PRESENTED BY TALHA SHAHZADI

0004RANA SOHAIL 007M USMAN KHAN

OO14EJAZ GADI 0025

MALIK SAQIB 0030

M WASEEM JUTT 0047

Group I

PRESENTED TO,PROF. USMAN

SB.

M USMAN KHAN UNIVERSITY OF CENTRAL PUNJAB COURSE MCOM K1F12MCOM0014

Introduction to Financial

Statements and Audit

Introduction to Financial Statements and Audit

We cover in this session the following:

1. Introduction to Financial Statements2. User’s of financial statements3. Why do we audit them

Introduction to Financial Statements Purpose of Financial Statements

Financial statements are a structured representation of the financial position (Balance Sheet) and financial performance (Income Statement) of an entity.

The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions.

Introduction to Financial Statements – User of Financial Statements

User of the financial statements Interest of the user

Equity investors (existing and potential) They are interested whether buy, hold or sell the shares in hand and also enable them in payment of dividends.

Loan creditors ie, existing and potential holders of debentures and loan stock, and providers of short-term loans

The amount will be paid when due and for continuation of the business.

Employees (existing, potential and past) Interested in stability and profitability for employment opportunities, remuneration and retirement benefits.

Business contacts including customers, trade creditors, competitors and potential take-over bidders

Whether the payment of loan will be made in due dates and enable sustainability of business for future business with the enterprise.

Government, including tax authorities, government departments and local authorities

Interested in allocation of resources and also to regulate the activities of an enterprise and determining tax policies and as a basis for national income.

Public, including tax payers, ratepayers and environmental groups

Trends and recent development in the prosperity of the entity and range of it’s activities.

Why do we audit them- Need for Audit

Principle (Shareholders)

Directors

Auditor

Information irregularityand conflict of interest lead

to information risk for the principle

Principle provides capital and hires manager

to manage it.

Directors hires audit to report on the fairness of manager financial statements. Risk information irregularity of principle reduce.

Auditor gathers evidence to evaluate fairness of manager financial statements.

Director is accountable to Principle;provides financial reports.

M waseem juttUNIVERSITY OF CENTRAL PUNJABCOURSE MCOMK1F12MCOM0047

Financial statement and audit major points for discussion

Objective

Types

Complete process

Regulation

Expectation gap

Objective

• Verify the Financial statements which are true and fair

• Compliance with international standards of reporting (IAS-1)

• International accounting standard-1(presentation f/s)

@Sako Mayrick 2006

Objectives of Auditing

• Primary Objective (main objective)–To produce a report by the auditor

of his opinion of the truth and fairness of financial statements so that any person reading or using them can have belief in them

@Sako Mayrick 2006

Objectives of Auditing

• Secondary– To detect errors and fraud ( Consider

materiality)– To prevent errors and fraud by the deterrent

and moral effect of the audit– To provide spin- off effects. The auditor will

be able to assist his clients with accounting , systems, taxation , financial , and other problems.

Talha shahzadiUNIVERSITY OF CENTRAL PUNJABCOURSE MCOMK1F12MCOM0004

Types of Audit

Internal audit not required by law but external audit is require in some situations.

Internal audit

External audit

Internal audit do only for in these situations

• The exercise of special investigations on detection of fraud.

• The preparation and documentation of internal procedures and processes in accordance with client needs and in accordance with regulatory bodies' requirements.

• The design and implementation of internal audit programs.

• The preparation of internal audit reports for management use and for company internal audit committees.

@Sako Mayrick 2006

Internal auditing External auditing

Objectives To advise management on whether the organization has sound systems of internal controls to protect the organization against loss

To provide an opinion on whether the financial statements provide a true and fair view

Legal basis All areas of the organization, operational as well as financial

Financial focus

Scope All areas of the organization, operational as well as financial

Financial focus

Approach Increasingly risk baseAssess risksEvaluate system of controlsTest operation of systemMake recommendation for

improvements

Increasingly risk basedTest underlying transactions that

form the basis of the financial statements

Responsibility To advice and make recommendations on the internal control and corporate governance

To form opinion on whether the financial statements provide a true and fair view.

Types of external audit• carried because the law requires them. Statutes

include Companies Act, Parastatal organization ActStatutory

audit

• Not compulsory for private companies• Only require for the satisfaction of shares

holdersNon-

statutory audit

@Sako Mayrick 2006

Planning of the audit

Assessment of the accounting and internal control systems and audit risk assessments

Consideration of the ways in which audit evidence can be sought

Testing of Internal Controls ‘test of control’

Extensive testing of transactions and balances ‘substantive procedures’

Reduced testing of transactions and balances “substantive procedures’

Review of financial statements

Audit Report

Complete process of audit

Rana sohailUNIVERSITY OF CENTRAL PUNJABCOURSE MCOMK1F12MCOM00o07

@Sako Mayrick 2006

• ATTESTATION occurs when a practitioner is engaged to issue or does issue a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party.

• Examples:– The effectiveness of internal control– Financial information other than the financial

statements– Future-oriented financial information– Compliance with statutory, regulatory, or

contractual obligations– Management’s discussion and analysis

AUDITING, ATTESTATION, AND ASSURANCE SERVICES

@Sako Mayrick 2006

AUDITING, ATTESTATION, AND ASSURANCE SERVICES

ASSURANCE services are independent professional services that improve the quality of information, or its context, for decision makers.Examples:

Risk assessmentInformation system reliabilityElectronic commerceHealth care performance measurement

Regulations

• IFAC (international federation for accountancy)

IFAC is comprised of 179 members and associates in 130 countries, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce. IFAC members are professional accountancy organizations recognized by law or general consensus within their countries as substantial national organizations. National organizations may apply to become an IFAC associate where the organization is working toward membership.

Subsidiary boards

i) IAASB The International Auditing and Assurance Standards

Board (IAASB) is an independent standard-setting body that serves the public interest by setting high-quality international standards for auditing.

ii) IFRS ( international financial reporting standard)iii) IAS (international accounting standard

Ejaz gadiUNIVERSITY OF CENTRAL PUNJABCOURSE MCOMK1F12MCOM0025

Professional ethics

• The International Ethics Standards Board for Accountants (IESBA) is an independent standard-setting body that serves the public interest by setting high-quality ethical standards for professional accountants and by facilitating the convergence of international and national ethical standards, including auditor independence requirements, through the development of a healthy, internationally appropriate code of ethics.

Conceptual framework

principal

threats

Safe guards

Principal

• Objectivity ( auditor must be independent)• Integrity ( auditor must be honest and

punctual)• Professional competence ( update with

knowledge and standards• Confidentiality (auditor don’t share the secrecy

of company to others.• Professional behavior ( auditor behavior must

be the professional.

Malik saqibUNIVERSITY OF CENTRAL PUNJABCOURSE MCOMK1F12MCOM0025

Threats

• interest threat ( auditor must be independent person, he have no any interest in company and its profits)

• Advocacy ( he is not doing any work on company behalf like negotiate with others organizations and companies)

• Intimation( he is purely independent person)

Expectation gap

• Auditor not prepare the financial statements of that company where he is doing audit.

• Qualified reports are the negative report of the organization while unqualified reports are positive reports of the company

• Auditor is not hire for the detection of fraud while he is hire for opinions on statements, but if he find any detection he will point out it.

Opinions on reports

Thanks