1. BIT-224 Audit Chapter-2 Muhammad Khurshid Khan

2. Auditing Standards GAAS—Generally accepted auditing standards ensure “uniformly high quality audit work” by all independent CPA. The accounting profession has developed 10 standards for audit task: Three general standards pertain to auditors; Next three belong to conduct of field work; and Last four give shape to audit report.

3. General Standards Audit is to be performed by a person having adequate technical training and proficiency as auditor. In all matters relating to the assignment, an independence of mental attitude is to be maintained. Due professional care is to be exercised in planning and performance of audit and preparation of audit report.

4. Standards of Field Work The work is to be adequately planned and the assistants, if any, are to be properly supervised. Sufficient understanding of internal control is to be obtained to plan audit and to determine nature, timing and extent of audit procedures. Sufficient competent evidential matter is to be obtained through inspection, observation, and confirmation to afford a reasonable basis for opinion regarding the financial statement under audit.

5. Standards of Reporting State preparation of financial statements as per GAAP. State circumstances in which principles have not been consistently observed in current period in relation to previous periods. Informative disclosure adequate. Clear cut indication of auditor’s work and responsibility.

6. Audit Report Audit report contains the opinion of auditors that they form during and conclusion of audit engagement. Audit report has three parts: 1.Opening or introductory paragraph; 2.Middle or scope paragraph; and 3.Final or opinion paragraph.

7. Introductory Paragraph states: Responsibility of management; management of client company is responsible for maintaining adequate accounting records and preparing proper financial statements. Financial statements are statements of client company not of auditors’. Responsibility of auditors; is to audit the financial statement and give their opinion as to their fairness of presentation. To establish validity of financial statements auditors compare these figures with accounting records and original evidence of transactions. But their opinion covers only financial statements which mention in their report.

8. Scope Paragraph describes audit process: It describes that audit was conducted in line with auditing standards. It also points out that audit is meant to obtain reasonable assurance that financial statements are free from misstatements. Audit does not provide absolute assurance but believe that procedures performed provide a reasonable basis for their opinion.

9. Opinion Paragraph This paragraph consist one paragraph which contains certain significant phrases. “In our opinion…” means auditors express nothing more than informed opinion. Auditors do not certify or guarantee that financial statements are accurate, correct or true. Guarantee of correctness can not issued because financial statements are based on estimates not on facts. Furthermore, auditor do not make complete and detailed examination of all transactions. Their audit is limited program of tests that leave possibility of some misstatements going un-detected.

10. Opinion Paragraph “Financial statements fairly represent in all material respects…”. Since many items on financial statements can not be measured exactly the auditors can not say financial statements present exactly or correctly financial position…. Present fairly in auditing context means that financial statements: 1.have been prepared in line with GAAP. 2.are informative of matters that may affect their use, understanding and interpretation. 3.are presented in reasonable manner that is not too detailed or condensed. 4.Reflect transactions and events within range of reasonable limits.

11. Audit reports and its Parts (a) Title; (b) Addressee; (c) Introductory paragraph; (d) Management’s responsibility for the financial statements; (e) Auditor’s responsibility;

12. Elements of Auditor’s Report (cont.) (f) Auditor’s opinion; (g) Other reporting responsibilities; (h) Auditor’s signature; (i) Date of the auditor’s report; and (j) Auditor’s address.

13. Contents of the Auditor's Report title, addressee, opening or introductory paragraph scope paragraph (describing the nature of an audit) opinion paragraph containing an expression of opinion on the financial statements, the date of the report the auditor's address, and auditor’s signature

14. Types of opinion Expressed in the Auditor's Report : unqualified, qualified, adverse, or disclaimer of opinion QUAD

15. Unqualified Audit Opinion Most common type of audit report Called “clean opinion” Used for more than 90 per cent of all audit reports Other audit reports are referred to as 'other than unqualified reports‘ (adverse opinion, disclaimer of opinion, and qualified opinion).

16. An Unqualified Opinion is e xpressed when the auditor concludes that the financial statements give a true and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

17. Modifications To The Opinion 2“Modifications to the opinion” refer to the changes made in the unqualified opinions with “except for” sentence. 2This opinion is largely favorable opinion issued with some qualification—deficiency in in the assertions. 2This is the second best choice for management.

18. When Auditor should modify the opinion : (a)The auditor concludes that, based on the audit evidence obtained, the financial statements are not free from material misstatement and accordingly are not prepared, in all material respects, in accordance with an applicable financial reporting framework; or (b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements are free from material misstatement.

19. Auditor’s Report Containing a Qualified Opinion An auditor’s report containing a qualified opinion is issued when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management, or limitation on scope is not so material as to require an adverse opinion or a disclaimer of opinion.

20. Auditor’s Report Containing an Adverse Opinion An adverse opinion is issued when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of her report is not adequate to disclose the misleading or incomplete nature of the financial statements.

21. Auditor’s Report Containing a Disclaimer of Opinion An auditor’s report containing a disclaimer of opinion should be expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and therefore is unable to express an opinion on the financial statements.