy and reliability of accounting statements and reports. Thus, it includes investigation process, attestation process, and the reporting process, pertaining to economic actions and events.

Auditor
An auditor is a person who makes an independent report to a company's members as to whether its financial statements have been properly prepared in accordance with the Companies Act 1984. The report must also say if a company's accounts give a true and fair view of its affairs. Most companies are required to have their accounts audited so the company appoints an auditor for this purpose.

Appointment of Auditor;
Section 252 throws light upon the appointment of an auditor: First Auditor The co-operative law authority can appoint the first auditor of a company if the company in the general meeting does not appoint the first auditor within 120 days of the date of incorporation of a company. Casual Vacancy The board of directors is empowered to fill any casual vacancy in the office of an auditor except one, which is caused by prior resignation. Appointment By Share holders In case the board of directors fails to appoint the auditor, the company can appoint the first auditor within 120 days of the date incorporation of the company.

 Role of an Auditor
The role of an auditor can be explained as under as;

Responsibilities of an Auditor: y Liable to be called upon to answer for one s acts or decisions: answerable y Able to fulfill one s obligations: reliable, trustworthy y Able to choose for oneself between right and wrong and y Involving accountability or important duties. Hence the word responsibilities is defined as something for which one is responsible. Rights/Powers and duties of auditors: Following are the powers and duties of an auditor in a company;

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Rights/Powers:
Access To Books;

According to Section 227(1) the auditor of a company has a right of access, at all items to the books and accounts and voucher of the company, whether kept at the
head office of the right of access to books etc is an absolute right and is not subject to any restriction exception or qualification. This means that the auditor can examine the books vouchers etc at any time during normal working hours.

Power of Inspection; It is a right of the auditor that he can inspect the record of the company at any time. He can visit without any notice and verify the cash or any document. Receiving Notices; According to Section 231 a company auditor has a right to receive all notices and other communications relating to any general meeting of the company, which any member of the company is either to have sent to him. Signs Audit Report; According to Section 229, the auditor has a right to sign the auditor's report or authenticate any other document of the company. Seek Legal and Technical Advice; The auditor has a right to seek opinions of experts in different fields whenever he feels it necessary as he is not expert in all the areas. Receive Remuneration; According to Section 224(8) the auditor has a right to receive remuneration for auditing the accounts of the company after he has completed the work of audit even if he is dismissed in the middle he has a right to get full remuneration of the year.

Duties:
Preparation of accounts; Duties of an Auditor is preparation of final accounts through that a through verification of all expenditure and incomes of the Company Verifying data; Calculating and verifying the accounting data's prepared by the company and preparing the Trading profit & loss a/c and balance sheet of the company. As well as preparing the auditing report to company higher authorities. Entity; The entity has complied with the relevant legislation s requirements in respect of the necessary disclosures. If the entity has not made all the disclosures required the audit report should, if possible, contain a statement of the required particulars.

The purpose of an audit

Managers often feel under pressure to portray their entities in a favorable light when they report to any interested parties. This is one reason why we have a detailed set of accounting standards to regulate the presentation of contentious items in the financial statements. There is, however, an even more fundamental issue that must be addressed in the financial reporting process. It is not enough merely to publish rules and
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regulations governing the financial statements; there has to be some mechanism to enforce their implementation. Auditing is largely about providing the readers of the financial statements with confidence in the figures. This is highlighted by the accountancy profession s definition of an audit.

Objective and general principles governing an audit of financial statements

I. The auditors can discharge their responsibilities with confidence only when they possess the professional qualities which includes independence, integrity, objectivity, professional competence and due care, confidentiality, professional behavior and technical standards. The auditor should comply with the following Code of Ethics for Professional Accountants issued by the International Federation of Accountants: 1) Integrity and objectivity. 2) Resolution of ethical conflicts. 3) Professional competence. 4) Confidentiality. 5) Tax Practice. 6) Activities outside Pakistan. 7) Publicity and advertising by Chartered Accountants. 8) Other occupations in which Chartered Accountants can engage without Council s permission. 9) Independence. 10) Professional competence and responsibilities regarding the use of non-accountants. 11) Fees and commission. 12) Clients monies. 13) Relations with other Chartered Accountants in practice. The auditors should conduct an audit in accordance with International Standards on audit (ISA). The auditor should plan and perform an audit with an attitude of professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated. The attitude of professional skepticism means the auditors makes a critical assessment with a questioning mind of the validity of audit evidence obtained. The procedures required to conduct an audit in accordance with ISAs should be determined by the auditor having regard to the requirements of ISAs , relevant professional bodies , legislation , regulations and where appropriate , the terms of the audit engagement and reporting requirements.

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The auditors responsibility to consider fraud and error

1. While this ISA focuses on the auditor s responsibilities with respect to fraud and error in an audit of financial statements, the primary responsibility for the
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prevention and detection of fraud and error rests with both those charged with governance and the management of the entity. 2. When planning and performing audit procedures and evaluating and reporting the results thereof, the auditors should consider the risk of material misstatements in the financial statements resulting from fraud and error. 3. In planning the audit, the auditor should discuss with other members of the audit team the susceptibility of the entity to material misstatements in the financial statements resulting from fraud or error. The auditors should have knowledge of fraud risk factors which are set out in Appendix to this ISA 240. 4. When the auditor identifies a misstatement resulting from fraud or a suspected fraud or error, the auditor should consider the auditor s responsibility to communicate that information to management, those charged with governance and, in some circumstances, to regulatory and enforcement authorities.

Consideration of laws and regulations

I. When planning and performing audit procedures and in evaluating and reporting the results thereof, the auditor should recognize that noncompliance by the entity with laws and regulations may materially affect the financial statements. In order to plan the audit, the auditor should obtain a general understanding of the legal and regulatory framework applicable to the entity and the industry and how the entity is complying with that framework. Further the auditor may also identify instances of noncompliance by inspecting correspondence with the relevant licensing or regulatory authorities. The auditor should either communicate with the audit committee, the board of directors and senior management or obtain evidence that they are appropriately informed regarding noncompliance that comes to the auditor s attention. If the auditor concludes that the noncompliance has a material effect on the financial statements, and has not been properly reflected in the financial statements, the auditors should express a qualified or an adverse opinion. If the auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate whether noncompliance that may be material to the financial statements has or is likely to have occurred, the auditor should express a qualified

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1) 2) 3)

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opinion or a disclaimer of opinion on the financial statements on the basis of a limitation on the scope of the audit. The auditors report on financial statements The auditor should review and assess the conclusions drawn from the audit evidence obtained as the basis for the expression of an opinion on the financial statements. The auditor s report should contain a clear written expression of opinion on the financial statements taken as a whole. The auditor s report should includes; (A) Title e.g. auditors report. (B) Addressee as required by the circumstances of the engagement and local regulations e.g. members of the company. (C) Introductory paragraph to identify financial statements audited and a statement of the responsibility of the entity s management and the responsibility of the auditor. (D) Scope paragraph to give reference to the ISAs or relevant national standards or practices and the description of the work the auditor performed. (E) Opinion paragraph. (F) Date of the report. (G) Auditor s address, and (H) Auditor s signature. In certain circumstances, an auditor s report may be modified by adding an emphasis of matter paragraph to highlight a matter affecting the financial statements which is included in a note to the financial statements that more extensively discusses the matter. The addition of such an emphasis of matter paragraph does not affect the auditor s opinion. Auditor should express qualified opinion when he concludes that an unqualified opinion can not be expressed but that the effect of any disagreement with management or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion. Auditor should express a disclaimer of opinion when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements.

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