Brief facts of the enquiry

The enquirer submitted that they were engaged to audit the financial statements of a private limited company (the company) for the year ended June 30, 20×1.

No proper record was provided to them on time by the company to start the audit after the close of the financial year and delay in finalizing the audit occurred on the part of the company. As the record of the company was not complete and audit requirements were not fulfilled even up to October 29, 20×1 by the company and there was a delay in issuing our audit report due to noncooperation of the management. However, they finalized the audit work and concluded to qualify report due to lack of proper documents/information. Due to late receipt of record, documents/information they were unable to issue our final letter till November 01, 20×1 with draft qualified audit report and three reminders thereafter which were not complied with by the company. The conflict of opinion arose on November 01, 20×1 in the shape of draft qualified audit opinion which was not acceptable to the company’s management. The auditor was threatened to be removed for the year ended June 30, 20×1 (for which audit was completed as explained above).

The enquirer also submitted that Annual General Meeting (AGM) of the company was to be held on October 28, 20×1 and Extra Ordinary General Meeting (EGM) for removal of auditors was to be held. Before that date (that is EGM or AGM) 21 days’ notice was also required to be sent to them, which was not issued. Therefore, their removal as auditor after the close of the financial year and lapse of the date of AGM is illegal. The company violated the provisions of section 248(1) of the Companies Act, 2017 (the Act) by not providing the proper record/information required by them for audit. The company’s finance manager hindered, obstructed and delayed in performance of their duties as auditor and also placed restrictions on the auditor’s rights to issue qualified audit report. Auditor’s rights available under section 248(2) of the Act and his independence was tried to be restricted.

Meanwhile, AGM of the company was due on October 28, 20×1. The company filed Form A and Form 29 with SECP and appointed another auditor for the year ending June 20×2 without sending a notice of meeting to the enquirer u/s 246(3) of the Act. Moreover, neither financial statements were presented in the AGM nor application was moved to SECP for extension of date of AGM.

The enquirer also submitted that thereafter, he received a letter dated December 01, 20×1 from SECP for their comments on removal of auditor for the year ended June 30, 20×1 for which they have already sent draft qualified audit report. In response to that letter they have agitated that their removal is illegal and un-lawful.

Thereafter, the company sent them a notice dated January 13, 20×2 to attend EGM of the company to be held on February, 04, 20×2 with the agenda item to remove them as auditor for the year ended June 30, 20×1. So, Special Resolution to be passed by the company in EGM is after thought and the appointment to be made of another auditor is also unlawful/void.

The enquirer requested for technical opinion on the following matters:

•Whether the company is justified to remove the auditor after receiving a draft qualified audit report which was not acceptable to the company.

•Whether the auditor appointed for the year ended June 30, 20×1 can be removed after the date of next AGM.

•Whether the auditor can be removed as and when required by the company by passing a resolution.

•Whether the member of ICAP playing the whole game on behalf of the company is guilty of professional misconduct.

•Is the auditor justified for claiming audit fee where he has completed the audit and sent draft qualified audit report to the company.

•What are the enquirer’s rights in this situation.

The Auditing Standards and Ethics Committee’s comments and conclusion

The Committee’s understanding of the enquiry

As per the information provided in the submitted fact pattern by the enquirer, the Committee noted the following significant information:

a)the enquirer was acting as statutory auditor of a company for the year ended June 20×1.

b)company did not provide proper records/ information to the statutory auditor that was required for the purpose of the audit, resultantly company did not comply with the provisions of section 248(1) of the Companies Act.

c)a statutory auditor, on November 01, 20×1, provided a draft qualified audit report on the financial statements for the year ended June 30, xxx, to the company’s management.

d)the draft qualified audit report was not accepted by the company, and the auditor was threatened to be removed from the position of statutory auditor for the year ended June 30, 20×1.

e)the Annual General Meeting (AGM) of the company was to be held on October 28, 20×1. (However, from the enquiry it is not clear whether AGM was held or not).

f)the company filed Form A and Form 29 with SECP and appointed another auditor for the year ending June 2022 without sending notice of meeting to the auditor as required under section 246(3) of the Companies Act, 2017.

g)SECP sought comments of the enquirer regarding his removal as statutory auditor of the company for the year ended June 30, 20×1. The enquirer submitted its response to the SECP.

h)the enquirer further received from the company notice of the Extra-Ordinary General Meeting (EOGM) (to be held on February 04, 20×2). The information received by the enquirer from the company included the agenda item for his removal as statutory auditor of the company for the year ended June 30, 20×1.

The Committee’s comments and views

1.The Committee considers and issues opinions on audit and ethics-related matters after consideration of:

•the particular facts and information provided in each enquiry; and

•the requirements of the International Standards on Auditing as applicable in Pakistan (ISAs), ICAP Code of Ethics, and audit and ethics-related provisions of the Companies Act, 2017.

The Committee’s analysis and responses to the enquired matters are based on the parameters outlined above and do not include ascertainment of facts relating to the enquired matter and independent study or evaluation of the legal and statutory obligations.

The Committee observed that the submissions by the enquirer (as mentioned in the enquiry) involve and require ascertainment of facts, including verification of documents, and specific circumstances. Further, the matter of removal of the enquirer as statutory auditor of the company for the year ended June 20×1 under specific circumstances is a legal matter. Determination of compliance with the legal provisions in respect of the removal of auditors in the specific case requires legal interpretations and a detailed review of related documentation which is not within the scope of the Committee’s work.

2.The Committee in the context of the enquired matters, however, considered it relevant to highlight and discuss the relevant provisions and requirements of the Companies Act and ISAs as applicable in Pakistan, and the Chartered Accountants Ordinance, 1961. These are provided hereunder:

Relevant Provisions of the Companies Act

3.The Companies Act contains provisions for the appointment, term, rights and duties, and removal of the statutory auditor.

In the context of the enquired matters, the Committee considered it pertinent to highlight section 246 (Appointment, removal, and fee of auditors) and section 248 (Auditors’ right to information) of the Companies Act.

Section 246 of the Companies Act contains the provisions relating to the auditor’s appointment, removal, and term of appointment. It explains that:

•the first statutory auditor of the company is appointed by the board. Subsequent to the first auditor, a company appoints a statutory auditor in the AGM. The statutory auditor is appointed on the recommendation of the board of directors and after obtaining the consent of the proposed auditor(s); (Section 246 (2))

•the auditor appointed by the board, or by the members in an AGM can be removed through a special resolution; (Section 246 (5))

•any casual vacancy of an auditor shall be filled by the board within thirty days from the date thereof. Provided that where the auditors are removed during their tenure, the board shall appoint the auditors with prior approval of SECP; (Section 246 (6))

•if the company, fails to appoint an auditor to fill up a casual vacancy within thirty days the Commission may fill the casual vacancy; (Section 246 (7))

Section 246 (9) obligates the company to send to the registrar intimation about the appointment of the statutory auditor (within fourteen days from the date of any appointment of an auditor) together with the consent in writing of the appointed auditor.

The term of the statutory auditor is also explained in section 246 of the Companies Act as subsection (1) and (2) explain that the statutory auditor retires at the conclusion of the AGM of the company. While subsection (6) explains that any auditor appointed to fill in any casual vacancy shall hold office until the conclusion of the next AGM.

Section 248 provides the right to the statutory auditor to access the books of account and obtain the information necessary for the audit of statutory financial statements. The auditor has this right till the time he is acting as statutory auditor of the company under the Companies Act. Section 248 explains that:

•the auditor of a company has a right to access at all times the company’s books, accounts, and all necessary information that is necessary for the performance of the audit; and

•it is the responsibility of the company’s officers to allow the auditor access to any books and papers or provide any such information possessed by him as and when required, or otherwise hinders, obstructs, or delays an auditor in the performance of his duties or the exercise of his powers or fails to give notice of any general meeting to the auditor or provides false or incorrect information.

4.The Committee also noted that the statutory auditor, in accordance with section 249 (Duties of auditor), shall:

b)conduct the audit and prepare his report in compliance with the requirements of International Standards on Auditing as adopted by the Institute of Chartered Accountants of Pakistan;

c)make out a report to the members of the company on the accounts and books of accounts of the company and on the financial statements which are to be laid before the company in general meeting; and

d)state in the auditor’s report the reason(s) along with the factual position to the best of his information where any of the matters referred to in section 249 (2) or (3) is answered in the negative or with a qualification.

5.As noted earlier, the term/ tenure of the statutory auditor is till the conclusion of the company’s AGM. The Committee would also like to highlight that in accordance with section 223 (Financial Statements) of the Companies Act, every company must lay before its financial statements in the AGM. These financial statements shall be audited by the auditor of the company, and the auditor‘s report shall be attached thereto, as stated in section 223(5) of the Companies Act.

Relevant requirements of the ISAs

6.The Committee noted that ISAs provide guidance for the auditor in cases where he is unable to obtain sufficient appropriate audit evidence. The auditor can qualify or disclaim an opinion in the auditor’s report. The auditor also has a right to withdraw from the audit engagement.

Relevant requirements of ISAs are discussed below in detail:

ISA 200 ‘Overall Objectives of the Independent Auditor and the conduct of an Audit in accordance with International Standards on Auditing’

7.In accordance with paragraph 5 of ISA 200, the auditor is required to obtain reasonable assurance whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.

However, when reasonable assurance cannot be obtained and the auditor is unable to achieve the overall objectives of the audit, the auditor is required to modify the auditor’s opinion or withdraw from the engagement (where withdrawal is possible under applicable law or regulation), in accordance with the ISAs. (paragraph 24 of ISA 200)

ISA 705 (Revised) ‘Modifications to the Opinion in the Independent Auditor’s Report’

8.ISA 705 (Revised) sets out requirements and provides guidance in determining a need for the auditor to express a qualified opinion or disclaim an opinion or withdraw from the engagement where withdrawal is possible under applicable law or regulation.

In the context of the enquired matter, the Committee noted that if, after accepting the engagement, the auditor becomes aware that management has imposed a limitation on the scope of the audit that is likely to result in the need to express a qualified opinion or to disclaim an opinion on the financial statements, the auditor should request the management to remove the limitation in accordance with paragraph 11of ISA 705 (Revised).

If management refuses to remove the limitation, the auditor is required to communicate the matter to those charged with governance and try to perform alternative procedures to obtain sufficient appropriate audit evidence. If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor then concludes to qualify the audit opinion or withdraw from the audit (where practicable and possible under applicable law or regulation) or disclaim an opinion on the financial statements. (paragraph 12 & A14 of ISA 705 (Revised))

ISA 210 ‘Agreeing the Terms of Audit Engagements’

9.The Committee, noted that ISA 210 sets out the auditor’s responsibilities in agreeing to the terms of the audit engagement with management and, where appropriate, those charged with governance. Paragraph 10 of this ISA requires that the agreed terms of the audit engagement should preferably be in writing in the form of the audit engagement letter or another suitable form of a written agreement.

10.Paragraph 6 of ISA 210 specifies the preconditions for an audit. Paragraph 6 (b) requires that the entity’s management should acknowledge and understand its responsibility to provide the auditor with the following:

a)access to all information of which management is aware that is relevant to the preparation of the financial statements such as records, documentation, and other matters;

b)additional information that the auditor may request from management for the purpose of the audit; and

c)unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

11.Paragraph A24 of ISA 210 provides guidance on the form and content of the audit engagement letter. ISA 210 also provides the sample engagement letter (in Appendix 1) which among other requirements includes the following:

•Scope of the audit and composition of the engagement team.

•The form of any other communication of results of the audit engagement.

•The requirement for the auditor to communicate key audit matters in the auditor’s report in accordance with ISA 701.

•The fact about the inherent limitations of an audit.

•The expectation that management will provide written representations.

•The expectation that management will provide access to all information of which management is aware that is relevant to the preparation of the financial statements, including an expectation that management will provide access to information relevant to disclosures. (emphasis is ours)

•The agreement of management to make available to the auditor draft financial statements, including all information relevant to their preparation, whether obtained from within or outside of the general and subsidiary ledgers (including all information relevant to the preparation of disclosures), and the other information, if any, in time to allow the auditor to complete the audit in accordance with the proposed timetable.

•Management agreement to make available to the auditor draft financial statements in time to allow the auditor to complete the audit in accordance with the proposed timetable.

•The basis on which fees are computed and any billing arrangements.

•A request for the management to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement outlined therein. (emphasis is ours)

12.The Committee, based on the above discussion, understands that the engagement letter (or other suitable forms of written agreement) between an auditor and engaging party is a legal document that determines the specific scope of the auditor’s work, rights, and responsibilities.

The Committee understands that the audit fee and terms of its payment are commercial matters agreed upon between the entity and the auditor. The audit fee and related terms for payment of the audit fee are set based on mutual trust and understanding between the parties.

The Committee also understands that all terms and conditions from the conduct of the audit till its conclusion, fees arrangements, payment terms and conditions, and any other specific terms should be clearly mentioned in the audit engagement letter and should be mutually agreed upon and signed by both parties.

Relevant provisions of the Chartered Accountants Ordinance, 1961

13.Regarding the enquirer’s submission of the professional misconduct of a member, the Committee observed that the Chartered Accountant Ordinance 1961 specifies the provisions relating to the member’s professional misconduct.

Under the Chartered Accountants Ordinance 1961, a member of the Institute if found guilty of professional misconduct is subject to disciplinary action.

The Committee in the context of the submitted fact pattern noted that the enquirer can refer any matter related to misconduct of another member to the relevant forum of the Institute in accordance with the requirements of the Chartered Accountant Ordinance 1961. The Committee is not the appropriate forum in this regard.

The Committee’s conclusion

14.The Committee based on its understanding of the enquired fact pattern and consideration of the requirements of the Companies Act and ISAs concluded that:

a)The tenure/ term of a statutory auditor appointed by a company is till the conclusion of the AGM of the company. In accordance with section 246 (2) of the Companies Act, the statutory auditor, accordingly, retires at the conclusion of the company’s AGM.

The Companies Act also contains provisions relating to the timing and business of the AGM, including laying off the company’s audited financial statements in accordance with section 223 of the Companies Act.

b)In accordance with section 246 of the Companies Act, members of a company can remove a statutory auditor from office during his tenure by passing a special resolution in a general meeting. The company can also appoint another auditor in place of the removed auditor. Such a company is required to ensure compliance with the statutory provisions when removing an auditor, including obtaining prior approval from SECP for the appointment of a new auditor.

The determination of compliance with the legal provisions in respect of the removal of the auditor in the specific case requires legal interpretations and a detailed review of related documentation which is not within the scope of the Committee’s work.

c)Under the Chartered Accountants Ordinance 1961, an aggrieved person or a member can send the complaint relating to the misconduct of the Institute’s member to the relevant forum of the Institute. In this context, the Committee is not the appropriate forum to investigate the matter/compliant and determine the misconduct.

d)Audit engagement letter is a written arrangement between the statutory auditor and the company (i.e. auditee). The purpose of the engagement letter is to inform the auditee of the scope and nature of the engagement and to clarify the responsibilities of the auditor and company. The audit engagement letter determines the specific scope of the auditor’s work, responsibilities, and rights including the right to obtain audit fees and any billing arrangements.

e)The Companies Act contains provisions relating to the rights and duties of the auditor when engaged to act as statutory auditor of a company. The statutory auditor:

•under section 248 of the Companies Act, has the right to seek and obtain access to all information, records, documentation, and other matters necessary for forming an audit opinion on the financial statements.

•under section 249 of the Companies Act, is required to conduct the audit and issue the audit report in accordance with the ISAs as applicable in Pakistan.

The ISAs discuss and explain the auditor’s and management’s responsibilities relating to the audit of financial statements.

Regarding the auditor’s right to obtain access to information and documents, ISA 200 explains that management is responsible to provide the auditor with access to all information, such as records and documentation, and other matters of which management and, where appropriate, those charged with governance are aware that are relevant to the preparation and presentation of the financial statements such as records, documentation and other matters. Management is also responsible to provide additional information that the auditor may request from management and unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

Further, the ISAs also allow the statutory auditor to withdraw from the audit engagement. In accordance with ISA 210, if the auditor is unable to agree to a change of the terms of the audit engagement and is not permitted by management to continue the original audit engagement, in such case the auditor shall:

•withdraw from the audit engagement where possible under applicable law or regulation; and

•determine whether there is an obligation, either contractual or otherwise, to report the circumstances to other parties, such as those charged with governance, owners, or regulators.

ISA 705 (Revised) also states that when management has imposed scope limitations, the auditor can withdraw from the engagement. ISA 705 (Revised) also explains that if wit hdrawal from the audit before issuing the auditor’s report is not practicable or possible, the auditor shall disclaim an opinion on the financial statements.

(Issued in April, 2022)