The auditor’s report on financial statements

International Standard on auditing-700

The audit is designed to allow the auditor to express an opinion. The

expectation of both the auditor and the client is that the report will be
unqualified, however, there may be reasons that the auditor does have
reservations about the fairness of presentations. Auditor report are
designed to promote clear understanding between the auditor and the
financial statement reader, therefore, a standard format is complied
with in all reports issued by the auditors.

Basic elements of the auditor’s report

a. Title
b. Addressee
c. Opening or introductory paragraph
i. Identification of financial statements audited
ii. A statement of the responsibility of the entity’s
management and the responsibility of the auditor
d. Scope paragraph
i. A reference to the ISAs or relevant national standards or
practices
ii. A description of the work the auditor performed
e. Opinion paragraph
i. A reference to the financial reporting framework used to
prepare the financial statements (identifying the country of
origin of the financial reporting framework when the
framework used is not international accounting standard);
ii. An expression of opinion on the financial statements

f. Date of the report

g. Auditor’s address
h. Auditor’s signature

Note: a measure of uniformity in the form and content of the

auditor’s report is desirable because it helps to promote the
reader’s understanding and to identify unusual circumstances
when they occur.

Title
It may be appropriate to use the term “independent auditor” in the
title to distinguish the auditor’s report from reports that might be
issued by officers of the entity, board of directors or by the auditor who
may not be required to abide by the same ethical requirements as the
independent auditor.
Addressee
The report is ordinarily addressed to the shareholders or the board of
directors of the entity whose financial statements are being audited.

Opening or introductory paragraph

The auditor’s report should identify the financial statements of the

entity that have been audited, including the date of and period
covered by the financial statements.

The auditor’s report should include a statement that the financial

statements are the responsibility of the entity’s management and a
statement that the responsibility of the auditor is to express an
opinion on the financial statements based on the audit.

“we have audited the accompanying balance sheet of M.S trading

(Private) Limited as at June 30, 2006 alongwith the profit and loss
account, cash flows and the statement of changes in equity for the
period then ended. These financial statements are the responsibility of
the company’s management. Our responsibility is to express and
opinion on these statements based on our audit.”

Scope paragraph

It refers to the auditor’s ability to perform audit procedures deemed

necessary in the circumstances. The reader’s needs this as an
assurance that the audit has been carried out in accordance with
established standards or practices. Unless otherwise stated. The
auditing standards and practices followed are presumed to be those of
the country indicated by auditor’s address. The report should include a
statement that audit was planned and performed to obtained
reasonable assurance about whether the financial statements are free
of material misstatement.

“ we conducted our audit in accordance with the auditing standards as

applicable in Pakistan. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
above said statements are free of any material misstatements. An
audit also includes assessing the accounting policies and significant
estimates made by management, as well as, evaluating the overall
presentation of the above said statements.”
What is reasonable assurance?

A conclusion that the financial statements are not materially misstated.

An auditor can not obtain absolute assurance because of limitations
described below.

How reasonable assurance is achieved?

It is achieved by obtaining audit evidence.

Factors affecting reasonable assurance

1. Inherent limitations of an audit i.e. failure of audit procedure to

detect material misstatement in financial statement because of
a) the use of testing (application of procedures on samples)
b) The inherent limitations of accounting and internal control
system.
c) Persuasive nature of audit evidence rather than conclusive
(persuasive one leading to an opinion, one which cause to
believe; Conclusive final , convincing)

2. Exercise of judgment by the auditor in gathering of evidence and

drawing of conclusion.

3. Existence of other limitations like related parties etc.

Opinion paragraph

The opinion paragraph should clearly indicate the financial reporting

framework used to prepare the financial statements (including
identifying the country of origin of the financial reporting framework
when the framework used in not international accounting standards)
and state auditor’s opinion as to whether the financial statements give
a true and fair view in accordance with that financial reporting
framework and, where appropriate, whether the financial statements
comply with statutory requirements.

“We believe that our audit provides a reasonable basis for our opinion
and, after due verification, we report that

a. In our opinion, proper books of account 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.
c. In our opinion and to the best of our information and according to
the explanation 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 june 30,
2006 and of the profit, its cash flow and changes in equity for
the year then ended; and
d. In our opinion Zakat deductible under the Zakat and Ushr
Ordinance, 1980 (XVIII of 1980), was deducted by the company
and deposited in the Central Zakat Fund established under
section 7 of that Ordinance;”

Date of report:

Auditor should date the report as of the completion date of the audit. It
is always after the approval date of the financial statements from the
Board of Directors.

Auditor’s address:

The report should name a specific location which is ordinary the city
where the auditor maintains the office that has responsibility for the
report.

Auditor’s signature:

The report should be signed in the name of the audit firm, the personal
name of the auditor or both as appropriate.
Modified auditor’s report
Types of auditor’s report

There are five basic types of audit reports.

1) Standard unqualified report

2) Unqualified report with an explanatory paragraph
3) Qualified report
4) Adverse report
5) Disclaimer of opinion

An auditor’s report is considered to be modified in the following

situations:

Matters that donot affect the auditor’s opinion

Explanatory paragraph (Emphasis of matter paragraph)

Matters that do affect the auditor’s opinion

a. Qualified opinion
b. Disclaimer of opinion
c. Adverse opinion

These arise when there is a limitation on the scope of the work or a

disagreement with management regarding acceptability of the
accounting policies selected, the method of application or the
inadequacy of financial statements disclosures.

Reasons for modifications;

Explanatory paragraph

Theexplanatory paragraph should be used to explain the followings;

i.
A change in accounting principles
ii.
Substantial doubt about a client being a going concern
iii.
A justified departure form the GAAP
iv.
The emphasis of some matter, such as unusually important
subsequent events, risks, or uncertainties associated with
contingencies, significant estimates or uncertainties.
Qualified report

i. A material unjustified departure from GAAP

ii. Inadequate disclosure
iii. A scope limitation

Adverse report

i. A pervasive and material unjustified departure from GAAP

ii. Lack of important disclosure

Disclaimer of opinion

If the auditor either lack independence or was unable to obtain

sufficient evidence to form an opinion on the overall fairness of the
financial statements. This may occur because of:

i. A scope limitation
ii. Substantial doubt about the client being a going concern
iii. The firm not being engaged to perform an audit.

Unqualified auditor’s report

Auditor’s report to the members

We have audited the annexed balance sheet of M.S trading (Private)

Limited as at June 30, 2006 and the related profit and loss account,
cash flow statement and statement of changes in equity together with
the notes forming part thereof, for the year then ended and we state
that we have obtained all the information and explanation which, to
the best of our knowledge and belief, were necessary for the purpose
of our audit.

It is the responsibility of the company’s management to establish and

maintain a system of inter control, and prepare and present the above
said statements in accordance in conformity with the approved
accounting standards and the requirements of the Companies
Ordinance, 1984. Our responsibility is to express an opinion on these
statements based on our audit.

We conducted our audit in accordance with the auditing standards as

applicable in Pakistan. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
above said statements are free of any material misstatements. An
audit also includes assessing the accounting policies and significant
estimates made by management, as well as, evaluating the overall
presentation of the above said statements. We believe that our audit
provides a reasonable basis for our opinion and, after due verification,
we report that;
 a. In our opinion, proper books of account 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.
c. In our opinion and to the best of our information and according to
the explanation 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 june 30,
2006 and of the profit, its cash flow and changes in equity for
the year then ended; and
d. In our opinion Zakat deductible under the Zakat and Ushr
Ordinance, 1980 (XVIII of 1980), was deducted by the company
and deposited in the Central Zakat Fund established under
section 7 of that Ordinance;”

Muhammad Safder and Co. Lahore

Chartered Accountants August 21,

2006

Modified report- matters that donot affect the auditor’s

opinion
 Auditor’s report to the members
We have audited the annexed balance sheet of M.S trading (Private)
Limited as at June 30, 2006 and the related profit and loss account,
cash flow statement and statement of changes in equity together with
the notes forming part thereof, for the year then ended and we state
that we have obtained all the information and explanation which, to
the best of our knowledge and belief, were necessary for the purpose
of our audit.

It is the responsibility of the company’s management to establish and

maintain a system of inter control, and prepare and present the above
said statements in accordance in conformity with the approved
accounting standards and the requirements of the Companies
Ordinance, 1984. Our responsibility is to express an opinion on these
statements based on our audit.

We conducted our audit in accordance with the auditing standards as

applicable in Pakistan. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
above said statements are free of any material misstatements. An
audit also includes assessing the accounting policies and significant
estimates made by management, as well as, evaluating the overall
presentation of the above said statements. We believe that our audit
provides a reasonable basis for our opinion and, after due verification,
we report that;

a. In our opinion, proper books of account 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.
c. In our opinion and to the best of our information and according to
the explanation 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 june 30,
2006 and of the profit, its cash flow and changes in equity for
the year then ended; and
d. In our opinion Zakat deductible under the Zakat and Ushr
Ordinance, 1980 (XVIII of 1980), was deducted by the company
and deposited in the Central Zakat Fund established under
section 7 of that Ordinance;”

Without qualifying our opinion, we draw the to note

No.---- to the financial statements. The company has
not made any provision for worker’s profit
participation fund based on the legal advice and in
view of a constitutional petition filed by another
company pending adjudication in Sindh High Court on
this matter. As more fully explained in the note, the
ultimate outcome of the matter cannot presently be
determined and no provision for any liability that
result has been made in the financial statements,
including any penalties which may become payable in
connection therewith.

Muhammad Safder and Co. Lahore

Chartered Accountants August 21,

2006

Modified auditor’s report- matters that do affect the auditor’s

report

Auditor’s report to the members

We have audited the annexed balance sheet of M.S trading (Private)
Limited as at June 30, 2006 and the related profit and loss account,
cash flow statement and statement of changes in equity together with
the notes forming part thereof, for the year then ended and we state
that we have obtained all the information and explanation which, to
the best of our knowledge and belief, were necessary for the purpose
of our audit.

It is the responsibility of the company’s management to establish and

maintain a system of inter control, and prepare and present the above
said statements in accordance in conformity with the approved
accounting standards and the requirements of the Companies
Ordinance, 1984. Our responsibility is to express an opinion on these
statements based on our audit.

Except as discussed in the following paragraph, we

conducted our audit in accordance with the auditing standards as
applicable in Pakistan. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
above said statements are free of any material misstatements. An
audit also includes assessing the accounting policies and significant
estimates made by management, as well as, evaluating the overall
presentation of the above said statements. We believe that our audit
provides a reasonable basis for our opinion and, after due verification,
we report that;

We did not observe the counting of the physical

inventories as of June 30, 2006, since that date was
prior to the time we were initially engaged as auditor
for the company. Owing to the nature of the
company’s records, we were unable to satisfy
ourselves as to inventory quantities by other audit
procedures.

a. In our except for the effects of such

opinion,
adjustments, if any, as might have been
determined to be necessary had we been able to
satisfy ourselves as to physical inventory
quantities, proper books of account 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.
c. In our opinion and to the best of our information and according to
the explanation 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 june 30,
2006 and of the profit, its cash flow and changes in equity for
the year then ended; and
d. In our opinion Zakat deductible under the Zakat and Ushr
Ordinance, 1980 (XVIII of 1980), was deducted by the company
and deposited in the Central Zakat Fund established under
section 7 of that Ordinance;”

Muhammad Safder and Co. Lahore

Chartered Accountants August 21,

2006

Modified auditor’s report- Disclaimer of opinion

Auditor’s report to the members
We were engaged to audited the annexed balance sheet of M.S
trading (Private) Limited as at June 30, 2006 and the related profit and
loss account, cash flow statement and statement of changes in equity
together with the notes forming part thereof, for the year then ended
and we state that we have obtained all the information and
explanation which, to the best of our knowledge and belief, were
necessary for the purpose of our audit.

It is the responsibility of the company’s management to establish and

maintain a system of inter control, and prepare and present the above
said statements in accordance in conformity with the approved
accounting standards and the requirements of the Companies
Ordinance, 1984. Our responsibility is to express an opinion on these
statements based on our audit.

We did not observe the counting of the physical

inventories as of June 30, 2006, and confirm accounts
receivable due to limitations placed on the scope of
our work.
Because of the significance of the matters discussed
in the preceding paragraph, we donot express an
opinion on the financial statements.

Muhammad Safder and Co. Lahore

Chartered Accountants August 21,

2006

Modified auditor’s report- adverse opinion

Auditor’s report to the members

We have audited the annexed balance sheet of M.S trading (Private)
Limited as at June 30, 2006 and the related profit and loss account,
cash flow statement and statement of changes in equity together with
the notes forming part thereof, for the year then ended and we state
that we have obtained all the information and explanation which, to
the best of our knowledge and belief, were necessary for the purpose
of our audit.

It is the responsibility of the company’s management to establish and

maintain a system of inter control, and prepare and present the above
said statements in accordance in conformity with the approved
accounting standards and the requirements of the Companies
Ordinance, 1984. Our responsibility is to express an opinion on these
statements based on our audit.

Except as discussed in the following paragraph, we

conducted our audit in accordance with the auditing standards as
applicable in Pakistan. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
above said statements are free of any material misstatements. An
audit also includes assessing the accounting policies and significant
estimates made by management, as well as, evaluating the overall
presentation of the above said statements. We believe that our audit
provides a reasonable basis for our opinion and, after due verification,
we report that;

The accounting policy adopted by the management

for valuation of presentation of fixed assets at
revalued amounts is not in accordance with the
guidance provided in International Accounting
Standard- 16 nor we were able to satisfy ourselves
about the accounts receivables.

In our opinion, because of the effect of matters

discussed above the financial statements does not
give a true and fair value of financial position of
the company as at June 30, 2006 and the results
of its operations and its cash flows for the year
then ended in accordance with International
Accounting Standards.

Muhammad Safder and Co. Lahore

Chartered Accountants August 21,

2006