The basics of auditing in Pakistan

Auditing is a critical pillar of financial governance, ensuring that businesses, government institutions, and non-profits present fair and accurate financial statements. In Pakistan, auditing is regulated by a combination of local laws, international standards, and professional codes of ethics. Whether statutory or internal, audits help enhance investor confidence, ensure regulatory compliance, detect fraud, and promote transparency in operations. This article provides a comprehensive overview of the fundamentals of auditing in Pakistan, including types, legal framework, processes, and key roles played by auditors.

What Is Auditing?

Auditing is the independent examination of financial information of any entity, whether profit-oriented or not, irrespective of its size or legal form, to express an opinion on its financial statements. It provides assurance to stakeholders that the financial reports are free from material misstatement due to fraud or error.

Legal and Regulatory Framework for Auditing in Pakistan

Auditing in Pakistan is governed by several laws and standards:

• Companies Act, 2017

• Code of Corporate Governance (CCG)

• International Standards on Auditing (ISAs)

• Securities and Exchange Commission of Pakistan (SECP) rules

• State Bank of Pakistan (SBP) regulations for financial institutions

• Institute of Chartered Accountants of Pakistan (ICAP) code of ethics

Types of Audits in Pakistan

1. Statutory Audit

This is a legally required audit for all registered companies under the Companies Act, 2017.

• Applicable to: Private Limited Companies, Public Companies, Non-Profit Organizations

• Mandatory: Yes, annually

• Conducted by: Chartered Accountants or audit firms approved by ICAP and SECP

2. Internal Audit

An independent, objective assurance activity designed to add value and improve operations.

• Applicable to: Listed companies, banks, large enterprises

• Focus: Risk management, internal controls, and operational efficiency

• Report: Submitted to Audit Committee or Board of Directors

3. Tax Audit

An audit specifically targeting tax compliance and accuracy of tax filings.

• Conducted by: FBR-authorized auditors or internal tax consultants

• Focus: Compliance with Income Tax Ordinance, 2001 and Sales Tax laws

• Trigger: Random selection or red flags in tax filings

4. Forensic Audit

A detailed investigation used to uncover fraud, embezzlement, or other irregularities.

• Commissioned by: Management, courts, or regulators

• Used in: Litigation, fraud detection, corporate disputes

• Evidence-based: Yes, often presented in court

5. Compliance Audit

Verifies whether an organization adheres to external laws or internal policies.

• Applicable to: Regulated sectors (banking, insurance, NGOs)

• Focus: SECP rules, donor requirements, ISO certifications

• Performed periodically: Annually or bi-annually

6. Special Purpose Audit

Audits conducted for a specific reason, e.g., IPO preparation, merger evaluation, or grant funding certification.

Audit Requirement under the Companies Act, 2017

According to the Companies Act:

• Private companies with paid-up capital above PKR 1 million must appoint an external auditor

• Public companies must appoint a practicing chartered accountant or audit firm

• Listed companies must rotate their auditors every five years

• Audit firms must be ICAP registered and comply with the Quality Control Review (QCR) framework

Appointment and Duties of External Auditors

Appointment Procedure

• Appointed by shareholders in the Annual General Meeting (AGM)

• In case of listed companies, appointment is made on recommendation of the Audit Committee

• Auditor must be independent and not have any conflict of interest

Duties of External Auditors

• Express an opinion on the financial statements

• Verify compliance with Companies Act and IFRS

• Ensure the company maintains proper books of accounts

• Report any fraud or suspicious transactions

• Submit Auditor’s Report with audited financials to SECP and FBR

Key Steps in the Audit Process

1. Planning and Risk Assessment

• Understand the business environment

• Identify risk areas (fraud risk, material misstatement)

• Define audit scope and materiality thresholds

2. Internal Control Evaluation

• Assess internal control systems

• Test their effectiveness

• Recommend improvements if controls are weak

3. Substantive Procedures

• Perform tests on account balances and transactions

• Verify supporting documentation (invoices, contracts, receipts)

• Check bank reconciliations, depreciation, inventory records, etc.

4. Final Review and Reporting

• Summarize findings

• Discuss key issues with management

• Draft and finalize the Audit Report with audit opinion

Types of Audit Opinions

The final audit report includes one of the following opinions:

• Unqualified Opinion (Clean Report): Financials are accurate and fairly presented

• Qualified Opinion: Exceptions exist but overall statements are reliable

• Adverse Opinion: Major misstatements found, financials are misleading

• Disclaimer of Opinion: Auditor unable to form an opinion due to lack of evidence

International Standards on Auditing (ISAs) Adopted in Pakistan

Pakistan has adopted ISAs issued by the International Auditing and Assurance Standards Board (IAASB). Key standards include:

• ISA 200 – Overall objectives of independent auditor

• ISA 315 – Identifying and assessing risks

• ISA 500 – Audit evidence

• ISA 700 – Forming an opinion and reporting

Audit Documentation Requirements

Auditors must maintain a detailed audit file that includes:

• Audit planning and risk assessment sheets

• Internal control questionnaires

• Working papers and sample test results

• Client confirmations and third-party verifications

• Copies of management representations

• Final signed financial statements

Role of the Audit Committee

For public interest and listed companies, an Audit Committee is mandatory:

• Comprises at least three non-executive directors

• Reviews financial statements before submission to the Board

• Oversees internal control and risk management

• Interacts with internal and external auditors

SECP Requirements for Listed Company Audits

SECP mandates specific audit-related obligations:

• Rotation of audit partner every five years

• Annual review of audit firm’s QCR rating

• Timely submission of audited accounts

• Auditor must report to SECP in case of fraud or mismanagement

Audit Requirements for NGOs and NPOs

Non-profit entities in Pakistan must undergo audits as per:

• Voluntary Social Welfare Agencies (Registration and Control) Ordinance, 1961

• Income Tax Ordinance, 2001 – To claim tax exemption

• Donor agency guidelines – Audits required for transparency

Audited financials are often required for grant renewals, donor credibility, and FBR approvals.

Challenges Faced in Auditing in Pakistan

• Resistance from management or lack of cooperation

• Incomplete or poorly maintained accounting records

• Non-compliance with internal controls

• Fraud concealment and documentation tampering

• Auditor independence issues in closely held companies

The Growing Importance of Internal Audit

As businesses scale, the need for internal audit grows. It helps:

• Evaluate internal systems

• Identify inefficiencies

• Detect potential frauds

• Improve governance and compliance

• Prepare for external audit

Audit Automation and Technology in Pakistan

Modern audit firms and businesses are using technology to improve efficiency:

• Data analytics to identify anomalies

• Audit software tools like CaseWare, IDEA, and ACL

• Cloud storage for audit documentation

• ERP integrations to pull real-time data for auditing

Qualifications and Registration of Auditors

Auditors in Pakistan must be:

• Chartered Accountants (CA) registered with ICAP

• Members of a firm holding a valid practicing license

• Having QCR rating if auditing listed or public interest entities

How Businesses Benefit from Quality Audits

• Enhanced credibility with stakeholders

• Improved internal processes and controls

• Better compliance with laws and tax regulations

• Identification of cost-saving opportunities

• Improved access to banking and investment

Conclusion

Auditing plays a vital role in promoting transparency, efficiency, and trust in Pakistan’s economic ecosystem. Whether for regulatory compliance or operational improvement, audits provide valuable insights into the financial and operational health of a business. As financial reporting and accountability requirements continue to evolve, businesses must adopt proper audit practices and collaborate with qualified professionals to ensure they meet local and international expectations. Sterling.pk offers a full suite of audit, assurance, and advisory services to help organizations of all sizes comply confidently and grow responsibly