 AUDITING

📘 1. Nature of an Audit
 Audit is an independent examination of financial information.
 It provides credibility and assurance to stakeholders (e.g. investors, creditors).
 It ensures that financial statements are true and fair and comply with legal
and regulatory standards.

📖 2. Definition of Audit
According to AAS-1 (Basic Principles Governing an Audit):

"An audit is the independent examination of financial information of any entity,

whether profit-oriented or not, and irrespective of its size or legal form, when such an
examination is conducted with a view to express an opinion thereon."

🌐 3. Scope of an Audit
The scope includes:

 Verification of books of accounts

 Checking internal controls
 Evaluating compliance with accounting standards and laws
 Forming an audit opinion on financial statements
 Can cover various types: Statutory Audit, Internal Audit, Cost Audit, Tax Audit,
etc.

🔍 The scope is influenced by legal requirements, client needs, and professional

standards.

🎯 4. Objectives of an Audit
A. Primary Objective:

 To express an independent opinion on whether the financial statements give

a true and fair view.

B. Secondary Objectives (Derived Objectives):

 Detection and prevention of errors and fraud

 Improving internal controls
 Ensuring compliance with statutory requirements
⚖ 5. Basic Principles of an Audit (As per AAS-1)

1. Integrity, Objectivity, and Independence

→ Auditor must be honest, impartial, and free from bias.
2. Confidentiality
→ Must not disclose client info without permission (unless legally required).
3. Skills and Competence
→ Audit should be conducted by qualified and competent professionals.
4. Work Performed by Others
→ Responsibility for work delegated to assistants or other auditors must be
reviewed.
5. Documentation
→ Maintain proper audit working papers for reference and support.
6. Planning and Supervision
→ Adequate planning ensures efficient and focused auditing.
7. Audit Evidence
→ Conclusions should be based on sufficient and appropriate evidence.
8. Internal Control System
→ Auditor should evaluate and rely upon the effectiveness of internal controls.
9. Reporting
→ Auditor must provide a clear, written opinion on the financial statements.

📂 1. Classification / Types of Audit

Audits can be classified based on purpose, legal requirement, time, and nature.
Here's a breakdown:

A. Based on Statute (Law):

1. Statutory Audit
o Mandated by law (e.g. Companies Act).
o Done annually by a qualified Chartered Accountant.
o Example: Company audits, bank audits.
2. Non-Statutory Audit
o Not required by law.
o Done voluntarily by management.
o Example: Partnership firm audit, trust audit.

B. Based on Time:

1. Interim Audit
o Conducted before the financial year ends.
o Helps in early detection of errors/frauds.
2. Final Audit (Annual Audit)
o Done after the end of the financial year.
o Comprehensive and covers the full year.
C. Based on Objective:

1. Internal Audit
o Conducted by internal staff or internal auditors.
o Focuses on internal controls, procedures, and risk management.
o Continuous in nature.
2. External Audit
o Done by an independent auditor.
o Focused on expressing an opinion on financial statements.
3. Tax Audit
o Mandated under Income Tax Act (Section 44AB in India).
o Checks compliance with tax laws.
4. Cost Audit
o Reviews cost records and cost accounting systems.
o Ensures proper cost control and reporting.
5. Management Audit
o Evaluates efficiency of management decisions and policies.
6. Social Audit
o Examines the social impact of business operations (CSR,
environmental impact).
7. Forensic Audit
o Done to detect and investigate fraud or financial crimes.

📌 2. Need for an Audit

 To ensure accuracy and reliability of financial statements.
 To detect errors and frauds.
 To maintain stakeholder confidence (investors, lenders, shareholders).
 To comply with legal and regulatory requirements.
 To evaluate and strengthen internal controls.
 To support decision-making by management and external users.
 Required for loan approvals, government contracts, or tenders.

✅ 3. Usefulness of Audit
Stakeholder Benefit
Independent check on management, assurance on financial
Owners/Shareholders
health
Management Improves internal controls, decision-making
Government Ensures tax compliance and legal adherence
Banks/Lenders Confirms financial credibility before lending
Investors Increases confidence in financial data
Public Trust in corporate transparency

Statutory Audit vs. Non-Statutory Audit

✅ 1. Statutory Audit
🔹 Meaning:
A Statutory Audit is an audit mandated by law (statute). It is compulsory for certain
organizations, such as companies registered under the Companies Act.

🔹 Examples:
 Audit of a company under the Companies Act, 2013 (India)
 Audit of banks under the Banking Regulation Act
 Audit of insurance companies under the Insurance Act

🔹 Key Features:
 Required by statute/law
 Conducted by a qualified Chartered Accountant (CA)
 Focuses on true and fair view of financial statements
 Must follow legal and regulatory audit standards
 Auditor is appointed as per the Act

🚫 2. Non-Statutory Audit
🔹 Meaning:
A Non-Statutory Audit is not required by law. It is conducted voluntarily by
organizations for internal or management purposes.

🔹 Examples:
 Audit of a sole proprietorship
 Audit of a partnership firm
 NGO audit (unless law requires it)

🔹 Key Features:
 Voluntary in nature
 Done to increase transparency or improve management controls
 Can be conducted by a CA or competent professional
 No fixed legal format or obligation
 Useful for internal review or stakeholder trust

🆚 Statutory vs. Non-Statutory Audit: Quick

Comparison
 Feature Statutory Audit Non-Statutory Audit
Requirement Legally required Optional / Voluntary
Companies, banks, insurance, Proprietorships, partnerships,
Applicable To
etc. NGOs
Based on specific Act (e.g.
Governing Law No governing statute
Companies Act)
Auditor
As per legal provisions As per organization’s decision
Appointment
Reporting Format Legally prescribed Customizable based on needs
Legal compliance, stakeholder Management decision-making,
Purpose
trust internal use

📊 Accounting vs. Auditing – Key Differences

Basis of
Accounting Auditing
Difference
Process of recording, classifying, Examination and verification of
1. Meaning and summarizing financial financial records and
transactions statements
To prepare accurate financial To express an independent
2. Objective
statements opinion on financial statements
Analytical and critical – involves
3. Nature of Constructive – involves
checking and evaluating
Work preparation of accounts
accounts
Done throughout the accounting Done after the accounting
4. Timing
period process is completed
5. Performed Auditors (usually Chartered
Accountants or bookkeepers
By Accountants)
6. Legal Mandatory only for certain
Mandatory for all businesses
Requirement businesses (e.g., companies)
Can be done by a person with Must be done by a qualified
7. Qualification
accounting knowledge auditor/CA
Accounting is independent of Auditing depends on accounting
8. Dependence
auditing records
Verifying and ensuring accuracy
9. Focus Area Recording financial data
of financial data
Financial statements (P&L, Audit report giving an opinion on
10. End Result
Balance Sheet, etc.) the financial statements

📚 Core Audit Concepts

✅ 1. Reasonable Assurance
 Definition:
Reasonable assurance means the auditor has obtained sufficient and
 appropriate evidence to conclude that the financial statements are free from
material misstatement, whether due to fraud or error.
 Auditors do not guarantee absolute assurance (i.e., 100% correctness).
 It reflects a high (but not absolute) level of confidence.

🧠 Due to inherent limitations of an audit (like sampling, fraud risk), only reasonable
assurance is achievable.

⚠ 2. Audit Risk

 Definition:
The risk that the auditor may give an inappropriate opinion on financial
statements that are materially misstated.
 Components:
1. Inherent Risk – Risk of error/fraud in an account area due to its nature
(e.g., complex estimates).
2. Control Risk – Risk that internal controls fail to detect or prevent
errors/fraud.
3. Detection Risk – Risk that the auditor’s procedures fail to detect
material misstatements.

🧠Audit Risk = Inherent Risk × Control Risk × Detection Risk

📏 3. Materiality
 Definition:
Information is material if its omission or misstatement could influence
economic decisions of users based on financial statements.
 It helps the auditor decide:
o Which areas to focus on
o What errors/misstatements matter
 Materiality is quantitative (size) and qualitative (nature).

🧠Materiality threshold differs by company size and stakeholder needs.

🧾4. True and Fair View
 Definition:
Financial statements give a true and fair view when they are:
o Free from material misstatements
o Prepared according to applicable accounting standards and laws
o Reliable, complete, and unbiased
 The auditor's report provides an opinion whether the statements show a true
and fair view.

✅ It is the ultimate goal of auditing—to ensure financial statements represent the

company's actual financial position.

🔁 5. Recurring Audit
 Definition:
An audit that is carried out year after year for the same client.
 Typical in:
o Company audits
o Bank audits
 Benefits include:
o Familiarity with the client’s systems
o Continuity in audit procedures
 Must be cautious to maintain independence and avoid bias.

👨 💼 6. Management’s Responsibility for Financial Statements

 Management is primarily responsible for:
o Preparing and presenting financial statements
o Ensuring compliance with accounting standards and legal
requirements
o Designing, implementing, and maintaining internal controls
o Preventing and detecting fraud or errors

⚠ Auditors only examine and give an opinion; they do not prepare or take
responsibility for the financial statements.

🇵🇰1. Regulatory Framework for Auditing in Pakistan

 Primary Legislation:
o Companies Act 2017 mandates audits for all companies except small
private firms; ICAP issues the adopted auditing standards (2018 ISA)
ACCA Global+3Scribd+3Scribd+3IFAC+7IFAC+7Scribd+7.
o SECP Act 1997 (amended 2016) introduced the Audit Oversight Board
(AOB) to monitor auditor quality and ensure alignment with ISAs Scribd.
 Regulatory Bodies:
o Institute of Chartered Accountants of Pakistan (ICAP):
 Sole professional body for CAs
 Adopts ISAs & IFAC Code of Ethics
 Oversees auditor training, CPD, Quality Control Reviews (QCR)
Wikipedia+1studylib.net+1IFAC+3Scribd+3Business Recorder+3
o AOB (under SECP):
 Registers firms, monitors QCR, ensures ISAs alignment
Wikipedia+14Scribd+14Reddit+14.
🧑 💼 2. External Auditor's Responsibilities & Role in
Detecting Errors/Fraud
 Primary Responsibilities:
o Audit according to ICAP adopted ISAs
o Express an independent opinion on whether financial statements
present a true and fair view Wikipedia+6IFAC+6Scribd+6
 Detecting Errors & Fraud:
o Auditors plan and perform audits with professional skepticism (ISA
200)
and pursue sufficient, appropriate evidence
Wikipedia+2Reddit+2Reddit+2Reddit+11ACCA Global+11Wikipedia+11.
o Under ISA 240, auditors:
 Assess fraud risk
 Design procedures to respond to those risks
 Report identified frauds, but are not guarantors of detection
Reddit+3IFAC+3Wikipedia+3Wikipedia+6Reddit+6Wikipedia+6.

💡 3. Postulates (Fundamental Assumptions) of

Auditing
1. Accounting System Exists – Transactions are recorded.
2. Auditor Independence – To ensure unbiased evaluation.
3. Existence of Financial Records – As the evidence base.
4. Existence of True Facts – Auditors seek objective reality.
5. Materiality Concept Applies – Only significant matters are considered.
6. Audit Standards Followed – ISAs provide the framework.
7. Reasonable Assurance is Possible – Absolute assurance is not assumed.
8. Audit Opinion is Based on Evidence – Sufficient, appropriate evidence
underpins the opinion.

(These postulates stem from general auditing principles and ISA foundations.)

📘 4. Glossary of Key Auditing Terms (Per ISAs / IAASB)

 Audit Evidence: Information used for audit conclusions (ISA 500).
 Professional Skepticism: Critical, questioning mindset (ISA 200).
 Professional Judgment: Using skill and knowledge in decisions (ISA 200)
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Global+6ICAP+6.
 Audit Risk: Risk of inappropriate audit opinion (IR × CR × DR)
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 Materiality: Significance that could influence decisions (ISA 320)
Wikipedia+1Reddit+1.
 True and Fair View: Financials free from material misstatement, complying
 with standards.
 Engagement Quality Review: Partner review under ISQM 2 for public interest
entities .

Internal Control: Definition, Meaning,

Objectives, Types, Principles &
Techniques

📘 1. Definition & Meaning of Internal Control

 Definition:
Internal control is a process designed, implemented, and maintained by
management and other personnel to provide reasonable assurance about the
achievement of objectives related to:
o Effectiveness and efficiency of operations
o Reliability of financial reporting
o Compliance with laws and regulations
 According to the Committee of Sponsoring Organizations (COSO), internal
control is:

"A process, effected by an entity’s board of directors, management, and other

personnel, designed to provide reasonable assurance regarding the achievement of
objectives."

🎯 2. Objectives of Internal Control

1. Safeguard Assets
o Protect assets against loss, theft, or misuse.
2. Ensure Accuracy and Reliability of Accounting Data
o Accurate and complete financial records.
3. Promote Operational Efficiency
o Efficient use of resources.
4. Encourage Adherence to Management Policies
o Compliance with company policies and procedures.
5. Ensure Compliance with Laws and Regulations
o Follow applicable rules and laws.

🔍 3. Types of Internal Control

 Preventive Controls:
Designed to prevent errors or fraud before they occur.
Examples: Authorization procedures, segregation of duties, access controls.
  Detective Controls:
Designed to detect errors or fraud that have already occurred.
Examples: Reconciliations, physical inventory counts, internal audits.
 Corrective Controls:
Designed to correct errors or irregularities discovered.
Examples: Backup procedures, disciplinary actions, system updates.

⚖ 4. Principles of Internal Control

1. Establishment of Responsibility
Assign responsibility to specific employees.
2. Segregation of Duties
Divide responsibilities to reduce risk of error or fraud.
3. Documentation and Record Keeping
Maintain proper records to provide an audit trail.
4. Physical Controls
Secure assets physically (e.g., locks, safes).
5. Independent Internal Verification
Review and check records and operations independently.
6. Human Resource Controls
Conduct background checks, train employees, and rotate duties.

🛠5. Techniques of Internal Control

 Authorization and Approval
Transactions are only executed with proper authorization.
 Reconciliation
Periodically comparing data from different sources to ensure accuracy.
 Physical Audits and Counts
Regularly verifying existence of assets (cash, inventory).
 Information Processing Controls
Controls over IT systems to prevent unauthorized access or errors.
 Performance Reviews
Comparing actual performance with budgets or standards.

difference between Internal Check and Internal Control:

Basis Internal Check Internal Control

A system of continuous A broader process to ensure
checking of work done by one achievement of objectives related
Meaning
person by another, usually to operations, financial reporting,
through division of duties and compliance
Encompasses all controls in the
Limited mainly to checking
organization including financial,
Scope accuracy and honesty in
operational, and compliance
accounting transactions
controls
 Basis Internal Check Internal Control
To prevent and detect To safeguard assets, ensure
Purpose errors/frauds in accounting reliable reports, promote efficiency,
records and ensure compliance
Focuses on accounting and Focuses on entire organizational
Focus Area
bookkeeping tasks process and policies
A part of internal control A comprehensive system including
Nature
system internal check
Implementatio By staff through supervision By management through policies,
n and cross-checking procedures, and systems
Checking one cashier’s work by Authorization procedures, physical
Example
another cashier controls, internal audits

Categories & Systems of Internal Control

🔹 Categories of Internal Control

Internal controls can be broadly classified into these categories based on their
nature and purpose:

1. Preventive Controls

 Aim: To prevent errors or fraud before they happen.

 Examples:
o Segregation of duties
o Authorization procedures
o Access restrictions (passwords, locks)

2. Detective Controls

 Aim: To detect errors or irregularities that have already occurred.

 Examples:
o Reconciliations
o Internal audits
o Physical inventory counts

3. Corrective Controls

 Aim: To correct and recover from errors or problems detected.

 Examples:
o Backup data restoration
o Revising procedures
o Disciplinary actions
🛠Systems of Internal Control
Internal controls are implemented through various systems designed to support
organizational objectives:

A. Manual System

 Relies on human effort and manual processes.

 Examples:
o Physical verification of stock
o Manual authorization/signatures
 Prone to human error but allows judgment and flexibility.

B. Automated System

 Uses computerized processes and IT controls.

 Examples:
o Automated payroll systems
o Electronic data processing with built-in validations
 Faster and reduces human errors but depends on system integrity.

C. Hybrid System

 Combination of manual and automated controls.

 Examples:
o Manual approval of electronically generated reports
o Automated stock update with physical verification
 Balances control strengths and weaknesses of both manual and automated
systems.

Internal Control: Key Components,

Important Elements & Limitations

🔑 Key Components of Internal Control

Based on the COSO Framework, the five key components are:

1. Control Environment
o Foundation of internal control
o Sets the tone at the top regarding integrity, ethics, and competence
o Includes organizational structure, assignment of authority, and human
resource policies
2. Risk Assessment
o Identifying and analyzing risks that may affect achievement of
 objectives
o Includes changes in external and internal environment
o Helps management prioritize controls
3. Control Activities
o Policies and procedures to address risks and ensure directives are
followed
o Examples: approvals, authorizations, verifications, reconciliations,
segregation of duties
4. Information and Communication
o Systems that support identification, capture, and exchange of
information
o Communication flows up, down, and across the organization
o Ensures timely and accurate information for decision-making
5. Monitoring Activities
o Ongoing or separate evaluations to check effectiveness of controls
o Includes internal audits, management reviews, and follow-up on
deficiencies

🏗Important Elements of Internal Control

 Segregation of Duties: Dividing responsibilities among different employees to
reduce fraud/errors
 Authorization and Approval: Transactions must be authorized before
execution
 Physical Controls: Safeguarding assets physically (locks, passwords)
 Documentation and Record Keeping: Maintaining proper records for
accountability and audit trails
 Independent Verification: Regular checks or audits by independent staff or
external auditors
 Competent Personnel: Hiring and training qualified employees

⚠ Limitations on the Effectiveness of Internal Control /

Audit
 Human Error: Mistakes or misunderstandings by personnel
 Collusion: Employees working together to bypass controls
 Management Override: Senior management bypassing established controls
 Cost vs. Benefit: Controls may not be cost-effective to implement fully
 Changing Conditions: New risks or environmental changes can reduce control
effectiveness
 Technological Failures: System errors, hacking, or IT breakdowns
 Fraud Concealment: Sophisticated fraud may evade detection despite
controls
Evaluation of Internal Controls &
Accounting Systems, and Substantive
Procedures

🔍 1. Evaluation of Internal Controls and Accounting

Systems
What is it?

 The process auditors use to understand and assess the design and
effectiveness of a company’s internal controls and accounting system.

Purpose:

 To determine how much reliance the auditor can place on internal controls.
 To identify weaknesses or risks that may lead to material misstatements.
 To plan audit procedures accordingly (e.g., more or less testing).

Steps involved:

1. Understand the system:

o Study policies, procedures, and flow of transactions.
o Review manuals, org charts, and documentation.
2. Walkthrough tests:
o Trace a few transactions through the system to see if controls work as
described.
3. Assess control design:
o Check if controls are adequate to prevent/detect errors or fraud.
4. Test operating effectiveness:
o Sample and test controls to see if they operate as intended over time.
5. Identify control weaknesses:
o Report findings and decide on impact on audit approach.

🧾2. Substantive Procedures

Definition:

 Audit procedures designed to detect material misstatements at the assertion

level in account balances and transactions.

Purpose:
  To obtain direct evidence about the completeness, accuracy, and validity of
financial statement items.

Types of Substantive Procedures:

1. Tests of Details
o Examine individual transactions, account balances, or disclosures.
o Examples:
 Confirmations of receivables
 Inspection of documents
 Physical inventory observation
2. Substantive Analytical Procedures
o Evaluate financial information by studying plausible relationships.
o Examples:
 Ratio analysis
 Trend analysis
 Comparing current year figures with prior years or budgets

When are substantive procedures used?

 When internal controls are weak or not reliable enough to reduce audit risk to
an acceptable level.
 To gather evidence directly on financial statement assertions.

1. Analytical Procedures
What are Analytical Procedures?

Analytical procedures involve evaluating financial information by analyzing

relationships and trends. Auditors use them to identify unusual transactions or
events that might signal potential errors or fraud.

Purpose:

 To gain an understanding of the client’s business and transactions.

 To identify areas of risk that need further investigation.
 To corroborate audit evidence obtained by other means.

Examples:

 Comparing current year sales with prior years.

 Calculating ratios like gross profit margin.
 Checking if expenses increase proportionally with sales.

When Used:

 During planning (to understand business).

  During substantive testing (to gather evidence).
 During final review (to assess overall reasonableness).

2. Tests of Controls
Tests of controls are audit procedures performed to check if the internal controls
are working properly. These tests help auditors decide how much they can rely on
controls to reduce detailed testing.

Detailed Tests of Controls for Various Systems:

a) Purchase System

 Purpose: To verify controls over purchases (approval, recording, payment).

 Common Controls Tested:
o Purchase orders are properly authorized.
o Receiving reports are matched with purchase orders and invoices.
o Payments are only made for authorized and recorded purchases.
 Test Example:
o Select sample purchases and check if all documents (PO, receiving
report, invoice) are matched and approved.

b) Sales System

 Purpose: To check controls on recording sales and preventing unauthorized

sales.
 Common Controls Tested:
o Sales invoices are properly authorized.
o Credit approval is obtained before sales.
o Shipping documents match sales invoices.
 Test Example:
o Review sales transactions for proper authorization and accuracy.

c) Payroll System

 Purpose: To ensure payroll is accurate and authorized.

 Common Controls Tested:
o Hiring and termination properly authorized.
o Payroll calculations are reviewed.
o Payroll payments are matched with approved timesheets.
 Test Example:
o Test a sample of payroll transactions for approval, calculation accuracy,
and payment.
d) Inventory System

 Purpose: To ensure inventory counts and records are accurate.

 Common Controls Tested:
o Physical inventory counts performed regularly.
o Inventory movements are authorized and recorded.
o Inventory valuation methods are consistent.
 Test Example:
o Observe physical counts and compare with inventory records.

e) Cash System

 Purpose: To control cash receipts and payments.

 Common Controls Tested:
o Cash receipts are recorded and deposited intact.
o Disbursements require proper approval.
o Bank reconciliations are performed regularly.
 Test Example:
o Check bank reconciliations and test sample cash transactions for
approval.

f) Capital and Expenditure

 Purpose: To control purchase and recording of fixed assets and large

expenses.
 Common Controls Tested:
o Capital expenditures require management approval.
o Fixed assets are recorded and safeguarded.
o Depreciation is calculated properly.
 Test Example:
o Review approval for capital purchases and verify fixed asset register.

3. Controls in Small Entities

 Small entities often have limited segregation of duties due to fewer
employees.
 Controls rely more on owner/manager supervision.
 Emphasis on:
o Authorization of transactions.
o Regular reviews by owner.
o Physical safeguards (locks, passwords).
o External audits or accountant reviews.
4. Internal Control in an EDP (Electronic
Data Processing) Environment
 EDP refers to computerized systems for accounting and operations.
 Unique Controls Include:
o General Controls:
Controls over IT infrastructure (access, backups, system development).
Example: Password controls, firewalls, system change management.
o Application Controls:
Controls specific to software applications (input, processing, output).
Example: Validations on data entry, automated calculations, error
reports.
 Risks in EDP:
o Unauthorized access, data loss, system errors.
 Audit Approach:
o Test IT controls before relying on computerized data.
o Use specialized IT audit techniques.

Internal Audit: Scope, Limitations & Types

🔍 Scope of Internal Audit

The scope defines the areas and activities covered by internal audit within an
organization. It can be wide-ranging depending on the objectives set by management
or the audit committee.

Areas covered under Internal Audit scope:

 Financial Audits: Checking accuracy and reliability of financial records and

compliance with accounting standards.
 Operational Audits: Reviewing efficiency and effectiveness of business
operations and processes.
 Compliance Audits: Ensuring adherence to laws, regulations, company
policies, and contracts.
 Information Systems Audit: Assessing controls over IT systems and data
security.
 Risk Management: Evaluating risk management processes and internal
controls.
 Fraud Detection and Prevention: Investigating fraud risks and recommending
controls.

Flexibility:

 Internal audit can cover any area deemed necessary by management, such as
 project audits, environmental audits, or quality control audits.

⚠ Limitations of Internal Audit

Despite its importance, internal audit has some limitations:

1. Scope Restrictions:
o May be limited by management or lack of access to all areas or
information.
2. Human Error:
o Auditors may miss errors or fraud due to oversight or
misunderstanding.
3. Collusion:
o Fraud involving collusion among employees may be difficult to detect.
4. Resource Constraints:
o Limited staff, time, or budget can restrict audit coverage and depth.
5. Management Override:
o Senior management might bypass controls or influence audit
outcomes.
6. Subjectivity:
o Audit judgments and opinions may vary between auditors.
7. Focus on Samples:
o Audits test samples, so some issues might remain undetected.
8. Changing Environments:
o Rapid changes in business or technology can render existing controls
less effective.

🏷Types of Internal Audit

1. Financial/Internal Accounting Audit

 Focuses on accuracy, completeness, and reliability of financial records.

 Ensures compliance with accounting policies and standards.

2. Operational Audit

 Reviews effectiveness and efficiency of operations.

 Looks at processes to improve productivity and reduce costs.

3. Compliance Audit

 Checks adherence to laws, regulations, and internal policies.

 Important in regulated industries (e.g., banking, healthcare).

4. Information Systems Audit (IT Audit)

  Evaluates controls over IT infrastructure, applications, data security.
 Ensures systems support business objectives and protect assets.

5. Performance Audit

 Examines whether resources are used economically, efficiently, and

effectively.
 Often used in public sector or non-profits.

6. Integrated Audit

 Combines financial, operational, and compliance audit into one

comprehensive review.

Responsibilities of Internal Auditor &

Internal Audit in Corporate Governance

🔹 Responsibilities of Internal Auditor

The internal auditor plays a crucial role in helping an organization achieve its
objectives by providing independent assurance. Their key responsibilities include:

1. Evaluating Internal Controls

o Assess effectiveness of internal control systems and recommend
improvements.
2. Risk Management
o Identify and assess risks; help management develop risk mitigation
strategies.
3. Compliance Monitoring
o Ensure company policies, laws, and regulations are followed.
4. Operational Efficiency
o Review business processes to identify inefficiencies and suggest
improvements.
5. Financial Accuracy
o Verify accuracy and reliability of financial and accounting records.
6. Fraud Prevention and Detection
o Detect and investigate fraud risks or incidents.
7. Advisory Role
o Advise management on governance, risk, and control processes.
8. Reporting
o Provide clear, timely reports to management and the audit committee.

🔹 Internal Audit and Corporate Governance

What is Corporate Governance?

Corporate governance refers to the system of rules, practices, and processes by

which a company is directed and controlled. It ensures accountability, fairness, and
transparency in a company’s relationship with stakeholders.

Role of Internal Audit in Corporate Governance:

1. Assurance Provider
o Gives independent assurance to the board and audit committee that
risks are managed and controls are effective.
2. Risk Oversight Support
o Supports the board in monitoring risk management frameworks.
3. Improving Controls and Processes
o Helps strengthen internal controls, which are critical for good
governance.
4. Ensuring Compliance
o Monitors adherence to laws, regulations, and ethical standards.
5. Facilitating Transparency
o Provides transparent, objective information that supports decision-
making.
6. Enhancing Accountability
o Encourages accountability by evaluating management performance
and controls.

Internal Audit Assignments &

Outsourcing Internal Audit

🔹 Internal Audit Assignments

What are Internal Audit Assignments?

These are specific audit tasks or projects assigned to internal auditors to examine
and evaluate particular areas of an organization.

Common Types of Internal Audit Assignments:

1. Financial Audits
o Review accuracy and compliance of financial records and transactions.
2. Operational Audits
o Assess efficiency and effectiveness of business operations.
3. Compliance Audits
o Verify adherence to laws, regulations, and internal policies.
4. Information Technology Audits
o Evaluate IT systems, controls, and security.
 5. Special Investigations
o Conduct fraud investigations or audits on suspected irregularities.
6. Follow-up Audits
o Review whether previously recommended improvements have been
implemented.

How Assignments Are Planned:

 Based on risk assessments, management requests, regulatory requirements,

or audit committee priorities.
 Auditors use a risk-based approach to focus on high-risk areas.

🔹 Outsourcing the Internal Audit Function

What is Outsourcing Internal Audit?

 Hiring an external firm or consultants to perform internal audit activities

instead of having an in-house team.

Reasons to Outsource:

 Cost savings (no need to maintain a full internal audit department).

 Access to specialized expertise and skills.
 Objectivity and independence from management.
 Flexibility in staffing and workload.

Advantages:

 Brings fresh perspectives and best practices.

 Allows the organization to focus on core activities.
 Can cover a broader range of audit areas with expert auditors.

Disadvantages:

 Possible lack of detailed understanding of company culture and processes.

 Risks related to confidentiality and data security.
 Dependency on external parties.
 Potential communication and coordination challenges.

Considerations Before Outsourcing:

 Define clear scope and objectives.

 Ensure confidentiality agreements are in place.
 Monitor and evaluate performance regularly.
 Maintain management oversight and ultimate responsibility.
Impact of Internal Controls on Audit Work
& Issuance of Management Letter

🔹 Impact of Internal Controls on Audit Work

What is the Impact?

Internal controls significantly influence how auditors plan and perform their audit
procedures.

Key Points:

1. Determining Audit Approach

o Strong internal controls mean auditors can reduce detailed
substantive testing (fewer transaction tests).
o Weak or ineffective controls require more extensive substantive
procedures to gather sufficient evidence.
2. Assessing Audit Risk
o Effective internal controls reduce the risk of material misstatement in
financial statements.
o Ineffective controls increase audit risk, requiring auditors to adjust their
procedures accordingly.
3. Efficiency of Audit
o Reliable internal controls make the audit process smoother and more
efficient.
o Poor controls increase audit time, effort, and cost.
4. Scope of Audit Work
o Auditors may perform tests of controls to evaluate the reliability of
controls before deciding on the nature, timing, and extent of
substantive tests.
5. Identification of Control Weaknesses
o Audit work includes identifying control deficiencies that may affect
financial reporting or compliance.

🔹 Issuance of Management Letter

What is a Management Letter?

A management letter is a formal document prepared by auditors that communicates

findings, weaknesses, and recommendations related to internal controls and other
matters to management.

Purpose:
  To provide constructive feedback on internal controls and operational issues.
 To recommend improvements to enhance efficiency, compliance, and risk
management.
 To highlight any control deficiencies or risks found during the audit.

Contents of a Management Letter:

 Summary of significant control weaknesses.

 Suggestions for corrective actions.
 Observations on financial and operational processes.
 Comments on compliance issues.
 Follow-up on previous audit recommendations.

Importance:

 Helps management strengthen internal controls.

 Facilitates better governance and accountability.
 Does not affect the audit opinion but complements the audit report.

Relationship Between Internal and

External Audit & Audit Working Papers

🔹 Relationship Between Internal and External Audit

Purpose and Roles:

Internal Audit External Audit

Conducted by employees or appointed by the Independent auditors appointed by
company shareholders or regulators
Continuous and ongoing function throughout Performed periodically, usually
the year annually
Focus on improving internal controls, risk Focus on providing an opinion on the
management, and operational efficiency fairness of financial statements
Reports primarily to management and audit Reports to shareholders and
committee regulatory bodies
Can perform detailed reviews of operations Provides independent assurance to
and controls external stakeholders
How They Relate:

1. Collaboration & Coordination

o External auditors often review internal audit reports and workpapers to
assess control risks and reduce their own testing.
o Internal auditors may assist external auditors by performing audit
procedures that external auditors rely on.
 2. Complementary Roles
o Internal audit focuses on helping management improve controls and
processes.
o External audit provides an independent opinion on financial statements.
3. Independence and Objectivity
o Internal auditors must maintain objectivity but are employees of the
company.
o External auditors must be fully independent.
4. Avoiding Duplication
o Proper coordination avoids overlapping work, saving time and
resources.

🔹 Audit Working Papers

What are Audit Working Papers?

 Documents prepared by auditors that record the procedures performed,

evidence obtained, and conclusions reached during the audit.

Purpose:

 Provide supporting evidence for the auditor’s opinion.

 Serve as a record of the audit work done.
 Help in planning and supervising the audit.
 Useful for review by supervisors, internal and external reviewers.
 Serve as evidence in case of disputes or legal issues.

Contents of Working Papers:

 Audit programs and checklists.

 Schedules and analyses of financial data.
 Copies or summaries of documents reviewed.
 Notes on discussions with management.
 Details of tests performed and results.
 Conclusions drawn and audit findings.

Characteristics:

 Should be clear, complete, and well-organized.

 Include cross-references and indexing.
 Maintained confidentially.

Functions of Chief Internal Auditor &

Reporting by Internal Auditors
🔹 Functions of Chief Internal Auditor
The Chief Internal Auditor (CIA) is the head of the internal audit department and
holds a key leadership role in overseeing audit activities.

Key Functions:

1. Planning and Organizing Audit Work

o Develop the annual internal audit plan based on risk assessment.
o Allocate resources and supervise audit teams.
2. Establishing Internal Audit Policies
o Set audit procedures, standards, and ethical guidelines.
3. Conducting Risk Assessments
o Identify and prioritize risks affecting the organization.
4. Leading Audit Execution
o Oversee the execution of audit assignments ensuring quality and
timeliness.
5. Reporting and Communication
o Prepare audit reports and communicate findings to management and
the audit committee.
6. Advising Management
o Provide recommendations to improve controls, efficiency, and
compliance.
7. Ensuring Follow-up
o Monitor implementation of audit recommendations.
8. Maintaining Independence and Objectivity
o Safeguard the independence of the internal audit function.
9. Liaison with External Auditors and Regulators
o Coordinate with external auditors and regulatory bodies when
necessary.

🔹 Reporting by Internal Auditors

Purpose of Reporting:

 To communicate audit findings, weaknesses, and recommendations to those

charged with governance and management.

Types of Internal Audit Reports:

1. Audit Report
o Summarizes the scope, findings, and recommendations of an audit.
o May include an opinion on adequacy of controls or risk management.
2. Management Letter
o A more detailed communication of control weaknesses and
suggestions for improvement (usually less formal than audit report).
 3. Follow-up Report
o Reviews progress on implementing prior audit recommendations.
4. Special Reports
o On specific investigations like fraud or special projects.

Recipients of Reports:

 Primarily management and the audit committee or board of directors.

 Sometimes shared with external auditors or regulators.

Characteristics of Effective Reports:

 Clear and concise language.

 Objective and fact-based.
 Highlight significant issues.
 Include practical recommendations.
 Timely delivery.

Difference Between Internal Audit and

External Audit
Aspect Internal Audit External Audit
To help management improve To provide an independent opinion
Purpose
operations and controls on financial statements
Appointed by the company Appointed by shareholders or
Appointment
(management or board) regulatory authorities
Broad: includes financial, Primarily financial statements
Scope
operational, compliance audits audit
Reports to management and audit Reports to shareholders and
Reporting
committee regulatory bodies
Continuous or periodic
Frequency Usually annual
throughout the year
Part of the organization, but
Independence Independent of the company
should be objective
Internal controls, risk Fairness of financial statements
Focus
management, and operations and compliance
Nature of Assurance with opinion on
Advisory and assurance
Work financial statements

Reliance of External Auditor on Internal

Auditor’s Report
Why External Auditors May Rely on Internal Audit Work:
  To gain assurance about the effectiveness of internal controls.
 To reduce the extent of their own testing if internal audit work is reliable.
 To save time and audit costs.

Conditions for Reliance:

 Internal audit function is competent, objective, and independent.

 Internal audit work is performed in accordance with professional standards.
 External auditor reviews and tests the quality of internal audit work.
 Internal audit procedures are relevant to external audit objectives.

How External Auditors Use Internal Audit Reports:

 Review internal audit findings and recommendations.

 Assess the adequacy of internal audit coverage.
 Perform tests of controls based on internal audit evidence.
 Evaluate whether to adjust their audit approach based on internal audit results.

Auditor: Appointment, Remuneration,

Resignation, Removal, Rights, Powers,
Duties, Liabilities, Qualifications, and
Disqualifications

🔹 Appointment of Auditor
 Who appoints?
o Usually appointed by the shareholders at the Annual General Meeting
(AGM).
o In some cases, regulatory bodies or government can appoint auditors.
 When?
o First auditor is appointed by the board or shareholders within 30 days
of company incorporation.
o Subsequent auditors are appointed annually.
 Term:
o Usually hold office until the conclusion of the next AGM.

🔹 Remuneration of Auditor
 The auditor’s fees are decided by the shareholders at the AGM or in the
company’s articles.
 Remuneration should be fair and reflect the work done.
  In some cases, the company may pay for expenses related to audit work.

🔹 Resignation of Auditor
 An auditor may resign by giving a written notice to the company.
 The auditor must also file a statement with the registrar explaining the
reasons for resignation.
 The company must inform the shareholders and appoint a new auditor if
necessary.

🔹 Removal of Auditor
 An auditor can be removed before the expiry of their term by a special
resolution of shareholders.
 The company must inform the regulatory authorities and give reasons for
removal.

🔹 Rights of Auditor
 Right to access company books, accounts, and vouchers.
 Right to obtain information and explanations from officers and employees.
 Right to receive notices and attend general meetings.
 Right to make copies of documents relevant to audit.

🔹 Powers of Auditor
 Power to inspect financial records and vouchers.
 Power to conduct audit as per law and professional standards.
 Power to report irregularities, frauds, or non-compliance.
 Power to request management to provide necessary documents.

🔹 Duties of Auditor
 Conduct audit with due professional care and independence.
 Express an opinion on financial statements’ fairness and accuracy.
 Detect and report fraud or errors discovered during the audit.
 Maintain confidentiality of company information.
 Comply with auditing standards and legal requirements.

🔹 Liabilities of Auditor
  Liable for negligence or misconduct in audit work.
 Responsible for damages caused by failure to detect fraud due to
carelessness.
 Can be held accountable to the company, shareholders, or third parties in
some cases.

🔹 Qualifications of Auditor
 Must be a Chartered Accountant or member of a recognized professional
accounting body.
 Should possess knowledge and experience in auditing and accounting.
 Must meet any regulatory requirements set by the country’s law.

🔹 Disqualifications of Auditor
 Auditor should not be an employee or officer of the company.
 Should not have a financial interest in the company.
 Cannot be related to a director or key management personnel.
 Cannot provide certain non-audit services that compromise independence.
 Cannot be a partner or employee of the previous auditor.

Procedure for Appointment of Auditors

under Companies Ordinance

🔹 Appointment of First Auditor

1. Timing:
o The first auditor must be appointed within 30 days of the company’s
incorporation.
2. Who Appoints?
o If the company has a board of directors:
The board of directors appoints the first auditor.
o If the board does not make the appointment within 30 days:
The members (shareholders) of the company appoint the auditor
within the next 90 days at an Extraordinary General Meeting (EGM).
3. Term:
o The first auditor holds office until the conclusion of the first Annual
General Meeting (AGM).

🔹 Appointment of Subsequent Auditors

 1. At Annual General Meeting (AGM):
o At each AGM, the company appoints one or more auditors to hold
office until the next AGM.
2. Procedure:
o The appointment is made by the shareholders through an ordinary
resolution in the AGM.
3. If Appointment Not Made:
o If the company fails to appoint an auditor at the AGM, the existing
auditor continues in office.
4. Filing with Registrar:
o The company must inform the registrar of the appointment or change
of auditor within the prescribed time (usually 14 days).

🔹 Additional Points
 Eligibility:
The auditor appointed must be a Chartered Accountant or a firm of Chartered
Accountants registered with the relevant professional body.
 Filling Casual Vacancies:
o If the auditor’s position becomes vacant before the expiry of the term
(due to resignation, death, or removal), the board of directors or
members (depending on circumstances) must fill the vacancy within
30 days.
 Regulatory Compliance:
o The appointment procedures and timelines must be followed strictly to
avoid penalties.

1. Appointment of Auditor by a Listed

Company (Companies Ordinance, 1984 -
Pakistan)
Key Provisions:

 Appointment at Annual General Meeting (AGM):

Listed companies are required to appoint their auditors at the AGM annually.
 Qualifications:
Auditors must be chartered accountants or audit firms registered with the
Institute of Chartered Accountants of Pakistan (ICAP).
 Regulatory Oversight:
The appointment of auditors in listed companies must comply with rules set
by the Securities and Exchange Commission of Pakistan (SECP) and the
Pakistan Stock Exchange (PSX).
 Tenure and Rotation:
o Auditor’s tenure is typically one year (until the next AGM).
 o Listed companies may have to follow additional rules regarding auditor
rotation to promote independence.
 Disclosure:
Details of the appointment and remuneration of auditors must be disclosed in
the company’s annual report.

2. Appointment of Sole Proprietor

Chartered Accountants as Auditors by
Business Name
 Business Name Registration:
Sole proprietor Chartered Accountants can practice under their personal
name or a business name registered with the relevant authority.
 Eligibility to Act as Auditor:
o The sole proprietor must be a member of ICAP and registered with the
auditing regulatory bodies.
o The business name under which they operate should be registered
with ICAP as a recognized audit practice.
 Legal Recognition:
Appointing auditors who operate under a business name (instead of a firm
name) is permissible as long as they meet all professional and legal
requirements.
 Responsibilities:
The sole proprietor auditor, whether operating under their own name or a
business name, is fully responsible for the audit work and compliance with
auditing standards.

3. International Standards on Auditing

(ISAs) and Guidelines
What are ISAs?

 International Standards on Auditing (ISAs) are professional standards issued

by the International Auditing and Assurance Standards Board (IAASB) under
the International Federation of Accountants (IFAC).
 ISAs provide a framework and detailed guidance for auditors to perform high-
quality audits worldwide.

Key Features of ISAs:

 Promote consistency, quality, and transparency in auditing.

 Cover all aspects of an audit, including planning, risk assessment, evidence
 collection, reporting, and communication.
 Help auditors form an opinion on whether financial statements present a true
and fair view.

Examples of Important ISAs:

 ISA 200: Overall objectives of the independent auditor and conduct of an audit.
 ISA 315: Identifying and assessing risks of material misstatement.
 ISA 330: Responses to assessed risks.
 ISA 500: Audit evidence.
 ISA 700: Forming an opinion and reporting on financial statements.

Guidelines:

 ISAs are often supported by implementation guides and practice notes

issued by professional bodies (like ICAP) to help auditors apply the standards
in local contexts.
 Many countries, including Pakistan, adopt or adapt ISAs as part of their
auditing regulatory framework.

Statements of Standard Accounting and

Auditing Practices (SSAAPs), Technical
Releases, and Professional Ethics

🔹 Statements of Standard Accounting and Auditing

Practices (SSAAPs)
What are SSAAPs?

 SSAAPs are authoritative guidelines and standards issued by the Institute of

Chartered Accountants of Pakistan (ICAP).
 They cover accounting principles, auditing procedures, and reporting
requirements to ensure uniformity and quality in financial reporting and
auditing in Pakistan.

Purpose:

 To guide accountants and auditors on proper accounting treatments and

audit procedures.
 To help maintain transparency, reliability, and comparability of financial
statements.

Features:
  SSAAPs align with International Financial Reporting Standards (IFRS) and
International Standards on Auditing (ISAs) but adapted for Pakistan’s legal
and business environment.
 They serve as a reference for auditors, accountants, and regulators.

🔹 Technical Releases
What are Technical Releases?

 Technical Releases are interpretative guidance and explanations issued by

ICAP to clarify complex or new accounting and auditing issues.
 They provide practical solutions and examples to help professionals apply
SSAAPs correctly.

Purpose:

 To address emerging issues, new regulations, or frequently asked questions.

 To offer step-by-step guidance on accounting treatments or audit techniques.

Nature:

 Not mandatory like SSAAPs but considered strong recommendations.

 Help ensure consistency in professional practice.

🔹 Professional Ethics
What is Professional Ethics?

 Professional ethics are a set of moral principles and standards that guide the
behavior and conduct of accountants and auditors.

Issued by:

 The Code of Ethics by ICAP, largely based on the International Ethics

Standards Board for Accountants (IESBA) Code of Ethics.

Key Principles of Professional Ethics:

Principle Explanation
Be honest and straightforward in all professional
Integrity
relationships.
Objectivity Avoid bias, conflicts of interest, or undue influence.
Professional Competence Maintain knowledge and skill; perform duties
and Due Care diligently and carefully.
Confidentiality Respect client and employer information; do not
 Principle Explanation
disclose without proper authority.
Comply with laws and regulations; avoid actions that
Professional Behavior
discredit the profession.
Importance:

 Ensures trust and confidence in the accounting profession.

 Helps maintain the reputation and credibility of professionals.

Concept of Audit Planning

What is Audit Planning?

Audit planning is the process by which an auditor prepares and organizes the audit
work before starting the actual examination of financial statements and records.

Why is Audit Planning Important?

 Efficient Use of Resources: Helps allocate time, staff, and tools effectively.
 Focus on Risk Areas: Identifies high-risk areas needing more attention.
 Compliance: Ensures audit is conducted according to auditing standards.
 Avoid Surprises: Reduces the chance of unexpected problems during the
audit.
 Coordination: Helps coordinate audit team activities.
 Cost-Effective: Prevents unnecessary work and controls audit costs.

Key Objectives of Audit Planning

1. Understand the Client’s Business:

o Learn about the company, its environment, industry, and risks.
2. Set Audit Scope and Objectives:
o Decide what areas will be audited and to what extent.
3. Assess Risks:
o Identify areas with potential for errors or fraud.
4. Develop Audit Strategy and Approach:
o Determine methods, procedures, and resources needed.
5. Allocate Work and Responsibilities:
o Assign tasks to audit team members based on skills.
6. Establish Timelines:
o Plan the schedule to complete the audit on time.

Components of Audit Planning

  Client Acceptance and Continuance: Decide if you will accept or continue
auditing the client based on risk assessment.
 Preliminary Review: Review past audit reports, financial statements, and
internal controls.
 Setting Materiality Levels: Decide thresholds for what constitutes significant
misstatements.
 Preparing Audit Program: Detailed step-by-step audit procedures to follow.
 Communication: Inform management and the audit team about the plan.

1. Benefits of Audit Planning

 Efficient Use of Resources: Helps allocate time, staff, and audit tools properly.
 Risk Identification: Focuses on areas with higher risk of errors or fraud.
 Better Coordination: Ensures audit team works smoothly and effectively.
 Improved Quality: Leads to a more thorough and accurate audit.
 Cost-Effective: Avoids unnecessary work, saving time and money.
 Compliance: Ensures audit is in line with auditing standards.
 Avoids Surprises: Identifies potential problems early.

2. Factors Affecting Audit Planning

 Size and Complexity of the Entity: Bigger or more complex companies require
more detailed planning.
 Nature of Business: Different industries have different risks and regulations.
 Previous Audit Experience: Past audit findings and the client’s reputation
matter.
 Internal Control System: Strong controls may reduce the amount of audit
testing.
 Management’s Integrity and Attitude: Good cooperation and honesty affect
planning.
 Availability of Staff and Resources: Skilled auditors and tools affect how the
plan is made.
 Legal and Regulatory Requirements: Laws or standards specific to the
company’s industry or location.
 Time Constraints: Deadlines may impact the extent and depth of planning.

3. Audit Planning Procedure

Step-by-step process:

1. Client Acceptance and Continuance:

Decide whether to accept or continue auditing the client based on risk
assessment and ethical considerations.
 2. Understanding the Client and Its Environment:
Gather information about the company, industry, operations, and regulatory
environment.
3. Preliminary Risk Assessment:
Identify areas with higher risk of material misstatements.
4. Assess Internal Controls:
Review and evaluate the client’s control systems.
5. Set Materiality Levels:
Decide the threshold for errors that would affect users’ decisions.
6. Develop Overall Audit Strategy:
Decide the scope, timing, and direction of the audit.
7. Prepare Detailed Audit Program:
List specific procedures and tests to perform.
8. Assign Audit Team and Resources:
Allocate tasks and responsibilities based on skills and availability.
9. Communicate the Plan:
Discuss the plan with management and audit team.

4. Overall Audit Strategy

 Definition:
It is the high-level plan that sets the direction, scope, and focus of the audit.
 Purpose:
To guide detailed audit planning and execution.
 Components:
o Audit Objectives: What the audit aims to achieve.
o Scope: Which areas, accounts, or processes will be audited.
o Timing: When audit procedures will be carried out.
o Resource Allocation: Number and skill level of audit staff.
o Audit Approach: Deciding between substantive testing or controls
reliance.
o Coordination: Planning how different teams or specialists will work
together.

Review of the Client's Business and

Accounting Requirements, Systems, and
Procedures

1. Review of the Client’s Business

Purpose:
  To understand the nature of the client’s business, industry, and environment.
 Helps the auditor identify risks, assess business complexity, and tailor the
audit approach.

Key Areas to Review:

 Industry and Market Position:

What industry is the client in? What are the industry risks and regulations?
 Business Operations:
What products/services does the company offer? How does it generate
revenue?
 Organizational Structure:
Understand the company’s departments, management hierarchy, and
ownership.
 Economic and Regulatory Environment:
Are there economic trends or laws affecting the business?
 Competitors and Customers:
Who are the major competitors? Who are the key customers or suppliers?
 Financial Health:
Overview of the company’s financial position and past performance.
 Management’s Attitude:
How cooperative and transparent is the management?

2. Review of Accounting Requirements

Purpose:

 To understand the accounting policies, standards, and reporting

requirements applicable to the client.

Key Points:

 Applicable Accounting Standards:

Does the client follow IFRS, local GAAP, or any other standards?
 Statutory Requirements:
What laws govern the preparation of financial statements (e.g., Companies
Ordinance, tax laws)?
 Reporting Timelines:
When are financial statements due? Are there any special reporting
requirements?
 Disclosure Requirements:
What disclosures must be made in the financial statements?
 Taxation and Regulatory Filings:
Understand tax rules affecting accounting and audit.

3. Review of Systems and Procedures

Purpose:

 To assess the client’s internal control systems and accounting procedures.

 Helps identify areas of potential error or fraud.

Key Areas to Review:

 Accounting System:
Is the accounting system manual or computerized? How are transactions
recorded?
 Internal Controls:
Are there controls over cash, purchases, sales, payroll, inventory, etc.?
 Authorization Procedures:
Who authorizes transactions and payments?
 Segregation of Duties:
Are responsibilities divided to prevent fraud?
 Record Keeping:
How are financial records maintained and stored?
 Compliance Checks:
Are procedures in place to ensure compliance with laws and policies?
 Use of Technology:
How does the client use IT for accounting and controls (e.g., ERP systems)?
 Monitoring:
How does management monitor the effectiveness of controls and systems?

Why is this Review Important?

 Helps the auditor design effective audit tests.

 Provides insight into risk areas needing more attention.
 Supports assessment of audit risk and materiality.
 Helps in determining whether to rely on internal controls or perform more
substantive testing.

Preceding Year’s Financial Statements

and Client Generated Information

1. Preceding Year’s Financial Statements

What are they?

 These are the financial statements prepared and audited in the previous
accounting period.
 Includes the Balance Sheet, Income Statement, Cash Flow Statement, and
 Notes to Accounts from the last year.

Why are they important in an audit?

 Reference Point:
They provide a benchmark to compare the current year’s figures and detect
unusual changes or trends.
 Risk Assessment:
Help auditors identify areas of risk by reviewing prior issues, errors, or
adjustments.
 Audit Planning:
Assist in planning audit procedures by highlighting accounts or transactions
that may need more attention.
 Understanding Accounting Policies:
Help the auditor understand the client’s accounting policies and methods
used previously.
 Assessing Going Concern:
Trends or financial difficulties noted in the previous year can signal going
concern issues.
 Consistency Check:
Auditors check whether the client has applied accounting policies
consistently over time.

How auditors use preceding year’s financial statements?

 Analyze significant fluctuations in account balances.

 Compare ratios and financial metrics year over year.
 Review audit reports and management letters for any issues highlighted
previously.
 Identify areas where the previous auditor had concerns or suggested
improvements.

2. Client Generated Information

What is it?

 This refers to all financial and non-financial information generated by the

client’s systems, including:
o Accounting records and journals.
o Management reports.
o Budgets and forecasts.
o Internal audit reports.
o Inventory records.
o Contracts and agreements.
o Other supporting documents related to transactions.

Importance for the auditor:

  Primary Evidence Source:
Much of the audit evidence is derived from client-generated information.
 Assessment of Reliability:
Auditors evaluate the accuracy, completeness, and reliability of this
information.
 Basis for Audit Testing:
Used to design and perform audit procedures such as verification,
confirmation, and analytical reviews.
 Control Evaluation:
Helps assess the effectiveness of internal controls over financial reporting.

Auditor’s Considerations:

 Integrity of Information:
Is the data accurate, timely, and free from manipulation?
 System Controls:
Are there adequate controls to ensure data integrity?
 Reconciliation:
Does client information reconcile with external evidence (e.g., bank
statements)?
 Use of Technology:
How is information generated and processed (manual vs. computerized)?

1. Determining Audit Risk and Materiality

Level

Audit Risk
What is Audit Risk?

 Audit Risk is the risk that the auditor may issue an incorrect audit opinion, i.e.,
stating that the financial statements are free from material misstatement
when they actually contain such misstatements.

Components of Audit Risk:

Component Explanation
Inherent Risk Risk of error or fraud in an account before considering controls.
Risk that client’s internal controls will fail to prevent or detect
Control Risk
errors.
Detection Risk that auditor’s procedures will fail to detect a material
Risk misstatement.
How to Determine Audit Risk?
  Assess Inherent and Control Risks based on the understanding of the client
and environment.
 Set Detection Risk level by planning audit procedures to reduce overall Audit
Risk to an acceptable low level.

Materiality Level
What is Materiality?

 Materiality refers to the magnitude of an omission or misstatement of

accounting information that influences the economic decisions of users taken
on the basis of the financial statements.

Factors Affecting Materiality:

 Size and nature of misstatement.

 User’s perspective and expectations.
 Nature of business and industry.
 Financial statement components (e.g., revenue, profit, assets).

Determining Materiality Level:

 Auditors set a quantitative threshold (e.g., 5% of net profit or 1% of total

assets).
 This level guides the auditor to focus on significant areas and ignore
immaterial details.
 Materiality is also considered for performance materiality (lower than overall
materiality) to reduce audit risk.

2. Audit Planning Memorandum

What is an Audit Planning Memorandum?

 A written document prepared by auditors summarizing the overall audit plan

before the audit begins.
 It captures all key aspects of audit planning to guide the audit team.

Contents of Audit Planning Memorandum:

Section Details
Client Background Overview of the client’s business and environment.
Scope of Audit Areas/accounts to be audited.
Audit Objectives What the audit aims to achieve.
Materiality Level Thresholds set for materiality and performance
 Section Details
materiality.
Audit Risks Identified risks (inherent and control risks).
Overall approach – e.g., reliance on controls,
Audit Strategy
substantive testing.
Resource Allocation Staff assigned, timelines, and responsibilities.
Previous Year Issues Summary of past audit findings and concerns.
Significant Accounting
Key policies to review.
Policies
Planned Procedures Key audit procedures and tests planned.
Purpose of the Memorandum:

 Ensures clear understanding among the audit team.

 Helps coordinate audit activities.
 Serves as a reference document throughout the audit.
 Supports documentation for audit quality and compliance.

1. Preparation of Audit Plans

What is an Audit Plan?

 An audit plan is a roadmap that outlines the nature, timing, and extent of audit
procedures to be performed.
 It provides a broad framework for conducting the audit efficiently and
effectively.

Purpose:

 Helps organize audit work.

 Ensures coverage of all significant areas.
 Allocates resources and sets timelines.

Steps in Preparing an Audit Plan:

1. Understand the Client: Business, industry, internal controls.

2. Assess Risks: Identify areas with higher risk of material misstatement.
3. Set Materiality: Determine the significance threshold.
4. Define Audit Objectives: What needs to be achieved for each area.
5. Determine Audit Approach: Decide on reliance on controls vs. substantive
testing.
6. Plan Resources: Assign staff and estimate time required.
7. Schedule Work: Set timelines for audit procedures.

2. Preparation of Detailed Audit

Programmes
What is an Audit Programme?

 A detailed list of audit procedures and steps to be performed to gather

evidence.
 It breaks down the audit plan into specific actions.

Purpose:

 Ensures all necessary audit work is done.

 Provides guidance to audit staff.
 Helps maintain consistency and completeness.

Components of a Detailed Audit Programme:

 Audit Area: For example, cash, sales, purchases.

 Objectives: What the auditor wants to verify (e.g., existence, accuracy).
 Procedures: Step-by-step tests to perform (e.g., count cash, verify invoices).
 Timing: When the procedures will be performed.
 Responsible Person: Who will perform the work.

Example:

Staff
Audit Area Objective Audit Procedure Timing
Assigned
Week
Cash Verify existence Physically count cash on hand John
1
Check Review purchase invoices and Week
Purchases Sarah
completeness contracts 2

3. Documentation of Audit Plan

What is Documentation of Audit Plan?

 It involves recording the audit plan and audit programmes clearly and
systematically.
 Part of the audit working papers which provide evidence of planning and
execution.

Importance:

 Serves as a reference during the audit.

 Helps in supervision and review by senior auditors.
 Provides evidence of compliance with auditing standards.
 Useful for future audits.
How to Document:

 Use standardized templates or software.

 Include audit planning memorandum, audit programme, risk assessment, and
materiality considerations.
 Ensure documentation is clear, complete, and dated.
 Update if there are any changes during the audit.

1. Audit Timetable

What is an Audit Timetable?

 An audit timetable is a detailed schedule that outlines when each audit

activity or procedure will be carried out during the audit process.
 It organizes the audit work over a timeline to ensure the audit is completed on
time.

Purpose of an Audit Timetable:

 Ensures all audit procedures are completed within the deadlines.

 Helps manage the audit team’s time and resources effectively.
 Facilitates coordination with the client to avoid disruption.
 Provides a roadmap for progress monitoring.

What does an Audit Timetable Include?

 Start and end dates for the audit.

 Dates for specific procedures (e.g., inventory count, payroll testing).
 Deadlines for submission of audit reports.
 Time allocated to review working papers.

2. Changes in Audit Plan During the

Course of an Audit

Why do Changes Happen?

 New information or risks may be discovered.

 Client circumstances may change (e.g., financial difficulties, management
changes).
 Errors or fraud suspicion found.
 Delays or resource availability issues.
 Regulatory changes or audit scope adjustments.
How to Handle Changes?

 Reassess Risks: Evaluate the impact of new findings on the audit risk.
 Revise Audit Plan: Modify objectives, scope, and procedures accordingly.
 Communicate: Inform audit team and client about changes.
 Document: Record reasons and details of changes in the audit working
papers.

3. Direction

What is Direction in Audit?

 Direction is the process of guiding and instructing the audit team on how to
carry out audit work.
 The auditor in charge provides clear instructions on tasks, deadlines, and
expected outcomes.

Importance:

 Ensures audit work is done systematically and according to plan.

 Keeps the team focused on audit objectives.
 Helps junior auditors understand their roles and responsibilities.

4. Controlling

What is Controlling in Audit?

 Controlling is the process of monitoring audit work to ensure it is progressing

as planned and meeting quality standards.
 It includes reviewing work done, verifying documentation, and making
corrections if necessary.

Why is Controlling Important?

 Ensures compliance with auditing standards.

 Detects errors or omissions early.
 Maintains the quality and accuracy of audit evidence.
 Helps manage time and resources effectively.

How is Controlling Done?

 Periodic review of audit work papers.

  Discussions with audit staff about progress and problems.
 Supervising complex audit areas.
 Feedback and guidance to auditors.

1. Supervision and Review of Audit Work

What is Supervision in Audit?

 Supervision means overseeing the audit team’s work to ensure it is done

properly, efficiently, and according to the audit plan.
 The senior auditor or audit manager guides junior auditors and supports them
in complex areas.

What is Review in Audit?

 Review is the process of critically examining audit work done to check for
accuracy, completeness, and compliance with auditing standards.
 Reviewers (senior auditors or managers) verify that audit evidence is
sufficient and conclusions are reasonable.

Importance of Supervision and Review:

 Ensures quality control and compliance with standards.

 Helps identify and correct mistakes early.
 Confirms that audit objectives are met.
 Provides guidance and training to junior staff.
 Enhances overall audit effectiveness and efficiency.

How is Supervision and Review Done?

 Regular meetings and progress updates.

 Checking working papers for completeness and accuracy.
 Ensuring audit procedures are properly performed.
 Addressing queries and difficulties faced by audit staff.
 Final review of key audit areas and reports before issuing.

2. Monitoring Time and Costs

Why Monitor Time and Costs?

 Audits must be completed within budget and deadlines.

 Monitoring helps avoid overruns and ensures efficient use of resources.
  Keeps the audit profitable and meets client expectations.

How to Monitor Time and Costs?

 Use timesheets where auditors record hours spent on each task.

 Track progress against the audit timetable.
 Review staff utilization to see if resources are efficiently allocated.
 Identify tasks taking longer than planned and investigate reasons.
 Adjust plans if necessary to control overruns.

Benefits of Monitoring:

 Detects delays early so corrective action can be taken.

 Helps in planning future audits better.
 Provides feedback on productivity and efficiency.
 Enables better client communication about progress and costs.

1. Terms of Audit Engagement

What are Terms of Audit Engagement?

 These are the conditions and scope under which the auditor agrees to
conduct the audit.
 They define the responsibilities of both the auditor and the client.
 Clear terms help avoid misunderstandings and disputes.

Why are Terms Important?

 They set expectations on the scope, objectives, and limits of the audit.
 Define the timelines, fees, and confidentiality.
 Clarify the roles and responsibilities of both parties.

2. Engagement Letter

What is an Engagement Letter?

 It is a formal written agreement between the auditor and the client.

 The engagement letter documents the terms of audit engagement.
 It acts as a contract outlining the auditor’s responsibilities and the client’s
obligations.

Purpose of the Engagement Letter:

  Establishes a clear understanding to avoid disputes.
 Protects both parties legally.
 Serves as evidence of the agreed terms in case of disagreements.

3. Contents of Engagement Letter

An engagement letter typically includes:

Content Description
Scope of Audit What the audit will cover and what is excluded.
What the audit aims to achieve (e.g., opinion on financial
Objectives of Audit
statements).
Responsibilities of
What the auditor will do (conduct audit, report findings).
Auditor
Responsibilities of
Provide access to records, cooperation, information.
Client
Audit Standards Reference to applicable auditing standards (e.g., ISA).
Timing and Duration When the audit will start and expected completion date.
Fees and Payment
How much and when the auditor will be paid.
Terms
Confidentiality Commitment to keep client information confidential.
Limitation of Liability Any limits on auditor’s legal responsibility.
Other Terms Special conditions, use of specialists, etc.

4. Acceptance of and Amendments in

Engagement Letter

Acceptance of Engagement Letter:

 Once the client reviews and agrees to the letter, they usually sign it to confirm
acceptance.
 Signing indicates mutual agreement to the terms.

Amendments to Engagement Letter:

 If circumstances change (e.g., scope, timelines, fees), the engagement letter

may need to be updated or amended.
 Amendments should be:
o Documented in writing.
o Communicated and agreed by both auditor and client.
o Signed by both parties to confirm acceptance of changes.
1. Techniques of Commencement of
Audit Work
When auditors begin their work, they use specific techniques to gather information
and plan their audit efficiently. These techniques help them understand the client’s
business and identify risks.

Common Techniques Include:

 Preliminary Review of Financial Statements:

Examining last year’s audited accounts and reports to understand financial
trends and risks.
 Understanding the Client’s Business:
Gathering information about the industry, operations, management, and
business environment.
 Assessment of Internal Controls:
Reviewing the client’s systems and controls to determine how reliable their
accounting records are.
 Initial Meeting with Management:
Discussing the audit scope, objectives, and any concerns or changes since
the last audit.
 Reviewing Prior Audit Reports:
Checking previous audit findings, management letters, and how issues were
addressed.
 Risk Assessment:
Identifying areas where there might be higher chances of errors or fraud.

2. Procedures Affecting Audit Work

These are audit procedures that can influence the effectiveness and scope of audit
work. Auditors must consider these carefully to plan the audit properly.

Key Procedures Affecting Audit Work:

 Understanding and Testing Internal Controls:

Strong controls may allow the auditor to reduce detailed testing; weak
controls require more substantive procedures.
 Analytical Procedures:
Using ratios and trends to identify unusual transactions or balances.
 Substantive Testing:
Verifying transactions and balances through detailed checks (e.g., invoices,
bank statements).
 Compliance Testing:
 Checking if the client follows laws, regulations, and company policies.
 Cut-off Procedures:
Ensuring transactions are recorded in the correct accounting period (more on
this below).
 Reviewing Accounting Estimates:
Examining how the client made estimates like depreciation or provisions.

3. Cut-off

What is Cut-off?

 Cut-off is an audit procedure to make sure that transactions are recorded in

the correct accounting period.
 It ensures that revenues and expenses are recognized when they actually
occur, not earlier or later.

Why is Cut-off Important?

 Prevents overstatement or understatement of income or expenses.

 Helps in presenting a true and fair view of financial statements.
 Avoids manipulation by delaying or accelerating transactions around year-end.

How is Cut-off Tested?

 Check sales invoices and shipping documents near the year-end date to
confirm sales are recorded in the right period.
 Review purchase invoices and receiving reports around year-end to verify
expenses are recorded properly.
 Examine cash receipts and payments close to year-end.
 Confirm inventory counts are conducted at the correct date and adjustments
made accordingly.

1. Techniques of Commencement of Audit Work

When an audit begins, auditors use specific techniques to get a clear picture of the
client’s business and plan the audit efficiently. These techniques help identify risks
and areas that need special attention.

Key Techniques:

 Understanding the Client’s Business and Environment:

Collect information about the industry, business operations, management,
and economic conditions.
 Reviewing Previous Audit Files:
 Check prior year audit reports, working papers, and management letters to
identify recurring issues or risks.
 Preliminary Analytical Review:
Analyze prior financial statements and compare with industry benchmarks or
current year data to spot unusual trends.
 Assessing Internal Controls:
Get an initial understanding of the client’s internal control systems to evaluate
reliability of accounting records.
 Discussing with Management and Staff:
Meet with key personnel to understand business changes, risks, and audit
expectations.
 Risk Assessment:
Identify areas prone to errors or fraud which will require more detailed audit
work.

2. Procedures Affecting Audit Work

These procedures influence the nature, timing, and extent of audit work needed to
gather sufficient and appropriate audit evidence.

Important Procedures:

 Test of Controls:
Checking if internal controls are working effectively to reduce detailed testing.
 Analytical Procedures:
Using financial ratios, trend analysis, and comparisons to detect
inconsistencies or unusual transactions.
 Substantive Testing:
Verifying account balances and transactions by examining supporting
documents like invoices, contracts, or bank statements.
 Compliance Procedures:
Ensuring that the company follows applicable laws, regulations, and company
policies.
 Cut-off Procedures:
Confirming that transactions are recorded in the correct accounting period.
 Reviewing Accounting Estimates and Judgments:
Checking reasonableness of estimates like depreciation, provisions, and
allowances.

3. Cut-off Procedure
Cut-off is a critical audit procedure that ensures all transactions are recorded in the
right accounting period, neither too early nor too late.

Importance:
  Prevents misstating revenues and expenses.
 Helps present a true and fair view of financial statements.
 Detects any attempts to manipulate income by shifting transactions between
periods.

How to Perform Cut-off Procedure:

 Sales Cut-off:
Verify sales invoices and dispatch documents near the year-end date to
ensure sales are recorded in the correct period.
 Purchases Cut-off:
Check purchase invoices and goods receipt notes around year-end to ensure
expenses are recorded properly.
 Cash Transactions:
Review cash receipts and payments close to year-end.
 Inventory Cut-off:
Confirm physical inventory counts correspond with the financial period under
audit.

Definition of Audit Technique

Audit Technique refers to the methods or procedures used by auditors to collect
evidence and carry out audit work effectively. These techniques help auditors verify
the accuracy and completeness of financial information and assess the reliability of
the client’s records.

Kinds of Audit Techniques

There are several audit techniques that auditors commonly use:

1. Physical Examination
Inspecting tangible assets like cash, inventory, or fixed assets to verify their
existence and condition.
2. Observation
Watching processes or procedures being performed by the client, such as
inventory counting or internal control activities.
3. Inquiry
Asking questions from client personnel or third parties to gather information
or explanations.
4. Confirmation
Obtaining direct verification from external sources, for example, confirming
bank balances or accounts receivable with customers.
5. Recalculation
Checking the mathematical accuracy of documents and records, such as
recalculating depreciation or totals.
6. Re-performance
 Independently executing procedures that the client has performed, like
rechecking reconciliations.
7. Analytical Procedures
Evaluating financial information through comparisons, ratios, trends, and
other analyses to detect unusual transactions or inconsistencies.
8. Scanning
Reviewing accounting records to identify unusual or significant items that
require further investigation.

1. Tests of Control

What are Tests of Control?

 These are audit procedures performed to evaluate the effectiveness of a

client’s internal controls.
 The auditor checks whether controls are operating as intended to prevent or
detect errors and fraud.

Purpose:

 To determine if controls can be relied upon to reduce the amount of detailed

testing.
 If controls are strong, auditors may reduce substantive testing.

Examples of Tests of Control:

 Inspecting documents for authorization signatures.

 Observing the client’s procedures (e.g., how cash receipts are handled).
 Re-performing control activities (e.g., reconciliation of accounts).
 Checking system access controls.

2. Substantive Procedures

What are Substantive Procedures?

 These are audit tests that directly verify the accuracy, completeness, and
validity of financial statement balances and transactions.
 They provide evidence on whether financial statements are free from material
misstatement.

Purpose:

 To detect errors or fraud in account balances and transactions.

 Usually performed after assessing controls or when controls are weak.
Types of Substantive Procedures:

 Tests of Details: Examining invoices, contracts, bank statements, etc.

 Analytical Procedures: Comparing ratios, trends, and other financial data to
expectations.

3. Management Representation

What is Management Representation?

 It is a written statement by management confirming the accuracy and

completeness of the information provided to auditors.
 It covers management’s responsibility for financial statements and disclosure
of all relevant information.

Purpose:

 To support audit evidence collected.

 To document management’s acknowledgment of responsibility and
disclosures.

Typical Contents:

 Confirmation that financial statements are prepared fairly.

 Disclosure of all related party transactions.
 Assurance that all fraud or suspected fraud has been reported.
 Confirmation of completeness of records.

1. Vouching

What is Vouching?

 Vouching is the process of checking the authenticity and validity of

transactions recorded in the books of accounts.
 It involves verifying each transaction with supporting documents like invoices,
receipts, contracts, bills, etc.

Purpose:

 To ensure that transactions are genuine and properly authorized.

 To detect any fraud, errors, or fictitious entries.

How Vouching is Done:

  Select a transaction from the books.
 Examine the related original documents.
 Confirm that the transaction is properly recorded and authorized.

2. Verification of Assets and Liabilities

What is Verification?

 Verification is the process of confirming the existence, ownership, valuation,

and completeness of assets and liabilities shown in the financial statements.
 Unlike vouching (which checks transactions), verification focuses on
balances.

Purpose:

 To ensure that assets and liabilities are real, owned by the company, and
accurately valued.
 To prevent overstatement or understatement in the balance sheet.

How Verification is Done:

 Physical inspection: For tangible assets like inventory and fixed assets.
 Confirmations: For receivables, bank balances, loans, etc.
 Review of legal documents: For ownership (title deeds, contracts).
 Recalculation: For valuation (depreciation, amortization).

3. Scrutiny of Trading

What is Scrutiny of Trading?

 Scrutiny of Trading involves carefully examining the trading account in the

financial statements.
 The trading account shows the gross profit by comparing sales and direct
costs (like purchases).

Purpose:

 To verify the accuracy of sales and purchase transactions.

 To identify any unusual or suspicious entries.
 To ensure correct calculation of gross profit.

How Scrutiny is Done:

  Check supporting documents for sales and purchase entries.
 Analyze sales returns and purchase returns.
 Compare sales and purchases with prior periods or industry norms.
 Verify cost of goods sold and inventory adjustments.

1. Profit and Loss Account

What is Profit and Loss Account?

 Also called the Income Statement, it summarizes the revenues and expenses
over a period to show the net profit or loss.
 It reflects the company’s operating performance during the accounting period.

Purpose in Audit:

 Auditors examine the Profit and Loss Account to verify the accuracy and
completeness of income and expense transactions.
 They ensure that profits or losses are correctly reported and in accordance
with accounting standards.

Audit Focus Areas:

 Sales revenue recognition.

 Expense classification and completeness.
 Accuracy of gross profit and net profit calculations.

2. Sampling Techniques

What is Sampling in Audit?

 Auditors cannot check every transaction due to volume and cost, so they
select a sample of transactions for testing.
 Sampling helps to draw conclusions about the whole population.

Common Sampling Techniques:

 Random Sampling: Every item has an equal chance of selection. Good for
unbiased results.
 Systematic Sampling: Selecting every nth item from a list.
 Stratified Sampling: Dividing the population into groups (strata) and sampling
from each group.
 Judgmental (Non-statistical) Sampling: Auditor uses professional judgment
to select samples based on risk or materiality.
3. Compliance Techniques

What are Compliance Techniques?

 Procedures auditors use to check whether the company is following laws,

regulations, policies, and internal controls.

Examples:

 Reviewing approvals and authorizations.

 Checking adherence to company policies (e.g., procurement procedures).
 Verifying compliance with tax laws and reporting requirements.
 Testing segregation of duties.

4. Substantive Testing

What is Substantive Testing?

 It involves detailed checks of financial transactions and balances to detect

material misstatements.
 These tests provide direct evidence about the accuracy of financial statement
amounts.

Types of Substantive Tests:

 Tests of Details: Examining invoices, contracts, bank statements, etc.

 Analytical Procedures: Comparing ratios, trends, and financial data against
expectations.

Purpose:

 To verify the validity and completeness of recorded transactions.

 To identify errors or fraud.

1. Analytical Review

What is Analytical Review?

 Analytical Review is an audit procedure where auditors evaluate financial

information by analyzing relationships, trends, and ratios to identify any
unusual or unexpected patterns.
  It helps auditors understand the business and detect possible errors or fraud.

Purpose:

 To spot inconsistencies or deviations from expected results.

 To reduce detailed testing if results appear reasonable.
 To highlight areas that require further investigation.

How it’s done:

 Compare current year figures with prior years or budget.

 Calculate financial ratios (e.g., gross profit margin, current ratio).
 Analyze trends over time.
 Compare client’s performance with industry averages.

2. Use of Computer Assisted Audit Techniques (CAATs)

What are CAATs?

 CAATs are software tools and techniques used by auditors to perform audit
tasks more efficiently and effectively by analyzing electronic data.

Benefits:

 Handle large volumes of data quickly.

 Increase accuracy and reduce human error.
 Perform complex data analysis and pattern detection.
 Automate repetitive audit tasks.

Common CAATs Applications:

 Data Extraction: Retrieving large data sets from client systems.

 Data Analysis: Sorting, filtering, and summarizing data to detect anomalies.
 Test of Transactions: Automated sampling, recalculation, or matching
transactions.
 Continuous Auditing: Ongoing audit procedures using real-time data.

Examples of CAATs:

 Audit software like IDEA, ACL, or custom Excel macros.

 Data analytics tools for trend and ratio analysis.
 Automated confirmation requests.

1. Reliance on Other Auditors

What is Reliance on Other Auditors?

 Sometimes, a company’s financial statements include parts audited by

different auditors (called other auditors).
 The principal auditor (main auditor) may need to rely on the work of these
other auditors for some parts of the audit.

When Does This Happen?

 When auditing subsidiaries or branches in different locations.

 When specialized parts of the audit are done by other auditors.

What Should the Principal Auditor Do?

 Evaluate the competence, independence, and work quality of the other

auditors.
 Decide how much reliance to place on their work.
 Perform additional procedures if needed to reduce audit risk.

Why is It Important?

 To ensure that the entire audit is reliable even if multiple auditors are involved.
 To avoid gaps or inconsistencies in the audit process.

2. Reliance on Experts

What is Reliance on Experts?

 Auditors sometimes need to use the work of experts when auditing complex
areas outside their expertise.
 Experts can be specialists like valuers, actuaries, engineers, lawyers, or IT
specialists.

When is Reliance on Experts Needed?

 Valuation of assets (e.g., property, investments).

 Assessing actuarial assumptions for pensions.
 Legal matters or complex contract interpretations.
 Technical assessments (e.g., IT systems).

What Should Auditors Do?

 Assess the competence, objectivity, and qualifications of the expert.

 Understand the expert’s work and its impact on the audit.
 Review the methods and assumptions used by the expert.
  If necessary, perform additional audit procedures to corroborate the expert’s
findings.

Why is It Important?

 Ensures audit conclusions are based on reliable information.

 Provides evidence in areas requiring specialized knowledge.

1. Concept of Audit Evidence

What is Audit Evidence?

 Audit Evidence is the information auditors collect to support their opinion on

the financial statements.
 It helps auditors confirm whether the financial statements are free from
material misstatement.

Characteristics of Good Audit Evidence:

 Sufficient: Enough quantity of evidence.

 Appropriate: Relevant and reliable for the audit objective.
 Timely: Collected during the right period.

Sources of Audit Evidence:

 Physical inspection.
 Documents and records.
 Confirmations from third parties.
 Observations.
 Oral and written representations from management.
 Analytical procedures.

Purpose:

 To provide a basis for the auditor’s conclusions about financial statement

accuracy.
 To reduce audit risk by supporting or contradicting recorded transactions.

2. Use of Assertions in Obtaining Audit Evidence

What are Assertions?

 Assertions are implicit or explicit claims made by management about

 financial statement items.
 They help auditors identify what needs to be tested and guide the collection
of evidence.

Common Types of Assertions:

Assertion Type Meaning

Existence Assets or liabilities exist at a date.
Completeness All transactions and accounts are included.
The entity owns the assets and is responsible for
Rights and Obligations
liabilities.
Assets and liabilities are recorded at correct
Valuation and Allocation
amounts.
Accuracy Transactions are recorded at the correct amounts.
Transactions are recorded in the correct accounting
Cut-off
period.
Presentation and
Financial info is properly classified and disclosed.
Disclosure
How Assertions Guide Audit Evidence:

 For each assertion, auditors design procedures to verify or disprove the claim.
 For example, to test existence of inventory, auditors perform physical counts.
 To test completeness of liabilities, auditors might review vendor statements
or unrecorded liabilities.

1. Audit Procedure for Obtaining Audit Evidence

What is an Audit Procedure?

 An audit procedure is a step or action taken by an auditor to collect and

evaluate evidence about financial statement assertions.
 The goal is to gather sufficient and appropriate evidence to form an audit
opinion.

Common Audit Procedures to Obtain Evidence:

 Inspection: Examining records, documents, or physical assets.

 Observation: Watching a process or procedure being performed.
 Inquiry: Asking questions from management or staff.
 Confirmation: Obtaining direct verification from third parties.
 Recalculation: Checking mathematical accuracy.
 Re-performance: Independently performing procedures originally done by the
client.
 Analytical Procedures: Comparing financial data and trends to expectations.
Steps in Performing Audit Procedures:

1. Plan the procedure based on audit objectives.

2. Select items or transactions to test (sampling may be used).
3. Perform the audit procedure thoroughly.
4. Document the evidence collected.
5. Evaluate the evidence to conclude on the audit objective.

2. Inspection of Records and Tangible Assets

Inspection of Records

 This involves examining documents and records to verify authenticity,

completeness, and accuracy.
 Examples of records inspected:
o Invoices, contracts, purchase orders.
o Bank statements, ledgers, journals.
o Payroll records and tax filings.

Purpose of Inspection of Records:

 To verify transactions occurred and were properly authorized.

 To confirm recorded amounts are accurate and valid.
 To detect any inconsistencies, errors, or fraud.

Inspection of Tangible Assets

 This involves physically examining assets like inventory, machinery, cash, or

fixed assets.
 Auditors check for:
o Existence and condition of the asset.
o Whether the asset is owned by the company.
o Proper valuation (e.g., checking depreciation).

Examples:

 Counting inventory and matching with records.

 Inspecting fixed assets for physical presence and condition.
 Verifying cash on hand through physical cash count.

wwAudit Procedures Explained

1. Observation

 What it is: Watching a process or procedure being performed by the client.

 Purpose: To check whether internal controls and procedures are actually
carried out as described.
 Example: Observing the counting of inventory or cash handling process.

2. Inquiry

 What it is: Asking questions to management or employees to get information

or explanations.
 Purpose: To understand processes, clarify uncertainties, and gather evidence.
 Example: Asking management about pending litigation or reasons for
significant variances.

3. Confirmation from Third Party

 What it is: Getting direct written verification from an external party about
information.
 Purpose: To confirm balances or transactions independently.
 Example: Requesting bank confirmations for account balances or
confirmation from customers on receivables.

4. Recalculation

 What it is: Checking the mathematical accuracy of documents or records.

 Purpose: To verify correctness of calculations.
 Example: Recalculating invoice totals, depreciation, or interest expense.

5. Re-performance

 What it is: Auditor independently performs a procedure or control originally

done by the client.
 Purpose: To check if controls or processes are working correctly.
 Example: Re-performing a bank reconciliation prepared by the client.

6. Analytical Procedure

 What it is: Evaluating financial information by analyzing relationships and

trends.
 Purpose: To identify unusual transactions or events that may need further
investigation.
 Example: Comparing current year sales to previous years or industry averages.
1. Need for Documentation of Work Done

Why Document Audit Work?

 Evidence of Audit Work: Documents prove that audit procedures were

performed.
 Supports Audit Opinion: Helps justify the auditor’s conclusions and opinions.
 Quality Control: Ensures audit quality and consistency.
 Reference: Useful for future audits, reviews, or inspections.
 Legal Protection: Provides protection in case of disputes or litigation.
 Communication: Helps in communication between audit team members and
with management.

2. Audit Notebook

What is an Audit Notebook?

 A personal notebook maintained by the auditor during the audit.

 Contains notes, observations, queries, reminders, and points to follow up.
 Acts as a quick reference and memory aid throughout the audit process.

3. Nature and Types of Working Papers

What are Working Papers?

 Working Papers are documents prepared and collected by auditors as

evidence of the audit.
 They record audit procedures performed, evidence obtained, and conclusions
reached.

Nature of Working Papers:

 They are confidential and owned by the auditor.

 Help in planning, performing, and reviewing audit work.
 Serve as a basis for supervision and quality review.

Types of Working Papers:

Type Description
Permanent Working Include information relevant to many audits (e.g., company
Papers bylaws, organizational charts).
 Type Description
Current Working Relate to the specific audit being conducted (e.g., trial
Papers balance, audit schedules).

4. Contents of Working Papers

Common Contents Include:

 Audit plan and programs: Steps and procedures to be followed.

 Trial balance: Financial statement balances.
 Adjusting entries: Corrections proposed or made.
 Supporting schedules: Detailed breakdowns (e.g., fixed assets schedule).
 Test results: Evidence and findings from audit procedures.
 Correspondence: Letters or communications relevant to audit.
 Checklists and questionnaires: For control testing.
 Notes and observations: Auditor’s comments or queries.

1. Ownership and Retention of Working Papers

Ownership

 Working papers are the property of the auditor or audit firm, not the client.
 This means the auditor controls access to the working papers.
 Clients can request summaries or reports but don’t own the underlying audit
documentation.

Retention

 Auditors must keep working papers for a specified period, usually defined by
law or professional standards.
 For example, in many jurisdictions, the retention period is 5 to 7 years.
 Retention helps:
o Provide evidence if questions arise later.
o Assist in quality reviews or inspections.
o Support in any legal proceedings.

2. Recording of Significant Points

 Significant points are important findings, issues, or observations discovered

during the audit.
 These should be clearly documented in the working papers.
 Helps ensure that:
 o Key audit matters are not overlooked.
o There is a record of how issues were addressed.
o Management’s explanations and auditor’s conclusions are captured.
 Examples:
o Unusual transactions.
o Discrepancies in accounting records.
o Internal control weaknesses.

3. Audit Files

What are Audit Files?

 Audit files are organized collections of all working papers and related
documents for a particular audit.
 They include:
o Permanent files: Long-term information like company policies,
organizational structure.
o Current files: Documents specific to the current year’s audit, such as
working papers, schedules, and correspondence.

Purpose of Audit Files:

 Provide a complete and systematic record of the audit.

 Help auditors plan and review audit work.
 Facilitate supervision and quality control.
 Serve as reference for future audits.

1. Assessment of Audit Risk

What is Audit Risk?

 Audit Risk is the risk that the auditor gives an incorrect opinion when the
financial statements are actually misstated.
 In other words, it's the chance the auditor misses significant errors or fraud.

Components of Audit Risk:

Audit risk has three main parts:

Component Meaning
Inherent Risk (IR) Risk of error or fraud before any controls are considered.
Risk that the company’s internal controls will fail to prevent or
Control Risk (CR)
detect errors.
 Component Meaning
Detection Risk
Risk that the auditor’s procedures fail to detect the errors.
(DR)
How is Audit Risk Assessed?

 Auditors assess inherent risk and control risk based on understanding the
business and controls.
 Then they design audit procedures to reduce detection risk to an acceptable
level.
 The overall audit risk = IR × CR × DR.

Purpose:

 To plan audit procedures effectively.

 To focus more on high-risk areas.

2. Materiality Assessment

What is Materiality?

 Materiality refers to the size or nature of an omission or misstatement that

would influence the decisions of users of financial statements.
 Simply, it means how big or important an error is.

Types of Materiality:

Type Description
Overall Materiality The threshold for the financial statements as a whole.
Performance Amount set below overall materiality to reduce risk of
Materiality undetected errors.
Specific Materiality Materiality for particular items or accounts.
How is Materiality Assessed?

 Auditors use benchmarks like profit before tax, total revenue, or total assets.
 They calculate a percentage (e.g., 5% of profit before tax) to set the
materiality level.
 Factors like the nature of the business and users' needs are considered.

Purpose:

 To decide which errors or omissions are important.

 To help plan the audit and evaluate findings.
1. Audit Sampling

What is Audit Sampling?

 Audit Sampling is the process where auditors select and test a representative
part of the data (like transactions or account balances) instead of checking
everything.
 Because it’s often impossible or impractical to check all items, sampling
helps auditors get reasonable assurance efficiently.

Why Use Sampling?

 Saves time and cost.

 Provides sufficient evidence when done properly.
 Helps focus on significant areas.

Types of Audit Sampling:

Type Description
Uses probability theory to select samples and evaluate results
Statistical Sampling
mathematically.
Non-Statistical Uses auditor’s judgment rather than formal statistical
Sampling methods.
Examples of Sampling Methods:

 Random sampling
 Systematic sampling (every nth item)
 Haphazard sampling (no structured method)
 Stratified sampling (dividing population into groups)

2. Definition of Risk

What is Risk?

 Risk is the chance or possibility of a negative event occurring.

 In auditing, risk means the chance that the financial statements contain
material misstatements that the auditor fails to detect.

Types of Risks in Auditing:

Risk Type Meaning

Risk of error or fraud without any
Inherent Risk
controls.
Control Risk Risk that internal controls fail to catch
 Risk Type Meaning
errors.
Detection Risk auditor’s procedures fail to detect
Risk errors.
Overall risk that auditor gives wrong
Audit Risk
opinion.

Key Types of Risks

1. Liquidity Risk

 What it is: The risk that a company will not have enough cash or liquid assets
to meet its short-term obligations (like paying bills or debts).
 Example: A business cannot pay its suppliers because cash is tied up in
inventory.

2. Management Risk

 What it is: The risk that poor decisions or actions by management will harm
the company’s performance or financial position.
 Example: Ineffective leadership leads to bad investments or loss of business.

3. Operational Risk

 What it is: Risk of loss from failed internal processes, people, systems, or
external events.
 Example: A system failure causes a halt in production; employee fraud;
natural disaster impacts operations.

4. Credit Risk

 What it is: The risk that customers or borrowers will not pay what they owe.
 Example: A customer defaults on payment for goods delivered on credit.

5. Market Risk

 What it is: The risk of losses due to changes in market prices, such as interest
rates, foreign exchange rates, or stock prices.
 Example: A company loses money because the currency exchange rate
changes unfavorably.
6. Compliance / Legal or Regulatory Risk

 What it is: The risk of legal penalties, fines, or damage because the company
fails to comply with laws or regulations.
 Example: A business faces a fine for violating environmental laws.

7. Reputation Risk

 What it is: Risk of loss from damage to the company’s reputation or public
image.
 Example: Negative media coverage leads to loss of customers or investors.

1. Risk Management

What is Risk Management?

 Risk Management is the process a company uses to identify, assess, and

control risks that could affect its business.
 The goal is to reduce negative impacts and help the company achieve its
objectives safely.

Key Steps in Risk Management:

1. Identify Risks: Find all possible risks (like financial, operational, legal).
2. Assess Risks: Evaluate how likely they are and how serious the impact could
be.
3. Plan Responses: Decide how to deal with risks — avoid, reduce, transfer
(insurance), or accept them.
4. Implement Controls: Put in place actions or policies to manage risks.
5. Monitor and Review: Continuously check and update risk management
processes.

Importance:

 Protects company assets and reputation.

 Helps in better decision-making.
 Ensures compliance with laws and regulations.
 Supports business continuity.

2. Board and Senior Management Oversight

What is Oversight?
  Oversight means supervision and guidance provided by the company’s Board
of Directors and senior management to ensure risks are managed well.

Role of the Board of Directors:

 Set the tone at the top for risk culture.

 Approve the company’s risk appetite (how much risk is acceptable).
 Monitor risk management frameworks and ensure effectiveness.
 Oversee management’s implementation of risk controls.

Role of Senior Management:

 Develop and implement risk management policies and procedures.

 Identify and report risks to the Board.
 Ensure that employees follow risk management practices.
 Respond promptly to emerging risks.

Why is Oversight Important?

 Ensures risks are managed proactively.

 Helps protect shareholder interests.
 Promotes accountability and transparency.
 Supports achieving business goals safely.

1. Completion Procedures

What are Completion Procedures?

 These are final audit steps performed to make sure all important audit work is
done before issuing the audit report.
 Purpose:
o To confirm all significant matters are addressed.
o To review the audit file for completeness.
o To check that financial statements and disclosures are accurate and
consistent.

Examples of Completion Procedures:

 Final analytical review of financial statements.

 Ensuring all audit adjustments are recorded.
 Reviewing subsequent events.
 Obtaining management representation letter.
 Final discussions with management or those charged with governance.

2. Events After the Reporting Period

What are Events After the Reporting Period?

 These are events happening after the financial statement date (reporting
period) but before the audit report is signed.
 They can impact financial statements or the audit report.

Types of Events:

Type Explanation Accounting Treatment

Adjusting Provide additional evidence about Adjust financial
Events conditions existing at the reporting date. statements.
Non-Adjusting Indicate conditions arising after the Disclose in notes but
Events reporting date. no adjustment.
Examples:

 Adjusting Event: Customer bankruptcy known after year-end, showing

receivables were impaired at year-end.
 Non-Adjusting Event: Major business acquisition after year-end.

3. Events Occurring up to the Date of Audit Report

 Auditors must consider all relevant events up to the date they sign the audit
report.
 If any new information arises affecting the financial statements, auditors
require management to update or disclose it.
 Auditors may perform additional procedures if significant events occur before
signing.

1. Letter of Representation

What is a Letter of Representation?

 It’s a formal letter written by the client’s management to the auditor.

 It confirms that management has provided all necessary information and that
the financial statements are accurate and complete.
 It helps the auditor get written assurance from management about key
matters.

Purpose:

 To document management’s responsibilities.

 To confirm facts, such as no undisclosed liabilities or fraud.
  To support audit evidence.

Typical Contents:

 Confirmation of the fairness of financial statements.

 Disclosure of all related parties and transactions.
 Confirmation of compliance with laws.
 Statements about existence of all assets and liabilities.
 Disclosure of any fraud or suspected fraud.

2. Letter to Management

What is a Letter to Management?

 It’s a letter written by the auditor to the management after the audit.
 It usually contains findings, recommendations, and suggestions to improve
controls or operations.
 Sometimes called a management letter or internal control letter.

Purpose:

 To communicate audit observations.

 To advise management on weaknesses or risks.
 To suggest improvements for better financial reporting or operations.

Typical Contents:

 Summary of audit findings.

 Comments on internal control weaknesses.
 Recommendations for improvement.
 Appreciation for cooperation.

1. Points Carried to Next Period

What are Points Carried to Next Period?

 These are audit findings, issues, or unresolved matters that could not be fully
addressed during the current audit.
 They are not finalized or corrected before the audit report date and therefore
need attention in the next audit period.
 Examples include incomplete documentation, ongoing investigations, or
matters requiring management action.
Why are They Important?

 To ensure continuous follow-up.

 Helps improve audit quality over time.
 Ensures unresolved issues are not forgotten.

2. Summary Record of Errors

What is a Summary Record of Errors?

 It’s a document that lists all errors or misstatements found during the audit.
 Errors can be quantified (monetary amounts) or qualitative (control
weaknesses).
 Helps auditors and management see the overall impact of errors.

Purpose:

 To evaluate whether errors are material enough to affect financial statements.

 To support decisions on audit adjustments.
 To help management understand and correct mistakes.

Typical Contents:

 Description of each error.

 Amount involved.
 Whether corrected or not.
 Impact on financial statements.

1. Contingent Liabilities

What are Contingent Liabilities?

 These are potential liabilities that may or may not become actual liabilities
depending on the outcome of a future event.
 They are not certain but could affect the company’s financial position if they
happen.

Examples:

 Lawsuits where the company might have to pay damages.

 Guarantees given on loans for other parties.
 Possible tax demands under dispute.
Accounting Treatment:

 If the liability is probable and the amount can be estimated, it should be

recorded in the financial statements.
 If it is possible but not probable, it should be disclosed in the notes.
 If it is remote, no need to record or disclose.

2. Commitments

What are Commitments?

 These are obligations to make payments or perform actions in the future.

 They are firm agreements the company has entered into but not yet fulfilled.

Examples:

 Contracts to buy goods or equipment in the future.

 Lease agreements.
 Construction contracts not yet completed.

Accounting Treatment:

 Usually disclosed in notes to financial statements.

 Sometimes recorded as liabilities if payment is certain.

1. Review of Audit Work

What is Review of Audit Work?

 It is the process of checking and evaluating the audit work performed by the
audit team before finalizing the audit report.
 This review ensures that:
o All audit objectives are met.
o Audit evidence collected is sufficient and appropriate.
o Audit procedures were correctly applied.
o Any issues or irregularities have been properly addressed.

Who Performs the Review?

 Usually, a senior auditor or audit manager reviews the junior auditors’ work.
 The audit partner or reviewer does a final review before signing off.
2. Review of Company’s Financial Statements

What is Reviewed?

 Auditors check whether financial statements:

o Follow applicable accounting standards.
o Present a true and fair view of the company’s financial position.
o Include all required disclosures.
o Are free from material misstatements (errors or fraud).

3. Conclusions Drawn

What Does the Auditor Conclude?

 Based on the audit evidence, the auditor forms an opinion such as:
o Unqualified (clean) opinion: Financial statements are fair and reliable.
o Qualified opinion: Except for certain issues, statements are fair.
o Adverse opinion: Financial statements are misleading.
o Disclaimer of opinion: Auditor cannot express an opinion.

4. Action Taken

What Happens After Conclusions?

 If issues are found:

o Auditors discuss them with management.
o Adjustments or disclosures may be requested.
 Management may take corrective actions.
 Auditor issues the final audit report.
 Sometimes a management letter is issued with recommendations.

Audit Reports

What is an Audit Report?

 An Audit Report is a formal document prepared by the auditor after

completing the audit.
 It communicates the auditor’s opinion on whether the company’s financial
statements are fair and reliable.
  It is the main output of the audit process.

Purpose of an Audit Report

 To inform users (shareholders, investors, regulators) about the accuracy and

reliability of financial statements.
 To provide assurance that the statements are free from material
misstatements.
 To highlight any issues or concerns found during the audit.

Types of Audit Reports

Type of Report Description

Unqualified Also called a “clean report,” means financial statements are fair
Opinion and free from material misstatements.
Financial statements are mostly fair, except for certain areas with
Qualified Opinion
issues.
Adverse Opinion Financial statements are misleading or incorrect overall.
Disclaimer of Auditor cannot express an opinion due to lack of sufficient
Opinion evidence or scope limitation.

Key Components of an Audit Report

1. Title: Usually states it is an independent auditor’s report.

2. Addressee: To whom the report is addressed (e.g., shareholders).
3. Introduction: States the financial statements audited and management’s
responsibility.
4. Scope Paragraph: Describes the nature and extent of the audit.
5. Opinion Paragraph: Auditor’s conclusion on the financial statements.
6. Other Reporting Responsibilities: Any other legal or regulatory requirements.
7. Signature of Auditor: Name, firm, and date of the report.

Example (Simplified)

Independent Auditor’s Report

To the Shareholders of XYZ Company,
We have audited the financial statements of XYZ Company for the year ended
December 31, 20XX.
Management is responsible for the preparation of these statements. Our
responsibility is to express an opinion based on our audit.
We conducted the audit in accordance with auditing standards.
In our opinion, the financial statements present fairly, in all material respects, the
financial position of XYZ Company.

[Auditor’s Signature]
Date

Importance of Audit Reports

 Builds trust among investors and stakeholders.

 Required by law for many companies.
 Helps in decision-making by users of financial statements.

1. Contents of an Audit Report

An audit report generally includes these key parts:

Section Description
Title Indicates it is an Independent Auditor’s Report.
Specifies who the report is addressed to (e.g.,
Addressee
shareholders).
Identifies the financial statements audited and
Introduction
management’s responsibility.
Scope Paragraph Describes the audit process and standards followed.
Opinion Paragraph States the auditor’s opinion on the financial statements.
Other Reporting Includes any additional legal or regulatory requirements
Responsibilities (if applicable).
Signature Auditor’s name, firm, and audit report date.

2. Qualifications in Audit Reports

What is a Qualification?

 A qualification is a statement by the auditor explaining limitations or

exceptions in the audit.
 It means the auditor cannot give an unqualified (clean) opinion because of
certain issues.
 The auditor still provides an opinion but with reservations.

Why do Qualifications Occur?

 Scope Limitation: Auditor was unable to obtain sufficient evidence.

 Disagreement with Management: Financial statements are not in full
accordance with accounting standards.
 Uncertainty: There are doubts about certain balances or transactions.
3. Forms of Qualifications
Type Explanation
Qualified Except for certain issues, financial statements are fairly presented.
Opinion Auditor explains specific areas of disagreement or limitation.
Adverse Financial statements are materially misstated and misleading.
Opinion Auditor explicitly states that the statements are not reliable.
Disclaimer of Auditor cannot express any opinion due to significant scope
Opinion limitations or uncertainties.

Examples of Qualification Wording:

 Qualified Opinion:
“Except for the effects of …, the financial statements present fairly…”
 Adverse Opinion:
“Because of the significance of the matters discussed, the financial
statements do not present fairly…”
 Disclaimer of Opinion:
“We were unable to obtain sufficient evidence to express an opinion…”

1. Statement of Compliance

What is a Statement of Compliance?

 It’s a declaration in the audit report confirming that the audit was conducted
in accordance with relevant auditing standards.
 Shows that the auditor followed required professional guidelines like
International Standards on Auditing (ISAs) or local auditing standards.
 Helps users trust the audit process and the auditor’s work.

Example Wording:

 “We conducted our audit in accordance with International Standards on

Auditing (ISAs).”
 “Our audit complies with the auditing standards applicable in [country].”

2. Dating of the Auditor’s Report

What Does the Date Indicate?

 The date on the audit report is the date when the auditor has completed all
significant audit work.
  It marks the point up to which the auditor has considered events affecting the
financial statements.
 Events occurring after this date are not reflected in the audit report unless the
report is updated.

Importance of Correct Dating:

 It limits the auditor’s responsibility to events up to that date.

 The auditor should not date the report before all audit evidence is gathered
and the report is finalized.

3. Signatories of the Auditor’s Report

Who Signs the Audit Report?

 The audit report must be signed by the auditor or audit firm responsible for
the audit.
 The signatory indicates who conducted the audit and takes responsibility for
the opinion.
 The signature can be:
o The name of the individual auditor (if applicable).
o The name of the audit firm.
o Sometimes both, depending on regulations.

Additional Information:

 The auditor’s address or location is often included.

 The date of the report is placed near the signature.

Other Information in a Report Containing Audited

Financial Statements

What is “Other Information”?

 It refers to all the information included in documents containing audited

financial statements, excluding the financial statements and the auditor’s
report.
 Examples include:
o Directors’ report
o Management discussion and analysis
o Chairman’s statement
o Corporate governance report
o Notes or supplementary information outside the financial statements
Why is it Important?

 This information is often published alongside the audited financial

statements.
 It provides context, explanations, and additional details to users.
 The auditor reviews this information to ensure it does not contain material
inconsistencies or misleading statements compared to the audited financial
statements.

Auditor’s Responsibilities Regarding Other Information

 The auditor reads the other information to identify any material

inconsistencies or contradictions with the audited financial statements.
 If a material inconsistency or misstatement is found, the auditor:
o Discusses it with management.
o May need to revise the audit report or request correction of the
information.
o If unresolved, may include an emphasis of matter or other matter
paragraph in the audit report, or even disclaim an opinion.

Reports on Accounts of Association of Persons (AOP)

and Sole Traders

1. Association of Persons (AOP)

 An Association of Persons is a group of individuals who come together for a

common purpose but are not registered as a company.
 Examples include joint ventures, clubs, or partnerships without formal
registration.

Auditor’s Report for AOP

 The auditor’s report on AOP accounts is similar to reports on companies but

usually less formal.
 The report includes:
o Opinion on whether the accounts show a true and fair view of the
financial position.
o A statement about whether the accounts comply with applicable
accounting standards.
 Often, these reports are prepared for tax or internal purposes.

2. Sole Traders
  A Sole Trader is an individual who owns and runs a business alone.
 Their accounts are usually simpler, focusing on income, expenses, assets, and
liabilities.

Auditor’s Report for Sole Traders

 Auditors provide a report confirming whether the financial statements or

accounts are fair and accurate.
 The report may be requested by banks, investors, or tax authorities.
 It often contains:
o A statement of the audit scope.
o An opinion on the fairness of the accounts.
o Disclosures of any material misstatements.

Key Differences from Company Audit Reports

Aspect AOP & Sole Trader Reports Company Audit Reports

Generally less formal, tailored to
Formality Highly formal and regulated.
client needs.
Often not legally mandatory but Legally required for
Legal
requested for specific purposes companies under company
Requirements
(e.g., tax). law.
May be limited or agreed upon with Comprehensive audit as per
Scope
the client. standards.

1. Special Purpose Reports

What Are Special Purpose Reports?

 These are audit or assurance reports prepared for specific needs or

objectives rather than general financial reporting.
 They focus on particular aspects like compliance, agreed-upon procedures, or
specific financial information.
 Often used by management, regulators, or specific stakeholders.

Examples of Special Purpose Reports:

 Compliance Reports: Confirm if certain laws, regulations, or contracts were

followed.
 Agreed-Upon Procedures Reports: Auditor performs specific tasks agreed
with the client, without expressing an opinion.
 Internal Control Reports: Assess effectiveness of internal controls.
 Tax Audit Reports: Focus on tax-related matters.
 Prospectus Audit Reports: Prepared for companies issuing shares to the
public.
 Project Audit Reports: Related to specific projects or grants.
Key Features:

 Tailored scope based on the user’s needs.

 May not follow the same format as general audit reports.
 Usually accompanied by specific terms of reference.

2. Requisites of Code of Corporate Governance

What is Corporate Governance?

 Corporate governance is the system by which companies are directed and

controlled.
 It involves rules, practices, and processes to ensure transparency,
accountability, and fairness in a company’s relationship with stakeholders.

Requisites (Key Elements) of a Code of Corporate Governance:

Requisite Description
Should have a balanced mix of executive and independent
Board of Directors
non-executive directors.
A committee of the board overseeing financial reporting and
Audit Committee
internal controls.
Transparency & Timely and accurate disclosure of financial and non-financial
Disclosure information.
Management and board must be accountable to
Accountability
shareholders and stakeholders.
Risk Management Systems to identify, assess, and manage risks effectively.
Robust internal control systems to safeguard assets and
Internal Controls
ensure accurate reporting.
Protecting the rights of shareholders including voting and
Shareholders’ Rights
participation in key decisions.
Promoting integrity, ethical behavior, and compliance with
Ethical Conduct
laws.
Regular Reporting Periodic financial and governance reports to stakeholders.

Importance of Corporate Governance Code

 Builds investor confidence.

 Enhances company’s reputation.
 Minimizes risks of fraud and mismanagement.
 Ensures long-term sustainability.