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.
Appointed by shareholders.
Appointed by management.
Reports to shareholders
Reports to management.
Determined by ISAs’.
Determined by management.
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,
(c) Professional competence and due care
(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.
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.
Independent decision made by auditor.
Applicable Financial Reporting Framework of Pakistan – comprise of,
(a) Company Ordinance, 1984.
Criteria for auditing standards – are:
- Planning/Risk Assessment
o Substantive procedures
o Test of controls
A risk that the auditor would express an incorrect or inappropriate audit opinion
It is the susceptibility of an account balance or a class of transaction towards material misstatements assuming there are no related internal control
(a) Account balance – Balance sheet items
(b) Class of transaction – Profit and Loss items
Risks that the internal control of the management would be unable to prevent, detect, or correct material misstatements.
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 needs to be sufficient(quantity) and appropriate(quality)
- True and fair view
- Free from material misstatement
Any omission or misstatement which is expected to influence the economic decision of the user taken on the basis of financial statements.