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Fundamentals of Auditing

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Fundamentals of Auditing ­ACC 311
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Lesson 44
AUDITOR'S  REPORT  ON
A
COMPLETE
SET
OF
GENERAL
PURPOSE
FINANCIALSTATEMENTS
(Effective for auditor's reports dated on or after December 31, 2006).
Auditor's report is issued as a result of an audit of a complete set of general purpose financial
statements prepared in accordance with a financial reporting framework that is designed to achieve
fair presentation.
The Auditor's Report on Financial Statements
The auditor's report should contain a clear expression of the auditor's opinion on the financial
statements.
Unless required by law or regulation to use different wording, the auditor's opinion on a complete set
of general purpose financial statements prepared in accordance with a financial reporting framework
that is designed to achieve fair presentation states whether the financial statements "give a true and
fair view" or "are presented fairly, in all material respects," in accordance with the applicable
financial reporting framework. These phrases "give a true and fair view" and "are presented fairly, in
all material respects," are equivalent. Which of these phrases is used in any particular jurisdiction is
determined by the law or regulations governing the audit of financial statements in that jurisdiction, or
by established practice in that jurisdiction.
Forming an Opinion on the Financial Statements
The auditor should evaluate the conclusions drawn from the audit evidence obtained as the basis for
forming an opinion on the financial statements.
When forming an opinion on the financial statements, the auditor evaluates whether, based on the
audit evidence obtained, there is reasonable assurance about whether the financial statements taken as
a whole are free from material misstatement. This involves concluding whether sufficient appropriate
audit evidence has been obtained to reduce to an acceptably low level the risks of material
misstatement of the financial statements and evaluating the effects of uncorrected misstatements
identified.
This evaluation includes considering whether, in the context of the applicable financial reporting
framework:
a.  The accounting policies selected and applied are consistent with the financial reporting
framework and are appropriate in the circumstances;
b. The accounting estimates made by management are reasonable in the circumstances;
c.  The information presented in the financial statements, including accounting policies, is relevant,
reliable, comparable and understandable; and
d. The financial statements provide sufficient disclosures to enable users to understand the effect of
material transactions and events on the information conveyed in the financial statements, for
example, in the case of financial statements prepared in accordance with International Financial
Reporting Standards (IFRSs), the entity's financial position, financial performance and cash flows.
Illustration of the Auditor's Report
Elements of the Auditor's Report
Consistency in the auditor's report promotes credibility in the global marketplace by making more
readily identifiable those audits that have been conducted in accordance with globally recognized
standards. It also helps to promote the reader's understanding and to identify unusual circumstances
when they occur.
Following are the elements of the auditor's report when the audit has been conducted in accordance
with the ISAs:
(a)
Title;
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Fundamentals of Auditing ­ACC 311
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(b)
Addressee;
(c)
Introductory paragraph;
(d)
Management's responsibility for the financial statements;
(e)
Auditor's responsibility;
(f)
Auditor's opinion;
(g)
Other reporting responsibilities;
(h)
Auditor's signature;
(i)
Date of the auditor's report; and
(j)
Auditor's address.
Title
The auditor's report should have a title that clearly indicates that it is the report of an independent
auditor.
A title indicating that the report is of an independent auditor, for example, "Independent Auditor's
Report," affirms that the auditor has met all of the relevant ethical requirements regarding
independence and, therefore, distinguishes the independent auditor's report from reports issued by
others.
Addressee
Ordinarily, the auditor's report on general purpose financial statements is addressed to those for
whom the report is prepared, often either to the shareholders or to those charged with governance of
the entity whose financial statements are being audited.
Introductory Paragraph
The introductory paragraph in the auditor's report should identify the entity whose financial
statements have been audited and should state that the financial statements have been audited. The
introductory paragraph should also:
a.  Identify the title of each of the financial statements that comprise the complete set of financial
statements;
b. Refer to the summary of significant accounting policies and other explanatory notes; and
c.  Specify the date and period covered by the financial statements.
Management's Responsibility for the Financial Statements
The auditor's report should state that management is responsible for the preparation and the fair
presentation of the financial statements in accordance with the applicable financial reporting
framework and that this responsibility includes:
a.  Designing, implementing and maintaining internal control relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether due to
fraud or error;
b. Selecting and applying appropriate accounting policies; and
c.  Making accounting estimates that are reasonable in the circumstances.
Auditor's Responsibility
The auditor's report should state that the responsibility of the auditor is to express an opinion on the
financial statements based on the audit.
The auditor's report should state that the audit was conducted in accordance with International
Standards on Auditing. The auditor's report should also explain that those standards require that the
auditor comply with ethical requirements and that the auditor plan and perform the audit to obtain
reasonable assurance whether the financial statements are free from material misstatement.
The auditor's report should describe an audit by stating that:
(a) An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements;
(b) The procedures selected depend on the auditor's judgment, including the assessment of the risks
of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity's preparation
and fair presentation of the financial statements in order to design audit procedures that are
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appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity's internal control. In circumstances when the auditor also has a
responsibility to express an opinion on the effectiveness of internal control in conjunction with
the audit of the financial statements, the auditor should omit the phrase that the auditor's
consideration of internal control is not for the purpose of expressing an opinion on the
effectiveness of internal control; and
(c) An audit also includes evaluating the appropriateness of the accounting policies used, the
reasonableness of accounting estimates made by management, as well as the overall presentation
of the financial statements.
The auditor's report should state that the auditor believes that the audit evidence the auditor has
obtained is sufficient and appropriate to provide a basis for the auditor's opinion.
Auditor's Opinion
An unqualified opinion should be expressed when the auditor concludes that the financial statements
give a true and fair view or are presented fairly, in all material respects, in accordance with the
applicable financial reporting framework.
When expressing an unqualified opinion, the opinion paragraph of the auditor's report should state
the auditor's opinion that the financial statements give a true and fair view or present fairly, in all
material respects, in accordance with the applicable financial reporting framework (unless the auditor
is required by law or regulation to use different wording for the opinion, in which case the prescribed
wording should be used).
When International Financial Reporting Standards or International Public Sector Accounting
Standards are not used as the financial reporting framework, the reference to the financial reporting
framework in the wording of the opinion should identify the jurisdiction or country of origin of the
financial reporting framework.
The auditor identifies the applicable financial reporting framework in such terms as:
"... in accordance with International Financial Reporting Standards" or
"... in accordance with accounting principles generally accepted in Country X ..."
When the applicable financial reporting framework encompasses legal and regulatory requirements,
the auditor identifies the applicable financial reporting framework in such terms as:
"... in accordance with International Financial Reporting Standards and the requirements of Country
X Corporations Act."
Other Matters
Standards, laws or generally accepted practice in a jurisdiction may require or permit the auditor to
elaborate on matters that provide further explanation of the auditor's responsibilities in the audit of
the financial statements or of the auditor's report thereon. Such matters may be addressed in a
separate paragraph following the auditor's opinion.
Other Reporting Responsibilities
In some jurisdictions, the auditor may have additional responsibilities to report on other matters that
are supplementary to the auditor's responsibility to express an opinion on the financial statements.
For example, the auditor may be asked to report certain matters if they come to the auditor's attention
during the course of the audit of the financial statements. Alternatively, the auditor may be asked to
perform and report on additional specified procedures, or to express an opinion on specific matters,
such as the adequacy of accounting books and records. Auditing standards in the specific jurisdiction
or country often provide guidance on the auditor's responsibilities with respect to specific additional
reporting responsibilities in that jurisdiction or country.
When the auditor addresses other reporting responsibilities within the auditor's report on the financial
statements, these other reporting responsibilities should be addressed in a separate section in the
auditor's report that follows the opinion paragraph.
Auditor's Signature
The auditor's report should be signed. The auditor's signature is either in the name of the audit firm,
the personal name of the auditor or both, as appropriate for the particular jurisdiction. In addition to
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the auditor's signature, in certain jurisdictions, the auditor may be required to declare the auditor's
professional accountancy designation or the fact that the auditor or firm, as appropriate, has been
recognized by the appropriate licensing authority in that jurisdiction.
Date of the Auditor's Report
The auditor should date the report on the financial statements no earlier than the date on which the
auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the
financial statements. Sufficient appropriate audit evidence should include evidence that the entity's
complete set of financial statements has been prepared and that those with the recognized authority
have asserted that they have taken responsibility for them.
In some jurisdictions, final approval of the financial statements by shareholders is required before the
financial statements are issued publicly. In these jurisdictions, final approval by shareholders is not
necessary for the auditor to conclude that sufficient appropriate audit evidence has been obtained.
The date of approval of the financial statements for purposes of the ISAs is the earlier date on which
those with the recognized authority determine that a complete set of financial statements has been
prepared.
Auditor's Address
The report should name the location in the country or jurisdiction where the auditor practices.
Auditor's Report
The auditor's report should be in writing. A written report encompasses both reports issued in hard
copy format and those using an electronic medium.
Auditor's Report for Audits Conducted in Accordance with Both ISAs and Auditing
Standards of a Specific Jurisdiction or Country
The auditor's report should refer to the audit having been conducted in accordance with the
International Standards on Auditing only when the auditor has complied fully with all of the
International Standards on
The auditor may refer to the audit having been conducted in accordance with both ISAs as well as
national auditing standards when the auditor complies with each of the ISAs relevant to the audit and
performs any additional audit procedures necessary to comply with the relevant standards of that
jurisdiction or country. A reference to both the ISAs and national auditing standards is not
appropriate if there is a conflict between the reporting requirements regarding the auditor's report in
the ISAs and in the national auditing standards that affects the auditor's opinion or the need to
include an emphasis of matter paragraph in the particular circumstances. For example, some national
auditing standards prohibit the auditor from including an emphasis of matter paragraph to highlight a
going concern problem, whereas ISA 701 requires the auditor to modify the auditor's report by
adding an emphasis of matter paragraph in such circumstances. In case of such conflicts, the auditor's
report refers only to the auditing standards (either ISAs or the relevant national auditing standards) in
accordance with which the auditor has complied with the reporting requirements.
When the auditor's report refers to both International Standards on Auditing and auditing standards
of a specific jurisdiction or country, the auditor's report should identify the jurisdiction or country of
origin of the auditing standards.
When the auditor prepares the auditor's report using the layout or wording specified by the law,
regulation or auditing standards of the specific jurisdiction or country, the auditor's report should
refer to the audit being conducted in accordance with both International Standards on Auditing and
the auditing standards of the specific jurisdiction or country only if the auditor's report includes, at a
minimum, each of the following elements:
a.  A title;
b. An addressee, as required by the circumstances of the engagement;
c.  An introductory paragraph that identifies the financial statements audited;
d. A description of management's responsibility for the preparation and fair presentation of the
financial statements;
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e.
A description of the auditor's responsibility to express an opinion on the financial statements and
the scope of the audit, that includes:
i)
A reference to the International Standards on Auditing and the auditing standards of the
specific jurisdiction or country, and
ii)
A description of the work an auditor performs in an audit.
f.  An opinion paragraph containing an expression of opinion on the financial statements and a
reference to the applicable financial reporting framework used to prepare the financial statements
(including identifying the country of origin of the financial reporting framework when
International Financial Reporting Standards or International Public Sector Accounting Standards
are not used);
g. The auditor's signature;
h. The date of the auditor's report; and
i.  The auditor's address.
Format of Auditor's Report under Companies Ordinance 1984
The format of Auditor's report to the members as per companies ordinance 1984 is as under that is to
be followed by all companies incorporated under this ordinance.
"FORM 35A" THE COMPANIES ORDINANCE, 1984
AUDITORS' REPORT TO THE MEMBERS
Introductory Paragraph
We have audited the annexed balance sheet of ............................ as at .................. and the
related *1 profit and loss account, *2 cash flow statement and statement of changes in equity together
with the notes forming part thereof, for the year then ended and we state that we have obtained all
the information and explanations which, to the best of our knowledge and belief, were necessary for
the purposes of our audit.
Management's Responsibility
It is the responsibility of the company's management to establish and maintain a system of internal
control, and prepare and present the above said statements in conformity with the approved
accounting standards and the requirements of the Companies Ordinance, 1984. Our responsibility is
to express an opinion on these statements based on our audit.
Auditor's Responsibility
We conducted our audit in accordance with the auditing standards as applicable in Pakistan These
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the above said statements are free of any material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the above said statements. An audit
also includes assessing the accounting policies and significant estimates made by management, as well
as, evaluating the overall presentation of the above said statements. We believe that our audit provides
a reasonable basis for our opinion and, after due verification, we report that ­
Opinion
(a)
in our opinion, proper books of accounts have been kept by the company as required by the
Companies Ordinance, 1984;
(b)
in our opinion -
(i)
the balance sheet and profit and loss account together with the notes thereon have
been drawn-up in conformity with the Companies Ordinance, 1984, and are in agreement with the
books of account and are further in accordance with accounting policies consistently applied *3
except for the changes as stated in note(s) ............... with which we concur;
(ii)
the expenditure incurred during the year was for the purpose of the company's
business; and
(iii)
the business conducted, investments made and the expenditure incurred during the
year were in accordance with the objects of the company;
(c)
in our opinion and to the best of our information and according to the explanations given to
us, the balance sheet, *1 profit and loss account, *2 cash flow statement and statement of changes in
equity together with the notes forming part thereof conform with approved accounting standards as
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applicable in Pakistan, and, give the information required by the Companies Ordinance, 1984, in the
manner so required and respectively give a true and fair view of the state of the company's affairs as at
........and of the *4 profit / loss, its *5 cash flows and changes in equity for the year then ended; and
Other Responsibilities
(d)
in our opinion *6 Zakat deductible at source under the Zakat and Ushr Ordinance, 1980
(XVIII of 1980), was deducted by the company and deposited in the Central Zakat Fund established
under Section 7 of the Ordinance.
Signature
[Name(s) of Auditors]
Date .................
Place ................
NOTES
Where applicable -
*1.
Substitute "income and expenditure account".
*2.
Substitute "sources and application of funds".
*3,
Where there is no change in -the accounting policy (ies) the portion "except for the changes
as stated; in note(s) .......with which we concur" may be omitted.
*4,
Substitute "surplus or deficit".
*5,
Substitute "changes in source and application of funds".
*6.
Where no Zakat is deductible, substitute "no Zakat was deductible at source under the Zakat
and Ushr Ordinance, 1980".
Where any of the matter referred to in the Auditors' Report is answered in the negative or with a
qualification, the report shall state the reason for such answers along with the factual position to the
best of the auditors' information.
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Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT