Auditing Standard No. (1) PDF

# Auditing Standard No. (1) ## Objective and Principles of Auditing ### Contents |Subject|Para.|Page| |:---|:---:|:---:| |Objective and Principles of Auditing| (1) | 815 | |Introduction| | | |Objective of an Audit| (2-3) | 815| |General Principles of an Audit| (4-6)| 815 | |Scope of an Audit| (7) |...

# Auditing Standard No. (1) ## Objective and Principles of Auditing ### Contents |Subject|Para.|Page| |:---|:---:|:---:| |Objective and Principles of Auditing| (1) | 815 | |Introduction| | | |Objective of an Audit| (2-3) | 815| |General Principles of an Audit| (4-6)| 815 | |Scope of an Audit| (7) | 816| |Reasonable Assurance| (8-12)| 817 | |Responsibility for the Financial Statements| (13)| 818 | |Effective Date| (14)| 818| |Adoption of the Standard| | 819| ### Objective and Principles of Auditing #### Introduction 1. The purpose of this Auditing Standard for Islamic Financial Institutions (ASIFI) is to establish standards and provide guidance on the objective and general principles governing an audit of financial statements prepared by a financial institution which conducts business in conformity with Sharia Rules and Principles. #### Objective of an Audit 2. The objective of an audit of financial statements is to enable the auditor to express an opinion as to whether the financial statements are prepared, in all material respects, in accordance with the Sharia Rules and Principles, the accounting standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and relevant national accounting standards and practices in the country in which the financial institution operates. The phrase used to express the auditor's opinion is "give a true and fair view". 3. Although the auditor's opinion enhances the credibility of the financial statements, the user cannot assume that the opinion is an assurance as to the future viability of the financial institution or as to the efficiency or effectiveness with which management has conducted the affairs of the financial institution. #### General Principles of an Audit 4. The auditor should comply with the "Code of Ethics for Professional Accountants" issued by the AAOIFI, and the International Federation of Accountants which do not contravene Islamic Rules and Principles. Ethical principles governing the auditor's professional responsibilities include: - Righteousness - Integrity - Trustworthiness - Fairness - Honesty - Independence - Objectivity - Professional Competence - Due Care - Confidentiality - Professional Behaviour - Technical Standards 5. The auditor should conduct an audit in accordance with ASIFIs, which are auditing standards approved by the Accounting and Auditing Organization for Islamic Financial Institutions. These contain basic principles and essential procedures together with related guidance in the form of explanatory and other material. 6. The auditor should plan and perform the audit with professional competence and due care recognizing that circumstances may exist which cause the financial statements to be materially misstated. For example, the auditor would usually expect to find evidence to support management representations and not automatically assume that they are necessarily correct. #### Scope of an Audit 7. The term "scope of an audit" refers to the audit procedures deemed necessary by the auditor in the circumstances to achieve the objective of the audit. The procedures required to conduct an audit in accordance with ASIFIs should be determined by the auditor having regard to the requirements of appropriate Islamic Rules and Principles, ASIFIs, relevant professional bodies, legislations, regulations which do not contravene Islamic Rules and Principles, and, where appropriate, the terms of the audit engagement and reporting requirements. International Standards on Auditing (ISAs) shall apply in respect of matters not covered in detail by ASIFIs providing these do not contravene Islamic Rules and Principles. #### Reasonable Assurance 8. An audit is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement. Reasonable assurance is a concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no material misstatements in the financial statements taken as a whole. Reasonable assurance relates to the whole audit process. 9. Reasonable assurance also means that the auditor has satisfied himself that the transactions he examined during his audit comply with Shari'a Rules and Principles as determined by the Shari'a Board of the financial institution. 10. However, there are inherent limitations in an audit that affect the auditor's ability to detect material misstatements. These limitations result from factors such as: - The use of sampling while testing transactions and balances. - The inherent limitations of any accounting and internal control system (including, for example, the possibility of collusion). - The fact that most audit evidence is persuasive rather than conclusive. 11. Also the work undertaken by the auditor to form an opinion is based on judgement, regarding in particular: - The gathering of audit evidence, for example, in deciding the nature, timing and extent of audit procedures, and - The drawing of conclusions based on the audit evidence gathered, for example, assessing the reasonableness of the estimates made by management in preparing the financial statements. 12. Further, other limitations may affect the persuasiveness of audit evidence available from which to draw conclusions on aspects of the financial statements (for example, transactions between related parties). In these cases certain ASIFIs identify specified procedures which may, because of the nature of these aspects, provide sufficient appropriate audit evidence in the absence of: - Unusual circumstances which increase the risk of material misstatement beyond that which would ordinarily be expected, or - Any indication that material misstatement exists. #### Responsibility for the Financial Statements 13. While the auditor is responsible for forming and expressing an opinion on the financial statements, the responsibility for preparing and presenting the financial statements in compliance with Sharia Rules and Principles and relevant legislation and regulations is that of the management of the financial institution. (Consideration should be given to the definition of management in relevant national legislation and regulations.) The audit of the financial statements does not relieve the management of the financial institution of this responsibility. #### Effective Date 14. This Standard shall be effective for financial statements for the financial periods beginning 1 Muharram 1418 A.H. or 1 January 1998 A.D. #### Adoption of the Standard The Standard of Objective and Principles of Auditing was adopted by the Board in its meeting No. (11) held on 2-3 Muharram 1417 A.H., corresponding to 19-20 May 1996 A.D.