Circular 2010/05

COMMENTS INVITED ON THE DRAFT AUDITING STANDARD 1 – AN AUDIT OF INTERNAL CONTROL OVER FINANCIAL REPORTING THAT IS INTEGRATED WITH AN AUDIT OF FINANCIAL STATEMENTS (AS-1)

With reference to our Circular 3/2010 dated March 18, 2010 the Institute is issuing an exposure draft on Auditing Standard 1 – An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements.

The need for this standard arose from the requirement by State Bank of Pakistan (SBP) for banks to have statutory auditors attestation to and report regarding efficacy of the bank’s/DFI’s internal control, which are relevant to the financial reporting. However, since the same concepts can be used by any other entity that is desirous of having an audit of internal control over financial reporting, no reference to SBP requirement has been made in the draft standard.

The requirement for statutory auditors’ report on internal controls over financial reporting exists only in United States and Japan. The requirements of the US framework are scattered in the form of Sarbanes Oxley Act, SEC Rules and Auditing Standard 5 issued by Public Company Accounting Oversight Board (PCOAB). Therefore, with respect to framework to be followed for reporting by statutory auditors, it was agreed that the audit would be carried out using Auditing Standard 5 issued by PCOAB. In view of this decision the Institute wrote to PCAOB to seek permission for adapting the AS-5 Standard. Subsequently AS-5 Standard has been adapted for local use as ‘Auditing Standard 1 – An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements’.

The main changes resulting from the adaptation of the standard for use in Pakistan are as follows:

  • Replacing the reference to US Auditing Standards and law with International Standards on Auditing (ISAs).
  • The option to have a combined report on the financial statements and internal controls has been eliminated and the standard requires a separate report on ICFR. The usual statutory audit report on financial statements will continue.
  • The proposed standard allows that the ICFR report can be rendered at the parent company level and may not include subsidiaries and associates.
  • Each of the audit reports will include a statement that the other audit report has been issued.

The full text of the draft standard can be downloaded from the Institute’s website.

Members are requested to send their valued comments to the Directorate of Technical Services at dtscomments@icap.org.pk latest by May 10, 2010. It would be helpful if the specific paragraph or group of paragraphs which is/are being commented upon is/are mentioned and that the matter is explained succinctly along with the proposed recommendation and the rationale for doing so.