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

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.

3. 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 therefore has a public accountability.

4. 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.

5. 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.

6. 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

7. 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.

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

9. 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

10. 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

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

12. 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.

13. 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

14. 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

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

16. 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.

17. 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.

18. 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.

19. 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.

20. 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

21. 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

22. 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.

23. 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.

24. 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.