AUDITING

1
 AGENCY
Delegate Power
Principal Engage Agent
Agency Problem
• The desires / goals of the principal and agent
have a conflict; and
• It is difficult or expensive for the principal to
verify what the agent is actually doing (whether
he is working appropriately)
 COMPANY
Delegate Power
Shareholder Engage
• Wide ownership base,
(listed - stock exchanges)
• Lack of interest in the
management - limited risk
and liability
• Short term motive - Capital
gains in stock market
BOD
• Delegated the task to run
the company
• Does not share the
Principal's motive of profit
maximization – more
interested in remuneration
 INFORMATION
Elect
Shareholder B.O.D
Information
A
• Information is ASYMMETRIC U • Shareholder
• Principal cannot monitor D
appoints Ext.
I
whether their interest is served T Auditor
• Auditor give an
External Auditor OPINION

Independent
 Shareholder Information BOD

External Auditor I
N
F
Independent O
R
M

Internal Auditor A
T
I
O
• External auditor appointed by N
shareholders
• Internal auditor appointed by BOD
(Audit Committee) Employees
POLICEMAN THEORY
• Is an auditor responsible for discovering
fraud, like a policeman?
• The theory suggests that Auditor is responsible
for searching, discovering and preventing fraud.
• The theory is now redundant as it is established
that audit is “Verification of truth and fairness
of the financial statements” and not preventing
frauds and errors.
Assurance = Confidence
a) A three party relationship: 1) intended user, (2)
responsible party and (3) the Practitioner
b) A subject matter: data to be evaluated that has
been prepared by the responsible party i.e.
historical financial information, non-financial
performance (key performance indicators),
processes (internal control) and behavior
(compliance with laws and regulations).
c) Suitable criteria: The subject matter is evaluated or
measured against criteria in order to reach an
opinion (Accounting Framework).
d) Evidence: Sufficient appropriate evidence needs
to be gathered to support the required level of
assurance.
e) An assurance report: A written report (Audit
Report) containing the practitioner's opinion is
issued to the intended user, in the form
appropriate to a reasonable assurance
engagement or a limited assurance engagement.
 LEVELS OF ASSURANCE
Absolute Not used in cases of FS

High but not absolute

Reasonable Positive form of opinion (Audit)

Risk greater than Reasonable

Limited Negative form of opinion (Review)
The degree of assurance that can be provided about the reliability
of the financial statements will depend on:
• the amount of work performed in carrying out the assurance
process, and
• the results of that work
 A
Absolute S
S T
U E
Reasonable R S
A T
N I
C
N
E
Limited G

The objective of a reasonable assurance engagement (audit)

is a reduction in assurance engagement risk to an acceptably
low level. The conclusion would usually be expressed in a
positive form.
Assurance = Confidence
a) A three party relationship: 1) intended user, (2)
responsible party and (3) the Practitioner
b) A subject matter: data to be evaluated that has
been prepared by the responsible party i.e.
historical financial information, non-financial
performance (key performance indicators),
processes (internal control) and behavior
(compliance with laws and regulations).
c) Suitable criteria: The subject matter is evaluated or
measured against criteria in order to reach an
opinion (Accounting Framework).
d) Evidence: Sufficient appropriate evidence needs
to be gathered to support the required level of
assurance.
e) An assurance report: A written report (Audit
Report) containing the practitioner's opinion is
issued to the intended user, in the form
appropriate to a reasonable assurance
engagement or a limited assurance engagement.
 PURPOSE OF AUDIT
The purpose of an audit is to enhance the degree of
confidence of intended users in the financial statements

Shareholder Information BOD

A
Financial Statements are U
D Auditor gives an OPINION
prepared, in all material respects, I on financial statements
in accordance with the applicable T
financial reporting framework
External Auditor
Independent
 APPOINTMENT
Every company shall at each AGM appoint an auditor to hold
office from the conclusion of that meeting until the conclusion of
the next AGM (Section 254 CO1984)

Shareholder Information BOD

• Shareholders will fix Chartered Accountant for:
A
auditor’s remuneration in U • All Public Cos & subsidiary
AGM D • Private Cos – only for
I
• Auditors appointed in AGM T those whose paid up
may be removed by special capital 3 million
resolution
External Auditor
 FINANCIAL STATEMENTS
Shareholder Information BOD
1. Annual Report
2. Half yearly financial statements (for listed cos.)
3. Quarterly financial statements (for listed cos.)
Annual Report includes: • Financial Highlights
• Financial Statements • Organogram
• Audit Report on Financial • CEO’s message
Statements • Shareholding Pattern
• Statement of Compliance – CCG • CSR report
• Audit Report on SC-CCG • Statement of value addition
 REPORTING FRAMEWORK
General Purpose Financial Statements: caters to common
financial information needs of a wide range of users

Special Purpose framework: caters to the special needs

of specific users of financial statements i.e. financial
statements prepared using cash basis, or guidelines
provided by regulatory bodies under specific situations
i.e. at the time of liquidation.
 SECP NOTIFICATION 10 SEP 2015
Public Interest Company (PIC)
• Public Company according to PSCCG 2012
• Utility or public service company
• Holding assets in fiduciary capacity (banks, pension fund etc)
• In process of filing to issue a class of security
Large Size Company
• Turnover more than 1 billion, or
• Paid up capital more than 200 million
PIC and Large Size Company will prepare financial statements
according to IFRS (Accounting framework will be IFRS)
 FINANCIAL REPORTING FRAMEWORK (2)
Small Size Company to use Accounting & Financial Reporting
Standards (AFRS) for Small Size Entities (SSE). Small Size
Company is other than a non-listed public company having:
a) paid-up capital not exceeding Rs. 25 million, and
b) turnover not exceeding Rs.100 million.
Medium Size Company is to use IFRS for SMEs:
A non-listed company which is not a:
• a) Public Interest Company; or
• b) Large Sized Company; or
• c) Small Sized Company other than a non-listed public
company.
 AUDIT FRAMEWORK
Shareholder Information BOD
A
- IFRS U International Standards on
- IFRS for SME D Auditing (ISA) issued by
I
- SSE T International Auditing and
- Guidelines on NGO / Assurance Standards Board
NPO Auditor
Generally Accepted Generally Accepted
Auditing Principles Auditing Standards
(GAAP) (GAAS)
 FAIR PRESENTATION
Fair presentation framework is one that requires compliance with
the requirements of the framework and:
1. Acknowledges explicitly or implicitly that, to achieve fair
presentation of the financial statements, it may be necessary for
management to provide disclosures beyond those specifically
required by the framework; or
2. Acknowledges explicitly that it may be necessary for
management to depart from a requirement of the framework to
achieve fair presentation of the financial statements. Such
departures are expected to be necessary only in extremely rare
circumstances
Compliance framework requires compliance but not (1) and (2)
 EXAMPLE
Cost of Land 15,000,000

Revalued - Land 7,000,000,000

Converted

Inventory Lower of Cost or NRV

 MANAGEMENT’S RESPONSIBILITY
• To prepare Financial Statements in accordance with
applicable reporting framework
• (Those charge with governance (BOD) are responsible
for oversight)
• Implement Internal Controls necessary to prepare FS
without material misstatement (ICFR in USA)
• Provide auditor with all information
• Unrestricted access to audit staff within entity
Management should acknowledge all of the above
 AUDIT OPINION
1. Financial Statements are prepared, in all material
respects, in accordance with an applicable financial
reporting framework
2. Financial statements are presented fairly; or
Financial Statements give a true and fair view
 AUDIT OPINION (CO1984)
• Whether or not Auditor has obtained all the information and
explanations which were necessary for purposes of the audit;
• Whether or not in their opinion proper books of accounts as
required by CO1984 have been kept;
• Whether or not in their opinion the B-S and P&L account have
been drawn up in conformity with CO1984 and are in agreement
with the books of accounts;
• Whether or not in their opinion and to the best of their
information and according to the explanations given to them, the
said accounts give the information required by this Ordinance in
the manner so required and give a true and fair view
 AUDIT OPINION (CO1984)
Whether or not in Auditor’s opinion-
• the expenditure incurred during the year was for the purpose of
the company’s business; and
• the business conducted, investments made and expenditure
incurred during the year were in accordance with the objects of
the company
• zakat deductible at source under the Zakat and Usher
Ordinance, 1980, was deducted by the company and deposited
in the Central Zakat Fund
 HONDA ATLAS
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