Objective and General Principles Governing and Audit of Financial

Statements

The purpose of Audit is to establish standards and ensure that financial transactions are
recorded properly on company books. For example when auditor audit a company then he
or she analysis all procedure of company flows and then recommend company to adopt
standards and give opinion on true and faire image of company.

Financial Statement

 Balance Sheet(show the position of the company)

 Profit and Loss Account(show the financial performance)
 Cash Flow(inflow and outflow)
 Notes To The Account(working detail about accounts)
 Change In Equity

Auditing

Auditing is a process of objectivity obtaining evidence regarding economic actions and

events. For example Auditor goes in company and examines the company operations and its
financial statements and its objective is to give opinion true and fire view whether the
financial statements are prepared in all material respects.

Auditor needs reasonable assurance to express an opinion about company means he or

should have to collect documented evidence for example when auditor count inventory he
or she should have to patch that slip with opinion as evidence.

Code of ethics and auditor responsibilities:

Independence

Auditor conducts his work independently and is not influenced or conducted by the
management for example when auditor conduct his work he should have do all work by
himself and don’t trust on others work.
Integrity

It is expected that auditor is an honest person of integrity with high character for example if
auditor have no honesty then nobody will trust on his view about company.

Objectivity

Auditor should have to focus on his objective to collect reasonable assurances about
information and don’t interfere with management for personal interest.

Professional Competence and Due Care

Audit work can be carried out only after obtaining required professional qualification for
example CMA or CA.

Confidentiality

Auditor has to keep secret all information about company he is not required to disclose
these in formations.

Professional Behavior

In audit process, auditor has to behave in professional manners and his interactions should
reflect highest standard of professionalism because if he not capable to show positive
attitude then no one give him attentions towards his opinion.

Technical standards

Auditor conducts the audit in accordance with national and international auditing standards.
Auditor can’t use their own way for audit they have to follow the ISAs standards.

Professional skepticism:

Not accepting the evidence you have gathered at face value, continuing to pursue all
avenues of inquiry on the topic at hand and increasing your awareness of
how supporting documentation is selected & the amount of documentation that is
collected.
Scope of Audit

Audit scope means the depth of an audit performed. Audits are performed for several
purposes: regular "checkups" of company records, to check for internal errors, for the
purpose of finding fraud inside a company, for the purpose of finding fraud in another
company, or even for the purpose of finding tax income and other offenses against ISAs
standards. Due to this fact, audit scope and objectives have a different meaning depending
on the person performing the audit as well as the reason behind the audit.

Audit Risks

Audit risk refers to the chance of an error slipping through an audit, usually a financial audit,
and resulting in a defective audit report. There are three type of risk firstly we discuss
inherent risk- How susceptible is an assertion to a material misstatement, assuming no
controls. Second control risk- How likely is it that a material misstatement will not be
detected and corrected by controls relevant to an assertion. Lastly Detection Risk- How
likely is it that the auditor will not detect a material misstatement in an assertion.

Concept and Role of Internal Audit

The purpose and the function of internal audit is to monitor the internal control for example
flow of information between the departments and their performance and role in
organization either they are working with benchmarks or not. Another purpose of internal
audit is to examine the financial and operating formations flows. Internal auditor has to
analysis the investments of company with different factors like exchange rates, inflation rate
etc. he has to make special investigation on defecting areas for example in manufacturing
firm

Internal audit and Risk Assessment

Risk assessment is core objective of internal auditor there are three types of risk assessment
operational risk- this is risk which can effects the operation of the business for example
plant & machinery capability affects the production process. Financial risk – this risk can
effects the long term planning of company for example company have plan to expand his
business after 5 years but company is not making profits due to the ineffective planning or
operations. Compliance risk- this risk shows effects of strategy of company auditor work is
to identify the dire effects of strategy of company.

External & internal audit

The role of external audit is to give truth and faire opinion on company but internal auditor
work is to examine controls & assess the risk. Internal auditor is appointed by the
management on other hand external auditor appoints by the shareholders. For example
internal auditor reports its wok to management but external auditor gives his opinion for
BOD and shareholders.

Assignments of internal Auditor

 Operation audit
 Financial Audit
 IT audit (audit of It department)
 Best value Audit

Internal audit report consist on following

 Introduction
 Exertive summary
 Findings, implication and Conclusion & Recommendations

Relation between internal & external Audit

When external audit seen the work of internal audit if he satisfied with his work then
external auditor can use his work as assurance of his opinion that make positive relation
between external and internal audit and that relation can work for the success of company.
 Engagement Letter

Date: February 15, 2011

The Board of Directors

abc Company limited

Multan Road Lahore, Pakistan

Respectable Sir,

Thank you for our appointment as auditor of your abc company LTD. As it is necessary to
clarify our role and duties to you, under companies’ ordinance act 1984, we wish to set our
detail of our terms of engagement as follows:

We will audit the company’s financial statements- balance sheet at 31st Dec 2010, Income
statement and cash flows for the year, for the purpose of expressing an opinion on them.

The preparation financial statements are the responsibility of the company’s management.
Our responsibility is to express an opinion on the financial statements based on our audit.

We will conduct audit only if the accounts are maintained Under GAAP and according to IAS
because those standards helps obtaining reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes assessing the
accounting principles used and estimates or predictions made by management, as well as
evaluation the overall financial statement presentation.

We will give a compliance report as required by the companies’ ordinance 1984. We will
perform sufficient test to obtain reasonable assurance that: the accounting records are
reliable and free of material misstatements.

In order to conduct audit we need that you should give us full access to all the records and
documents that are maintained by your organization.

In addition to our opinion on the financial report, we will report any weakness in the
system of accounting and internal controls, which come to our notice. We will also report
any matter as designated by specific reporting responsibilities and requirements under
companies’ ordinance 1984.

We are appointed as your new auditors so we should clearly mention that we will contact
the predecessor auditor for audit related information and to get NOC.

We will discuss and can contact the internal auditor or use any expert for valuation and
need access over the documents that he maintained of this organization about the internal
controls.

Our fees, inclusive of GST and should be Rs1.2 Millions excluding the travel, and other out-
of-pocket costs. Our team will be allowed to use the company’s printers and internet for
official use.

If this letter correctly expresses your understanding, please sign the enclosed copy and
return it to us.

In case of any queries with this engagement then please contact our firm.

Yours devotedly

abc

Dated February 15, 2011

 Planning an Audit Financial Statements

Purpose

The purpose is to establish standards and provide guidance on the considerations and
activities applicable to planning an audit of financial statements.

Auditor plan Involves

Planning an audit involves establishing the overall audit strategy for the engagement and
developing an audit plan, in order to reduce audit risk to an acceptably low level. Planning
Involves the engagement partner and other key members of the engagement team to
benefit from their experience and insight and to enhance the effectiveness and efficiency of
the planning process.
Advantage of Planning
Adequate planning helps to ensure that appropriate attention is devoted to important areas
of the audit, that potential problems are identified and resolved on a timely basis and that
the audit engagement is properly organized and managed in order to be performed in an
effective and efficient manner.
Preliminary Engagement Activities
Perform procedures regarding the continuance of the client relationship and the specific
audit engagement, Evaluate compliance with ethical requirements, including independence
and establish an understanding of the terms of the engagement.
The Overall Audit Strategy
The overall audit strategy sets the scope, timing and direction of the audit, and guides the
development of the more detailed audit plan. The establishment of the audit strategy
involves.
Determining the characteristics of the engagement that define its scope, such as the
financial reporting framework used industry-specific reporting requirements and the
locations of the components of the entity.
Ascertaining the reporting objectives of the engagement to plan the timing of the audit and
the nature of the communications required, such as deadlines for interim and final
reporting, and key dates for expected communications with management and those
charged with governance; and
Considering the important factors that will determine the focus of the engagement team’s
efforts, such as determination of appropriate materiality levels, preliminary identification of
areas where there may be higher risks of material misstatement, preliminary identification
of material components and account balances, evaluation of whether the auditor may plan
to obtain evidence regarding the effectiveness of internal control, and identification of
recent significant entity-specific, industry, financial reporting or other relevant
developments.
The resources deploy for specific areas
The resources to deploy for specific audit areas, such as the use of appropriately
experienced team members for high risk areas or the involvement of experts on complex
matters;
The amount of resources to allocate to specific audit areas, such as the number of team
members assigned to observe the inventory count at material locations, the extent of
review of other auditors’ work in the case of group audits, or the audit budget in hours to
allocate to high risk areas;
When these resources are deployed, such as whether at an interim audit stage or at key cut-
off dates; and
How such resources are managed, directed and supervised, such as when team briefing and
debriefing meetings are expected to be held, how engagement partner and manager
reviews are expected to take place (for example, on-site or off-site), and whether to
complete engagement quality control reviews.
The Audit Plan
The audit plan is more detailed than the audit strategy and includes the nature, timing and
extent of audit procedures to be performed by engagement team members in order to
obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
A description of the nature, timing and extent of planned further audit procedures at the
assertion level for each material class of transactions, account balance, and disclosure, as
determined. Auditor’s Procedures in Response to Assessed Risks. The plan for further audit
procedures reflects the auditor’s decision whether to test the operating effectiveness of
controls, and the nature, timing and extent of planned substantive procedures.
Audit Program

Step by step procedure laid down by the auditing firm that (depending upon the audit

scope) must be followed by its accountant(s) in conducting an audit.

 Set procedure to implement

 Contain objective and time budget for each audit area like HRM, inventry etc.
 Instrustion for audit staff (responsibility of work of staff e.g who will audit HRM n
inventry.)
 Control and properly excute he work

Timing of the Audit

The entity’s timetable for reporting, such as at interim and final stages. The organization of
meetings with management and those charged with governance to discuss the nature,
extent and timing of the audit work. The discussion with management and those charged
with governance regarding the expected type and timing of reports to be issued and other
communications, both written and oral, including the auditor’s report, management letters
and communications to those charged with governance.
Analytical Procedures

If analytical procedures are being performed as a substantive test, the auditor will need to
gather information to evaluate the explanation being considered, since the primary purpose
of substantive analytical procedures is to provide evidence as to the validity of an account
balance. The type and amount of corroboration for the explanation will vary based on
factors such as the size of the unexpected difference, the significance of the difference to
the overall financial statements, and the risks (e.g., internal control and inherent) associated
with the account balance(s) affected. As any of these factors increase, the reliability of the
information obtained in support of the explanation should also increase. SAS No. 56
provides guidance for auditors in the evaluation of the reliability of data.
Auditors include the following factors

 Data obtained from independent sources outside the entity are more reliable
than data obtained from sources within the entity.
 If data are obtained from within the entity, data obtained from sources
independent from the amount being audited are more reliable.
 Data developed under a system with adequate controls are more reliable than
data from a system with poor controls

After an auditor gathers information for purposes of evaluating an analytical procedures

explanation, it is a matter of professional judgment in determining whether the evidence
adequately supports the explanation. This is one of the most important steps of the
analytical procedures process and is referred to as the decision phase of the process.