Assurance services, assurance providers and need for assurance services: Since the industrial revolution in 18th century,

businessmen started forming joint stock companies to do business. In many situations, people who managed the business (called managers or responsible party) were different from those who owned the business (called shareholders). To judge the performance about financial performance and financial position of company (these statements are now called financial statements. Soon after, it was recognized that financial statements prepared by managers were often biased and represented best view of business instead of true and-fair-view, thus their credibility was questioned. To enhance the credibility of these financial statements, an expert person was hired by shareholders whose objective was to give assurance (i.e. credibility) on financial statements to shareholders. These persons were called assurance providers and their role was recognized in such a great way that, soon in became a legal requirement for companies to get their financial statements examined by assurance providers before they are given to share holders. In todays corporate environment, scope of assurance service has widened than just a legal requirement and many other benefits are derived by owners from such assurance services e.g.: 1. Enhances credibility of financial statements and provides facilitation in: Sale and purchase of business of shares Filing tax returns Settlement of insurance claims Obtaining bank loans 2. Error and fraud are identified 3. A check on employees which produces positive behavior 4. Mean of settlement between partners 5. Improved efficiency and effectiveness of operations (by identifying deficiencies in procedures and suggesting improvements) Similarly there are some other intended users/stake holders (in addition to shareholders) who get benefit from assurance services e.g. employees, bankers, tax authorities etc. Definition and elements of an assurance engagement/service: Definition of assurance engagement: Assurance engagement means an engagement in which a practitioner (i.e. assurance provider) obtains evidence and expresses a conclusion to enhance the confidence of the intended users (other than the responsible party) about the evaluation of a subject matter against suitable criteria.

ELEMENTS OF ASSURANCE ENGAGEMENT For an engagement to be assurance engagement it must have the following FIVE essentials or elements (also known as essentials or elements of assurance engagements): 1. Existence of three party relationship which involves: I. II. III. Practitioner ( mostly a chartered accountant) a responsible party (management of company) intended users (stakeholders)

2. Subject matter (e.g. financial statements) 3. Criteria; (e.g. GAAP of IFRS) 4. Sufficient appropriate evidence collected as a result of examination 5. Expression of opinion in the form of a written report issued by the practitioner providing assurance of: I. II. higher degree as under reasonable assurance engagements Moderate degree as under limited assurance engagements.

Levels/types of assurance and limitation of assurance service: Types of assurance: There are three types of assurance: 1. Absolute assurance 2. Reasonable assurance ( also called high or positive assurance) 3. Limited assurance (also called moderate or negative assurance) Absolute assurance is perfect level of assurance Reasonable assurance is a high but not absolute assurance Limited assurance is a moderate level of assurance. Audit risk is the risk that auditor expresses an inappropriate opinion when financial statements are materially misstated. Why absolute assurance cannot be provided Absolute assurance can never be provided because of some inherent limitations of an assurance of an assurance service (i.e. an audit) which make most of the evidence persuasive rather than conclusive i.e.

Time and cost limitation (auditor checks sample of transactions) Nature of financial reporting (uncertainties, estimates and judgment in financial statements cannot be objectively verified) Nature of audit procedures Fraud is more difficult to detect than errors. Management may not provide complete information to auditor. Assurance providers may not have specific legal powers e.g. power to search.

Types of assurance services performed by chartered accountants There are two types of assurance services: 1. Reasonable assurance engagement. 2. Limited assurance engagement. Types of Level of engagemen assurance t provided Reasonable reasonabl assurance e engagemen t Objective/definition Evidence gathering procedures Procedure includes Preliminary engagement activities Planning engagement activities Performing engagement Issuing report. Procedures are deliberately limited as compared to a reasonable assurance engagement The assurance report Assurance report states positive form of expression of practitioner s conclusion. example

An engagement to provide high but not absolute assurance Objective is to reduce the audit risk to provide basis for positive form of expression of practitioners conclusion.

Audit of financial statement s

Limited limited assurance engagemen t

An engagement to provide moderate level of assurance. Objective is to reduce the audit risk to provide basis for negative form of expression of practitioners conclusion

Assurance report states negative form of expression of practitioner s conclusion

Review of financial statement s.

While performing assurance services, auditor should act like a judge i.e. he should be independent of client (from financial interest and key post, business and management relation) and should give his conclusion on the basis of facts.

Appointing authority of statutory auditor: FIRST AUDITOR 1. By directors (within 60 days of incorporation) 2. By members (if directors dont appoint first auditor within 60 days of incorporation) 3. By SECP (if directors/members dont appoint auditor within 120 days of incorporation) Tenure is from the date of appointment till the end of first AGM. SUBSEQUENT AUDITOR: 1. By members in each AGM 2. By SECP (if no auditor is appointed by members in AGM) Tenure is from the end of this AGM till the end of next AGM. CASUAL VACANCY 1. By directors (within 30 days of occurrence of casual vacancy) 2. By SECP (is casual vacancy is not filled by directors within 30 days) Tenure is from the date of appointment till the end of next AGM. Removal before expiry of term: (by members via special resolution) 1. By SECP Tenure is from date of appointment till the end of next AGM. NOTE: person appointing the auditor fixes the remuneration of auditor.

Procedures for appointment of statutory auditor (by members) Legal procedure for appointment of statutory auditor: 1) Every year, audit committee shall suggest an auditor (retiring or otherwise) to BOD and BOD shall nominate that auditor for appointment.

2) A member can also nominate an auditor provided notice is sent to company at least 14 days before AGM. 3) Company shall notify all members about nominations, at least 7 days before AGM. 4) Retiring auditor make representation to members if he thinks he should be appointed for the next term. 5) In AGM, members will pass a resolution to appoint an auditor from the nominated auditors.

Ethical procedure in cases of change in professional appointment : Procedures by outgoing auditor/existing CA: 1) If existing chartered accountant (willing for re-appointment) is not re-appointed, he shall file with institute a copy of representation if made to members. 2) If existing chartered accountant is removed before completing the audit, he must immediately file with institute a statement of facts. Procedures by incoming auditor/proposed CA: 1) A proposed C.A shall communicate directly with existing C.A to determine whether there are any reasons which threaten compliance with ethical or legal requirements (via professional clearance letter). This communication between existing and proposed chartered accountants is bound by principle of confidentiality. Both should obtain permission from client before communication. If client refuses permission, engagement should not be accepted. If proposed CA is unable to communicate or does not receive reply, he should obtain information from alternative sources e.g. inquiries of third parties and senior management, or background investigation. 2) It shall be obligatory on the proposed chartered accountant to obtain a copy of representation made by outgoing auditor before acceptance. 3) (if existing chartered accountant is removed before completing the audit) proposed chartered accountant should inform institute about offer of appointment and should not accept the offer prior clearance of the institute. Rights and duties of statutory auditor Rights/powers of auditor

Right of Access to books, accounts and vouchers of company (for branches outside Pakistan it will be sufficient if access is allowed to copies and documents transmitted to principal office in Pakistan) Requiring necessary information and explanation necessary to perform duties. Rights to Receive all notices relating to any general meeting Attend any general meeting To be heard at any general meeting which concerns him as auditor. Right to receive notice of removal and make representation Right to demand and receive remuneration.

Duties of auditor To make audit report to members To certify receipt and payment contained in statutory report. To make report on declaration of solvency in case if proposal of voluntary winding up. If company is issuing shares or debentures, duty to issue a report to be included in prospectus stating: Profit and loss of last 5 years Rate of dividend of last 5 years. If no accounts were made up for any of the period, the fact should be stated.

Qualification and disqualification of statutory auditor: Qualification: Audit of public company or Private Company which is subsidiary of a public company or private company with paid up capital of three million rupees or more shall be conducted only by:

A chartered accountant or A firm of chartered accountants in firms name (provided its partners are chartered accountants) (Person must be a chartered accountant within the meaning of the chartered accountants ordinance, 1961) Rest of companies, audit is required but qualification of auditor is not prescribed. Disqualification Following persons are disqualified to act as auditor (even if person is chartered accountant), if at time of appointment, (sole practitioner or any of partners in a firm) He (or his spouse and minor children) holds shares in an audit client (or its associated companies). However, he may be appointed as auditor if he discloses the fact at the time of appointment and disposes shares within 90 days of appointment. He is indebted to the company (however sums payable to a credit card issuer is not debt if it is up to RS 500,000 and sum payable to a utility company is not debt if it is unpaid for a period up to 90 days) He is or was an employee (or officer or director) of the company in last 3 years. He is a partner or employee of an employee( or officer or director) of the company He is spouse of a director It is a body corporate.

If, after his appointment, an auditor becomes subject to any of the disqualifications specified above, he shall be deemed to have vacated his office as auditor with effect from the date on which he becomes disqualified. Important notes 1. Appointment of a partnership by firms name shall be appointment of all persons who were partners at a time of appointment. 2. A person who is disqualified for appointment as auditor of company is also disqualified for whole group (i.e. for subsidiaries, holding, and subsidiary of holding company) 3. If a company appoints disqualified persons as auditor, this appointment shall be void abinitio and SECP may fill vacancy. 4. Indebtedness includes lease arrangements.

Definition of associated companies/ undertakings: Companies/ undertakings are associated if: An owner, partner, director or shareholder of 20% voting rights in one company is also the owner, partner, director or shareholder of 20% voting rights in another company Companies are under common control or management One is subsidiary of another. However, shares owned by government and directors nominated by government are not considered to determine status of associate.

Listing regulations (requirements for listed companies only) Rotation For financial institutions: auditor shall be rotated after every five years. For other companies: auditor or engagement partner shall be rotated after every five years (rotated partner cannot return before two years) Employment A person ( or his parents, spouse, children) cannot be appointed as CEO, CFO, director or internal auditor if he was a partner or employee of the firm involved in audit at any time during the two years preceding such appointment. Non-assurance services by auditor Auditor of a listed company cannot provide following services to his audit client: 1. Preparing accounting records or financial statements 2. Design and implementation of information technology systems (significant to overall financial statements) 3. Valuation services for material items of financial statements 4. Internal audit services related to financial statements 5. Management functions or decisions 6. Human resource services relating to executive recruitment 7. Litigation support services 8. Legal services