AUDITORS’ REPORT

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Fundamentals of Auditing ACC 311

Lesson 02

Fundamentals of Auditing

Auditing An Introduction

What is an auditor's report?

The primary aim of an audit is to enable the auditor to say "these accounts show a true and fair view" or, of

course, to say that "they do not show a true and fair view".

At the end of his audit, when he has examined the entity, its record, and its financial statements, the auditor

produces a report addressed to the owners/stake holders in which he expresses his opinion of the truth and

fairness, and sometimes other aspects, of the financial statements.

Standard format of Auditor's Report as per the Companies Ordinance 1984:

FORM 35A

AUDITORS' REPORT

We have audited the annexed balance sheet of COMPANY NAME as at THE DATE and the related profit

and loss account, cash flow statement and statement of changed in equity together with the notes forming

part thereof, for the year then ended and we state that we have obtained all the information and

explanations which to the best of our knowledge and belief were necessary for the purposes of our audit.

It is the responsibility of the company's management to establish and maintain a system of internal control

and prepare and present the above said statements in conformity with the approved accounting standards

and the requirements of the Companies Ordinance, 1984. Our responsibility is to express an opinion on

these statements based on our audit.

We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These

standards require that we plan and perform the audit to obtain reasonable assurance about whether the

above said statements are free of any material misstatement. An audit includes examining, on a test basis,

evidence supporting the amounts and disclosures in the above said statements. An audit also includes

assessing the accounting policies and significant estimates made by management, as well as evaluating the

overall presentation of the above said statements. We believe that our audit provides a reasonable basis for

our opinion and, after due verification, we report that:

a) In our opinion, proper books of accounts have been kept by the company as required by the

Companies Ordinance, 1984

b) In our opinion:

i. The balance sheet and profit and loss account together with the notes thereon have been

drawn-up in conformity with the Companies Ordinance, 1984, and are in agreement with the

books of account and are further in accordance with accounting policies consistently applied

ii. The expenditure incurred during the year was for the purpose of the company's business; and

iii. The business conducted investments made and the expenditure incurred during the year were

in accordance with the objects of the company.

c) In our opinion and to the best of our information and according to the explanations given to us, the

balance sheet, profit and loss account, cash flow statement and statement of changes in equity together

with the notes forming part thereof conform with approved accounting standards as applicable in

Pakistan and, give the information required by the Companies Ordinance, 1984, in the manner so

required and respectively give a true and fair view of the state of the company's affairs as at DATE and

of the profit/loss its cash flows and changes in equity for the year then ended; and

d) In our opinion Zakat deductible at source under the Zakat and Usher Ordinance, 1980 was deducted by

the company and deposited in the Central Zakat Fund established under Section 7 of that Ordinance.

Date

Signature

Place

(Name(s) of Auditors)

Fundamentals of Auditing ACC 311

Standard format of Auditor's Report as per the International Auditing Standards:

INDEPENDENT AUDITOR'S REPORT

[Appropriate Addressee]

Introductory Paragraph

We have audited the accompanying financial statements of ABC Company, which comprise the balance

sheet as at December 31, 20X1, and the income statement, statement of changes in equity and cash flow

statement for the year then ended, and a summary of significant accounting policies and other explanatory

notes.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in

accordance with International Financial Reporting Standards. This responsibility includes: designing,

implementing and maintaining internal control relevant to the preparation and fair presentation of financial

statements that are free from material misstatement, whether due to fraud or error; selecting and applying

appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted

our audit in accordance with International Standards on Auditing. Those standards require that we comply

with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the

financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the

financial statements. The procedures selected depend on the auditor's judgment, including the assessment

of the risks of material misstatement of the financial statements, whether due to fraud or error. In making

those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair

presentation of the financial statements in order to design audit procedures that are appropriate in the

circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal

control. An audit also includes evaluating the appropriateness of accounting policies used and the

reasonableness of accounting estimates made by management, as well as evaluating the overall presentation

of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our

audit opinion.

Opinion

In our opinion, the financial statements give a true and fair view of (or" present fairly, in all material

respects,") the financial position of ABC Company as of December 31, 20X1, and of its financial

performance and its cash flows for the year then ended in accordance with International Financial

Reporting Standards.

Report on Other Legal and Regulatory Requirements

[Form and content of this section of the auditor's report will vary depending on the nature of the auditor's

other reporting responsibilities.]

[Auditor's signature]

[Date of the auditor's report]

[Auditor's address]

What stands for auditor's opinion?

The auditor, in his report, does not say that the financial statements do show a true and fair view. He can

only say that in his opinion the financial statements show a true and fair view. The reader or user of

financial statements will know from his knowledge of the auditor whether or not to rely on the auditor's

opinion. If the auditor is known to be independent, honest, and competent, then his opinion will be relied

upon.

Fundamentals of Auditing ACC 311

What are the different types of audit?

Three types of audits are discussed in general, i.e.,

1. Financial statement audits

2. Operational audits

3. Compliance audits

Financial Statement Audits

An audit of financial statements is conducted to determine whether the overall financial statements (the

quantifiable information being verified) are stated in accordance with specified criteria. Normally, the

criteria are the requirements of the applicable International Financial Reporting Standards (IFRSs) and the

Companies Ordinance 1984. The financial statements most commonly comprises of the Balance Sheet,

Income Statement, Statement of Changes in Equity, Cash Flow Statement, and Notes to the accounts.

The assumption underlying an audit of financial statements is that these will be used by different groups for

different purposes. Therefore, it is more efficient to have one auditor who will perform an audit and draw

conclusions that can be relied upon by all users than to have each user perform his or her own audit. If a

user believes that the general audit does not provide sufficient information for his or her purposes, the user

has the option of obtaining more data. For example, a general audit of a business may provide sufficient

financial information for a banker considering a loan to the company, but a corporation considering a

merger with that business may also wish to know the replacement cost of fixed assets and other information

relevant to the decision. The corporation may use its own auditors to get the additional information.

Operational Audits

An operational audit is a review of any part of an entity's operating procedures and methods for the

purpose of evaluating efficiency and effectiveness. At the completion of an operational audit,

recommendations to management for improving operation are normally expected.

An example of an operational audit is evaluating the efficiency and accuracy of processing payroll

transactions in a newly installed computer system. Another example, where most accountants would feel

less qualified is evaluating the efficiency, accuracy, and customer satisfaction in processing the distribution

of letters and parcels by a courier company such as TCS.

Because of the many different areas in which operational effectiveness can be evaluated, it is impossible to

characterize the conduct of a typical operational audit. In one organization, the auditor might evaluate the

relevancy and sufficiency of the information used by management in making decisions to acquire new fixed

assets, while in a different organization the auditor might evaluate the efficiency of the paper flow in

processing sales.

In operational auditing, the reviews are not limited to accounting. They can include the evaluation of

organization structure, computer operations, production methods, marketing, and any other area in which

the auditor is qualified.

The conduct of an operational audit and the reported results are less easily defined than for either of the

other two types of audits. Efficiency and effectiveness of operations are far more difficult to evaluate

objectively than compliance or the presentation of financial statements in accordance with accounting

conventions and principles; and establishing criteria for evaluating the quantifiable information in an

operational audit is an extremely subjective matter.

In this sense, operational auditing is more like "management consulting" than what is generally regarded as

"auditing". Operational auditing has increased in importance in the past decade.

Compliance Audits

The purpose of a compliance audit is to determine whether the entity is following specific procedures, rules,

or regulations set down by some higher authority.

A compliance audit for a private business could include determining whether accounting personnel are

following the procedures prescribed by the company controller, reviewing wage rates for compliance with

minimum wage laws, or examining contractual agreements with bankers and other lenders to be sure the

company is complying with legal requirements.

In the audit of governmental units such as districts school, there is extensive compliance auditing due to

extensive regulation by higher government authorities. In virtually every private and non profit organization,

Fundamentals of Auditing ACC 311

there are prescribed policies, contractual agreements, and legal requirements that may call for compliance

auditing.

Results of compliance audits are typically reported to someone within the entity being audited rather than to

a broad spectrum of users.

Management, as opposed to outside users, is the primary group concerned with the extent of compliance

with certain prescribed procedures and regulations. Hence, a significant portion of work of this type is done

by auditors employed by the entity itself.

There are exceptions; when an organization wants to determine whether individuals or entities that are

obligated to follow its requirements are actually complying, the auditor is employed by the entity issuing the

requirements.

An example is the auditing of taxpayers for compliance with the federal tax laws, where the auditor is

employed by the government to audit the taxpayers' tax returns.

Following table summarizes the three types of audits and includes an example of each type and an

illustration of three of the key parts of the definition of auditing applied to each type of audit.

Examples of the Three Types of Audits

TYPES OF

EXAMPLE

QUANTIFIABLE

ESTABLISHED

AVAILABLE

AUDIT

INFORMATION

CRITERIA

EVIDENCE

Financial

Annual Audit of

General Motors

International

Documents,

Statement Audit

General Motors'

financial statements

Financial

records, and

financial

Reporting

outside sources

statements

Standards

of evidence

Operational

Evaluate whether

Number of payroll

Company

Error reports,

Audit

the computerized

records processed

standards for

payroll records,

payroll processing

in a month, costs of

efficiency and

and payroll

for subsidiary is

the department, and

effectiveness in

processing costs

number of errors

payroll

operating

made

department

efficiently and

effectively

Compliance

Determine if

Company records

Loan agreement

Financial

Audit

bank

provisions

statements and

requirements for

calculations by

loan continuation

the auditor

have been met

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