Professional Documents
Culture Documents
CHAPTER TWO
BASIC CONCEPTS OF AUDITING
LO #
LEARNING OBJCTIVE
N/A
Q. # 59(c i) of Question
Bank
LO 3
MANAGEMENTS
RESPONSIBILITIES
LO 5
LO 6
(AND
TCWGS)
1.3.9 (Responsibility of
management)
AUDITORS RESPONSIBILITIES/OBJECTIVE
1.4.5
STAKEHOLDERS RESPONSIBILITIES
15.4.2
SCOPE OF AUDIT
LO 8
INTERNATIONAL
ACCOUNTANTS (IFAC)
LO 10
FEDERATION
OF
AUTHORITY/STATUS/APPLICATION
OF
INTERNATIONAL STANDARDS ON AUDITING
(ISAs)
Q. # 4a (Core concepts)
Type of Question
Question # in ICAPs
Question Bank
Q. # 4b (Core concepts)
Type of Question
Case Study
Compliance Framework:
Compliance framework is a financial reporting framework that requires compliance with
requirements of the framework, and does not contain acknowledgement for fair representation
framework (regarding additional disclosures or departure from requirements of framework).
An example is Tax-basis Framework.
Fair Presentation Framework:
Fair presentation framework is a financial reporting framework that requires compliance with
requirements of the framework, and contains acknowledgment that, to achieve fair presentation, it
may be necessary for management:
To provide disclosures in addition to specific requirements of framework or
To depart from a requirement of framework
An example is International Financial Reporting Standards.
(04 marks)
(CA Inter Spring 2012)
In a fair presentation framework, financial statements should present true and fair view.
The term True and Fair View has not been defined in the Companies Ordinance 1984 or in ISAs or
in IFRSs. Therefore, it is the most judgmental and difficult aspect of audit. Generally,
Financial statements are True when:
o data is correctly transferred from accounting records to financial statements, and
o financial statements are free from factual errors, and
o financial statements comply with accounting standards and local regulations.
Financial statements are Fair when:
o financial statements are free from undue bias in financial statements, and
o financial statements show substantive over form and consistency.
Study Tip
Terms give true and fair view and present fairly, in all material respects are
equivalent. However, first term is more common in practice.
(05 marks)
(CA Inter Spring 2004)
(04 marks)
(ACCA F8 December 2010)
(AND
THOSE
CHARGED
WITH
GOVERNANCE)
(04 marks)
(CA Inter Autumn 2001)
LO 6: STAKEHOLDERS RESPONSIBILITIES:
It is the responsibility of general public (i.e. stakeholders) to understand and eliminate expectation
gap so that scope of audit is not misunderstood.
Expectation Gap:
Expectation Gap is the difference between what general public perceives about role and
responsibilities of auditor and what statutory role and responsibilities of auditor are.
Public expectations are usually higher than auditors statutory responsibilities.
Some Common Misunderstandings (i.e. Expectation Gap) about Audit:
1. Auditor prepares financial statements.
2. Auditor checks 100% transactions of entity during the accounting period.
3. Auditor is responsible to detect all misstatements.
3
Scope of audit means nature, timing and extent of audit procedures which are necessary to achieve
the overall objective of audit (i.e. to obtain reasonable assurance).
Scope of audit of an entity is determined considering:
1) Requirements of International Standards on Auditing (ISAs).
2) Requirements of local laws and regulations.
3) Auditors Professional Judgment.
4) Terms of Engagement between auditor and client.
(03 marks)
(CA Final, Winter 1998)
For the successful completion of a good audit, it is necessary that auditor exercises following
attributes throughout the audit engagement:
Professional Judgment:
Definition:
Professional Judgment is the application of Cumulative Audit Knowledge, Experience and Training,
within the context of auditing, accounting and ethical standards, in different circumstances of audit
to reach an appropriate course of action or conclusion.
Areas where professional judgment is applied:
in assessing risk of material misstatement.
in determining whether an item is material.
in planning and performing nature, timing and extent of audit procedures
in evaluating whether sufficient appropriate evidence has been obtained or there is need to
obtain more evidence.
in evaluation of managements judgments and estimates.
Professional Skepticism:
Definition:
Professional skepticism is an attitude that includes:
a questioning mind
being alert to conditions which may indicate possible misstatement (due to error or fraud),
and
critical assessment of audit evidence.
It does not mean to disregard past honesty and integrity of client or disbelieve everything client
says. Rather, it means not to accept anything without corroborative evidence.
Independence:
Independence means auditor should be free to perform audit procedures without any bias or
influence. Auditor should be Independent of financial, personal and employment relations with
client.
(This concept will be discussed in detail in later chapters.)
IFAC supports the development of profession in the area of auditing, ethics, professional education
and public sector by following activities:
development of high-quality standards and guidance
facilitating the adoption and implementation of standards and guidance
promoting the value of professional accountants worldwide
speaking out on public interest issues
Explain briefly the role of International Auditing and Assurance Standards Board (IAASB).
(04 marks)
(CA Inter -Spring 2008)
Authority/Status of an ISA:
In Pakistan, audit is conducted in accordance ISAs. ISAs are written in the context of audit of
financial statements and contain:
objectives,
required procedures to meet objectives and
explanatory material on application of procedures.
Therefore, it is compulsory for auditors to comply with all required procedures of all adopted ISAs.
Exception to application of ISA:
A required procedure will not be performed if it is not relevant.
A required procedures will also not be performed if it is not practicable. However, in this case,
auditor shall document:
reason of departure from required procedure, and
alternative procedures performed to obtain evidence/assurance.
CONCEPT REVIEW QUESTION
Explain the status of International Standards on Auditing.
(02 marks)
(ACCA F8 December 2010)
Briefly discuss the authority attaching to International Standards on Auditing (ISAs) with respect to
audit of a limited company in Pakistan.
(CA Inter -Spring 2006)
Why adherence to International Standards on Auditing is important for the auditors? Discuss.
(05 marks)
(CA Inter -Autumn 2003)
You will be expected to comment on the situation in the light of auditors responsibilities.
Case Study:
You were the engagement partner on the audit of a commercial bank which has a network of more than 200
branches, across the country. During a recent meeting, a member of the audit committee referred to an
instance of irregularity in a branch, whereby the Branch Manager had extended credit to a close relative
without following the banks credit disbursement procedures. The member criticized the auditors for their
failure to highlight such instances.
Required:
As an engagement partner, write a letter to the audit committee explaining your point of view in detail with
specific references to the International Standards on Auditing, wherever applicable. (09 marks)
(CA Final, Winter 2008)
Solution:
View point expressed by member of audit committee is incorrect.
Auditors Primary responsibility/Overall objective is:
To obtain reasonable assurance whether financial statements are free from material misstatement
(due to error or fraud) to enable auditor to express opinion on financial statements,
To report on financial statements and
To communicate in accordance with the auditors findings as required by ISAs. (e.g. to communicate
TCWG significant deficiencies in internal control if identified during the audit).
Granting a credit without following banks procedures is a weakness in Internal Control, not a misstatement
in financial statements. Therefore, responsibility regarding financial statements has been fulfilled.
Although auditor is required to communicate TCWG significant deficiencies in internal control if identified
during the audit; however:
(a) This deficiency may not have been identified during the auditor because auditors work is based on sample basis
or branch manager may have intentionally concealed this fact from auditor which makes it difficult to detect
such irregularities.
(b) Even if identified, this deficiency in internal control may not be significant in auditors judgment.
Last but not least, primary responsibility to design, implement and operate internal control is of
management/TCWG (and not of auditor).
Case Study:
During the course of the audit of Smart Services Limited for the year ended March 31, 2010, the auditor
noted certain contradictions between the results of inquiries from companys legal advisor and the
representation provided by the management in respect of certain contingencies.
Considering the above scenario, explain how the attitude of Professional Skepticism would help the
(03 marks)
auditor to deal with such matters?
(ICMA Pakistan Summer 2010)
Solution:
Auditor shall not ignore this inconsistency between inquiries from legal advisor and managements
representation as it increases risk of material misstatement.
Auditor should perform further specific procedures to determine which source of evidence is reliable:
1. further inquiry of management and legal advisor about reasons of difference.
2. inspect documents relating to litigations/contingencies.
3. obtain opinion from third parties e.g. other lawyers.
4. consider subsequent decision of the legal case/contingencies.
In the light of results of procedures performed, auditor shall also consider effect of the matter on other
aspects of the audit.