CA

PAPER
CAF 09
AUDIT
AND
ASSURANCE
(BLUFF NOTES)

Autumn 2021 EDITION

BY: ZIA UL HAQ
 ABOUT THE AUTHOR

The author, Mr. Zia Ul Haq, ACA is an associate member of Institute of Chartered
Accountants in England and Wales (ICAEW), and FCCA (fellow member of
Association of Chartered Certified Accountant (ACCA) UK). He is also an MBA from
Anglia Ruskin University UK.

He has worked with Deloitte UK, (audit and assurance department) at

managerial level and Sainsbury’s UK (a leading UK based supermarket chain) in
HR department.

Having served the firm and industry for 5 years, he has adapted teaching as
profession on full time basis in 2011.

Currently he is working with RISE School of Accountancy and teaching CA

(CAF-04 BMBS, CAF-09 Audit and Assurance, CFAP-03 BMS, CFAP-06 Audit,
Assurance and Related Services, MSA-1, MSA-2) as well as at ACCA level.
 CONTENTS
Chapters Page

1 Concept and need for assurance 1

2 Obtaining an engagement 13

3 Professional ethics and codes of conduct 18

4 Planning and Risk assessment 22

5 Evidence and Sampling 37

6 Internal control 49

7 Tests of controls 57

8 Substantive Procedures 82

9 IT Controls and CAATs 89

10 Related Party Transactions 98

11 Reliance on Others 101

12 Audit Report 106

13 Audit Report & Finalisation 122

14 Review Engagement 128

Past Paper Questions + Answers 131

 Grid Chapters Weighting
General concepts and principles of audit 1,2 15 --- 20
Performance of audit and reporting 4, 5, 7, 8, 10, 12 25 --- 35
Specific areas 10, 11, 13, 14 20 --- 25
Computer programming and IT controls 6, 7, 9 10 --- 15
Professional Ethics 3 10 --- 15
Total 100

Statistics of ICAP Examination Result

Attempt Students appeared Students passed

Spring 2021
Autumn 2020 2928 780 (27%)
Spring 2020 3515 1429 (41%)
Autumn 2019 3209 801 (25%)
Spring 2019 2696 571 (21%)
Autumn 2018 2724 1506 (55%)
Spring 2018 2572 759 (29%)
Autumn 2017 2295 337 (14%)
Spring 2017 2189 783 (35%)
Autumn 2016 2708 1484 (55%)
Spring 2016 2632 416 (19%)
Autumn 2015 2862 917 (32%)
 CAF 9 -- Audit and Assurance Past Papers Analysis
Chapter Topic A 14 S 15 A 15 S 16 A 16 S 17 A 17 S 18 A 18 S 19 A 19 S 20 A 20

1 Company Act 8 8 6 10 6 4 3 8 6 4

Other Areas 3 6 5 8 7 4
2 Engagement 5 4 9 3 8 5 4 4

3 Ethics 9 12 13 10 9 10 12 12 13 11 11 15

4 Planning and Risk 3 9 22 6 6 2 5 5 4 8

Materiality 5 7 2 3 6 7

Analytical Procedures 4 11 9

Fraud 6 10 11 11 4 13 9 4 5 13 8

5 Evidence 2 4

Audit documentation 7 6

Sampling 1 3 7 10
6 Internal Controls 22 4 12 6 6

Other Techniques 13 4
7 Sales 3 5 15

Purchases 10 15

Wages 7

Inventory 8 6 9

Non-current Assets 11

Cash 6

8 Receivables 12 12 5 9 6 5 7 10

Other Areas 10 3 11 2 5 7

9 IT Controls & CAATs 6 4 8 10 10 9 7 9 15 11 12 12 10

10 Related Party 2 7 4 12 6 3 11 8 10

11 Internal Audit 6 2 4 6 4 7

Expert 9 6 2 6 6

12 Audit Report 6 14 10 15 16 9 15 8 18

13 Going Concern 5

Written Representation 5 7 5 8

Subsequent Event 7 10 9 9

14 Review Engagement 2 3 8 5
_____________________________________________Chapter 1: Concept and Need for Assurance

CHAPTER 1
CONCEPT AND NEED FOR ASSURANCE
DEFINITION OF AN AUDIT
The objective of an audit of financial statement is “to enable the auditor to express an opinion whether the
financial statements are prepared, in all material respects (give true and fair view), in accordance with
an identified financial reporting framework (IAS/IFRS)”

THE AUDIT PROCESS

Planning and risk evaluation * Objectives:

-to formulate the audit strategy
(risk evaluation)
-to formulate the audit plan
(development of an audit programme
addressing the risks identified)
Ascertain and record the By using: -narrative notes
accounting and internal -internal control questionnaires (ICQs)
control systems -flowcharts
-the client’s procedures manual
-internal audit systems notes

Perform walk through tests * -to verify the systems work as recorded

Evaluate the system’s controls -by using internal control evaluation

checklists or questionnaires (ICEQs)

If strong If weak

Perform tests of controls *

If unsatisfactory Perform large volumes INTERIM

of substantive tests * AUDIT *

If satisfactory

Report to management
Perform reduced volume of
substantive tests *

Perform further tests of control and / or

substantive tests for the rest of the period FINAL
AUDIT *

Review the financial statements -to verify management assertions *

and working papers

Form an opinion and report -to shareholders

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_____________________________________________Chapter 1: Concept and Need for Assurance

ESSENTIAL TERMINOLOGY
Risk evaluation
 This involves an analysis of the client’s business environment, the nature of its business, the nature of
individual transactions, which could result in misstatements in the financial statement, and if undetected
could result in an inappropriate audit opinion.

Walk-through tests
 These are audit tests performed to verify the system works as recorded
 One or two transactions are selected and “walked through” the system from origin to conclusion
 They are performed annually to confirm the system still works as recorded
 The sample size is too small to draw any valid conclusion other than the system works as recorded

Tests of control
 These are designed to seek evidence that each control was properly performed throughout the period
under review
 If controls are found to be satisfactory, the auditor will seek to place reliance on them to reduce the
volume of substantive tests of detail

Substantive tests or tests of detail

 These are tests on transactions and balances to prove validity, accuracy and completeness of
recording.
 Objective of Substantive Procedures is to detect material misstatements in financial statements at assertion
level. These include Analytical Procedures and Tests of Details.

Interim audits
 Audit work performed before the year end has finished is called Interim audit
 Audits, particularly of large companies, are often conducted in stages. Due to time pressure and reporting
deadlines, audit work may be commenced before the client’s financial year has finished to perform
detailed audit work particularly on systems and transactions
 this is performed before the end of the accounting period and may include:
- Discussions with staff and management designed to enhance auditor’s understanding of the entity and
the environment
(To more fully plan the audit and hopefully reduce the work performed at year end)
-Recording information about internal control systems that are relevant to the audit;
-Performing some preliminary controls testing or substantive procedures

Final audit
 Audit work performed after the year end is called final audit
 This is sometimes called the “balance sheet audit”
 Audit concentration is on verifying items and management assertions in the balance sheet and income
statement/profit and loss account
 this is performed after the year-end when the draft F/S are available and include full-year balances.
-Normally the interim audit work is performed by fewer but more senior staff.
-The final audit is then much longer and involves the whole audit team.

The Concept of True and Fair View

 By “true” is meant that financial statements are:
- Free from material misstatement. - Based on verifiable evidence.

 By “fair” is meant that the financial statements are:

- Objectively presented - Free from management bias - Relevant to the needs of users

The concept is a dynamic concept and is incapable of precise lasting legal definition, but to be true and fair,
financial statements must live up to the current needs and expectations of users.
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The Concept of Materiality

ISA 320 – ‘Materiality in planning and performing an audit’- defines the concept as follows:

Misstatements are considered to be material if they, individually or in the aggregate, could reasonably be
expected to influence the economic decisions of users taken on the basis of the financial statements.

 Misstatements include errors, omissions, non-disclosures and misclassifications.

 Materiality is not capable of general mathematical definition since it involves qualitative as well as
quantitative considerations:

 Quantitative judgments are made in terms of the size of an item when compared with other items
in the financial statements.

 Qualitative judgments are made in terms of the nature of an item irrespective of size.

(Materiality will be covered in more detail later when planning the audit is considered)

Agency Theory
Agency theory implies that the agent should work in the best interest of the principal.
Auditors are the agents of shareholders and it is expected that in case of conflict of interest, they should
consider their duties to the users.
In the absence of agency relationship, the users will not have enough confidence in the audited accounts.

Stewardship
Stewardship refers to the obligation of looking after the assets with care and caution.
The person who manages the assets of the owners is called steward. The steward (directors) should take the
actions in the best interest of shareholders. There may be a conflict of interest between the directors and
shareholders. Therefore, the directors want financial statements audited by an independent party to enhance
the credibility. The independent audit reduces the shareholders' mistrust of the directors.

Accountability:
Management and Directors are responsible to the shareholders for their actions and decisions. To show their
accountability, directors and management prepare financial statements and present them to shareholders.

ASSURANCE ENGAGEMENT:
In an assurance engagement the practitioner evaluates a subject matter against suitable criteria, and expresses
an opinion designed to enhance the degree of confidence of the intended user about the subject matter.

Elements of Assurance Engagement:

Every assurance engagement consists of following 5 elements:
Three 1. Intended users (the parties who require subject matter and assurance report e.g.
party shareholders, bankers)
relationship 2. A responsible party (the party which is responsible for preparation of subject matter i.e.
management)
3. A practitioner (the professional who verifies subject matter and provides assurance on it
i.e. auditor)
A subject Subject matter is the information which is prepared by responsible party, and is to be
matter verified by practitioner e.g. financial statements (historical or prospective).
Suitable Criteria means Framework (i.e. standard rules and regulations) which is used to prepare
Criteria financial statements.
Framework may be general purpose (for wide range of users e.g. IFRS) or special purpose
(for specific users e.g. Tax Laws).
Suitable means it should be selected appropriately.
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Evidence Evidence is the information used by auditor in arriving at the conclusions on which opinion
is based.
Evidence should be Sufficient and Appropriate.
Written It is a report written in standard format (as per ISAs or as per local Laws) which includes
Report conclusion of practitioner. It is provided by practitioner to intended users.
If any of the above element is missing, engagement will be called non-assurance engagement.
Types of Assurance
“Assurance” means confidence with which a practitioner expresses his conclusion.
There are two levels of assurance that can be provided to assurance client i.e. Reasonable Assurance and
Limited Assurance.

Limited Assurance (also called Moderate Level or Negative Assurance)

It is a moderate level of assurance which is expressed in negative form of conclusion i.e. “nothing has come to
our attention that causes us to believe that financial statements do not give true and fair view”.
This level of assurance is usually given in review of financial statements, or examination of
forecasts/projections.

Reasonable Assurance (also called High Level or Positive Assurance)

It is a high, but not absolute, level of assurance which is expressed in positive form of conclusion i.e.
“financial statements give true and fair view”.
This level of assurance is usually given in an audit of financial statements.
Auditor is responsible to obtain reasonable assurance, which is not a guarantee that financial statements are
free from all misstatements. There may be some undetected misstatements even after audit due to inherent
limitations of audit.

Why absolute assurance cannot be provided / Inherent Limitations of Audit:

Absolute assurance means guarantee that auditor has detected all misstatements. Auditor cannot provide
absolute assurance because of following inherent limitations of audit:
1. Because of time and cost limitation, auditor checks only a sample of transactions.
2. Fraud involving collusion and complex techniques are harder to detect.
3. Some accounts in financial statements involve estimates / judgments/ uncertainties which are difficult to
calculate and verify.
4. Many of the audit procedures are based on auditor’s judgment which can be faulty.
5. Management may not provide complete information to auditor.
6. Auditor does not have specific legal powers e.g. power to search.
7. Most of the evidence is persuasive rather than conclusive.

RESPONSIBILITIES OF MANAGEMENT & TCWG FOR FINANCIAL STATEMENTS:

Overall Responsibilities:
Management is responsible:
(a) For preparation and presentation of financial statements in accordance with AFRF.
(b) For such internal controls which are necessary for preparation of financial statements;
(c) To provide auditor with all relevant information, and additional information requested by auditor and
unrestricted access to persons to obtain evidence.
Specific Responsibilities:
Management is also responsible for other specific responsibilities e.g. assessing entity’s ability to continue as
going concern.

RESPONSIBILITIES (OR OVERALL OBJECTIVE) OF AUDITOR:

Auditor is responsible to obtain reasonable assurance whether the financial statements are free from
material misstatements, and to issue report. Auditor is also required to communicate certain matters to
TCWG.
Auditor is responsible to communicate following matters to TCWG:
Auditor’s responsibility for the audit of financial statement Planned scope and timing of audit.
Significant findings from audit. Auditor’s independence.
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RESPONSIBILITIES OF STAKEHOLDERS / EXPECTATION GAP:

It is the responsibility of stakeholders to understand and eliminate expectation gap so that scope of audit is not
misunderstood.

Expectation Gap:
Expectation gap means public perception of the role and responsibilities of the external auditor is different
(and usually higher) from his statutory role and 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 provides absolute assurance (i.e. he certifies or guarantees that financial statements are correct).
4. Auditor is responsible to detect all misstatements and fraud.

Consequences of Expectation Gap:

It increases tendency to file legal actions against auditors without any valid basis.

How to Reduce Expectation Gap:

Expectation gap can be reduced by:
Mentioning management’s responsibilities, and auditor’s responsibilities in Engagement Letter and
Auditor’s Report.
Expanding and improving the format of auditor’s report.
Steps taken by SECP and ICAP e.g. through implementation of Code of Corporate Governance.
Public awareness

Statutory Audit – Regulatory Framework (Companies Act 2017)

AUTHORITY FOR APPOINTMENT AND REMOVAL OF STATUTORY AUDITOR:
In Pakistan, audit of annual financial statements is required for all types of companies, except a private
company having paid up capital of Rs. 1 million or less.

Appointing Authority for Auditor:

Appointment of first auditor:
First auditor is appointed by Board of Directors within 90 days of incorporation. If the company fails to
appoint the first auditor within 90 days of incorporation, Commission may appoint auditor.

Appointment of subsequent auditor:

Subsequent auditor is appointed by members at each AGM (on recommendation of the board, and after
obtaining consent of auditor). If the company fails to appoint subsequent auditor at an annual general meeting,
Commission may appoint auditor.

Appointment in case of casual vacancy:

Casual vacancy (i.e. death or disqualification of auditor during audit) is filled by directors within 30 days of
its occurrence. If the company fails to fill casual vacancy within thirty days of occurrence of the vacancy,
Commission may appoint auditor.

Appointment in case of mid-term removal of auditor:

If auditor is removed before expiry of his term, board of directors shall appoint the auditor with prior approval
of the Commission.

If a disqualified person is appointed by company:

If a disqualified person is appointed as auditor, this appointment shall be void, and SECP will appoint
qualified auditor in his place.

Tenure/Term of Auditor:
Tenure of auditor appointed in each case is from date of appointment till the conclusion of next AGM.
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Mid-Term Removal of Auditor: (i.e. removal before expiry of tenure)

An auditor, whether appointed by Directors or appointed by Members, can be removed before expiry of his
term by members through Special Resolution.

Remuneration of Auditor:
The remuneration of the auditor shall be fixed:
(a) by the members in the general meeting; or
(b) by the board or by the Commission, if the auditor are appointed by the board or the Commission, as the
case may be.

APPOINTMENT AND REMUNERATION OF AUDITOR (SEC 246)

Auditor Time of Appointment Appointed by Term of Office
First 90 days of incorporation Directors Till 1st AGM
Subsequent At AGM Members on recommendation of the BOD. Till next AGM

Casual Vacancy 30 days of such vacancy Directors Till next AGM

 Auditor, appointed by directors or the members, may be removed before conclusion of next AGM by
Special Resolution
 If auditor is removed by Special resolution, next auditor will be appointed by board with prior approval of
SECP.

SECP shall appoint auditor, on its own motion or on application by company or members, if:
 1st auditors not appointed by directors within 90 days of the incorporation
 Auditor not appointed in an AGM
 Casual vacancy not filled by directors within 30 days
 Auditors appointed are unwilling to act

Appointing Authority Remuneration Fixed by

Directors Directors
SECP SECP
All other, cases Members

PROCEDURES FOR RETIREMENT/REMOVAL/CHANGE OF EXISTING AND

APPOINTMENT OF NEW AUDITOR IN AN AGM
 Board of Directors shall recommend auditor, after obtaining consent of proposed auditor.
A notice of recommendation shall be sent to members, and retiring auditor alongwith the notice of AGM.
(same auditor may also be recommended)

 Member(s) having at least 10% shareholding shall also be entitled to propose any auditor whose consent
has been obtained.
A notice shall be given to company at least 7 days before the date of the AGM
On receipt of such notice, company shall:
-Sent a copy of notice to the retiring auditor, forthwith.
-Post it on its website.

 Retiring auditor can make representation to company at least 2 days before AGM.
It shall be read in AGM and it shall be mandatory for auditor/representative to attend the meeting.

 Company shall-intimate the registrar within 14 days of appointment / removal / casual vacancy together
with the consent of appointed auditor

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QUALIFICATION AND DISQUALIFICATION OF AUDITORS (SEC 247)

 Auditor shall be a CA having valid certificate of practice form ICAP or a Firm of CAs for:
-Public Company
-Private Company which is subsidiary of Public Company
-Private Company having paid up share capital of at least Rs. 3 million.
 For companies other than above, auditor shall be CA or CM A having certificate of practice from
respective institute or Firm of CAs/CMAs having such criteria as may be prescribed
 Firm where majority of partners practicing are qualified for appointment can be appointed in firm’s name.
 Only partners meeting above criteria shall be authorized to act and sign on behalf of firm.

DISQUALIFICATIONS OF AUDITOR
1. Person who during preceding 3 years was director, other officer or employee of Company
2. Person who is a director, other officer or employee of Company
3. Person who is a partner or employee of a director, officer or employee of Company
4. Spouse of the director of Company
5. Person indebted to Company, other than in ordinary course of business of such entities
-Not be considered indebted, if owes less than 1,000,000 to a credit card issuer
- Not be considered indebted, if unpaid utility dues for ≤90 days to utility Company
6. Body Corporate
7. Person or his spouse and his minor children, or in case of a firm, all partners of a firm who holds any
shares in Company or its associated company.
(If he holds shares before appointment, the fact shall be disclosed at time of appointment and shall
disinvest such shares within 90 days of appointment)
8. Person who has given a guarantee/security in connection with the indebtedness of any third person to the
company other than in the ordinary course of business of such entities
9. Person or a firm who directly or indirectly, has business relationship with the company other than in the
ordinary course of business of such entities:
10. Person who has been convicted by a court of an offence involving fraud and a period of 10 years has not
elapsed from the date of such conviction;
11. Person who is not eligible to act as auditor under the code of ethics as adopted by the ICAP and the
ICMAP;

 Person disqualified as auditor of a company shall also be disqualified for its holding company, its
subsidiary company or subsidiary company of its holding company.
 If after appointment auditor becomes disqualified, he shall deem to vacate office with effect from date he
becomes disqualified
 If an unqualified / disqualified person is appointed as auditor; it shall be void and SECP may appoint a
qualified person in place of the auditor appointed by Company.
 A person, who not being qualified to be an auditor, acts as auditor of a company shall be liable to a
penalty of level 2

RIGHTS AND DUTIES OF AUDITORS

RIGHTS (Sec 248)
 To access freely to all books & papers of Company and all supporting documents
 Access to copies/extracts of branch records as transferred to Principal office of company
 To require any of the following, to provide him necessary information or explanations:
- Any director, officer or employee of the company;
- Any person holding or accountable for any of company’s books, accounts or vouchers;
- Any subsidiary of the company;
- Any officer, employee or auditor of any subsidiary.
- Any person holding or accountable for books, accounts or vouchers of any subsidiary
 The auditor is entitled to attend, receive all notices of any general meeting
 The auditor is entitled to be heard at any general meeting which he attends on any part of the business
which concerns him as auditor.

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DUTIES (Sec 249)

 Conduct audit, prepare report and express opinion in compliance with the requirements of ISA adopted by
the ICAP.
 Carry out such examination to form an opinion as to
- Whether adequate accounting records have been kept and adequate returns have been received from
branches not visited by him; and
- Whether the company's F/S are in agreement with accounting records and returns.
 Auditor shall make a report on books of accounts and F/S; shall be laid before AGM.
 The report shall state; whether or not:
- They have obtained sufficient audit evidence for audit
- In their opinion, proper books of accounts have been kept
- Statement of Financial position and profit and loss account and Other Comprehensive Income or the
income and expenditure account and the cash flows has been prepared in accordance with Act and are in
agreement with their books and returns.
- The true and fair view has been given by F/S
- In their opinion all the investments made, expenditure incurred and guaranteed extended was for the
purpose of the business.
- Zakat deductible under Zakat and Ushr Ordinance 1980 been deducted & deposited.
 If auditor's report makes reference to some other report or statement:
-Such report be annexed to auditor's report and be considered a part of report.
 SECP may direct any Company or class of Company that the auditor’s report shall also include a
statement of such additional matters as may be so specified.
 Where any qualification is put in auditor's report, there shall be added the reasons for it and the true
position of Company to the best of auditor's knowledge.
 For listed company, auditor or a person authorized by him in writing shall be present in the general
meeting in which financial statements and auditor’s report are to be considered.
 SECP may by general or special order, direct, that the statement of compliance to be attached with
Directors Report, shall be reviewed by the auditor who shall issue a review report to the members on the
format as specified.

AUDIT OF COST ACCOUNTS (SEC 250)

Where any company or class of companies are required to keep cost accounts, SECP may direct audit of cost
accounts be conducted in specified manner & stipulations by a CA or CMA having same powers, duties etc as
auditor, and other prescribed powers, duties & liabilities

Such audit shall be directed by SECP subject to the recommendation of the regulatory authority supervising
the business of relevant sector. . .
Any contravention or default in complying with requirements of sections 246, 247, 248 and-250 shall be an
offence liable to a penalty of level 3 on the standard scale (Sec252]

Following definitions are important to understand and to be memorised in the context of answering the
scenarios of Companies Act area in the ICAP exams.

Associated Company (Section 2(4)- CompaniesAct2017)

Two or more companies/undertakings, interconnected with each other in the following manner
 If one is the subsidiary of another; or
 If companies or undertakings are under common management or control; or
 If undertaking is a modaraba managed by the company; or
 If owner, partner, director or person having ≥ 20% voting power in one company/undertaking, is also
owner, partner, director or person having ≥ 20% voting power in other company/undertaking; or

Note: Investment of spouse or minor children deemed to be investment of that person:

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_____________________________________________Chapter 1: Concept and Need for Assurance

Following person, /investments do not create relationship of associates

 Nominee director of Federal/Provincial Government or a financial institution owned/Controlled by
those or NIT.
 Directorship of a person appointed as an “independent director"; or
 Shares owned by the NIT or a financial institution directly or indirectly owned or controlled by the
Federal Government or a Provincial Government or CDC

Subsidiary company (Section 2(68) - Companies Act 2017)

It means a company or body corporate whose more than fifty percent (50%) voting securities are held or
controlled (directly or indirectly), by some other company or such other company controls the composition of
the board of such company.

PENALTY FOR NON-COMPLIANCE WITH COMPANIES ACT 2017:

Situation Penalty
A person who is not qualified (or is subsequently disqualified) Penalty of Level 2 at Standard Scale i.e.
to be an auditor of a company, acts as auditor of a company Penalty @ Rs. 1,000 per day subject to
maximum of Rs. 500,000.
If auditor’s report or review report or any other document is Penalty of Level 2 at Standard Scale i.e.
signed/authenticated in contravention of the requirements of the Penalty @ Rs. 1,000 per day subject to
Act, or maximum of Rs. 500,000.
If auditor’s report or review report or any other document is
untrue or fails to bring out material facts about the affairs of the
company
If the auditor’s report is made with the intent to profit the Penalty of Level 2 at Standard Scale i.e.
auditor or any other person or to put another person to a Penalty @ Rs. 1,000 per day subject to
disadvantage or loss or for a material consideration maximum of Rs. 500,000.
+
Auditor shall be punishable with
imprisonment for a term which may
extend two years and with a penalty
which may extend to one million rupees.
If company or an officer of company refuses or fails (without Penalty of Level 3 at Standard Scale i.e.
lawful justification): Penalty @ Rs. 500,000 per day subject to
to allow auditor access to books and papers in his custody or maximum of Rs. 100,000,000.
to provide auditor information and explanation required by
him or
obstructs or delays an auditor in performance of his duties or
fails to give notice of a general meeting to auditor, or
provides false or incorrect information

International Standards on Auditing (ISAs)

Introduction to IFAC and IAASB
IFAC
 ICAP is a member of IFAC.
 IFAC is the global organization for the accountancy profession.
 It is dedicated to serving public interest by strengthening the profession and contributing to the
development of strong international economies.
 It has 175 members and associates in 130 countries, representing approximately 3 million accountants in
public practice, education, government service, industry and commerce.
 IFAC provides the structures and processes that support the development, adoption, and implementation
of high quality international standards.
 IFAC supports the development of the accountancy profession in emerging economies, and speaks out on
public interest issues where the profession’s voice is most relevant.
 IFAC promotes its values of integrity, transparency, and expertise.
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 IFAC includes four boards:

-IAASB: The International Auditing and Assurance Standards Board
- IAESB: The International Accounting Education Standards Board
- IESBA: The International. Ethics Standards Board for Accountants
- IPSASB: The International Public Sector Accounting Standards Board

IAASB
 It is an independent standard-setting body
 It sets high-quality international standards for auditing, assurance, and other related standards
 It facilitates the convergence of international and national auditing & assurance standards.

Process of issuing auditing standards

 A subject is selected for detailed study, with a view to eventually issuing an ISA.
 After study and research, if there is agreement to proceed, an exposure draft is produced.
 The exposure draft is approved by the IAASB
 Comments and proposed amendments are considered by the IAASB;
 The draft standard is then modified and approved by the IAASB.
 The new ISA is then published.

International Auditing Practice Statements

In addition to ISAs, the IAASB also issues International Auditing Practice (IAPSs) aim to:
 Provide help to auditors in implementing ISAs
 Promote good auditing practice in general.

Standards issued by IAASB

Type of standard When applied
International Standards on Auditing (ISAs) In the audit of historical financial information
International Standards on Review Engagements In the review of historical financial information
(ISREs)
International Standards on Assurance Engagements In assurance engagements other than audits or
(ISAEs) reviews of historical financial information
International Standards on Related Services On compilation engagements &
(ISRSs) engagements to apply agreed upon
procedures
International Standards on Quality Control Apply to all services carried out under the
(ISQCs) lAASB’s engagement standards

 After approval it is distributed widely amongst the profession and others for comment.
 The IAASB’s pronouncements do not override local laws or regulations.
 If local laws or regulations differ from, or conflict with, the IAASB’s standards then a professional
accountant should not state that he has complied with the IAASB’S standards.

International Standards on Auditing (ISAs)

 Each ISA contains:
 An introduction stating the purpose and scope of the ISA
 The objective of the ISA.
 Definitions of terms used in the ISA
 Requirements prescribing the obligations of the auditor in relation to the ISA.
 Application and other material which gives guidance on compliance with the ISA’s requirements and gives
examples of procedures which could be performed.

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Authority/Status of an ISA:
 In Pakistan, audit is conducted in accordance ISAs. To obtain reasonable assurance, it is compulsory
 for auditors to comply with all required procedures of all ISAs.

Exception to follow requirements of ISA:

 A required procedure will not be performed if it is not relevant or is not practicable. However, if a
 procedure is not practicable, auditor shall document:
reason of departure from required procedure, and
alternative procedures performed to obtain evidence/assurance.
ISA 200 requires the auditor to:
 Comply with all ISAs relevant to the audit
 Comply with relevant ethical requirements
 Plan and perform an audit with professional skepticism
 Exercise professional judgement in planning and performing an audit
 Obtain sufficient appropriate audit evidence to allow him to obtain reasonable assurance

ESSENTIALS FOR PROPER CONDUCT OF AN AUDIT

Professional skepticism -An attitude that includes a questioning mind, being alert to conditions wh.ch may
indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

Professional judgment - The application of relevant training, knowledge and experience, within the context
provided by auditing, accounting and ethical standards, in making informed decisions about the courses of
action that are appropriate in the circumstances of the audit engagement.

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.

Sufficient appropriate audit evidence -Sufficiency is the measure of the quantity of audit evidence.
Appropriateness is the measure of the quality of audit evidence in terms of its relevance and reliability.

 An audit involves performing procedures to obtain sufficient appropriate audit evidence about the
amounts and disclosures in the F/S.
 The procedures include the assessment of risks of material misstatement of the F/S, whether due to fraud
or error.
 In making those risk assessments, the auditor considers internal control relevant to the entity's preparation
and fair presentation of F/S in order to design appropriate audit procedures, but not for the purpose of
expressing an opinion on their effectiveness.
 An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of accounting estimates made by management.

ADVANTAGES AND LIMITATIONS OF STATUTORY AUDIT

Advantages of statutory audits:
 Audit increases the credibility of published financial statements.
 Confirms to management that they have performed their statutory duties correctly.
 Provides assurance to management that they have complied with non-statutory requirements
 Provides feedback on the effectiveness of internal controls.
 Where internal controls are weak or inadequate, the auditor will give recommendations for improvement.
 This will assist management in reducing- risk and improving the performance of the company.

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ADVANTAGES OF ASSURANCE SERVICES TO AN ORGANIZATION:

For Shareholders:
Most of the misstatements are identified.
Assists in sale or purchase of business.
Assists in grant of loan by bank.

For Directors/Management:
 Auditor identifies deficiencies in entity’s internal control system.
 Audit confirms that management is performing its statutory and non-statutory duties.

FINANCIAL STATEMENTS
Auditor is required to express opinion whether financial statements are correct. A complete set of financial
statements include following:
Statement of financial position.
Statement of comprehensive income
Statement of changes in equity.
Statement of cash flows.
Notes to the accounts.

Applicable Financial Reporting Framework (AFRF) is the financial reporting framework adopted by
management and TCWG, in preparation of financial statements considering legal requirements, nature of
entity, nature of financial statements, and purpose of financial statements.

FINANCIAL REPORTING FRAMEWORK AND ITS TYPES

A financial reporting framework is a set of criteria used to prepare financial statements.
There are two main types of financial reporting frameworks i.e. Compliance Framework and Fair Presentation
Framework.

Compliance Framework:
Compliance framework is a financial reporting framework that requires compliance with requirements of the
framework, and does not contain acknowledgements which are contained in fair presentation framework
(regarding additional disclosures or departure from requirements of framework to achieve fair presentation).
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.

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