ACN 403

An Audit is the independent examination of financial statements or

related information of an 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

Introduction:
Audit is an independent examination of financial statements of an entity that
enables an auditor to express an opinion whether the financial statements are
prepared (in all material respects) in accordance with an identified and acceptable
financial reporting framework (e.g. international or local accounting standards and
national legislation) This view of audit is presented by ISA 200 Objective and
General Principles Governing an Audit of Financial Statements. The phrases used;
to express the auditors opinion means that the financial statements give a true
and fair view or have been presented fairly in all material respects. True and fair
presentation means that the financial statement are prepared and presented in
accordance with the requirements of the applicable International Financial Reporting
Standards (IFRS) and local pronouncements/legislations.

What we can understand as the essential features of an audit from the above
definition and explanation are as under:

* An auditor involves in examination of financial statements, the auditor is not

responsible for the preparation of the financial statements.

* The end result of an audit is an opinion to assist the user of the financial
statements. Auditing therefore relies heavily on professional judgment, not merely
on the facts.

* The auditors opinion makes reference to true and fair or fair presentations
but true and fair is again a matter of judgment. It is not precisely defined for the
auditor.

* In order to make the user of the auditors report able to feel confident in relying
on such report, the auditor should be independent of the entity. Independent
essentially means that the auditor has no significant personal interest in the entity.
This allows an objective, professional view to be taken.

Why is there a need for an audit? The problem that has always existed at the time
when the manager reports to the owners is that: whether the owners will believe
the report or not? This is because the reports may:

a. Contain errors

b. Not disclose fraud

c. Be inadvertently misleading

d. Be deliberately misleading

e. Fail to disclose relevant information

Relationship between Auditing and Accounting:

Auditing and accounting are closely connected but both are separate activities. The
directors of a company are responsible for establishing books of accounts that will
accurately record financial information and that are used for preparing the annual
financial statements. It is similarly the responsibility of the directors to adopt
consistent and appropriate accounting policies in order to prepare and present the
financial statements. The financial statements have to comply with national
legislative requirements and International Financial Reporting Standards (IFRSs).
Accounting is the process of recording, classifying, summarizing and reporting
financial information in a logical/systematic manner for the purpose of decision
making. To provide relevant & reliable information, accountants must have a
thorough understanding of the principles and rules that provide the basis for
preparing the financial statements.

Many financial statement users and members of the general public confuse auditing
with accounting. The confusion results because most auditing is concerned with
accounting information, and many auditors have considerable expertise in
accounting matters. The confusion is increased by giving the title Chartered
Accountant to individuals performing a major portion of the audit function.

Who can be an Auditor?

For appointment as auditor of:

a) a Public Company or

b) a Private Company which is a subsidiary of a Public Company.

c) a Private Company having paid up capital of three million rupees or more.

The person must be a Chartered Accountant within the meaning of the Chartered
Accountants Ordinance, 1961. For listed companies an auditor must have a
satisfactory QCR (quality control review) rating issued by ICAP.

An Auditors 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.

Types of Auditors:
There are three types of auditors: internal, governmental, and external (i.e.,
independent auditors or certified public accountants). Internal auditors
are employees of the organization whose activities are being examined and
evaluated during an independent audit. The primary purposes of internal
auditing are to review and assess a company's policies, procedures, and
records and to review and assess a company's performance given its plans,
policies, and procedures. Therefore, internal auditors review financial records
and accounting systems, assess compliance with company policies,
evaluate the efficiency of company operations, and assess the attainment of
company goals.

Governmental auditors include accountants employed by the U.S. General

Accounting Office (GAO). The GAO serves as the accounting and auditing
branch of Congress. These governmental accountants perform accounting
and auditing tasks for the entire federal government. In addition, most states
have their own accounting and auditing agencies, which resemble the GAO.
Because the GAO and its state counterparts are separate agencies from the
departments and agencies they audit, they are similar to external auditors.
Consequently, federal and state departments and agencies often have their
own internal auditors, who provide internal auditing services similar to those
described above. Moreover, GAO auditing largely has the same focus as
internal auditing: examining financial records, assessing compliance with
laws and regulations, reviewing efficiency of operations, and evaluating the
achievement of objectives.

Types of Audits:
Major types of audits conducted by external auditors include the financial
statements audit, the operational audit, and the compliance audit. A
financial statement audit (or attest audit) examines financial statements,
records, and related operations to ascertain adherence to generally accepted
accounting principles, meaning that the audit determines whether
companies have followed the financial reporting standards given by various
sanctioning boards such as the Financial Accounting Standards Board.
An operational audit examines an organization's activities in order to assess
performances and develop recommendations for improved use of business
resources. A compliance audit has as its objective the determination of
whether an organization is following established procedures or rules.
Auditors also perform statutory audits, which are performed to comply with
the requirements of a governing body, such as a federal, state, or city
government or agency.

Internal auditors also perform financial statement audits, operational audits

(which are also referred to as performance auditing and management
auditing), and compliance audits, although their audits have a different
scope and their reports a different purpose. Because of the potential for
conflicts of interest, internal auditors perform financial statement audits for
internal use only. Nevertheless, much of the work internal auditors do is
similar to the work external auditors do, except that it is not intended for
external use. In addition, an operational audit involves reviewing an
organization's activities to evaluate performance, attainment of business
goals, and efficient use of resources. Internal auditors also perform
compliance audits to ensure conformity with company policies as well as with
applicable government laws and regulations. Even though internal auditors
are employees of the companies they audit, they nevertheless strive for
independence in so far as possible.

Auditing Standards:
The auditing process is based on standards, concepts, procedures, and
reporting practices, primarily imposed by the American Institute of Certified
Public Accountants (AICPA). While these standards and procedures constitute
the foundation of auditing for all three types of auditors, other organizations
such as the Institute of Internal Auditors and the General Accounting Office
impose their own standards and procedures, which apply to internal auditing
and governmental auditing, respectively. The auditing process relies on
evidence, analysis, conventions, and informed professional judgment.
General standards are brief statements relating to such matters as training,
independence, and professional care. AICPA general standards are:

1. The examination is to be performed by a person or persons having

adequate technical training and proficiency as an auditor.

2. In all matters relating to the assignment, an independence in mental

attitude is to be maintained by the auditor or auditors.

3. Due professional care is to be exercised in the performance of the

examination and the preparation of the report.

Standards of reporting outline the required auditing standards relating to the

audit report and its contents. AICPA standards of reporting are:
 1. The report shall state whether the financial statements are presented
in accordance with generally accepted accounting principles.

2. The report shall state whether such principles have been consistently
observed in the current period in relation to the preceding period.

3. Informative disclosures to the financial statements are to be regarded

as reasonably adequate unless otherwise stated in the report.

4. The report shall contain either an expression of opinion regarding the

financial statements, taken as a whole, or an assertion to the effect
that an opinion cannot be expressed. When an overall opinion cannot
be expressed, the reasons therefore should be stated. In all cases
where an auditor's name is associated with financial statements, the
report should contain a clear-cut indication of the character of the
auditor's examination, if any, and the degree of responsibility he or she
is taking.

The Auditing Process:

Auditors generally conduct audits following four general steps: planning,
gathering evidence, evaluating evidence, and issuing a report.

In planning the audit, the auditor develops an audit program that identifies
and schedules audit procedures that are to be performed to obtain the
evidence. The auditor must be aware of potential problems involved in the
auditing process, such as whether company property and debt actually exist
or whether company transactions actually took place. In addition, the auditor
usually formulates a hypothesis about company financial information at this
step, such as "Company financial reports are accurate" or "Company
financial reports are inaccurate." Audit evidence is proof obtained to support
these hypotheses and ultimately the audit's conclusions.

Audit Reports:
The independent audit report sets forth the independent auditor's opinion
regarding the financial statements. The auditor's opinion indicates whether
the financial statements are fairly presented in conformity with generally
accepted accounting principles, and applied on a basis consistent with that
of the preceding year (or in conformity with some other comprehensive basis
of accounting that is appropriate for the entity). A fair presentation of
financial statements is generally understood by accountants to refer to
whether:
 1. The accounting principles used in the statements have general
acceptability.

2. The accounting principles are appropriate in the circumstances.

3. The financial statements are prepared so they can be used,

understood, and interpreted.

4. The information presented in the financial statements is classified and

summarized in a reasonable manner.

5. The financial statements reflect the underlying events and transactions

in a way that presents the financial position, results of operations, and
cash flows within reasonable and practical limits.

The auditor's unqualified report contains three paragraphs. The introductory

paragraph identifies the financial statements audited, states that
management is responsible for those statements, and asserts that the
auditor is responsible for expressing an opinion on them. The scope
paragraph describes what the auditor has done and specifically states that
the auditor has examined the financial statements in accordance with
generally accepted auditing standards and has performed appropriate tests.
The opinion paragraph expresses the auditor's opinion on whether the
statements are in accordance with generally accepted accounting principles.

Various audit opinions are defined by the AICPA's Auditing Standards Board
as follows:

1. Unqualified opinion: An unqualified opinion states that the financial

statements present fairly, in all material respects, the financial
position, results of operations, and cash flows of the business in
conformity with generally accepted accounting principles.

2. Explanatory language added to the auditor's standard report:

Circumstances may require that the auditor add an explanatory
paragraph (or other explanatory language) to the report.

3. Qualified opinion: A qualified opinion states that, except for the effects
of the matter(s) to which the qualification relates, the financial
statements present fairly, in all material respects, the financial
position, results of operations, and cash flows of the business in
conformity with generally accepted accounting principles.

4. Adverse opinion: An adverse opinion states that the financial

statements do not represent fairly the financial position, results of
 operations, or cash flows of the business in conformity with generally
accepted accounting principles.

5. Disclaimer of opinion: A disclaimer of opinion states that the auditor

does not express an opinion on the financial statements.

Investors should examine the auditor's report for citations of problems such
as debt-agreement violations or unresolved lawsuits." Going concern" '
references can suggest that the company may not be able to survive as a
functioning operation. If an "except for" statement appears in the report the
investor should understand that there are certain problems or departures
from generally accepted accounting principles in the statements that
question whether the statements present fairly the company's financial
statements and that will require the company to resolve the problem or
somehow make the accounting treatment acceptable.

Legal Responsibilities:
The legal responsibilities of the auditor are determined primarily by the
following:

1. Specific contractual obligations undertaken.

2. Statutes and common law governing the conduct and responsibilities

of public accountants.

3. Rules and regulations of voluntary professional organizations.

Conclusion:
In auditing the financial statements, the concern is with determining whether the
presented financial statements properly (true and fair) reflect the financial
information that occurred during the accounting period. Since auditors are primarily
concerned with the end result of this work i.e. do the financial statements show a
true and fair view? In order to arrive at their conclusion the auditors must have a
deep knowledge and understanding of accounting (including applicable accounting
standards) and in practice, the directors will consult with the auditors as to
appropriate accounting policies to follow.
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