Daily Times

The practice of auditing dates back to the 18th century where it was primarily carried out to verify whether the government records were kept in the desired format but later progressed into a much more detailed testing practice to root out fraud and error. There are numerous misconceptions associated with the process of audit with the public perception of the role and responsibilities of an external auditor differing from their actual statutory responsibilities. It is often inherently misunderstood that the audit report (the outcome of audit) amounts to a certificate that can be completely relied upon for future decision making, that the auditor tests 100% of the transactions provided to them and it is their responsibility to prevent and detect fraud, creating an expectation gap.

Audit is an official examination of the accounting systems which enables the auditor to convey an opinion whether the financial statements under scrutiny are prepared in accordance with the applicable reporting framework, the framework being a combination of the local legislation and the accounting and reporting standards in practice. The said opinion is an expression of assurance about the information under review and adds credibility to the financial statements published by a company. Depending upon the amount of work performed and its results, the assurance can be either a high level of assurance (though not absolute) or a moderate level of assurance.

The practitioner aims to obtain sufficient and appropriate evidence in order to express an opinion whether the subject matter is drawn in accordance with the suitable criteria, is free from material misstatement (due to fraud and error) and gives a true and fair view (free from error and undue bias). The responsibilities of the auditor are often incorrectly confused with those of the management .To better differentiate the two, the management is solely responsible for the preparation of the financial statements, implementation of internal controls (to give assurance that the objectives of the entity are achieved), prevention and detection of fraud and providing the auditor with access to information and personnel related to the preparation of the financial statements and any such additional information, deemed necessary for carrying out the audit. The auditor on the other hand will conduct the audit by first testing the underlying internal controls (implemented by the management) and once satisfied will move towards individual transactions. After the detailed audit work has been carried out the auditor tests the client’s compliance with the relevant accounting framework, whether the accounting policies it has adopted are acceptable and the disclosures (contained in the annual report) are adequate, if adequate records are kept by the company and whether the financial statements are in agreement with those records. The auditor also reviews the consistency of the disclosed information with the known business facts. Once an overall review of the financial statements is carried out, an audit report is prepared in compliance with the requirements of International Standards on Auditing (ISAs) as adopted by the Institute of Chartered Accountants of Pakistan (ICAP).

An external audit increases the credibility of the published financial statement of the company while confirming that the management has performed both their statutory and non-statutory duties

The auditor shall modify their opinion in cases where the evidence indicates that either the financial statements contains a material misstatement or the auditor was unable to obtain sufficient appropriate evidence to form a conclusion. Depending upon the nature of misstatement or lack of evidence the auditor can decide to issue a qualified or adverse opinion and may even disclaim an opinion if there are multiple uncertainties surrounding the subject data. In doing so the practitioner ensures that he remains compliant with all the relevant ISAs and ethical requirements while exercising professional skepticism and professional judgement.

As discussed earlier, the opinion issued by the practitioner is not absolute because no matter how robust the systems adopted by the client may be, there are bound to be inherent limitations incorporated within them. The audit evidence the auditor seeks to gain is rather persuasive rather than conclusive, the assurance opinion is ultimately subjective and based on professional judgement and in order to balance cost and efficiency the auditor uses a sampling technique instead of carrying audit procedures on the entire population of transactions. However, no matter how intricate the testing procedure, there remains a risk that the evidence may be tampered or deliberately misrepresented in order to conceal the truth.

Requirements relating to the appointment of external auditors are discussed in detail in sections 247-253 of the Company Act 2017.According to the press release dated, 18th December 2019, SECP has registered a total number of 108,433 companies. A company should always have an auditor appointed under the Company Act 2017 except for a private company having a paid-up capital not exceeding PKR 1 Million or such higher amount as may be notified by the commission.

An external audit increases the credibility of the published financial statement of the company while confirming that the management has performed both their statutory and non-statutory duties. Auditing acts as a measure of accountability while providing feedback on the effectiveness of the internal controls implemented by the management. In cases where the internal controls prove deficient, the auditor gives recommendations for corrections and improvements. Doing so assists the management in reducing risk and improving the overall performance of the company. In cases where a statutory audit is not required, arranging an annual audit may prove as an indicator for potential lenders or investors.

The external auditor has to comply with regulations set by the government and the professional body (ICAP in this case) covering technical and professional standards and qualifications. Therefore, the practitioner has to comply with the fundamental principles of Integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. The auditors in any condition is prohibited to take part in any activity that impairs their ability to adhere to professional ethics, mentioned above. ICAP ensures that an individual undergoes the appropriate educational, training and practice requirements for entry into the profession and meets all such professional development requirements and professional standards.

The writer is a freelancer