Principles of Audit and

Assurance
What is an Audit?
Audit is an independent examination of financial statements of an entity that enables
an auditor to express an opinion whether the financial statements are prepared (in all
material respects) in accordance with an identified and acceptable financial reporting
framework (e.g. international or local accounting standards and national legislations)
This view of audit is presented by ISA 200 Objective and General Principles Governing
an Audit of Financial Statements.
The phrases used; “to express the auditor’s opinion” means that the financial
statements give a true and fair view or have been presented fairly in all material
respects.
True and fair presentation means that the financial statement are prepared and
presented in accordance with the requirements of the applicable International
Financial Reporting Standards (IFRS) and local pronouncements/legislations.
What is an Audit?
What we can understand as the essential features of an audit from the above
definition and explanation are as under:
• An auditor involves in examination of financial statements, the auditor is not
responsible for the preparation of the financial statements.
• The end result of an audit is an opinion to assist the user of the financial statements.
Auditing therefore relies heavily on professional judgment, not merely on the facts.
• The auditor’s opinion makes reference to “true and fair” or “fair presentations” but
“true and fair” is again a matter of judgment. It is not precisely defined for the auditor.
• In order to make the user of the auditor’s report able to feel confident in relying on
such report, the auditor should be independent of the entity. Independent essentially
means that the auditor has no significant personal interest in the entity. This allows an
objective, professional view to be taken.
Why is there a need for an audit?
The problem that has always existed at the time when the manager
reports to the owners is that: whether the owners will believe the
report or not? This is because the reports may:
a. Contain errors
b. Not disclose fraud
c. Be inadvertently misleading
d. Be deliberately misleading
e. Fail to disclose relevant information
f. Fail to conform to regulations
What is the distinction between auditing
and accounting?
Relationship between auditing and accounting
Auditing and accounting are closely connected but both are separate
activities. The directors of a company are responsible for establishing
books of accounts that will accurately record financial information and
that are used for preparing the annual financial statements. It is
similarly the responsibility of the directors to adopt consistent and
appropriate accounting policies in order to prepare and present the
financial statements. The financial statements have to comply with
national legislative requirements and International Financial Reporting
Standards (IFRSs).
What is the distinction between auditing
and accounting?
• Accounting is the process of recording, classifying, summarizing and reporting
financial information in a logical/systematic manner for the purpose of decision
making. To provide relevant & reliable information, accountants must have a
thorough understanding of the principles and rules that provide the basis for
preparing the financial statements.
• In auditing the financial statements, the concern is with determining whether the
presented financial statements properly (true and fair) reflect the financial
information that occurred during the accounting period. Since auditors are primarily
concerned with the end result of this work i.e. do the financial statements show a
true and fair view? In order to arrive at their conclusion the auditors must have a
deep knowledge and understanding of accounting (including applicable accounting
standards) and in practice, the directors will consult with the auditors as to
appropriate accounting policies to follow.
Who can be an auditor?
For appointment as auditor of:
a) a Public Company or
b) a Private Company which is a subsidiary of a Public Company.
c) a Private Company having paid up capital of three million rupees or more.
The person must be a Chartered Accountant within the meaning of the
Chartered Accountants Ordinance,
1961.
For listed companies an auditor must have a satisfactory QCR (quality
control review) rating issued by ICAP.
What is an auditor’s report?
The primary aim of an audit is to enable the auditor to say “these
accounts show a true and fair view” or, of course, to say that “they do
not show a true and fair view”.
At the end of his audit, when he has examined the entity, its record,
and its financial statements, the auditor produces a report addressed to
the owners/stake holders in which he expresses his opinion of the truth
and fairness, and sometimes other aspects, of the financial statements.
AUDITORS’ REPORT
a) In our opinion, proper books of accounts have been kept by the company as required by
the Companies Ordinance, 1984
b) In our opinion:
i. The balance sheet and profit and loss account together with the notes thereon have been
drawn-up in conformity with the Companies Ordinance, 1984, and are in agreement with
the books of account and are further in accordance with accounting policies consistently
applied
ii. The expenditure incurred during the year was for the purpose of the company’s
business; and
iii. The business conducted investments made and the expenditure incurred during the
year were in accordance with the objects of the company.
AUDITORS’ REPORT
c) In our opinion and to the best of our information and according to the
explanations given to us, the balance sheet, profit and loss account, cash
flow statement and statement of changes in equity together with the notes
forming part thereof conform with approved accounting standards as
applicable in Pakistan and, give the information required by the Companies
Ordinance, 1984, in the manner so required and respectively give a true and
fair view of the state of the company’s affairs as at DATE and of the
profit/loss its cash flows and changes in equity for the year then ended; and
d) In our opinion Zakat deductible at source under the Zakat and Usher
Ordinance, 1980 was deducted by the company and deposited in the Central
Zakat Fund established under Section 7 of that Ordinance.
INDEPENDENT AUDITOR’S REPORT
1. Introductory Paragraph
2. Management’s Responsibility for the Financial Statements
preparation and fair presentation of these financial statements
designing, implementing and maintaining internal control relevant to the preparation and fair
presentation of financial statements
3. Auditor’s Responsibility
express an opinion on these financial statements based on our audit
4. Opinion
In our opinion, the financial statements give a true and fair view of (or” present fairly, in all
material respects,”) the financial position of ABC Company as of December 31, 20X1, and of
its financial performance and its cash flows for the year then ended in accordance with
International Financial Reporting Standards.
What are the different types of audit?
Three types of audits are discussed in general, i.e.,
• 1. Financial statement audits
• 2. Operational audits
• 3. Compliance audits
The purpose of a compliance audit is to determine whether the entity
is following specific procedures, rules, or regulations set down by some
higher authority.
Advantages of an audit
We have seen that the need for an external audit in the case of
companies arises primarily from the existence of split-up of ownership
from control. There are however, certain advantages in having financial
statements audited even where no statutory requirement exists for
such an audit in the case of a sole-trader ship, partnership, or non-
profit organizations for example.
These advantages can be summarized as follows:
Advantages of an audit
a) Disputes between management may be more easily settled. For
instance, a partnership which has complicated profit sharing
arrangements may require an independent examination of those
accounts to ensure, as far as possible, an accurate assessment and
distribution of the profits.
b) Major changes in ownership may be facilitated if past accounts
contain an independent audit report, for instance, where two sole
traders merge their business to form a new partnership.
Advantages of an audit
c) Application to lenders/financial institutions for finance may be
strengthened by the submission of audited accounts. However do
remember that a bank, for instance, is likely to be far more concerned
about the future of the business and available security, than by the past
historical accounts, audited or otherwise.
d) The audit is likely to involve an in depth examination of the business
and so may enable the auditor to give more constrictive advice to
management on improving the efficiency of the business.
Disadvantages of an audit
Like most thing in life, audits are not entirely without their
disadvantages. There are two main points to make here:
b) The audit fee! Clearly the services of an auditor must be paid for. It is
for this reason that few partnerships and even fewer sole traders are
likely to have their accounts audited.
c) The audit involves the client’s staff and management in giving time to
providing information to the auditor. Professional auditors should
therefore plan their audit carefully to minimize the disruption which
their work will cause.
What are the different stages of audit?
Auditing is essentially a practical task. The auditor always needs to reflect the nature of the
circumstances of the entity under audit. It is unlikely that any two audit assignments will ever
identical. It is however possible to identify a number of standard stages in a typical external audit.
These are as follows:
- Audit appointment
- Engagement letter
- Initial planning
Knowledge of the business
Risk Assessment
Internal control review (procedures)
Control procedures (authorities/approvals/segregation of duties)
- Preparation of the audit plan
- Accounting system review
What are the different stages of audit?
- Analytical review techniques (Compliance procedures-Application of control
test procedures) like purchasing are according to the controls established.
- Considering the ways in which audit evidence can be sought
- Substantive testing (transaction level procedures)
- Reasonable assurance
- Review of the financial statements (compliance with the standards/material
misstatement etc.)
- Preparation and signing of report
At the stage of considering the ways of seeking audit evidence the auditor will
make a preliminary evaluation of the entity’s control system:
What are the different stages of audit?
1. If the controls are likely to lead to a true and fair set of financial
statements the auditor will test those controls.
2. If they appear weak he will not rely on the controls but carry out
extensive testing of the transactions and balances which appear in the
financial statements by means of substantive procedures.
3. If the controls are operating effectively, the auditor can reduce the
amount of substantive testing described above and adopt a reliance
approach.
4. If not then the auditor will be forced into a extensive substantive
approach