A key component: The eyebrow-raising audit standards of Pakistan

Entity-specific audit raises question of adhering to procedures

KARACHI: A true and fair financial statement (FS) is an essential requirement for a company. An audit, internal and external, is crucial to assure that the FS is free from material misstatement.

While an internal audit department is usually found in all the big entities in Pakistan, the more concerning issue is the standard and limitations of external auditing. There is a certain risk already attached to internal audits being manipulated to show biased results. This susceptibility to fraud is known to external auditors, who are specifically trained to recognise these limitations.

But when evidence is limited and companies stop providing information relevant to the audit, the assurance provided by the audit firm is dented severely, hurting the reliability of an audited company’s FS.

When asked about the difficulties faced, an external auditor working in one of the top firms in Pakistan said that there is a vast difference in compliance between local and foreign entities.

“Many companies in Pakistan get their FS audited just because it’s a statutory requirement,” said an auditor working for EY Pakistan – one of the top audit consultancy firms in the country.

“They do not prepare any underlying schedules/supportive documents required for us to carry out assessments.

“Meanwhile, foreign-based audit clients call for field work once they have fully compiled all relevant documents and the line of items needed for the FS.”

A materiality study – understanding the volatility of errors in the FS – is extremely important in the earlier phase of the audit planning. But, according to him, this report is almost completely ignored in Pakistan, giving rise to more inefficient sampling size for the external auditors to perform on.

Auditors have complained that six to seven professionals take up to 35 days in auditing a public listed company with a turnover of around Rs6 billion in Pakistan. Whereas abroad, it takes three auditors to complete the same quantum of field work in a week or two, regardless of the size of the entity.

Lack of management coordination

The requirement of providing external auditors with all necessary documentation is the responsibility of the management. Receiving all evidence to support a positive opinion on a financial statement is the statutory right of an auditor.

Explaining how professionals in Pakistan deal with this lack of compliance by the management, an experienced auditor stated that they usually do all the work themselves instead of arguing with persistent managers who claim no accountability.

While common practices reject principles of audit set by regulatory bodies, some auditors practising in Pakistan argue it is the inherent limitations of a declining economy that entities cannot fully commit to a substantial reporting framework.

This, however, does not discredit the effects of a thorough audit. When shareholders are briefed on an audit that is done by the book, it is implied that confidence shoots up to the roof. The owners of the company are assured that the management is adequately equipped to handle the operations of the entity. This also makes forecasting and budgeting much easier.

Easier said than done

A complete audit requires capital, planning and most importantly, commitment. If the upper hierarchy of the company gives priority to the procedures, it automatically translates the importance of the process to the lower staffs.

A more realistic approach to the cash-stricken market of Pakistan is something un-holistic. This is where a company has to assess which area is more susceptible to misreporting. For example, an online portal has to focus on security around access to database, while a restaurant needs to focus on physical security on ledgers.

This can be achieved through segregation of duty and a sound internal control system, which will decrease the inherent risk of a material misstatement in a financial statement, resulting in lesser and more effective work for the auditor.

Some argue that old client relations and not adhering to ethical standards is the reason for negligent auditing, but it is paramount to understand that these conditions are present in countries far more developed than Pakistan.

Audit firms in Pakistan are well equipped to handle any sort of difficulty, but it is important that the entities realise that statutory requirements like an audit can be looked at differently: A company can see it as just a mere requirement and get done with it half-heartedly, or they can understand that an audit can reflect and even improve the company’s business environment and work on an effective review.

the writer is a staff correspondent

Published in The Express Tribune, March  2^nd, 2015.

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