Roles Duties and Responsibilities of Auditors Introduction Auditors

Roles, Duties and Responsibilities of Auditors

Introduction • Auditors, who are expected to be watchdogs of organizations • Brought in by management through some profitable assignments • The allegation that annual reports presented by companies today lack truthfulness and transparency need not be stressed • Instances are galore where obliging auditors have helped companies falsify accounts and window dressing for small monetary gains • Basic role of auditors is to clarify the veracity of accounts maintained by companies for the benefits of stakeholders

Defining Audit “The independent examination of any entity, whether profit oriented or not and irrespective of its size or legal form, when such as examination is conducted with a view to expressing an opinion thereon” (ICAI)

Objectives of an Audit “ the objectives of an audit of financial statements is to enable an auditor to express an opinion on financial statements which are prepared within a framework of recognized accounting policies and practices and relevant statutory requirements” ( Standard auditing practices of ICAI)

Types of Audit 1. Financial statements Audit Ø it is conducted to determine whether the overall financial statements are in accordance with specified criteria 2. Compliance Audit Ø To determine whether the auditee is following specific procedures, rules and regulations set by higher competent authorities 3. Operational Audit Ø It is a review of any part of an organization’s operating procedures and methods for evaluating effectiveness and efficacy

Defining Auditor • A person appointed by a company to perform an audit • Required to certify that the accounts produced by his client companies have been prepared in accordance with normal accounting standards • Represent a true and fair view of company • Usually, Chartered accountants are appointed as auditors

Types of Auditors 1. Internal auditors Ø Ø Ø Employed by the organization They may conduct all types three types of audits The may assist external auditors in completing financial statement audits or perform audits for the use of management within organization 2. Independent auditors Ø They are usually Certified Public Accountants (CPA) Ø Their opinion about financial statements make statements more credible to investors, bankers, labor unions, government agencies and general public

Continued…. . 3. Government auditors Ø They work in various local, state and federal or central government agencies Ø They perform all three types of audits Ø Such as, local and state auditors verify that businesses collect and remit sales taxes and excise duties as required by law

Duties of an Auditors As provided by SECP The auditor is required to make a report to the members of the company on the: Ø Ø Ø Financial statements Books of account of the company On every balance sheet Profit and loss account and covers all other documents forming part of the balance-sheet and profit and loss account

Continued…. . The auditor’s report to the members covers the following matters: Ø Confirmation as to whether all information and explanations necessary for the purposes of the audit have been obtained or not Ø Confirmation as to whether proper books of account are being maintained by the company as required by Ordinance or not. Ø Confirmation as to whether the preparation of balance sheet and expenditure account are in conformity with the Ordinance and in agreement with the books of accounts.

Continued…. . It must also provide Opinion regarding true and fair view of the following: Ø The balance sheet as at the end of its financial year Ø The profit and loss account or the income and expenditure account and of the profit or loss or surplus or deficit for its financial year and Ø statement of changes in financial position or sources and application of funds of a listed company.

Continued…. . Ø Incurring of expenditure during the year for the purposes of the company’s business and, making investments and Ø Incurring expenditures during the year in accordance with the objects of the company Ø Opinion regarding: § Deduction of Zakat deductible at source under the Zakat and Usher Ordinance, 1980; and § Deposit thereof in the Central Zakat Fund, if applicable.

What is a qualified auditor’s report If the auditor answers any of the matters given above in the negative or with a qualification, the reasons for such an answer shall be provided in the auditor’s report. An auditor is also required to state the factual position to the best of his information.

Responsibilities of Auditors In case of listed companies: Ø Attending the Annual General Meeting in which the balance-sheet and profit and loss account and the auditor’s report are to be considered Ø They have to reply to the questions of Members. Ø Auditors are given the notices and they may attend the AGM, but their presence is not mandatory.

Responsibilities of Auditors Standards auditing practices provide the following responsibilities of Auditors: § He is responsible forming and expressing his opinion on financial statement § He determines whether the relevant information is disclosed properly in financial statements § He has to ensure that his work involves exercise of judgment § He is not expected to perform duties which fall outside the scope of his competence

Removal of Auditors can be removed § Through passing special resolution in a general meeting. § There should be a proper justification for removing the auditor in compliance with Section 253(3) of the Ordinance. § A company is also required to send intimation thereof to the registrar concerned, on Form-29, under section 205 of the Ordinance within fourteen days from the date of removal.

Responsibilities of an Audit firm Ø Professional requirements § Personnel to adhere the principles of independence, integrity, objectivity, confidentiality and professional behavior. Ø Skills and competencies § Personnel must have attained and maintained technical standards and professional competence. Ø Assignment § Audit work is to be assigned to personnel who have the degree of technical training and proficiency required in the circumstances. Ø Delegation § There must be sufficient direction, supervision and review of work at levels to ensure work meets appropriate standards of quality.

Continued…. . Ø Consultation § If necessary consult within or outside organization with those who have appropriate expertise. Ø Acceptance and retention of clients § An evaluation of prospective clients and review of existing clients are done. In making decision to accept or retain a client, the firm independence and ability to serve the client are to be considered. Ø Monitoring § The continued adequacy and operational effectiveness of quality control policies and procedures are to be monitored.

Responsibilities regarding the mis-statement of Financial Statements Ø If appropriate disclosure regarding the material mis-statement of affecting the prior period financial statement is not made, then auditors should issue a modified report on current period financials modified with respect to corresponding figures included. Ø When financial statements of prior period are not audited, incoming auditor should obtain sufficient appropriate audit evidence about: § Closing balance have been correctly brought forward to current period and § Opening balance does not contain mis-statements that materially affect the financial statements of current period

Audit failures leading to Corporate Scams Ø Case of Enron Corporation Series of shocking incidents q In May, 2001 § Arthur Andersen connived with its client Sunbeam Corporation for financial fraud and fudging of accounts § In June, 2001 American superior court fined Arthur Andersen toward damage to shareholders for certifying false statement of accounts of Waste Management Inc.

Ø Deliotte and Touche also landed in trouble in 2002, for applying a valuation model for fast food franchises which misled bankers into extending credits to unworthy clients and incurring a colossal bad debt of $10 billion Ø In 1999, another reputed US base accounting firm, Ernst & Young paid $335 million to settle a law suite related to accounting problems to a client Ø Another American Accounting firm, KPMG attracted censure from SEC for engaging in improper professional practices. Its money market account opened in May 2000 with an initial deposit of $25 million, constituted 15 of the fund’s net assets at one point of time

“Auditors were not Designed to detect fraud” The Enron Debacle

Cost Audit Methodology The cost audit methodology as structured originally under section 233 B of the bill has the following two perspectives: Ø The attestation of cost structure Ø The efficiency review perspective, which is more methodological driven

Quality Audit • The quality movement has gained momentum with new techniques of quality management as well as refinement of the existing practices in Asian industry • Quality audits have been accepted as a value adding framework and industry is concerned about non-conformances • Quality practices are benchmarked with world class standards and focus on bridging quality gaps is accepted as a part of corporate governance

Conclusion • The board of directors, the auditors committee or senior management, internal auditors, for statutory auditors, form the foundation on which effective corporate governance has to be built. • For statutory auditors, the essential driving force has been the legislative and regulatory requirements to make independent verification and attestation as to true and fair view of the financial state of affairs for the benefit of shareholders and the financial community. • Internal auditors being well versed in the organization’s culture, structure and policies and procedures are essentially called upon by senior management to continuously review operations and obtain as assurance as to the level of efficiency and profit improvement. • It is here the cost auditor, as part of internal audit function, has a unique role to play.