Auditing is a critical process that ensures the accuracy, reliability, and transparency of a business’s financial information. In Pakistan, conducting an audit is not just a regulatory requirement for companies under the Companies Act, 2017, but also a key tool for strengthening corporate governance, managing risk, and building stakeholder trust.
This comprehensive guide outlines the audit process in Pakistan, its legal framework, audit types, procedures, reporting standards, and best practices for businesses and auditors alike.
Table of Contents
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Introduction
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What is an Audit?
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Types of Audits in Pakistan
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Legal Framework for Auditing in Pakistan
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Who Requires an Audit?
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Appointment of Auditors
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Key Audit Standards and Frameworks
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Pre-Audit Preparation
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Understanding the Entity’s Operations
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Risk Assessment and Internal Controls Review
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Substantive Testing and Verification
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Gathering Audit Evidence
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Audit Documentation and Working Papers
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Drafting the Audit Report
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Unqualified vs Qualified Audit Opinions
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Auditor’s Responsibilities Under Law
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Compliance with SECP and FBR Requirements
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Common Audit Challenges in Pakistan
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The Role of Technology in Auditing
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Internal Audits vs External Audits
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Importance of Annual Audits for SMEs
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Auditing Non-Profit and Public Sector Entities
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Role of Chartered Accountants in Pakistan
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Conclusion
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SEO Title and Meta Description
1. Introduction
An audit is an independent examination of financial records, internal controls, and transactions to ensure compliance with applicable laws and standards. In Pakistan, audits are essential for legal compliance, investor confidence, and strategic business decision-making.
2. What is an Audit?
An audit involves a systematic review of an organization’s financial statements and operations to verify that they present a true and fair view of its financial position. It helps detect errors, fraud, and non-compliance with accounting standards.
3. Types of Audits in Pakistan
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Statutory Audit – Mandatory under the Companies Act, 2017 for all public companies and private companies exceeding turnover thresholds
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Internal Audit – Conducted periodically to improve operations and reduce risk
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Tax Audit – Conducted by FBR to verify tax compliance
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Forensic Audit – Used to investigate suspected fraud or financial misconduct
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Compliance Audit – Ensures adherence to industry-specific regulations and standards
4. Legal Framework for Auditing in Pakistan
Auditing in Pakistan is primarily governed by:
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Companies Act, 2017
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Code of Corporate Governance
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Income Tax Ordinance, 2001
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Sales Tax Act, 1990
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SECP Regulations
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International Standards on Auditing (ISAs) issued by ICAP
5. Who Requires an Audit?
Mandatory audit requirements apply to:
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All public companies
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Private companies with capital ≥ PKR 1 million or turnover ≥ PKR 10 million
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NGOs, societies, and trusts receiving public funding or registered under specific acts
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Entities registered under SECP or filing audited returns with FBR
Banks, insurance companies, and listed firms must also conduct audits under their respective regulatory regimes.
6. Appointment of Auditors
Auditors are appointed by:
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The Board of Directors (in the first annual general meeting)
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Shareholders (by passing an ordinary resolution)
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The SECP (in cases of non-compliance or failure to appoint)
Only practicing Chartered Accountants registered with ICAP can conduct statutory audits in Pakistan.
7. Key Audit Standards and Frameworks
Audit firms in Pakistan follow:
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International Standards on Auditing (ISAs)
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IFRS and IAS for financial reporting
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ICAP Code of Ethics
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SECP audit directives
These standards ensure objectivity, independence, and high audit quality.
8. Pre-Audit Preparation
Before the audit begins, the auditor and company should:
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Define the scope of the audit
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Sign an engagement letter
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Discuss timelines, fees, and deliverables
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Ensure availability of previous financial statements and internal control documents
9. Understanding the Entity’s Operations
Auditors begin by gaining a thorough understanding of:
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Nature of the business
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Industry practices
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Regulatory environment
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Internal control systems
This helps in designing effective audit procedures and identifying risk areas.
10. Risk Assessment and Internal Controls Review
A critical part of auditing is evaluating:
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The design and effectiveness of internal controls
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Areas prone to material misstatement
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Fraud risk indicators
Auditors document this through walkthroughs, interviews, and control testing.
11. Substantive Testing and Verification
Auditors conduct substantive tests to verify transactions and balances, including:
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Sales and purchase invoices
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Bank statements and reconciliations
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Inventory counts
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Fixed asset registers
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Loan and lease agreements
12. Gathering Audit Evidence
Reliable audit evidence must be:
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Sufficient and appropriate
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From both internal and external sources
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Documented with workpapers and confirmations
The more risk involved, the more evidence the auditor must gather.
13. Audit Documentation and Working Papers
Audit working papers include:
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Audit programs and checklists
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Risk assessments
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Summary of test results
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Adjustments and findings
Proper documentation supports the audit opinion and meets regulatory inspection requirements.
14. Drafting the Audit Report
Once procedures are complete, the auditor prepares a report that includes:
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Auditor’s opinion (unqualified, qualified, adverse, disclaimer)
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Notes to the financial statements
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Basis of opinion and scope of audit
This report is attached to the company’s annual financial statements.
15. Unqualified vs Qualified Audit Opinions
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Unqualified Opinion – Indicates the financial statements present a true and fair view
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Qualified Opinion – Indicates limitations or exceptions in specific areas
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Adverse Opinion – Suggests major misstatements
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Disclaimer of Opinion – Issued when the auditor cannot form an opinion due to lack of evidence
16. Auditor’s Responsibilities Under Law
An auditor in Pakistan must:
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Maintain independence and professional skepticism
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Report fraud or financial irregularities
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Ensure compliance with laws and accounting standards
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Retain audit files for regulatory review
Failure to comply may result in penalties, suspension of license, or legal action.
17. Compliance with SECP and FBR Requirements
Companies must file:
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Audited financial statements annually with SECP
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Tax returns and audit reports with FBR
Auditors must also file Form 29 and ensure compliance with Section 223 of the Companies Act and FBR’s audit clauses.
18. Common Audit Challenges in Pakistan
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Lack of proper documentation by SMEs
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Incomplete record-keeping
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Cash-based transactions without traceability
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Resistance from management during fieldwork
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Inconsistent application of IFRS or GAAP
Training, communication, and digital tools help overcome these challenges.
19. The Role of Technology in Auditing
Technology is transforming audits through:
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Cloud accounting integration
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Data analytics and automation
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E-invoicing systems (linked to FBR)
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Remote audit procedures via cloud platforms
Audit firms in Pakistan are increasingly adopting tech to improve accuracy and efficiency.
20. Internal Audits vs External Audits
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Internal Audit is conducted by in-house or outsourced teams to assess controls and operations
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External Audit is conducted independently and is legally mandated
Both are important for risk management, but only external audits provide legal assurance to shareholders and regulators.
21. Importance of Annual Audits for SMEs
Even if not legally required, SMEs benefit from voluntary audits as they:
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Improve credibility with banks and investors
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Identify inefficiencies and fraud risks
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Help in budgeting and forecasting
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Build trust with customers and suppliers
22. Auditing Non-Profit and Public Sector Entities
Auditing is equally vital in the non-profit and government sectors. Auditors ensure:
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Donor funds are properly utilized
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Grants are accounted for transparently
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Public funds are not misappropriated
Pakistan’s Auditor General oversees public sector audits, while NGOs often engage external Chartered Accountants.
23. Role of Chartered Accountants in Pakistan
Chartered Accountants play a vital role in Pakistan’s auditing landscape. Regulated by ICAP, they are licensed to:
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Conduct statutory audits
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File assurance reports
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Sign financial statements
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Report fraud to regulators
Their expertise ensures that audit reports carry credibility and legal standing.
24. Conclusion
Auditing is not merely a compliance formality but a strategic necessity for financial transparency and stakeholder confidence. Whether you’re a listed company, an SME, or a non-profit, conducting audits in line with Pakistan’s legal framework and global standards is essential.
At Sterling.pk, we deliver high-quality, independent audit services tailored to the needs of modern Pakistani businesses. Our Chartered Accountants are equipped to help you meet compliance, reduce risk, and unlock insights from your financial data.