Audit:

It is an independent examination of financial statements to express an opinion that financial statements give a true and fair presentation in accordance with applicable financial reporting framework.

There are two types of auditors:

• Internal auditors
• External auditors

When the word auditor is used without any qualification would always imply external auditor.

Internal auditor V/S External auditor

DIFFERENCE	External Auditor	Internal Auditor
Appointment	Appointed by shareholders.	Appointed by management.
Reporting	Reports to shareholders	Reports to management.
Scope	Determined by ISAs’.	Determined by management.
Nature/Dependency	Independent.	Dependent on managements.
Requirement of law	Required by law.	Not required by law.

Fundamental principles of audit:

Following are the five fundamental principles found in a good auditor,

  (a)    Integrity

  (b)   Objectivity

  (c)    Professional competence and due care

  (d)   Confidentiality

  (e)   Professional behavior

Management’s responsibility to audit:

Following are the premise of audit,

  (a)    Responsibility for the preparation of financial statements.

  (b)   Responsibility for the internal controls necessary for the preparation of financial statements.

  (c)    Responsibility to provide the auditor

(a)    Access to all information

(b)   Information requested by auditor

(c)    Unrestricted access to the entire person in the entity.

Professional Skepticism:

It means that auditor should conduct the audit with a questioning mind assuming that the management is neither honest not dishonest.

He should exercise due diligence based on facts and figures.

Professional Judgment:

Independent decision made by auditor.

Applicable Financial Reporting Framework of Pakistan – comprise of,

  (a)   Company Ordinance, 1984.

  (b)   IFRS

  (c)    IAS

Criteria for auditing standards – are:

  (a)    Relevance

  (b)   Reliability

  (c)    Neutrality

  (d)   Completeness

  (e)   Understandability

Audit Cycle

•      Acceptance
•      Planning/Risk Assessment
•      Performance 

o Substantive procedures
o Test of controls

•      Review
•      Report

Audit Risk:

A risk that the auditor would express an incorrect or inappropriate audit opinion

Inherent risk:

It is the susceptibility of an account balance or a class of transaction towards material misstatements assuming there are no related internal control

Note:

(a) Account balance – Balance sheet items

(b) Class of transaction – Profit and Loss items

Control Risk:

Risks that the internal control of the management would be unable to prevent, detect, or correct material misstatements.

Detection Risk:

A risk that the audit procedures performed by auditor would be unable to detect material misstatement

It has further two types:

  (a)    Sampling Risk – exists due to sampling – low quantity high sampling risk.

  (b)   Non-sampling Risk – Audit is of a test nature, procedures used may not be effective enough to detect risk.

     Audit Evidence: 

     Audit evidence needs to be sufficient(quantity) and appropriate(quality)

• True and fair view
• Free from material misstatement  

Material Misstatement: 

 Any omission or misstatement which is expected to influence the economic decision of the user taken on the basis of financial statements.