1.       Record of direct dispatch and direct receipt of third party confirmations

Enquiry:

During our audits third party direct confirmations are sent directly by our staff (on local GPO post) and received in our office in enclosed envelop and dates of send/ receive were mentioned in control sheet. Is there any audit requirement to send them by courier? Also is there any requirement of audit to maintain in and out registers or stamping in and out of the mail is mandatory condition for audit?

Opinion:

The Board would like to draw your attention to Para A4 of ISA 505, External Confirmations, which states the factors that need to be considered when designing confirmation request. One of the factors is the method of communication that can be in paper form, or by electronic or other medium. Therefore, ISA 505 does not mandate as part of audit procedure to send third party direct confirmations, only through courier other means like reliable general postage system may also be used.

In case of obtaining bank confirmation guidance is provided under ATR 18 ‘Bank Reports for Audit Purposes’.
Further, with regard to your query on audit requirement to maintain in and out registers or stamping in and out of the mail. This is not an audit requirement but may be firm’s internal policy to maintain in and out registers or stamping in and out of the mail for control purposes, as it considers necessary.

(October 02, 2017)

2.      Signature of auditor’s report

Enquiry:

Section 251 of the Companies Act, 2017 states that ‘if the auditor is an individual the report must be signed by him’. A clarification is required, whether a sole-proprietor has to affix his or her personal signatures on the audit report now against the previous practice of signing in the name of the firm.

Opinion:

Your attention is drawn to section 251 of the Companies Act, 2017:

“251. Signature of auditor’s report.- (1) The auditor’s report must state the name of the auditor, engagement partner, be signed, dated and indicate the place at which it is signed.

2) Where the auditor is an individual, the report must be signed by him.”

 

Further, ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, mentions that:

“A64. The auditor’s signature is either in the name of the audit firm, the personal name of the auditor or both, as appropriate for the particular jurisdiction”.

 

The jurisdiction practice is that the report is signed in the name of which the sole proprietor / firm is registered. If the sole proprietor is registered in his name, he will use his name in signing if is registered by his initials such as BH & Co. then will sign using those initials.

(October 02, 2017)

3. Name of signing partner

Enquiry:

In the audit report, name of the engagement partner is given while signing it in the firm’s name.
If a letter, suggestion or any paper other than audit report is signed in the firm’s name, is it necessary that the name of the partner signing in firm’s name to be given?

Opinion:

Where the auditor’s report is signed by the partnership firm, the name of the engagement partner is to be mentioned, in accordance with the requirements of the Companies Act, 2017. Further, Institute’s ATR 19 ‘Identification of the Engagement Partner in the Auditors’ Report on the Financial Statements/ Interim Financial Information’ also specifies that the name of the engagement partner shall be mentioned in the audit and review reports.

We understand that it is not necessary to mention in a letter, advice or any other paper the name of the partner signing the document in the firms’ name.

(September 08, 2017)

4.    Suggestion by professional firm

Enquiry:

The Committee’s valuable guideline & advice is required on the following matters:

1. Can we issue written professional advice on basis of discussion with the other side concerned/ advised?
2. If the CA firm is a partnership firm, shall the suggestions be signed in the personal name of the partner or in the firm’s name?
3. If signed in the firm’s name, is the name of the signing partner be given or not?

 

Opinion:

Responses to your queries are as follows:

1. A written professional advice may be issued on the basis of engagement letter signed with the client.

2 & 3. The Companies Act, 2017 and Institute’s ATR 19 ‘Identification of the Engagement Partner in the Auditors’ Report on the Financial Statements/ Interim Financial Information’ outline the requirements to mention the name of the firm and engagement partner in the audit and review reports. The other suggestion/ advice may be issued in the personal name of the partner or in the firm’s name.

(September 08, 2017)

5.   Signing of the audit report of EOBI

Enquiry:      

The particulars of query are:

• We were appointed as auditors of EOBI for the years ended June 30, 2007 to June 30, 2011.
• The audits for the years ended June 30, 2007 to June 30, 2010 were duly completed and audit reports were issued.
• We finished the field work for the audit of the year ended June 30, 2011 and provided the management of EOBI with our initialed audit report along with the financial statement for the year initialed for the purpose of identification.
• We in our cover letter requested the management of EOBI to have the financial statements approved by its Board of Trustees and meet other signing conditions after which we would sign our report.
• Due to various issues and changes in the Board of Trustees and management of EOBI neither the financial statements were approved nor the signing conditions met.
• Subsequently, the new Board of Trustees of EOBI appointed another firm of Chartered Accountants for the year ended June 30, 2012 onwards.
• The management of EOBI has now approached us to issue our audit report for the year ended June 30, 2011 as the financial statement have now been approved by the Board.

Considering the above facts, the Committee is requested to guide us whether under these circumstances we can issue the audit report on the financial statement for the year ended June 30, 2011, especially considering the fact that at present we are not the auditors of EOBI.

Opinion:

Considering the fact that the Board of Trustees (the Board) of EOBI changed prior to the approval of financial statements for the year ended June 30, 2011, and subsequently, the newly formed Board appointed another firm of chartered accountants as auditors for the year ended June 30, 2012, prior to the issuance of the signed audit report for the year ended June 30, 2011 by the predecessor auditor.

This has created an anomaly as traditionally the draft audited financial statements are approved by the Board and the retiring auditor sign the audit report thereon, prior to the appointment of the new auditor.

Given the fact that EOBI Act and Rules are silent on the above issue, therefore in Committee’s view, there is nothing barring the auditor to issue an audit report now (in the current date), provided that the financial statements and management representation letter are (now) approved and signed by the current Board and subsequent events’ effect on financial statements is considered by the auditor keeping in view the date of (now) the audit report.

Attention may also be drawn to the paragraphs 41 and A38 – A41 of ISA 700, ‘Forming an Opinion and Reporting on Financial Statements’:

41.  The auditor’s report shall be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements, including evidence that: (Ref:  Para. A38 – A41)

(a)    All the statements that comprise the financial statements, including the related notes, have been prepared; and

(b)    Those with the recognized authority have asserted that they have taken responsibility for those financial statements.

Both paragraphs 41 and  A41 of ISA 700 explain that the audit process is not complete until those with the recognized authority have asserted that they have taken responsibility for the financial statements, which is evidenced through approval of the Board. Accordingly the retiring auditor is obliged to sign the audit report for 2011, as all audit procedures have been completed unless something else has materialized during the intervening period.

Further, the auditor’s responsibility under ISA 560, ‘Subsequent Events,’ will stretch from July 1, 2011 to the date of the auditor’s report, and may require the performance of additional audit procedures.

In the light of above, the Committee is of the view that the retiring auditor may sign the audit report for the year ended June 30, 2011, after the financial statements have been approved by the Board.

However, for extra caution, the retiring auditor is also advised to act under legal advice.

                                                                                                 (January 09, 2017)

 6. Appointment of Statutory Auditors under PPRA Rules

Enquiry: 

It is requested to please advise whether Public Procurement Regulatory Authority Rules are applicable on the selection process for the appointment of Statutory Auditors of a government owned entities as the government owned entities have to abide by the said rules for the acquisition of goods and services.

It is also viewed that the appointment of statutory auditor’s under the Companies Ordinance, 1984 or any other law governing the corporate entities is the sole prerogative of the shareholders and such appointment does not fall within the ambit of the classification, ‘procurement of services’  where Federal or Provincial Procurement Rules are applicable.

Opinion:

The Statutory Auditors are appointed to fulfill obligations under the statute (i.e.   Companies Ordinance, 1984). This statute does not make any difference between public sector companies or other companies as far as appointment of auditors under section 252 is concerned.

The questions:

1.   Whether fulfillment of the said statutory obligation under the Companies Ordinance, 1984 constitutes “acquisition of services” under the PPRA Rules; and
2.   Whether PPRA Rules have an overriding effect on the provisions of the Companies Ordinance, 1984 in this  regard

involve legal aspect and the inquirer should seek legal advice thereon.

(June 24, 2016)

7.   Appointment of Auditor

 Enquiry:     

One of our clients, at their AGM appointed another firm as their Auditor for the audit of next financial year without complying with the provision stated in section 253(2) of Companies Ordinance 1984 as notice of this was not sent to us being the retiring auditor.

We are of the view that the appointment of new auditor was not legally valid as the said provisions of Companies Ordinance were not followed, accordingly NOC to incoming auditor for acceptance of this assignment was not given.
Based on above anomaly in their appointment, the incoming auditor resigned and our client again approached us to appoint us as Auditors for next year.

We have accepted the assignment however are we required to request retiring auditor to give NOC given their appointment was not valid?

Opinion:

The Committee would like to draw your attention to the requirements of the Companies Ordinance 1984, CA Ordinance 1961 and ICAP Code of Ethics:

253    Provisions as to resolutions relating to appointment and removal of auditors.

(1) A notice shall be required for a resolution at a company’s annual general meeting appointing as auditor a person other than a retiring auditor.

(2)      The notice referred to in sub-section (1) shall be given by a member of the company to the company not less than fourteen days before the annual general meeting, and the company shall forthwith send a copy of such notice to the retiring auditor and shall also give notice thereof to its members not less than seven days before the date fixed for the annual general meeting and, if the company is a listed company, shall also publish it at least in one issue each of a daily newspaper in English language and a daily newspaper in Urdu language having circulation in the Province in which the stock exchange on which the company is listed is situate.

Please also refer clause 7 of Part 1 of 1st Schedule of Chartered Accountants Ordinance 1961 which mentions that:

“A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he:

(7)   Accepts a position as auditor previously held by another member of the Institute without first communicating with him in writing.”

Section 210.14 of the ICAP Code of Ethics requires the proposed auditor to obtain permission in writing from existing auditor before accepting engagement.

Based on above, the retiring auditor is supposed to receive the notice required under section 253(1) (reproduced above). However, in this case as the compliance of section 253(2) is not made, the Committee is of the view that appointment of new auditor was not legally valid and in effect no auditor is appointed in AGM so the provisions of section 252 (6) and (7) will be applicable and hence the issue of obtaining NOC is not relevant in this situation.

Note: Due to the fact that the matter could have legal implications, the Committee sought legal opinion also. Lawyer strongly recommended that the concerned auditor and the company should seek advise from their own legal advisor on the matter.

(December 02, 2015)

 8.  Signing of Previous Year Audit Report of Corporation

 Enquiry:    

State Life Insurance Corporation of Pakistan (the corporation) is a state owned entity established and governed under Life Insurance (Nationalization) Order, 1972. The Board of Directors of the corporation was dissolved on 12 May 2013. The financial statements of the corporation for the year ended 31 December 2012 were initialed by two firms of Chartered Accountants. However, due to non-existence of Board of Directors, these financial statements remained unapproved and the Auditors’ Report thereon was not issued by the auditors. One of the auditors completed his term and the other one continued. For the subsequent year ended 31 December 2013, another firm of Chartered Accountants was appointed as auditors as a replacement of the auditors ceased to continue with the approval from Ministry of Finance. Section 28 of the Life Insurance (Nationalization) Order, 1972 deals with the appointment of auditors and audit of the financial statements of the corporation.

The Board of Directors of corporation has been re-constituted during the year and the financial statements of the corporation are being approved by the Board of Directors. The auditors for the relevant year who ceased to continue are reluctant in signing the Auditor’s Report as they believe that they are currently no more the auditors of the corporation as of the approval of the financial statements by the Board of Directors in current date. We write to seek your opinion as to the signing of the Auditor’s Report for the year ended 31 December 2012 by the predecessor auditors in the current date.             

Opinion:     

The Committee has examined your enquiry and understand that draft audited financial statements of the Corporation for the year ended 31 December 2012 (2012 Financials) were not approved in accordance with the provisions of Life Insurance Nationalization Ordinance, 1972 (LINO) due to non-constitution of the Board by the Federal Government. Accordingly, the auditors, one of whom having completed five years tenure and due to retire (retiring auditor), also could not sign the audit report on 2012 Financials. The Federal Government prior to approval and signing of these draft audited accounts appointed a new auditor in place of retiring auditor for the audit of financial statements for the subsequent years.

This has created an anomaly as traditionally the draft audited accounts are approved by the Board and retiring auditor sign the audit report prior to appointment of new auditors. Given the fact that LINO is silent on this specific issue, the Committee consider that the retiring auditor may sign the audit report on 2012 Financials after these have been approved by the Board, to avoid any undue hardship to the Corporation.

However, for extra caution, the Corporation is advised to act under legal advise.

(December 02, 2014)

9.  Technical opinion regarding audit relating to subsequent sale of an entity and all its assets after reporting date

Enquiry:      

      1.   The Company was a GOING CONCERN as at June 30, 2012 and there was no intention of the management                  to dispose of the assets of the company. In fact the company earned reasonable profits during the period.

2. Financial Statements of Company ‘A’ for the year ended June 30, 2013 have been prepared on historical cost basis. The management concludes that the Going Concern basis is appropriate. No material uncertainties leading to significant doubts about Going Concern have been identified. However, the Auditor does not agree with management conclusion that the Going Concern basis is appropriate due to the fact that the assets of the company have been disposed off in subsequent period.

3. Due to unavoidable circumstances the company stopped its operations during the period under audit i.e. June 30, 2013.
4. After reporting date i.e. June 30, 2013 the company ‘A’ disposed all of its assets (including land, building & machinery).
5. No revaluation of Assets including Land, Building and Plant & Machinery was carried out by the company before the sale of the company ‘A’ assets.
6. No depreciation has been charged on assets of the company during the period under audit.

MANAGEMENT OPINION

There was no revaluation carried out by the company before the sale of the company ‘A’ that is why the accounts have been prepared on historical cost basis.

Management of company ‘A’ is of the opinion that as the company have been sold out there is no need to provide depreciation in the period under audit.

Your opinion is sought for the correct treatment of the afore-stated events in case the Company had not accounted for the afore-stated events in accordance with the IAS, IFRS & ISA.

Opinion:     

The Committee would like to draw your attention to the following paragraph of ISA 570 ‘Going Concern’ which is self-explanatory:

Use of Going Concern Assumption Inappropriate

21. If the financial statements have been prepared on a going concern basis but, in the auditor’s judgment, management’s use of the going concern assumption in the financial statements is inappropriate, the auditor shall express an adverse opinion. (Ref: Para. A25–A26)

However, where management also concludes or agrees with auditors that the going concern assumption is not appropriate, they should comply with the requirements of para A26 of ISA 570 which is reproduced below for ready reference:

A26.   If the entity’s management is required, or elects, to prepare financial statements when the use of the going  concern assumption is not appropriate in the circumstances, the financial statements are prepared on an alternative basis (for example, liquidation basis). The auditor may be able to perform an audit of those financial statements provided that the auditor determines that the alternative basis is an acceptable financial reporting framework in the circumstances. The auditor may be able to express an unmodified opinion on those financial statements, provided there is adequate disclosure therein but may consider it appropriate or necessary to include an Emphasis of Matter paragraph in the auditor’s report to draw the user’s attention to that alternative basis and the reasons for its use.

Further, the management must be apprised of the fact that when a going concern assumption becomes inappropriate, the financial statement must be prepared on an alternative basis (for example, liquidation basis) instead of normal fair value presentation framework.

In conclusion, where the going concern assumption does not remain appropriate, the carrying values of assets and liabilities must be reassessed and stated at their recoverable/ realizable and settlement values, respectively.

(March 19, 2014)

10. Advice on Audit Report

Enquiry: 

We request you to please give your valuable opinion in the following matter:

a) What is the significance of an initialed audit report?

b) The client did not return the initialed audit report with qualified opinion to us for full signature although the audited account, i.e. Balance Sheet and Income Expenditure have been signed by the management. We request you to clarify that can an initialed audit report be changed from qualified opinion to disclaimer although these accounts have been signed by the management as during the audit of subsequent years we found that the initialed audit report with qualified opinion given by us in previous years is not suitable under the circumstance and hence Disclaimer must be given.

We request you to give us your precious opinion that can we change the initialed audit report to a disclaimer opinion (although these have been signed by management) when we sign the audit report which is issued by us.

Opinion:

The Companies Ordinance 1984 and ISAs do not have a requirement to initial the audit report. This practice was originated as evidence that audit has been completed subject to satisfactory clearance of outstanding matters described in the covering letter.

Accordingly, the audit report is not issued until it has been signed by the auditor. However, those charged with governance/ Board of Directors must be properly communicated about the subsequent change in auditor’s opinion according to the provisions of ISA 260 ‘Communication with those charged with Governance’.

(March 19, 2014)

 11.   Appointment of Consultant for Internal Audit Assignments

 Enquiry: 

ABC Ltd (hereinafter referred to as ‘Company’) is a Public Sector Enterprise listed at all Stock Exchanges of Pakistan. The Company complies with Code of Corporate Governance 2012 and Public Sector (Corporate Governance) Rules 2013, both issued by Securities and Exchange Commission (SECP) of Pakistan.

The Company has a well-equipped Internal Audit Department, headed by a Qualified Professional (FCA), and the Department carries out all Internal Audit Assignments in-house, except for few third party audits which are outsourced, keeping in view availability of staff resources.

Public Sector (Corporate Governance) Rules 2013 (hereinafter referred to as ‘Rules 2013’) requires all Public Sector Enterprises to implement, as far as practicable, International Standards for the Professional Practice of Internal Auditing (the Standards) issued by the Institute of Internal Auditors (the IIA).

External Quality Assessment Review: The Board Audit Committee (BAC) of the Company decided to conduct an External Quality Assessment Review (QAR) of Internal Audit Department, keeping in view the provisions of the IIA Standard 1312. The objective of this review was to assess the effectiveness of Audit Function, and to identify areas where improvement can take place. Furthermore, another objective of this review was to obtain independent assurance that all legal and regulatory requirements associated with Internal Audit Function are being complied with and that sufficient procedures exists within the Internal Audit Department to ensure that Quality work is performed.

Draft Internal Audit Manual: The Internal Audit Department has also prepared a Draft Internal Audit Manual, detailing procedures that should be implemented in the Audit Department, so as to achieve more efficiency and standardization of audit work. The procedures are in draft form, and are different from existing procedures being followed. Keeping in view that an External QAR may take place, it was envisaged that results of QAR are likely to impact the Draft Procedures which may require amendment/ improvement. Therefore, it was decided that results of QAR will be incorporated in the draft Manual, so that its implementation will not cause any inconsistency with the results and recommendations of QAR.

Scheme of Work:

For this purpose, Internal Audit Department wants to appoint a Consultant, to broadly cover the following work:

1. Carry out QAR in line with guidelines of the Standards issued by IIA, and produce a report highlighting areas in Internal Audit Department where improvement is sought, including the blend of staff and core competencies required, scope of work, effectiveness of existing procedures, etc.

2. To take the results of QAR and review the Draft Audit Manual and ensure that the draft procedures are in line with the results and recommendations of QAR. Where any inconsistency is noted, the Consultant will be required to make suitable amendments or additions in draft procedures to bring them in line with results of QAR.

Question:

The Management of the Company is evaluating whether the above scheme of work raises any question of ‘Conflict of Interest’ or ‘Independence’ if the work of QAR and Revalidation of Draft Audit Manual is given to a single consultant. The Management has the following questions:

1. If the Consultant who is carrying out QAR is also required to revalidate the Draft Procedures, will it create a ‘Conflict of Interest’, keeping in view the requirements of IIA Standard?

2. Does QAR falls under the ‘Attribute’ Standards, and Review of Manual falls under ‘Performance’ Standards, and if so, do the Standards require that these work be carried out mandatorily by two separate consultants?

Internal Audit Department of the Company has reviewed the Standards in detail, including Practice Advisory on QAR (1312-1) and finds that no such conflict of interest prevails if a single consultant is required to carry out QAR and revalidation of draft Internal Audit Manual. Furthermore, QAR covers compliance of all Standards, and not just Attribute standards, and review of existing procedures is also part of such QAR.

Request to ICAP Committee:

The Committee is requested to kindly provide its view on the questions 1 and 2 noted above. The opinion of honorable Committee will assist the Company in opting a way forward.

Opinion:  

The Committee has considered your enquiry and would like to state in the beginning that the Committee primarily deals with matters related to accounting, auditing, governance and related laws and regulations. Accordingly, the knowledge and expertise of standards issued by the Institute of Internal Auditors are not available with the Committee and accordingly we are constrained to issue any views and opinions on these standards.

However, since the matter relates to practicing members of the Institute, the Committee is expressing its views in accordance with the ICAP Code of Ethics, as applicable in Pakistan, which is obligatory on ICAP members.

Accordingly, we are expressing views on question 1 only.

Based on the available information the Committee considers that conflict of interest situation does not appear to arise when both the engagements are performed by a single consultant.

However, the Committee would like to emphasize that one of the primary responsibilities of the Audit Committee is to assess independence while approving engagement of consultants. The Audit Committee must take into account relevant facts, including an inquiry from prospective consultants regarding their own independence assessment of the engagement, and firm level risk mitigation and threat safeguard procedures to be adopted by the firm.

(April 22, 2014)

12.  Auditors’ Report on Going Concern Assumption

Enquiry: 

Technical advice is sought on the following matters:

1. A company ceased its operations since last three years due to adverse economic conditions. The company did not obtain any loan from the financial institutions or otherwise. Liquid funds available with the company cover 73.00 times of current liability. The financial statements of the company show the positive equity although there is accumulated loss. Further, the management has no intention to liquidate the company.  In the perspective of the aforesaid facts, what is the auditors’ responsibility as per International Standard on Auditing– 570?
2. A company was incorporated four years back. The company did not commence its operations due to adverse economic conditions. The company has no long and short term liabilities except immaterial balance payable to the directors against payments made during the last three years for government fee (SECP and miscellaneous) and auditors remuneration etc. Further, the management has no intention to liquidate the company. In the perspective of the aforesaid facts, what is the responsibility of auditors as per International Standard on Auditing?

Opinion:

The Committee would like to draw your attention to the following: (underline is ours)

Conceptual framework of financial reporting defines “Going Concern” assumption as:

4.1     The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed.

IAS 1 ‘Presentation of Financial Statements’ provides the following requirements of Going Concern:

25    When preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties. When an entity does not prepare financial statements on a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern.

26   In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period. The degree of consideration depends on the facts in each case. When an entity has a history of profitable operations and ready access to financial resources, the entity may reach a conclusion that the going concern basis of accounting is appropriate without detailed analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate.

The Committee would also like to draw your attention to the following para of the ISA 570 ‘Going Concern’: (underline is ours)

2. Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. General purpose financial statements are prepared on a going concern basis, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. Special purpose financial statements may or may not be prepared in accordance with a financial reporting framework for which the going concern basis is relevant (for example, the going concern basis is not relevant for some financial statements prepared on a tax basis in particular jurisdictions). When the use of the going concern assumption is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business. (Ref: Para. A1)

6. The auditor’s responsibility is to obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the going concern assumption in the preparation of financial statements and to conclude whether there is material uncertainty about the entity’s ability to continue as a going concern… ….

12. The auditor shall evaluate management’s assessment of the entity’s ability to continue as a going concern.

17. Based on the audit evidence obtained, the auditor shall conclude whether, in the auditor’s judgment, a material uncertainty exists related to events or conditions that, individually or collectively, may cast doubt on the entity’s ability to continue as a going concern. A material uncertainty exists when the magnitude of its potential impact and likelihood of occurrence is such that, in the auditor’s judgment, appropriate disclosure of the nature and implications of the uncertainty is necessary for:

           a) In the case of a fair presentation financial reporting framework, the fair presentation of the financial                                statements……..

18. If the auditor concludes that the use of going concern assumption is appropriate in the circumstances but a material uncertainty exists, the auditor shall determine whether the financial statements:

1. Adequately describe the principal events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and management’s plans to deal with these events or conditions; and
2. Disclose clearly that there is a material uncertainty related to events or conditions that  may  cast  significant  doubt  on  the  entity’s  ability  to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business.

19. If adequate disclosure is made in the financial statements, the auditor shall express an unmodified opinion and include an Emphasis of Matter paragraph……”

20. If adequate disclosure is not made in the financial statements, the auditor shall express a qualified opinion or adverse opinion, as appropriate, in accordance with ISA 705.

It is apparent from a reading of the above that management has to make an assessment that the entity will continue as a going concern. The entity may make this assessment without detailed analysis where the entity has a history of profitable operations and ready access to financial resources. In other cases, management may need to consider a wider range of factors.

The auditor’s responsibility is to obtain sufficient appropriate audit evidence about the appropriateness of management’s assessment of the going concern assumption and to conclude whether there is material uncertainty about the entity’s ability to continue as a going concern, or not. Where conditions or events have been identified that may cast a significant doubt, the auditor may perform additional audit procedures illustrated in para 16 of the ISA 570 ‘Going Concern’ to obtain sufficient and appropriate audit evidence.

The Committee is of the view that the going concern assessment by management is required where the company ceases its operations or does not commence its operations, both due to adverse economic conditions. Although the company has sufficient liquid assets to settle its liabilities without incurring losses, ceasing or not starting operations are an indication that a material uncertainty is present. In both these cases, the auditor’s responsibility is to obtain sufficient appropriate audit evidence and to conclude whether there is material uncertainty, or not. In case where auditor’s conclusion is different from the management’s assessment, appropriate reference in the opinion is required as illustrated in ISA 570 ‘Going Concern’.

In view of above opinion, the ICAP Selected Opinion No. 2.5 of Volume IX earlier issued by the Committee on ‘Qualification of Going Concern assumption for a Dormant Company’ stands withdrawn.

(July 4, 2013)

 13.  Appointment of QCR rated auditor for Stock Broker

Enquiry:  

Can a SME / SSE Company doing the business as a stock broker in Stock Exchange can appoint an auditor who is not in the list of QCR Panel?

Opinion:

We invite your attention to the definition of MSE as defined in the Accounting and Financial Reporting Standards for MSEs and SSEs issued by ICAP and notified by the SECP:

“A Medium-Sized Entity (MSE) is an entity that:

(a) is not a listed company or a subsidiary of a listed company;

(b) has not filed, or is not in the process of filing, its financial statements with the Securities and Exchange Commission of Pakistan (SECP) or other regulatory organisation for the purpose of issuing any class of instruments in a public market;

(c) does not hold assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance company, securities broker/dealer, pension fund, mutual fund or investment banking entity;

(d) is not a public utility or similar entity that provides an essential public service;

(e) is not economically significant on the basis of criteria as defined in paragraph 3 below; and

(f) is not a Small-Sized Entity (SSE) as defined in paragraph 4 below.”

In view of the clause (c) above the Committee is of the opinion that the Company doing the business as a stock broker falls under the definition of Economically Significant Company and QCR rated firm is required to be appointed as its external auditors.

(November 08, 2013)

 14.  Audit Report on Consolidated Financial Statements after change of Auditors

 Enquiry:    

We were the auditor of a parent company for the year 10-11. We signed our audit report on the separate financial statements for the year ended 30 June 2011. We completed our work on the consolidated Financial Statements (FS) of the company for the year ended 30 June 2007, 2008 and 2009 and send draft to client. After about four months they changed the auditors. Now, since we are not the auditors of the company, but the company has contacted us to issue audit report on the consolidated FS. Can we do so and at what date?

Opinion:     

The Committee would like to draw your attention to section 252(1) of the Companies Ordinance, 1984:

“Every company shall at each annual general meeting appoint an auditor or auditors’ to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting”.

The Committee is of the view that if consolidated financial statements have not been approved in the AGM, then the previous auditor cannot express an opinion on them, although he may have completed the necessary field work.

(November 06, 2012)

15.  Date of signing of Audit Report by the External Auditor

Enquiry:   

The auditor initialed draft accounts for the year ended December 31, 2010 and same was submitted to its company along with the letter to the management of the company dated March 15, 2011 and it was stated therein that the accounts will be signed after these are approved by the management of the company and receipt of other necessary documents by the company as are required at the time of finalization of audit like representation letter.

The auditor however, received duly signed accounts by the management of the company on August 3, 2011 for signing of audit report. The examination of the Audit report in question revealed that, the date of signing of audit report was April 8, 2011. On inquiry, the Auditor of the company informed that they signed the audit report on April 8, 2011 due to the reason that, these accounts were approved by the management on April 8, 2011.

An opinion is sought as to whether, the auditor can sign and dated the audit report on back dates i.e. April 8, 2011 while the signed accounts have been received late i.e. August 8, 2011.

 

Opinion: 

The Committee would like to draw your attention to the following paras of ISA 700 ‘Forming an Opinion and Reporting on Financial Statements’:

41. The auditor’s report shall be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements, including evidence that: (Ref: Para. A38– A41)

            (a) All the statements that comprise the financial statements, including the related notes, have been prepared;              and

            (b) Those with the recognized authority have asserted that they have taken responsibility for those financial                  statements.

A38.   The date of the auditor’s report informs the user of the auditor’s report that the auditor has considered the effect of events and transactions of which the auditor became aware and that occurred up to that date. The auditor’s responsibility for events and transactions after the date of the auditor’s report is addressed in ISA 560.

A39.   Since the auditor’s opinion is provided on the financial statements and the financial statements are the responsibility of management, the auditor is not in a position to conclude that sufficient appropriate audit evidence has been obtained until evidence is obtained that all the statements that comprise the financial statements, including the related notes, have been prepared and management has accepted responsibility for them. (Underline is ours)

Based on the above, the Committee is of the view that the auditor should sign audit opinion after all the sufficient appropriate audit evidence has been obtained i.e. audit has been completed in all respects and the accounts have been duly approved by the management.

(December 28, 2011)

16.  Issuance of Auditors’ Report

Enquiry:

One of our clients (a private limited company) applied for financing from a bank and provided to the bank financial statements for last three years audited by its statutory auditors (which are not the “Category A” class Audit Firm on the panel of SBP of Auditors) along with other documents needed and as required by the bank for the financial accommodation. Later, the bank approved the financing facilities with the following condition in its approval letter:

“The company shall provide financial statements for the year 2008, 2009, 2010 and future years audited by “Category A” class Audit Firm as mentioned on SBP Panel of Auditors under BSD Circular letter No. 12 dated 16-9-2010.

Now, the company wants to get its financial statements audited by “Category A” class Audit Firm. Please provide us technical opinion, if the company can get its financial statements for last three years re-audited by “Category A” class Audit Firm on the specific request of the management of the company for exclusive use of the bank/financial institution, and if so, does the audit report may be addressed to board of directors using the format of Form 35-A, or should use any other format for auditors report i.e. format of Auditors report under IAS 700 “Forming an opinion and reporting on financial statements” (Paragraphs 20-45).

Opinion:

The Committee is of the view that the re-audit of the financial statements of the Company should be carried out in accordance with the specific terms of engagement and should not be considered as a statutory audit.

The Committee is also of the view that auditor’s report may be issued under IAS 700 ‘Forming an opinion and Reporting on Financial Statements’.

      (April 15, 2011) 

17. Certificate of Net Capital of members of Karachi Stock Exchange (KSE)

Enquiry:

With reference to above subject matter, we are enclosing herewith form of certificate issued by the KSE for reporting on net capital of members of the KSE. The format uses the words ‘audited’ whereas auditors only arrives at figure by examining ledgers and no other audit procedures are performed. We understand that this engagement may be undertaken as per ISRS No. 4400 ‘Engagement to perform Agreed upon Procedures Regarding Financial Information’. Considering this, we request you to provide us appropriate advice to understand and appropriately discharge our reporting responsibilities.

Opinion: 

The Committee considered your enquiry and is of the view that the certification of Net Capital Balance does not fall under the scope of ISRS No. 4400 ‘Engagement to perform Agreed upon Procedures Regarding Financial Information’ rather it is an Assurance Engagement and appropriate assurance procedures would need to be performed to enable the auditor to issue the required certificate.

Further, as this certification is a regulatory requirement on the basis of audit/ review therefore the form of certificate provided by KSE may be followed for the purpose.

(April 15, 2011)

 18. Situation where a conflict of Interest arises

Enquiry:

ABC is a public company limited by shares and is listed on all the Stock Exchanges of Pakistan.

The Bank tenders for various consultancy in which the auditors of the bank have also been participating in the past. We would like to know if there is any bar on the auditors of the bank applying for and being given consultancy contracts or would it be considered as conflict of interest.

Opinion:

Your attention is drawn to clause 31-C of the Listing Regulations which is reproduced below for reference:

31-C (i) No Listed company shall, appoint or continue to retain any person as an auditor who is engaged by the company to provide services that are prohibited.

(ii) A listed company shall also not appoint or continue to retain any person as an auditor, if a person associated with the auditor is, or has been, at any time during the preceding three months engaged as a consultant or advisor or to provide any services that are prohibited. (underlining is ours)

The list of prohibited services as given in the listing regulations may be consulted and are not being reproduced here.

In view of the above, the Committee is of the opinion that consultancy contract in respect of prohibited services cannot be given to the auditors of the bank.

(July 2009)

19.  Auditor’s Certificate for bonus issue based on Un-Audited Financial Statements

Enquiry:

I am working in a Company which intends to issue bonus share based on un-audited third quarter financial statements of the Company. Clause (iii) of Rule 6 of the Companies (Issue of Capital) Rules, 1996 provides that “a listed company may issue bonus shares subject to the following conditions, namely:

(iii) a certificate from the auditors shall be obtained to the effect that the free reserves and surpluses retained after the issue of the bonus shares will not be less than twenty-five per cent of the increased capital; and

I would like to seek opinion from ICAP as to whether the Company may issue bonus shares on the basis of free reserve computed on un-audited financial statements of the Company. As per our understanding, Auditors may give certificate on free reserve based on un-audited financial statements as well as audited financial statements of the Company.

Opinion: 

The Committee considered your enquiry and is of the opinion that the certificate should be issued on the basis of audited or reviewed financial statements.

(June 7, 2008)

20.  Clarification on early adoption of IFRS

Enquiry:

We are listed on the Karachi Stock Exchange and serve as holding equity to one of the fastest growing IT enabled services group of companies in the world with subsidiaries in Pakistan, North America, Canada and UK.

We would like to adopt the IFRS in their entirety, as applicable to us, with effect from the financial period beginning July 1, 2005. We are aware of the fact that these IFRS have not yet been adopted by ICAP and as such not been notified by the SECP, and we would like to seek your clarification with regard to early adoption of the IFRS in Pakistan.

Early Adoption of IFRS

International financial reporting standards encourage early adoption of most of the standards issued by the IASB. Keeping in view this provision, can a company adopt the international financial reporting standards before their adoption /notification?

 Statement of Compliance

Reference is made to Circular 01/2003 dated February 24, 2003 issued by ICAP titled “Statement of Compliance”. What would be the impact on the statement of compliance if we adopt IFRS voluntarily and prepare the financial statements in compliance with the IFRS?

Comparatives

If the IFRS are not adopted, the words “Audited” would appear against the comparative balance sheet to be shown in the interim financial statements. If the IFRS is adopted and the comparative balance sheet is restated, would it be necessary to have the restated comparative balance sheet audited or reviewed by the auditors of the company?

Opinion:

The Institute always encourages early application of IAS/IFRS but with regard to the adoption of those IFRS which have replaced some already existing IAS, the Committee is of the opinion that such IFRS should not be adopted unless their corresponding IAS are de-notified by SECP as compliance with the requirements of such IAS is compulsory.   However, with regard to the application of those IFRS which are new and do not replace any existing IAS, the Committee is of the opinion that requirements of such IFRS can be complied with early, provided they do not override any local requirement or regulation.  Further the Committee is also of the view that there would be no change in the “Statement of Compliance” which was issued by ICAP through its Circular No. 01/2003 dated February 24, 2003 if your company voluntarily complies with the requirements of IFRS.

With regard to your third enquiry on comparatives your attention is drawn towards the following paragraphs of ISA 710 on ‘Comparatives’ which are self-explanatory:

20. The auditor should obtain sufficient appropriate audit evidence that the comparative financial statements meet the requirements of the applicable financial reporting framework. This involves the auditor evaluating whether:

(a)      Accounting policies of the prior period are consistent with those of the current period or whether                                    appropriate adjustments and/or disclosures have been made; and

(b)      Prior period figures presented agree with the amounts and other disclosures presented in the prior                                 period or whether appropriate adjustments and disclosures have been made.

21. When the financial statements of the prior period have been audited by another auditor, the incoming auditor evaluates whether the comparative financial statements meet the conditions in paragraph 20 above and also follows the guidance in ISA 510.

22. When the financial statements of the prior period were not audited, the incoming auditor nonetheless evaluates whether the comparative financial statements meet the conditions specified in paragraph 20 above and also follows the guidance in ISA 510.

23. If the auditor becomes aware of a possible material misstatement in the prior year figures when performing the current period audit, the auditor performs such additional audit procedures as are appropriate in the circumstances.

(November 19, 2005)

21.  Identification of Financial Statements In Auditors’ Report

Enquiry:

Please refer to Institute’s Circular No. 4/99 dated June 17, 1999 whereby the members of the Institute have been directed that as the preparation of financial statements of an enterprise is the responsibility of the management and not of the auditors, therefore, the financial statements of an enterprise should not be stamped or signed by the auditors unless there is a statutory requirement to do so.

I have also gone through the opinion of the Technical Advisory Committee published in the ICAP’s Newsletter of April 2004 wherein the Institute’s decision for not signing or stamping the financial statements being audited has been fortified by giving following two reasons:

i) The responsibility for preparing the financial statements is solely that of the management and the auditor is only required to render an opinion thereon; and

ii) If the management intends to mislead the lender or any other person even a stamp or an initial of the auditor on the financial statements may not deter it from doing so.

In this regard I would like to add here that; firstly by merely initialing or stamping the financial statements by the auditors for identification purposes only neither the management would be absolved nor the auditors would assume the responsibilities for preparing the financial statements and secondly the policies and procedures should be formulated to facilitate the majority of the people and should not be such which would cause inconvenience to the majority of the people.

We are following the practice of not signing or stamping the financial statements being audited by us and usually these financial statements are printed on the plain paper or in some cases on the companies’ letterheads. We have often been asked by our clients to sign or stamp the financial statements as their bankers ask them that how can they verify that these are the same financial statements which have been audited. In some cases we have also been sent the financial statements from the lending institutions to confirm that these are the same financial statements that have been audited by us.

Although the foregoing issue has been dealt with in the Institute’s Circular No. 9/2004 dated August 11, 2004, whereby it has been stated that the confirmation may be done through a confirmation letter. This means that the confirmation letter would state that ‘we confirm that the annexed financial statements are the same that have been audited by us’. The problem still persists that how would we identify the annexed financial statements and without any identification mark on financial statements such confirmation would not be of any   use. Moreover, such a confirmation would also be a time consuming exercise as we have to compare the accounts sent by the bankers with our copy time and again.

In this context, I would like to draw your attention to paragraphs 8 and 11 of the ISA 700 “The Auditor’s Report on Financial Statements’ which are reproduced here under for your perusal;

“8.     The auditor’s report should identify the financial statements of the entity that have been audited, including the date of and period covered by the financial statements’.

“11.    An illustration of these matters in an opening (introductory) paragraph is:

‘We have audited the accompanying balance sheet of the ABC Company as of December 31, 20XX, and the related statements of income and cash flows for the year then ended. —-

Footnote 5 has been explained as under:

“⁵ The reference can be by page numbers.”

The requirements regarding identification of the financial statements in the auditor’s report as stated in the foregoing para of ISA-700, include the following identifications;

i) Description of the financial statements being audited e.g. balance sheet, profit and loss account, cash flow statement and statement of changes in equity along with related notes;

ii) Date of and period covered by the financial statements e.g. as at December 31, 20XX in case of balance sheet and for the year or half year, three months ending December 31, 20XX etc. in case of profit and loss account and cash flow statement; and

iii)     Reference to the accompanying or annexed financial statements being audited e.g. from page No. XX to Page No. XX as explained in paragraph 11 of ISA 700.

To my mind, presently we (all the practicing firms) are only complying with the requirements of ISA 700 regarding financial statements identification enumerated at ( i and ii)above and are not complying with the requirement of ISA 700 enumerated at (iii) above by not giving any reference to the financial statements being audited by us.

The Institute should consider this matter and suggest a suitable way for referring the financial statements being audited in the auditor’s report in order to fully comply with the requirements of the ISA 700. The reference may be made in one of the following ways:

i) by inclusion of the brackets and words, “(duly initialled and stamped by us for identification purposes)” after the word “annexed” appearing in the introductory paragraph of the auditor’s report; or

ii) by referring to the annexures at the end of the auditor’s report after date and place of signing the report as under:

“Encl.:/Annex:  Balance Sheet, Profit and Loss Account, Cash Flow Statement, and Statement of Changes in Equity along with notes 1 to XX, duly initialed and stamped by us for identification purposes”.

The stamp for identification should be a special stamp which may contain the words “STAMPED FOR IDENTIFICATION ONLY’ apart from the name and address of the audit firm.

Keeping in view the foregoing discussion you are requested to kindly clarify the following matters:

i) How can we identify/refer the financial statements being audited by us in the confirmation letter if these are sent back to us by our clients/bankers for confirmation? and

ii) If you suggest a way to identify/refer the financial statements as stated above then why we cannot follow the same procedure at the time of signing the auditor’s report?

 

Opinion:

The appropriate Committee of the Institute has examined the issue raised by you in detail and is of the opinion that this particular issue has already been discussed twice after the issuance of circular 4/99 dated June 17, 1999 and all the concerns raised by you were also taken into cognizance at that time. However the Committee has again reconsidered the above issue based on your inquiry and is of the view that opinion published in Newsletter of April 2004 is appropriate and does not need any revision.

With regard to your concern on requirement of paragraph 11 of ISA 700 relating to reference of page numbers which our members are not complying with and further your suggestion that reference may be made by either including the words ‘duly initialed and stamped by us for identification purposes’ in the bracket or referring to the annexures at the end of the auditor’s report. In this regard the Committee is of the view that first of all this is not a mandatory requirement as report format i.e. Form 35 A does not have any such requirement. Secondly even if we suggest the requirement of referring page numbers in the auditors’ report format as stated in paragraph 11, the concern raised by you does not appear to be addressed.

Regarding your query that how you can identify/refer the financial statements audited by you if these are sent to you for confirmation. In this regard the Committee does not see any issue relating to verification of financial statements as you just have to confirm to the bank by giving the reference and date of their letter that financial statements received by you were the same which you had audited. You are therefore not required to identify the financial statements by initialing them.

(September 11, 2004)

22.  Is Pirated Software a Company’s Assets?

Enquiry:

While auditing fixed assets your members in practice must be verifying or ‘auditing’ the veracity of the value placed on software, which can be a very large asset in a lot of companies. These days some companies may not be able to function without using the software they ‘own’ or claim to own.

Assets are either owned or leased by companies. In the case of a company using copied or commonly known as ‘pirated software’ which in most cases has been acquired for nominal value when its real value is very high what is the ICAP policy of the impact on the auditors’ work? Most companies are given a clean opinion whereas the fact is that some businesses are using stolen assets that can neither be classified as owned or leased. In my view a company using stolen assets cannot be given a clean audit report; however auditors rely on the management representation letter or the fact that the management is responsible if it uses stolen property (which cannot be its assets).

It is not difficult to establish whether for example a key business control system used by a company is licensed or not. Just as a debtor’s circularization establishes to some degree the value of amounts receivable I would suggest that the ICAP Technical Committee evolve a method or guidance for auditors to satisfy themselves that a significant software asset is indeed owned or licensed as the case may be. Furthermore the Disciplinary Committee should be empowered to hear cases where professional members are involved in either selling or using stolen software.

Opinion:

The appropriate Committee of the Institute would like to draw your attention towards the following paragraphs of ISA 250 ‘Consideration of Laws and Regulations’

2. When planning and performing audit procedures and in evaluating and reporting the results thereof, the auditor should recognize that noncompliance by the entity with laws and regulations may materially affect the financial statements. However, an audit cannot be expected to detect noncompliance with all laws and regulations.  Detection of noncompliance, regardless of materiality, requires consideration of the implications for the integrity of management or employees and the possible effect on other aspects of the audit.

3. The term “noncompliance” as used in this ISA refers to acts of omission or commission by the entity being audited, either intentional or unintentional, which are contrary to the prevailing laws or regulations.

Responsibility of Management for the Compliance with Laws and Regulations

9. It is management’s responsibility to ensure that the entity’s operations are conducted in accordance with laws and regulations. The responsibility for the prevention and detection of noncompliance rests with management.

The Auditor’s Consideration of Compliance with Laws and Regulations

11. The auditor is not, and cannot be held responsible for preventing noncompliance. The fact that an annual audit is carried out may, however, act as a deterrent.

Reporting of Noncompliance

33. If in the auditor’s judgment the noncompliance is believed to be intentional and material, the auditor should communicate the finding without delay.

To the Users of the Auditor’s Report on the Financial Statements

35. If the auditor concludes that the noncompliance has a material effect on the financial statements, and has not been properly reflected in the financial statements, the auditor should express a qualified or an adverse opinion.

In view of the above paragraphs, the Committee is of the opinion that the concern expressed by you is appropriately addressed by the above said paragraphs of ISA 250, which are required to be complied with by all the practicing members of the Institute who carry out the audit, therefore, there appears to be no need to issue any further guideline as suggested by you.

(September 11, 2004)

23.  Auditor’s Report In case of audits of Proprietors and Partnership Firms

Enquiry: 

Thank you for your response vide letter # CA/DTS/TAC-2003 dated November 21, 2003 in connection with above.

In the letter you have recommended two International Auditing Standard ISA-700 and ISA-800, but these standards provide general guidance regarding such audit reports. The inquiry raised in our previous letter was for specific format for auditor report for sole proprietors and partnership firms.

It is worth mentioning that the ICAP has issued a format of Audit report for NGO’s and charitable Institutions vide ATR-17 but no attempt has yet been made for proprietorship concerns and partnership firms, which constitute a major portion of our industry.

You are requested to please consider this matter so that the practice of issuance of different nature audit reports in the absence of exact format may be stopped.

Opinion:

 We appreciate your concern regarding a standardized format of audit report for the sole proprietors and partnership firms. However, we would like to clarify that the nature and scope of audits of sole proprietors and partnership firms largely varies on a case-to-case basis.

As you are aware that limited companies are run by the board of directors while trusts and NGOs are run by the board of trustees. In both cases, public money is invested/utilized for running the entity and there arises a need for an independent auditor to step in and report on the smooth operations of the business. While the entities like sole proprietors and firms are owned by one or more persons with limited or no interest of the general public thus there does not exist a liability to report to the stakeholders of the company or to the trustees at large. Also, there is no legal binding on such entities to get their audits done on a regular basis; rather such entities normally opt for an audit (mostly agreed upon procedures) as per their individual needs.

Therefore, keeping in view the above, the Institute does not find it appropriate to issue a standardized format of audit report where in most of the cases such format would not suffice the need of the audit. The Institute would also like to reiterate that the guidance provided in ISA 700 and ISA 800 is adequate for an auditor to exercise judgement and tailor the audit report as per the specific needs of the audit of such entities.

(January 3, 2004)

24. Omission of phrases from the specified format of Auditors’ Report on the Financial Statements of a Private Limited Company

Enquiry:

This is with reference to our telephonic conversation on April 12, 2004 regarding the above subject matter, we seek further clarification from Technical Committee as follows: –

Do Auditors of Private Limited Company, while expressing their opinion on the financial statements of the company, have authorization of SECP, ICAP, any other Governmental/ Non-Governmental body or legislation / Ordinance to omit following phrases from the Auditors’ report to the members?

1. The second paragraph line 2 of Auditors’ report “the approved accounting standards and”
2. Sub para (c) of third paragraph of Auditors’ report “conform with approved accounting standards as applicable in Pakistan, and”

For your reference the extract of Section 234 of Companies Ordinance 1984 and specimen of Auditors’ report is attached in which above mentioned phrases are underlined. (Only relevant paragraphs of Form 35A and Notes thereon reproduced – DTS)

In addition to above please clarify if a private limited company that has not declared / paid any dividend to its shareholders during the financial year and as a result no deduction of zakat thereon, should Auditors add following phrases in their report?

 “in our opinion Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII) of 1980), was deducted by the company and deposited in the Central Zakat Fund established under section 7 of that Ordinance”.

Or should replace the above phrases with the following.

“no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980”

 THE COMPANIES ORDINANCE, 1984

[See section 255(3) and rule 17A]

 Form 35A

AUDITORS’ REPORT TO THE MEMBERS

It is the responsibility of the company’s management to establish and maintain a system of internal control, and prepare and present the above said statements in conformity with the approved accounting standards and the requirements of the Companies Ordinance, 1984. Our responsibility is to express an opinion on these statements based on our audit.

(c)      in our opinion and to the best of our information and according to the explanations given to us, the balance sheet, ^*1 profits and loss account, cash flow statement and statement of changes in equity together with the notes forming part thereof conform with approved accounting standards as applicable in Pakistan, and, give the information required by the Companies Ordinance, 1984, in the manner so required and respectively give a true and fair view of the state of the company’s affairs as at ————– and of the ^*3 profit/loss, its cash flows and changes in equity for the year then ended; and

(d)      in our opinion ^*4 Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980), was deducted by the company and deposited in the Central Zakat Fund established under section 7 of that Ordinance.

 NOTES

Where applicable—

*1.      Substitute “income and expenditure account” in case of association not for profit.

*2.      Where there is no change in the accounting policy(ies) the portion “except for the changes as stated in note(s)  with which we concur” may be omitted.

*3.      Substitute “surplus or deficit” in case of association not for profit.

*4.      Where no Zakat is deductible, substitute “no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980”.

Opinion:

The appropriate Committee of the Institute is of the opinion that the wordings of the format of Auditors’ Report to the members as prescribed in Form 35-A cannot be amended except for those paragraphs which have been allowed in the Notes of the format which also deal with your enquiry relating to deduction of Zakat.

The appropriate Committee also wishes to clarify that the phrases, for which you wish to know the authority for deletion, are the very basis on which an auditor forms and expresses an opinion. The following paragraphs 17 and 19 of ISA 700 – The Auditor’s Report on Financial Statements issued by IFAC and adopted by ICAP will help you to appreciate the situation more fully:-

17. The opinion paragraph of the auditor’s report should clearly indicate the financial reporting framework used to prepare the financial statements and state the auditor’s opinion as to whether the financial statements give a true and fair view (or are presented fairly, in all material respects) in accordance with that financial reporting framework and, where appropriate, whether the financial statements comply with statutory requirements.

19. The financial reporting framework is determined by IASs, rules issued by recognized standard setting bodies, and the development of general practice within a country, with an appropriate consideration of fairness and with due regard to local legislation. To advise the reader of the context in which the auditor’s opinion is expressed, the auditor’s opinion indicates the framework upon which the financial statements are based. The auditor refers to the financial reporting framework in such terms as:

            “… in accordance with International Accounting Standards (or [title of financial reporting framework                                 with reference to the country of origin])            ….”

This designation will help the user to better understand which financial reporting framework was used in preparing the financial statements.

For an elaboration of financial reporting framework in Pakistan, the Committee would like you to refer to Circular No. 01/2003 dated February 24, 2003 issued by the Professional Standards and Technical Advisory Committee of the Institute.

(May 8, 2004)

25.  Technical Opinion on ISA 505

Enquiry: 

We are the company engaged in manufacturing. The sale of our product is made through distributors designated by the company. These distributors collect and deposit the amount in our sales collection accounts opened in the branches of the commercial bank situated in urban and rural areas all over Pakistan. These accounts are non-checking accounts (i.e. the company cannot issue cheque or transfer the amount to any account other than the designated sales collection control account). These accounts are opened under an agreement with a reputable commercial bank, under which the branches are required to transfer the amounts collected on next working day to our designated sales collection control account maintained for the collection of sale receipts. The accounts opened are well in excess of 85 in number.

INQUIRY

The International Standard on Auditing 505 ‘External Confirmations’ requires that the auditors may confirm balances with the banks directly. Keeping in view, the nature and number of these accounts some of the letters circularized by the auditors remain unattended by the branches, despite various reminders and follow up.

In this regard we seek your opinion, whether the auditors are required to circularize the letters to the branches of the banks with which the company is maintaining such accounts. If it is necessary, could the auditors satisfy themselves and sign the auditor’s report on the financial statements on the basis of the bank statements received by the company from time to time and checking subsequent transfer of the amounts in the main sales collection account, in case the replies are not received directly by the auditors till the date of signing of auditor’s report.

Opinion:

The appropriate Committee of the Institute would like to draw your attention towards the following paragraphs of International Standard on Auditing 505: –

2. The auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence to support certain financial statement assertions. In making this determination, the auditor should consider materiality, the assessed level of inherent and control risk, and how the evidence from other planned audit procedures will reduce audit risk to an acceptably low level for the applicable financial statement assertions.

4. External confirmation is the process of obtaining and evaluating audit evidence through a direct communication from a third party in response to a request for information about a particular item affecting assertions made by management in the financial statements. In deciding to what extent to use external confirmation the auditor considers the characteristics of the environment in which the entity being audited operates and the practice of potential respondents in dealing with requests for direct confirmation.

In view of the above, the Committee is of the opinion that, though audit evidence from external sources is more reliable than audit evidence generated internally, it is the discretion of auditor whether he wants to send the request or not for balance confirmation.

Further following paragraph of ISA 505 also provides guidance when an auditor is unable to obtain a response in reply to his balance confirmation request:

31. The auditor should perform alternative procedures where no response is received to a positive external confirmation request. The alternative audit procedures should be such as to provide the evidence about the financial statement assertions that the confirmation request was intended to provide.

You would appreciate that the external auditor has the sole discretion in the matter. He may, therefore, be within his rights to insist on receiving a response to his request for confirmation directly before rendering his opinion.

(May 8, 2004)

26. Clarification regarding Signing of Auditors’ Report and other documents on change of status of the firm

Enquiry:

We have been appointed as the statutory auditors of our clients in their respective annual general meetings held during last year under the capacity of a sole proprietor firm. However, now the status of our firm has changed from a sole proprietorship firm to a partnership firm with effect from July 12, 2003 by the introduction of a partner. We have submitted the information regarding the introduction of partner as required by Section 252 of the Companies Ordinance, 1984 to all our clients and accordingly they have intimated the said change to the Registrar Joint Stock Companies by filing Form 29 as required by that section.

You are requested to kindly advise us whether the auditors’ report and other documents purported to be signed or authenticated by the auditors, may be signed or authenticated by any partner in the firm name or only by the person appointed in the respective annual general meetings in the capacity of sole proprietor of the firm.

An early response shall be highly appreciated as the finalization of our audits is around the corner.

Opinion:

The appropriate Committee of the Institute is of the opinion that your sole-proprietor firm has ceased to exist in practice from the day you formed into a partnership firm and your sole-proprietor firm can, accordingly, no longer continue to be the auditors. A casual vacancy has therefore been created.

This new firm of partnership can, however, be appointed to fill in the casual vacancy under section 252 (4) read with section 252(5) and 252(6) of the Companies Ordinance, 1984 created by the closure of the sole-proprietor firm.

Since the appointment of the new partnership firm by the firm name shall be deemed to be the appointment of all the persons who are partners in the firm at the time of appointment, the auditors’ report and other documents may be signed or authenticated by any partner in the firm appointed, subject to the matters discussed in the preceding paragraphs.

(October 4, 2003)