1

Superior University

AUDITING MID ASSIGNMENT

Submitted to: Madam Maryam Khawar Submitted by: AHSAN ULLAH 11407

ACKNOWLEDGEMENT

By the grace of almighty Allah, I have been able to compile my assignment. Without his help, I cannot accomplish any objectives in our lives. The omnipotent Allah bestows this ability, knowledge, strength and competence required for this assignment to me as boons. Special acknowledgement for our respected Professor Maryam Khawar who gives opportunity to give summary on the International Auditing Standard. We are really thankful our teacher and her guidance for the completion of this assignment.

INTERNATIONAL STANDARD ON AUDITING 200

OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS

INTERNATIONAL STANDARD ON AUDITING 200 (ISA):

This International Standard on Auditing (ISA) deals with the independent auditors overall Responsibilities when conducting an audit of financial statements in accordance with ISAs. Specifically, it sets out the overall objectives of the independent auditor, and explains the Nature and scope of an audit designed to enable the independent auditor to meet those Objectives. It also explains the scope, authority and structure of the ISAs, and includes Requirements establishing the general responsibilities of the independent auditor applicable in all audits, including the obligation to comply with the ISAs.

An Audit of Financial Statements:

The purpose of an audit is to enhance the degree of confidence of intended users in The financial statements. This is achieved by the expression of an opinion by the Auditor on whether the financial statements are prepared, in all material respects, In accordance with an applicable financial reporting framework. In the case of most General purpose frameworks, that opinion is on whether the financial statements Are presented fairly, in all material respects, or give a true and fair view in Accordance with the framework. An audit conducted in accordance with ISAs and A relevant ethical requirement enables the auditor to form that opinion.

Financial Statements Includes:

1. Balance sheet 2. Profit and loss account 3. Cash flow statements 4. Notes to the accounts 5. Statements of changes in equity 6. Any other information

Objective of an Audit of Financial Statements:

ISA 200 states there are two overall objectives of the auditor. To obtain reasonable assurance about whether the financial statements as a Whole are free from material misstatement, whether due to fraud or error, Thereby enabling the auditor to express an opinion on whether the financial Statements are prepared, in all material respects, in accordance with an Applicable financial reporting framework.' Secondly: 'To report on the financial Statements, and communicate as required by the ISAs in accordance with the Auditors findings. In addition, ISA 200 contains an objective relating to situations where Reasonable assurance cannot be obtained, in which case the auditor, depending On the circumstances, may qualify the audit opinion, or disclaim an opinion, or withdraw from the assignment.

General principles of an audit

These are the general principle of an audit. A) Ethical requirements relating to an audit of financial statement. B) Conduct of an audit in accordance with ISAs C) Plan and perform an audit with an attitude of professional skepticism.

Ethical requirements
The auditor shall comply with relevant ethical requirements, including those Pertaining to independence, related to financial statement audit engagements.' ISA 200 reminds us that the auditor is bound by one or more ethical codes, Depending on the jurisdiction in which the auditor operates. The ethical code, Including compliance with quality control measures, therefore underpins the

Conduct of an audit.

1. Independence:
Auditor conducts his work independently and is not influenced or controlled by The management. Example: The auditor should not be influence by the management.

2. Integrity:
It is expected that the role of auditor with integrity, an honest person who does Not indulge in malpractices. Example: He should perform all his assign duties with integrity and honesty and Does not involve in any immoral activity.

3. Objectivity:
The auditor focuses on his work to obtain relevant information and evidence Which is only related to or assist in forming his audit opinion? This is the basic Objective of the audit. Example: The main purpose of the auditor is to conduct audit during the course Of the audit work he should have the focus only to his work and should not be Involve in any other activity.

4. Professional Competence and Due Care:

The auditor must be a chartered accountant and in certain cases cost and Management accountant. The auditor must have the proper training for the Conduct of an audit.

5. Confidentiality:
The auditor should have to keep all the information of his client. The auditor is Not allowed to disclose any information of his client to the third party except as Permitted / allowed by law. Example: The auditor should keep all the informations of his clients secret and Should not share with any other except order by law.

6. Professional Behavior:
Behavior and attitude of an auditor should reflect highest standard of Professionalism throughout the audit process. Example: the auditor should behave professionally during the course of the Audit.

7. Technical Standards:
Auditor conducts the audit in accordance with national and international Auditing standards and acceptable auditing standards.

B) Audit should conduct an Audit in Accordance with ISAs

Auditor should audit according to international standard of Audit .the auditor is also aware of international Auditing practice statements (IAPSs) applicable to the audit engagement.

C) Professional skepticism
The auditor shall plan and perform an audit with professional skepticism, recognizing that circumstances may exist which causes the financial statements to be materially misstated. The ISA explains that it is necessary to maintain an Attitude of skepticism throughout the audit, and is especially important in the Critical assessment of audit evidence.

SCOPE OF AN AUDIT
It refers to procedures that are used to achieve the objectives of audit by Auditors. For example 1. Insurance Act 1938 2. Companies Ordinance 1984 3. Baking companies ordinance 1962 4. ISAs 5. IASs

Reasonable Assurance
An auditor cannot give absolute guarantee that the statements of an Organizations are true and fair in every aspect because there are some Limitations due to followings a. The use of testing. b. The inherent limitations of internal control (for example, the possibility of management override or collusion). c. The fact that most audit evidence is persuasive rather than conclusive.

Persuasive evidence:
Persuasive evidence is evidence that has the power to influence or persuade Someone to believe in its truth. For example stationery is purchased and auditor checking its invoices as proof of its occurrence.

Conclusive Evidence:
Evidence is conclusive which is directly and easily verifiable. For example a building Is purchased and auditor verifies it by seeing it physically.

AUDIT RISK

INHERENT RISK

CONTROL RISK

DETECTION RISK

Audit Risks:
Auditors risk is the risk that the auditor may give an inappropriate opinion When the financial statements are materially misstated. Audit risk has three Components.

Inherent Risk:
Inherent risk is the susceptibility of an account balance or class of transaction to a material misstatement either individually or when aggregated with misstatements of other balances or classes, assuming that there were no internal controls. The auditor should study and evaluate the degree of inherent risk in order to determine the audit plan. He should also consider other factors, which might compensate for an otherwise high degree of inherent risk.

Control Risk
Control risk is the risk that misstatements could occur in an account balance or class of transaction and that could be material, either individually or when Aggregated with other misstatements, will not be prevented or detected and Corrected on a timely basis by the accounting and internal control system.

Detection Risk
Detection risk is the risk that an auditor's substantive procedures will not detect a Misstatement that exists in an account balance or class of transactions that could Be material, either individually or when aggregated with misstatements in other Balances or classes. There is an inverse relationship between detection risks and The combined level of inherent and control risks. Thus when inherent and control risks are high, acceptable detection risk should be Low to reduce the audit risk to an acceptably low level. It should, however, be noted That the assessed levels of inherent and control risk cannot be sufficiently low to Eliminate the need to perform substantive procedures. When the auditor Determines that the detection risk regarding material assertion in the financial Statements cannot be reduced to an acceptably low level, the auditor should Express a qualified opinion or a disclaimer of opinion as may be appropriate.

10

Responsibility for the Financial Statements

The managements responsibility includes: 1. Designing, implementation and maintaining internal control relevant to the Preparation of financial statements that is free from material misstatement, Whether due to fraud or error. 2. Selecting and applying appropriate accounting policies 3. Making accounting estimates that are reasonable in the circumstances

Audit Engagement Letter

To,

The Board of Directors, ABC Company LTD, Kot lakhpat Lahore Pakistan

To, The Board of Directors, ABC Company LTD, kot lakhpat Lahore Pakistan.

Subject: Audit Engagement Letter

Dear Sir/Madam, as certified public accountants licensed to practice in Pakistan, we are pleased to confirm our understanding of the services we are to provide to your company (ABC Company LTD) for the year ended December 31, 2012.Principle contents of the audit engagement letter are as follows:

1. Object of the audit:

The objective of our audit is the expression of opinions as to whether your basic financial statements are fairly presented, in all material respects, in conformity with generally accepted accounting principles, and to report on the fairness of the additional information provided during the course of the audit.

11

2.

Management Responsibilities:

Management of you company (ABC Company.)is responsible for the basic financial statements and all accompanying info, as well as all representations contained therein. You are responsible for making all management decisions and performing all management functions relating to the financial statements, schedule of expenditures, and related notes, and for accepting full responsibility for suchdecisions.Management is responsible for making all financial records and related information available to us. Management is responsible for the design and implementation of programs and controls to prevent and detect fraud, and for informing us about all known or suspected fraud or illegal acts. In addition, you are responsible for identifying and ensuring that the entity complies with applicable laws, regulations, contracts, agreements, and grants. It is managements responsibility to follow up and take corrective action unreported audit findings, and to prepare a summary schedule of prior audit findings and a corrective action plan. The summary schedule of prior audit findings should be available for our review on (Dat

3. Scope of Audit:
We will audit the financial statements, each major fund, and the aggregate remaining fund information, which collectively comprise the basic financial statements, of your company (ABC Company LTD) by applicable regulations, legislations or professional standards etc as of and for the year ended December 31, 2011.

4. Form of Audit Report:

The form or content of our report may need to beam ended in the light of our audit findings. Whether long form report as given in the companys ordinance 1984 or a simple certificate etc. will be issued on the completion of the audit.

5. Unrestricted Access to records, Documents and Books:

Unrestricted Access to records, Documents and Books: The auditor should have free and unrestricted access to the entitys records, documents and books etc

6. Management Representation letter:

12

You will be required to acknowledge in the management representation letter that you have reviewed and approved the financial statements, schedule of expenditures, and related notes prior to their issuance, and have accepted responsibility for them. This letter wills be signed by the Chief Executive Officer (CEO) or Chief financial officer (CFO).

7. Inherent Limitations of some material misstatement Remaining Undiscovered:

Because of the inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with ISAs.

8. Audit Planning:
Our audit team consisting 8 members will audit your financial statements from 6 January 2012 to 30 February 2012.

9. Management Letter / Letter of Recommendation:

We will points out the shortcoming; discrepancies and weaknesses observed during the course of the audit and specify recommendations for rectification and improvements thereon in the management letter.

10.Involvement of Internal Auditor:

If it is required by our Auditor to obtain or discuss information related to audit they can involve the internal auditor in the process of audit.

11.Involvement of other auditors and expertise:

If I have need of other auditor and any expertise. I am independent to call these expertises for auditing .the charges of this specialized person you will pay.

12.Audit Fee:
Our fees for all services are related to our standard hourly rates in effect at the time services are performed. Our standard hourly rates vary according to the degree of responsibility involved and the experience level of the personnel assigned to your engagement. Our fee for this engagement, which we estimate, will range from PKR.____

13

to PKR.____, plus out-of-pocket expenses, except that we agree that our maximum fee, including expenses, will not exceed PKR.____. This fee is based on the assumption that you will provide assistance, anticipated cooperation from your personnel, and the assumption that unexpected circumstances will not be encountered during the engagement. If significant additional time is necessary, we will discuss it with you and arrive at a new fee estimate before we incur the additional costs. Any amendments to the not-to-exceed amount of the fees will be in writing and signed by both our firm and the invoices for these fees will be rendered each month as work progresses and are payable upon presentation.

13.Confirmation of Terms of Engagement by Client:

Please sign and return the attached copy of this letter to indicate your acknowledgement of, and agreement with, the arrangements for our audit of the financial statements including our respective responsibilities. In accordance with the provisions of state law, this engagement agreement must be approved by the Legislative Auditor prior to commencement of our work. Upon your signature and approval, we will seek approval of the Legislative Auditor of this engagement. We look forward to a pleasant association and the opportunity to provide the services included in this engagement. If you have any questions, please let us know. This letter will be effective for future years unless it is terminated, amended or superseded. Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our audit of the financial statements. Yours Very truly,

XYZ & Co.

Chartered Accountants (Signature)

(Name of the Member)

14

ISA-230 Documentation
Documentation
Documentation is one of the International Standards on Auditing. It serves to direct The documentation of audit working papers in order to assist the audit planning and Performance; the supervision and review of the audit work; and the recording of Audit evidence resulting from the audit work in order to support the auditor's Opinion.

Audit Working Papers

A working paper is any document or record containing a report, correspondence and Any other information that an auditor collects or any record which the auditor Produces in the course of the audit procedures to discharge his professional duty to Clients. An audit is erroneously regarded as a process by which the auditor piles up Papers or heaps of books. However, the more paper the auditor amasses, the better The audit he has done. (a) The auditor should document matters which are important in providing audit Evidence to support the auditors opinion and evidence that the work was carried Out in accordance with ISAs. (b) The auditor should prepare working papers which are sufficiently complete and Detailed to provide an overall understanding of the e-audit. (c) The auditors should record in the working papers information on planning the Audit, the nature, timing and extent of the audit procedures performed and the Results thereof and the conclusions drawn from the audit evidence obtained. The Extent of working papers which the auditor produces or obtains is a matter of Professional judgment since it is neither necessary nor practical to document every Matter the auditor considers.

15

In assessing the extent of working papers to be prepared or retained, it may be Useful for the auditor to consider what would be necessary to provide another Auditor who has no previous experience of the audit work with an understanding of The work performed and the basis of the principal decisions taken but not the Detailed aspects of the audit.

Purpose of the audit working Papers

The main objective of the auditors working papers is to record and demonstrate the Steps which have been taken by the auditor to enable him form an independent Opinion on the financial statements upon which they are required to report. Therefore, in order to achieve this objective, audit working papers should provide: (a) Information about the organization being audited, including its recent history; (b) Evidence of work done in the course of the audit; (c) A means of controlling the current years audit work and also as a means of Planning the subsequent years audit; and (d) Schedules in support of the accounts audited and summaries of the clients Books.

Audit working paper should show that:

Audit work planned according to engagement contract. Assistances work properly supervised and checked by auditor.

Preparation of Audit working paper:

No standard format is advocated for audit working papers. It is however, important to ensure that working papers not only conform with the requirements of a particular firm but also satisfy the requirements of an independent reader. The following guidelines should be observed when writing up working papers: (a) Each working paper should be clearly headed with the clients name, the subject Matter of the working paper, the date of the engagement, the initials of staff Preparing the working paper and the date. (b) As far as possible, working papers should be prepared on standard stationery. (c) Details of work done must be clearly shown as to leave no doubt in the minds of readers.

16

Audit Working Papers files:

Audit working papers are usually arranged in two files according to their contents, Namely,

Permanent audit file. Current audit file

Permanent audit file.

This file contains information of continuing importance, which will be required for More than one audit. With the contents of this file, the auditors will have a better Understanding of the clients operations and business. The file will also typically Contain the following information: (i) A brief history of the business as to the nature of business, major competitors, Major sources of revenue and operating industry. (ii) List of major accounting policies (iii) Copies of statutes and regulations governing the entitys accounts and audit; (iv) Names and addresses of the companys directors including details of service Contracts with them. (v) The memorandum and articles of association of the business. (vi) Copies of documents of continuing importance and relevance, such as Legal Mortgages and Debenture deeds; (vii) An organizational chart of the business showing names of responsible officials and lines of reporting. (viii) Addresses of the registered office and all other premises, with a short description of the work carried on at each; (ix) Names and addresses of the companys subsidiaries and associated companies. (x) List of books, other records and where they are kept.

17

The Current Audit File

This file contains information relevant to the year under consideration and it is Based on the contents of this file, that the auditors form opinion on the clients Financial statements. The current file will typically contain the following documents: (i) A copy of the financial statements being audited and the trial balance;

(ii) The audit programme, which will contain the list of audit work to be done and The list of audit tests to perform; (iii) Schedules of major items in the profit and loss accounts and the balance sheet; (iv) List of audit queries and their dispositions; (v) List of matters requiring the engagement audit partners attention; (vi) Extracts of minutes of meetings of the board and management; (vii) A description of the internal control systems in operation; (viii) Letters of Representations from management; (ix) Checklists for compliance with statutory disclosure requirements and Accounting standards; and (x) Management letter setting out internal control weaknesses in the system to the client.