OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF

OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS Lecture 2

Objective of an Audit • To enable an auditor to express an opinion whether the financial statements are prepared as per. International or Local Accounting Standards • The terms used to express the opinion are “give a true and fair view”. • It improves credibility of financial statements.

General Principles of an Audit Professional Ethics: • It is vital to the public image and credibility of the profession. • It is important to recognize that many groups in society rely on accountant’s work. • The accountant accountability. therefore has a public

Characteristics of Accountants • Auditor is independent of management. • Auditor is honest and is not corrupt. • He is not subjective in forming his opinion. . • Auditor has attained certain professional qualification. • Auditor does not disclose the information. • He should maintain his professional knowledge and skill. • Audit should be performed by certain standards, international or national.

International Standards on Auditing (ISAs) • The auditor may also conduct the audit in accordance with both ISAs and auditing standards of a specific jurisdiction or country. • The audit should be planned and performed with an attitude of professional skepticism. • An attitude of professional skepticism means the auditor makes a critical assessment.

SCOPE OF AN AUDIT • Audit procedures that are deemed appropriate in the circumstances to achieve the objective of the audit. • Audit opinion • Reasonable assurance • Sufficient appropriate audit evidence • Audit procedures

Audit-Evidence • It is obtained by applying necessary audit procedures. • Auditing is concerned with the verification of accounting date. • means looking for sufficient evidence depends on what experience and knowledge of contemporary auditing standards.

An auditor obtains audit evidence for the following areas • • Existence Rights and obligations Occurrence Completeness Valuation Measurement Presentation and disclosure

REASONABLE ASSURANCE • A conclusion that the financial statements are not materially misstated. • It is achieved by obtaining audit evidence. • An auditor cannot obtain absolute assurance

Factors affecting reasonable assurance • Inherent limitation of an audit • Exercise of judgment by the auditor in gathering of evidence and drawing of conclusion. • Existence of other limitations like related parties

Inherent Limitations of Accounting and Internal Control • • • Management over rides Collusion with employees Collusion with third party Unaffordable cost of internal control Human error

AUDIT RISK AND MATERIALITY • The risk that the auditor expresses inappropriate audit opinion when the financial statements are materially misstated. • The concept of reasonable assurance acknowledges that there is a risk the audit opinion is in appropriate.

Risk of material misstatement levels: • Overall Financial Statement level • Often relates to entity’s control environment • Also relates to declining economic conditions • Transactions, account balances, & disclosures level

Responsibility for the Financial Statements • Designing, implementing and maintaining internal control relevant to the preparation and presentation of financial statements. • Selecting and applying appropriate accounting policies; • Making accounting estimates

The Audit Requirement • Not all limited companies are required to have their financial statements audited. • Small companies are exempt from the audit requirement

Appointment First Auditors • The first auditors of a company shall be appointed by the directors within 60 days of incorporation of the company • The first auditors will hold office till the first annual general meeting • If the directors fail to appoint the first auditors, the members shall appoint the first auditors.

Subsequent Auditors • At each annual general meeting the company shall appoint the auditors • The auditors shall hold office from the conclusion of that meeting till the conclusion of next annual general meeting. • If no auditors are appointed at annual general meeting Commission shall appoint an auditor.

Casual Vacancy • Any casual vacancy shall be filled by directors. • Auditors so appointed shall hold office till next annual general meeting • If directors do not appoint auditors to fill casual vacancy within 30 days, Commission may appoint an auditor.

Remuneration of Auditors Fixation of remuneration of auditors depends upon the authority appointing the auditors, i. e. • If auditors are appointed by directors, directors shall fix the remuneration. • If auditors are appointed by COMMISSION, COMMISSION shall fix remuneration. • In all other cases, the members (Company) shall fix the remuneration.

Procedure for Change / Removal /Appointment of New Auditors • Notice from a member is required for a resolution at the AGM • The member shall give notice to the company at least 14 days before the AGM • On receipt of the notice the company shall send a copy of such notice to the retiring auditor and members • In case of a listed company, notice shall be published • The retiring auditor can make representations

Change of Auditors • Notice from a member from the date of AGM At least 14 days • Send Copy of the notice to: a) The retiring auditor forthwith b) Members At least 7 days before

Removal of Auditors • First auditor appointed by the directors may be removed by the members in a general meeting. • Another person nominated by a member should be appointed • The notice of nomination of the proposed auditor should be given to the member’s at least 14 days • An auditor or auditors appointed in an annual general meeting may be removed before the next annual general meeting through a special resolution.

Qualification of Auditors • 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 • The person must be a Chartered Accountant within the meaning of the Chartered Accountants Ordinance, 1961.

Disqualification of Auditors • Present directors, other officer or employees of the company or who held these offices during the last three years. • A partner or employee of a director, other officer or employee of the company. • A spouse of a director. • A person who is indebted to the company. • A body corporate. • A person or his spouse or minor children or in case of firm all partners of such firm who holds any shares of an audit client or any of its associated companies.