Rania Ahmed 08 Sept, 2022

ASSIGNMENT 1
QUESTION 1
What are the objectives of this course i.e., learning outcomes and how can this course be helpful
to you in your future career?

It is reflected in the syllabus, that this course intends to walk the students through the key steps
of the auditing process, whilst providing relevant examples and experiences alongside to
contextualize the theoretical concepts. Moreover, it also highlights the disconnect that exists
between the ideals and reality as influenced by the cultural norms, values held particularly by the
Pakistani society. This presents crucial ethical dilemmas, which can then be discussed within the
classroom and an attempt to reach an optimal solution can be made. The outcome of this course
is to produce an unqualified audit report; hence, providing reasonable assurance with regards to
the statutory audit of said financial statements.

As mentioned within class, audit is not a subject of its own but rather an interdisciplinary tool that
utilizes accounting and finance concepts to ascertain the conformity of a client’s financial
statements. Accordingly, the learnings attained can also be applied to other disciplines. For
instance, ethics form the backbone of an individual’s corporate personality. This is constantly
questioned and revisited in auditing as every situation juts forth its own set of dilemmas that
require evaluation through a specific audit lens. The formation of this perspective, in my opinion,
is going to be the most significant takeaway from this course, regardless of the careers that we
proceed to pursue. Since although we could learn the skills required to excel in our preferred
careers, the presence of a sound ethical character is what I deem most necessary for professional
and personal development.

QUESTION 2
Why is there a need for Audit / External Audit Profession? Explain with the help of Agency Theory
and your examples.

The need for auditors arises due to the inherent conflict of interest that exists between the
principal-agent relationship. Overtime as organizations have grown and become more complex in
form, structure; the need to enforce accountability on the management of these corporates has
become necessary. Stakeholders that invest into the business, like shareholders entrust the
management to earn their investments high returns. However, the nature of this fiduciary
relationship is tainted when the management indulges in using these funds for their own interests
and benefits, all while portraying them as growth opportunities for the company; for example, by
creating unnecessary reserves.
Hence, justifying the role of an auditor that reduces the information asymmetry and conveys their
opinion of whether or not the investments are being utilized for the principal’s best interest. For
instance, a qualified audit report will act as a cautionary instrument to an unsophisticated investor
and make them wary of their investment in that particular organization.
Rania Ahmed 08 Sept, 2022

QUESTION 3
Explain the Theory of Inspired confidence, and the Lending credibility theory, use examples to
elaborate your explanation.

The Theory of Inspired Confidence is a concept modeled around the Rational Expectations Theory
(Tardi, 2020), whereby it can be assumed that individuals base their decisions on their rationality,
available information and their experiences. Therefore, it can be said that the stakeholders have
certain “expectations” when they invest into client organizations that they require scrutiny of.
The demand for auditors is a direct consequence of this ideology and hence they are tasked with
the responsibility to assume an independent front and provide reasonable assurance to the
external stakeholders. However, stakeholders must be aware of the scope of the auditors
assurance and the auditor himself must not arouse expectations that are beyond the extent of his
technical and professional capabilities (Duits, 2012). For instance, an auditor can ensure true and
fair presentation in a certain class of asset, yet he is unable to say the same for all class of assets
and liabilities in a company’s record; since, the scope of his audit is limited.

The Lending Credibility Theory, as suggested by its name elucidates that auditors essentially
pledge credibility to the stakeholders of an organization. This credibility is ensured as a result of
a statutory audit of financial statements which the auditor qualifies as modified or unmodified
and points out the shortcomings independently and through continuous skepticism. Henceforth,
when stakeholders come across these audited financial reports their concerns are subsided and
they will be encouraged to invest further. So essentially auditors reduce the possibility of
information asymmetry between the principal-agent and further emphasize the credibility of this
information (Yliopiston, 2010). For instance, a novice investor with limited financial knowledge
would refer to the audit reports of the corporations he is interested in investing, to gauge the
probable risk and benefits of such venture.

QUESTION 4
Difference between Internal and External Audits?

Internal and external auditors both perform the role of providing assurance and risk assessment
for their clients; however, the purpose and focus of these audits, amongst other things, is what
differs. Internal auditors work within the company as employees and continuously analyze
internal controls, compliance to corporate governance, financial reporting and other processes to
identify any weaknesses or frauds within the company. This allows for constant improvement and
ensures that the business is able to achieve its required objectives effectively. In 2019, the SBP
issued a new set of guidelines (Syed Irfan Ali et al., 2019) in relation to internal audit, which had
to be adopted by financial firms henceforth. This document specified the eligibility criteria of a
CIA as having at least 5 years of audit and 15 years of finance related experience. Moreover, it
also stated that the CIA would report to the audit committee functionally and the CEO
administratively. Although, there is not a specific set of standards to be followed for internal
Rania Ahmed 08 Sept, 2022

auditing purposes they do follow the standards1 set by IIASB. The guidelines specify roles and
responsibilities, as well as, the scope of internal audits and risk assessment requirements.

As for external auditors, they inherently provide assurance to the stakeholders a company that
the client has presented a true and fair view of their financial statements. They also assure their
conformity to the established criterions, such as IFRS, IAS and ISA’s. Unlike internal auditors, they
are independent and report directly to the stakeholders whose interest they have to preserve.
Moreover, they have to be certified CA’s by ICAP2 to conduct these audits. External audits are
conducted at the end of quarters or financial years within a period of 3 months depending on the
size of the client company. Furthermore, the scope of their audit is limited to financial statements
for which they can provide reasonable assurance in the form of an audit report included in the
annual report. The scope of their assurance might extend to verifying whether an organization is
in compliance with corporate governance standards; however, this is merely for review purposes
and provides limited assurance. Hence, external auditors can only suggest any discrepancies and
weaknesses within the client organization, but they cannot warrant any change.

QUESTION 5
Referring to Company Law knowledge, Explain the regulations regarding the Auditor’s
Appointment and Removal in Pakistan. (You can refer to Companies Act 2017 for this).

How much time is available for issuing Audit Report and is an Extension provided.

The legislation regarding the appointment and removal of auditors is mentioned in Section 246 of
the Companies Act, 2017. These specificities can best be explained through an example. Company
A is a limited corporation that has received its certificate of incorporation 60 days ago and as per
Section 246 (1), they must hire their first auditor(s) before the passage of 90 days from
incorporation. Complying to this requirement, Company A hired Ahmed to perform their statutory
audit for the following financial year. At the subsequent AGM, Ahmed will retire and a new auditor
will be appointed. This auditor as per Section 246 (2) will be hired based upon the
recommendation of Company A’s board and after obtaining the consent of the recommended
auditor. This new auditor will then prepare an audit report for the upcoming financial year and
retire at the subsequent AGM. Additionally, as per Section 246 (4), the retiring auditor; for
instance, Ahmed could propose himself as an auditor, once again, by submitting a notice to the
company. Besides the general removal process of an auditor at every AGM, there could be a
situation where an auditor is to be removed immediately. During the year, Company A discovered
instances of misconduct and fraud in relation to their hired auditor and therefore decided to
remove him immediately. To do so as per Section 246 (5), a special resolution will have to be
passed where no less than ¾ of the members will have to vote for the removal of said auditor.

Nevertheless, due to this casual vacancy the audit could not be completed within the reasonable
timeframe as specified in the Audit Policy 20153, where the audit of a particular tax year must be
completed in that same financial year. Therefore, a reasoned extension was provided by the

1
Standards - CIA-Pakistan | The Institute of Certified Internal Auditors Pakistan (iciaglobal.org)
2
Pakistan | IFAC (https://www.ifac.org/about-ifac/membership/profile/pakistan)
3
2015917189520315AuditPolicy2015-forWEBPORTAL.pdf (fbr.gov.pk)
Rania Ahmed 08 Sept, 2022

Board upon the submission of a written request by Company A. The terms of this extension will
differ according to each situation and as the Board will deem necessary 4.

4
Selection of Cases for Audit (fbr.gov.pk)
Rania Ahmed 08 Sept, 2022

References
Duits, H. B. (2012). The added value of auditing in a non-mandatory environment. Retrieved

from https://pure.uva.nl/ws/files/1637268/145912_06.pdf

Syed Irfan Ali, Akhtar Javed, M., Raza Malik, M. Q., & Pasha Khero, Z. (2019). Guidelines on

Internal Audit Function. State Bank Of Pakistan. Retrieved from

https://www.sbp.org.pk/bprd/2019/Guidelines-C2.pdf

Tardi, C. (2020). Rational Expectations Theory. Retrieved from

https://www.investopedia.com/terms/r/rationaltheoryofexpectations.asp

Yliopiston, V. (2010). A Theoretical Examination of the Role of Auditing and the Relevance of

Audit Reports. Retrieved from https://www.uwasa.fi/materiaali/pdf/isbn_978-952-476-

298-4.pdf