Concept of Audit and Other Assurance Engagement

AUDIT FRAMEWORK

Concept of audit and other assurance engagement:

Assurance engagement: is one in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended user other then the responsible party about the outcome of the evaluation of a subject matter against criteria.

Objective of audit: is to enable the auditor to express an opinion on whether the financial statements are prepared in all material respects, in accordance with applicable financial reporting framework.

External Audit: An independent person review the financial statements of a company, Which are prepared by the management of a company and reports to shareholders who are the owner of a company it is an assurance engagement and high level of assurance is given but not absolute.

End product of audit is to give opinion on the financial statements whilst an audit might provide by products such as advice to the directors on how to run the business; its objective is solely to report to shareholders.

Other assurance engagements:

Assurance engagement: / Objective: / Level of assurance: / Assurance provided:
External audit
Engagement: / Is to provide assurance that the information audited is free from material misstatement. / High but not absolute level of assurance / Positive assurance
Review engagement: / Is to provide assurance that the information subject to review is free of material misstatement. / Limited level of assurance. / Negative assurance

Negative assurance (limited assurance):is when auditor gives an assurance that nothing has come to his attention which indicates that the financial statements have not been prepared according to framework.

Statutory audits: audits which are required by law are called statutory audits and audits which are not required by law are non statutory audits.

Limitations of AUDIT:

• Audit is not objective judgment have to be made
• Not all items in the financial statement are tested
• Limitation in accounting and control system
• Audit report has inherent limitations(e.g. standard format, audit jargons e.t.c)
• Audit report issued after a long time after year end
• Audit evidence sometimes indicates what is probable not certain

Advantages of non statutory audits:

• It can provide mean of settling accounts between the partners.
• Where audited accounts are available this may make the accounts more acceptable to the taxation authorities when it comes to agreeing an individual partners liability to tax
• The sale of the business or negotiation of loan facilities may be facilitated if the firm is able to produce audited accounts
• An audit on behalf of sleeping partner is useful since generally such a person will have little other mean of checking the accounts of the business or confirming the share of profits due to him or her.

Concept of accountability, stewardship and agents:

Accountability: is the quality or state of being accountable that is being required or expected to justify actions and decisions. It suggests an obligation or willingness to accept responsibility for one action.

Stewardship: refers to the duties and obligations of a person who manages another person’s property.

Agents: are people employed or used to provide a particular service. In the case of a company, the people being used to provide the service of managing the business also have the second role of being people in their own right trying to maximize their personal wealth.

Stakeholders: various parties interested in the accounts of a company are called stakeholders.(e.g. shareholders, employees, directors, creditors e.t.c)

Explanation:The directors are accountable for the shareholders investment. The shareholders have bought shares in that company. They expect a return from their investment. As the directors manage the company, they are in a position to affect that return. If the Directors mismanage the company, and it goes bankrupt, it indeed, the opposite is true and original investment may even be lost.

Concept of materiality, true and fair presentation and reasonable assurance:

External auditors give an opinion on the truth and fairness of financial statements. This is not an opinion of absolute correctness. True and fair are not defined in law or audit guidance, but the following definitions are generally accepted.

True:information is factual and conforms to reality. In addition the information conforms with required standards and law. The financial statements have been correctly extracted from the books and records.

Fair: information is free from discrimination and bias and in compilation with expected standards and rules. The accounts should reflect the commercial substance of the company’s underlying transactions.

Reasonable assurance: assurance which is of high, but not absolute, level of assurance. The auditor’s report does not guarantee that the financial statements are correct, but that they are true and fair within a reasonable margin of error.

Materiality: is an expression of the relative significance or importance of a particular matter in the context of the financial statements as a whole. A matter is material if its omission or misstatement would reasonably influence the economic deceision of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatements.

REGULATIONS GOVERNING APPOINTMENT, QUALIFIACTION, REMOVAL AND RIGHTS OF AUDITORS

The Audit is primarily is a statutory requirement therefore eligibility to conduct an auditor, rights and duties of the auditor, procedure to remove the auditor and other related matters are set down in Companies Ordinance 1984.

APPOINTMENT OF AUDITOR

First Auditors:

a)The first auditors of a company shall be appointed by the directors within 60 days of incorporation of the company [252(3)].

b)The first auditors will hold office till the first annual general meeting [252(3)].

c)If the directors fail to appoint the first auditors, the members shall appoint the first auditors, provided further that the auditors such appointed shall not be removed during the tenure expect through a special resolution [(252(6)].

d)Where the first auditors are not appointed either by the directors or by the members within 120 days of incorporation of the company, the Securities & Exchange Commission of Pakistan (SECP)(Commission) will appoint the auditor [252(6)].

Subsequent Auditors:

a)At each annual general meeting the company (members) shall appoint the auditors [252(1)].

b)The auditors shall hold office from the conclusion of that meeting till the conclusion of next annual general meeting [Section 252(1)].

c)If no auditors are appointed at annual general meeting Commission(SECP) shall appoint an auditor. To exercise this power the company must give notice to Commission within one week of these powers having become exercisable [252(7)].

Note:Provided that an auditor or auditors appointed in a general meeting may be removed before conclusion of the next annual general meeting through a special resolution [252(1)].

Casual Vacancy:

a)Any casual vacancy shall be filled by directors [Sec 252(4)].

b)Auditors so appointed shall hold office till next annual general meeting. [Sec 252(5)]

c)If directors do not appoint auditors to fill casual vacancy within 30 days, Commission may appoint an auditor.[Sec 252(6)]

Commission's powers to appoint auditors [252(6)]:

The Securities & Exchange Commission of Pakistan may appoint an auditor if the following situations arise:

a)first auditors are not appointed within 120 days from incorporation;

b)subsequent auditors are not appointed in annual general meeting;

c)casual vacancy is not filled within 30 days: and

d)Auditors appointed are unwilling to act as auditors.

To exercise this power, the company must give notice to Commission within one week of its powers becoming exercisable.

SUMMARY:

Auditors / Time of Appointment / Appointing Authority / Terms of Office / Appointing Authority in default / Remarks
First Auditor / Within 60 days Directors Till first of incorporation / Directors / Till first AGM / Members / Members shall appoint 1st auditor at a general meeting within 120 days. After 120 days Commission may make the appointment
Subsequent auditors / AGM / Members / Till next AGM / Commission / If auditors are not appointed in AGM, Commission may appoint auditors.
Casual Vacancy / Within 60 days of the vacancy / Directors / Till next AGM / Commission / After 30 days of vacancy, Commission may appoint auditors.

REMUNERATION OF AUDITORS [252(8)1:

Fixation of remuneration of auditors depends upon the authority appointing the auditors, i.e.

a)If auditors are appointed by directors, directors shall fix the remuneration.

b)If auditors are appointed by COMMISSION, COMMISSION shall fix remuneration.

c)In all other cases, the members (Company) shall fix the remuneration.

PROCEDURE FOR CHANGE OF SUBSEQUENT AUDITORS REMOVAL OF AUDITORS I APPOINTMENT OF NEW AUDITORS (SECTION-253).

New auditors can be appointed in place of retiring auditors if the following requirements are fulfilled.

(a)Notice from a member is required for a resolution at the AGM (253(1)).

(b)The member shall give notice to the company at least 14 days before the AGM that he intends to propose the appointment of another person as auditor (253(2)).

(c)On receipt of the notice the company shall send a copy of such notice to the retiring auditor and members, at least seven days before the AGM.

(d)In Case of a listed company, notice shall be published at least in one issue of an English and an Urdu daily newspaper having circulation in the province where the stock exchange(s) is situate on which the shares of the company are listed.

(e) The retiring auditor can make representations and the company shall send a copy ofrepresentation to a member or it may be read at AGM. Provided that the representation cannot be sent OR read at the AGM if the Registrar does not permit so on the application of the company or any other person. (253(3)).

(f)A company within 14 days after the AGM shall notify to the Registrar of the

1. Appointment of new auditors with their consent letter. 253(5).
2. Retirement or removal of auditors. Section 253(6)

CHANGE OF AUDITORS – CHECKLIST:

Actions RequiredTiming

• Notice from a member from the date of AGMAt least 14 days
• Send Copy of the notice to:

-the retiring auditorForthwith

-membersAt least 7 days before the date of AGM

• Publication of the fact in newspapersAny time before the AGM

that notice has been received.

• Representation by auditorsSent to members before AGMor read at AGM
• Notification of the change to the RegistrarWithin 14 days after the date of AGM

REMOVAL OF AUDITORS:

i)First auditor appointed by the directors may be removed by the members in a general meeting.

ii)Another person nominated by a member shall be appointed in place of the outgoing auditor.

iii)The notice of nomination of the proposed auditor shouldbe given to themembersat least 14 days before the general meeting and all the procedure stated above would be required to be followed in this case also.

iv)An auditor or auditors appointed in an annual general meetingmaybe removed before conclusion of the next annual general meeting through a special resolution.

v)In the above case, SECP may appoint the auditor(s) of the company.

QUALIFICATION & DISQUALIFICATION OF AUDITORS

A person shall not be qualified to act as an auditor if

a)He is not a chartered accountant (within the meaning of the Chartered Accountants Ordinance, 1961) in case of ( appointment as auditor of):

-Public Company or

-Private Company which is a subsidiary of a Public Company.

-Private Company having paid up capital of three million rupees or more.

Note:

1. A firm whereof all the partners practicing in Pakistan are Chartered Accountants may be appointed by its firm name as auditors of a company and may act in its firm name.
2. For listed companies an auditor must have a satisfactory QCR (quality control review) rating issued by ICAP.

b)Present directors, other officer or employees of the company or who held these offices during the last three years.

c)A partner or employee of a director, other officer or employee of the company.

d)A spouse of a director

e)A person who is indebted to the company, provided that a person who owes:

1. Asum of money not exceeding five hundred thousand rupees to a credit card issuer OR
2. A sum to a utility company in form of unpaid dues for a period not exceeding ninety days shall not be deemed to be indebted to the company.

f)A body corporate.

g)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.

Provided that if such a person holds shares prior to his appointment as auditors, whether as an individual or a partner in a firm the fact shall be disclosed on his appointment as auditor and such person shall disinvest such shares within ninety days of such appointment.

h)A person disqualified for appointment as an auditor due to above reasons is disqualified from holding the office of auditor of another company which is a subsidiary or holding company of that company 254(4).

AUDITOR RIGHTS AND DUTIES:

The law gives auditors both rights and duties. This allows auditors to have sufficient power to carry out an independent and effective audit. In this section we look at the rights and duties of auditors.

Rights:

The auditors must have certain rights to enable them to carry out their duties effectively.

The principal rights auditors should have, excepting those dealing with resignation or removal, are set out in table below:

Access to record / A right of access at all times to the books, accounts and vouchers of the company(in whatever form they are held .
Information and explanations / A right to require from the companies officers such information’s and explanations as the think necessary for the performance of their duties as auditors.
Attendance at/notices of general meeting / A right to attend any general meeting of the company and to receive all notices of and other communications relating to such meetings which any member of the company is entitled to receive.
Attendance at/notices of general meeting / A right to be heard at general meeting which they attend of any part of the business that concerns them as auditors.
Rights in relation to written resolutions / A right to receive a copy any written resolution proposed.

If auditors have not received all the information and explanations they consider necessary, they should state this fact in their audit report.

Duties:

The auditors are required to report on every balance sheet (statement of financial position) and profit and loss account (statement of comprehensive income) lay before the company in general meeting.

The auditor must consider the following.

Compliance with legislation / Whether the financial statements have been prepared in accordance with the relevant legislation.
Truth and fairness of accounts / Whether the balance sheet shows a true and fair view of the company’s affairs at the end of the period and the end of the period and the profit and loss account (and cash flow statement) shows a true and fair view of the results for the period.
Adequate accounting records and returns / Whether adequate accounting records have been kept and returns adequate for the audit received from branches not visited by the auditor.
Agreement of accounts to records / Whether the accounts are in agreement with the accounting records and return.
Consistency of accounts to record / Whether the information is director’s report is consist with the financial statement.
Directors benefits / Whether disclosure of director’s benefits has been made as required y law.

AUDIT FRAMEWORK1Chapter 1