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A UDITING should refer to other sources for further information. 1. Auditor provides Audit Opinion on the true and However, the narrative in the document will be a useful fair view of financial statements prepared by source of guidance for audit stakeholders and help in Company Management addressing the expectation and information gaps. 1.1 Audit Opinion What is an audit of financial statements is based on the The management of a company is responsible for current applicable law and generally accepted accounting preparing the financial statements. The auditor is and auditing practices the future of which is currently responsible for expressing an opinion indicating that under debate around the world and is open to change. reasonable assurance has been obtained that the financial statements as a whole are free from material What is an Audit of Financial Statements? misstatement, whether due to fraud or error, and that these are fairly presented in accordance with the The audit of listed companies is a statutory and regulatory approved accounting standards as applicable in Pakistan. requirement in order to enhance the reliability of financial The ISAs provide clear requirements and application statements, safeguard the interest of stakeholders and and other explanatory material for how an audit shall cater to the various decision making needs of the user be carried out and the level of assurance obtained. groups and also rendering the management accountable It is the auditor’s responsibility to plan and conduct for their responsibility of managing the entity on behalf the audit in such a way that it meets the applicable of the shareholders; hence the appointment of auditors auditing standards and sufficient appropriate evidence and the audit life cycle is an ensuing process. is obtained to support the audit opinion. However, what constitutes sufficient appropriate evidence is ultimately There’s a general perception that the auditors are a matter of professional judgment. Sufficiency relates to appointed to detect fraud, however, the responsibility quantum of audit evidence and appropriateness relates of the auditor is to express an opinion on the financial to the relevance and reliability of audit evidence. statements (including the related disclosures), whether they are presented fairly in all material respects and to ascertain during the course of audit, whether proper An auditor conducting audit books of accounts have been maintained in accordance with the law, applicable financial reporting standards in accordance with ISAs is in Pakistan, and pronouncements of the relevant professional bodies. It needs to be understood that responsible for obtaining the primary responsibility for the prevention and reasonable assurance that the detection of fraud rests with both those charged with governance of the entity and management. An financial statements taken as auditor conducting audit in accordance with ISAs is responsible for obtaining reasonable assurance that a whole are free from material the financial statements taken as a whole are free from material misstatements, whether caused by fraud or misstatements, whether caused error. by fraud or error. Auditors are appointed by the shareholders and report to them directly after having gone through the audit The auditor considers a number of factors in determining committee and board of directors. This reporting is in whether financial statements are free of material the form of an audit opinion. misstatement, and in evaluating any misstatements identified. These factors require professional judgment, An effective and efficient audit process will, almost where auditors use their skill and experience to form invariably, also identify insights about some areas a view based upon the evidence gathered on the where management may improve their controls or financial statements taken as a whole. The audit processes. In case of significant control deficiencies opinion is clearly stated as a separate paragraph in the the auditor is required to communicate control audit report. The auditor issues a ‘clean’ opinion when deficiencies to management and board of directors. it concludes that the financial statements are free from These communications add value to the company and material misstatement. enhance the overall quality of business processes. This There may still be some matters which are not related reporting is in the form of a management letter. or have an impact on the financial statements which either because of certain provisions in the ISAs or In undertaking an audit, auditors apply relevant for some other reason require reference in the audit International Standards on Auditing (ISAs) which opinion. For example, if the engagement is an initial are adopted in Pakistan that provides specific engagement and the auditor opts to make reference requirements and guidance on performing audit that corresponding figures were audited by the engagements. The paragraphs below provide details previous auditor in the audit opinion, such a matter of key matters relevant for the understanding of audit is placed under the heading ‘Other matters’. The audit and the audit process itself. report would still be a ‘clean’ opinion. The Pakistan Accountant | Jan-Mar 2015 25