Submitted to

Mr. Zahirul
7/22/2014
Meherun Nahar
ID: s111286
Subject: Audit 2
Audit Reality in
Bangladesh
Audit reality in Bangladesh
Introduction
Auditing in the perspective of the accounting profession relates to an examination of company
accounts to determine the extent whether accounts are prepared in accordance with GAAP.The
purpose of auditing is to increase the credibility and reliability of financial statements prepared
by management.Needed in the corporate sector due to the separation of ownership and control.
Types of Services Provided by Auditors
1. Assurance services
2. Attestation services
. !on " Assurance services
Auditing
Auditing is a systematic process of ob#ectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence between
those assertions and established criteria and communicating the results to interested users.
Auditors perform audit procedures in accordance with generally accepted auditing standards
to determine the reasonable assurance whether the financial statements are free from
misstatements.
Audit is only reasonable not absolute assurance.
Audit Objectives
$inancial audit is not an assurance towards a long term viability of the business nor is it an
assurance that a business is managed effectively and efficiently.
Audit objectives are:
i. To ensure compliance with accounting standards
ii. To ensure company affairs are regulated by %ompanies Act 1&&'( and
iii. To detect material misstatements caused by fraud and error.
iv. The primary ob#ective of audit is to enable auditor to express his ) her opinion as to
whether the financial statements are*
v. A true and fair view and that the assertions made by directors and management are
correctly reflected in the financial statements.
vi. Prepared in accordance to applicable laws and regulations.
True and $air +iew
Auditing must be carried out by a competent, independent person.
-b#ective is to express an opinion of whether the financial statements present a .True and
$air +iew/ of the business.
True view " 0nformation on the financial statements are based on facts not myths. %an be
verifiable from source documents.
$air view 1 $ree from biases and discrimination and is in compliance with standards and
rules. 2eflect .actual situation/.
Demands for Auditing
%onflict of interest
%omplexity
2emoteness
%onse3uence
Types of Audit
There are four types of audit as classified below*
1 !inancial Statements Audit
This type of audit used to determine whether the financial statements have been verified and
stated in accordance with GAAP which in turn in accordance with re3uirements of legislation
and regulation. Perform by independent external auditor to improve reliability for different group
of users.
" #ompliance Audit
4sed to determine whether the management is following specific procedures, regulations or rules
set down by higher authority. A compliance audit may be needed to chec5 whether organi6ation
have complied with specific policies or contractual agreements. The result of compliance audit is
generally reported internally to management.
$ Operational Audit
An operational audit is used to review the organi6ation7s operating procedures and methods.
-b#ective here is to review the efficiency and effectiveness of operating procedures an resources
allocation as well as the effectiveness and efficiency of management.
2ecommendations for improvements usually accompany such audit.
% !orensic Audit
$orensic audit re3uires the use of critical analyses and investigative skills, integrated with
accounting knowledge and business experience. 8xample of forensic audit includes cases of
business or employee fraud, criminal investigations and shareholders ad partnership disputes.
Internal and e&ternal Audit
0ndependent
0nternal auditors are not independent in their wor5 area. 0nternal audit is done by the internal
staff appointed by the management. But external auditors are independent auditors.
-b#ective, $unction, 9cope and :ethodology
The role of internal auditing is determined by management and its ob#ectives differ from those of
external auditor who is appointed to report independently on the financial statements.
8mployment
0nternal auditor are conducting their employment internally whether external auditor are
conducting their employment externally.
8ducation bac5ground and 8xpertise
To be an external auditor the person must be an certified charter accountant or need to 3ualified
with other professional degree. -n the other hand internal auditor need not to 3ualify with
professional degree.
'elations(ip of audit procedures to assertion:)
A set of audit procedures prepared to verify assertions for a component of the financial
statements is usually referred to as an audit programmer. 0n some instances more than one audit
procedure is re3uired to meet an assertion. %onversely in some cases an audit procedure
provider7s evidence for more than on assertion. 0n These terms are discussed in below*1
*anagement assertion:)
%ompleteness
-wnership
+aluation
8xistence
;isclosure
-ccurrence
:easurement
Audit objectives:)
;isclosure
-wnership
Accuracy
+alidity
+aluation
%utoff
%ompleteness
%lassification
Audit procedures:)
+&amination: 1 0nspecting records, documents or tangible
Observation:)<oo5ing at a process or procedures being performed
In,uiry and #onfirmation:)9ee5ing information of 5nowledgeable person inside or
outside the entity
#omputation:)%hec5ing the arithmetical accuracy or perform independent calculation
Analytical revie- procedures:)Analysis of significant ratios and trends and
investigation of fluctuation that are inconsistent with 5nown information
In conclusion, it will say that management assertions, audit ob#ectives and audit
procedures are interrelated.
'esponsibilities of Auditor and *anagement
The auditor and management have different responsibilities as outlined below*
Auditor7s responsibilities*
a= To state an opinion on the financial statements in the auditor7s report based on his )her
independent examination.
b= To provide reasonable assurance that the financial statements are free from material
misstatements.
c= The audit exercise is performed with due care and competence.
d= The auditor (as e&tensive .no-ledge about the nature of the client7s business and
industry in order to determine the validity of the assertions.
:anagement 2esponsibilities*
a= To prepare the company7s yearly financial statements.
b= To maintain ade3uate accounting and internal control systems.
c= To safeguard the company7s assets.
d= To prevent/ detect errors, irregularities and fraud.
Auditor 'eport
The auditor report is a clearly written communication prepared by the auditor at the conclusion
of an audit that expresses the auditor7s opinion as to whether*
1 The financial information has been prepared using acceptable accounting policies,
including those specified in the relevant accounting records.
1 The financial information complies with relevant regulations and statutory
re3uirements.
1 The view presented by the financial statements as a whole is consistent with the
auditor7s 5nowledge of the business of the entity, and
There is ade3uate disclosure of all material matters necessary to give a true and fair view.
Audit process:
!undamental principles of Audit
0ntegrity
-b#ectivity
Professional %ompetence and ;ue %are
%onfidentiality
Professional Behaviour
Audit Importance0s:
$irst of all, for most organi6ations >for instance companies, larger charities and clubs= publishing
audited accounts once a year is something they must do by law. But most experts agree that the
real value of the audit process goes far beyond ?tic5ing a box7.
0n fact, having independent and unbiased auditors confirm that an organi6ation7s claims about its
financial position, and the process behind these claims, are true and fair is useful for a wide
range of reasons, depending on your point of view. $or instance*
0nvestors and shareholders* These people own the organi6ation but, in many cases, will not be
closely involved in its day to day running. 9o, again, an independent audit is very interesting to
them, since it provides a trusted second opinion on the organi6ation7s financial statements and, in
turn, gives some, insight as to how well it is being run.
%ompany accountants)$inance ;irectors* These people are essentially in charge of the finances
of the organi6ation being audited and, for them, going through an audit is mostly about
confidence and peace of mind. @aving an independent expert poring over your figures might be
a little bit uncomfortable at times, but the reward is in ma5ing sure that your numbers are true
and fair.
Ahat7s more, most audits these days will loo5 at ?internal control systems7 as well as the
finances. These systems are usually established through the specific design of computer systems
and, for instance, ensure that the authori6ation of transactions is controlled according to clear
rules and policies. Bnowing these control systems are sufficiently strong and are wor5ing
properly is also very reassuring.
$inally, many company accountants and finance directors also value wor5ing closely with
auditors, believing they can help to solve complex accounting problems, offer world class advice
on issues ranging from governance to business processes and 5eep them up to date with the latest
techni3ues, rules and regulations.
$inancial analysts* These people help to determine what an organi6ation7s shares are worth and,
therefore, its value as a whole. They do so by independently analy6ing and commenting on its
financial position as well as ma5ing predictions about its future success. $or financial analysts,
audited accounts are a vital tool, since they provide unbiased and independently chec5ed
information on which to base their wor5.
2egulators* These independent organi6ations are tas5ed with overseeing wide range of
industries to ensure individual firms are operating fairly and legally. They may ma5e use of
audited accounts as part of the ongoing monitoring of each firm or to help with more specific
investigations.
-ther sta5eholders* ;epending on the organi6ation being audited, the outcome of an audit
process may be interesting to a whole range of other sta5eholders, such as politicians, #ournalists
and the general public.
Advantages of Auditing
Auditing is the analysis of the financial accounts)records, by a 3ualified accountant, and
procedures of a firm or organi6ation. This is essential in order to gain a fair perspective on the
companyCs financial statements. Aith auditing, potential investors and creditors can loo5 at the
financial statements to decide whether to invest in a business or not. Auditing is important as it
also protects the public from scams and corrupt business procedures.
T(e advantages for a business audit are:
1. Gain a strong sense of internal control.
2. 0dentify 5ey areas for improvement in your company.
. Test out the performance of new technology.
D. 8valuate threats, economy, efficacy and 3uality.
'. 2eali6e fraudulent occurrences in the business.
E. Analy6e and understand your firmsC financial data.
F. The public are protected from corruption.
T(e disadvantages of a business audit are:
1. 0t does not ta5e into account the productivity and the s5ills of the employees of the business.
2. The financial data is never current and does not reveal much about the present financial
position of a company.
. ;ifferent accountants use different techni3ues( therefore it would be hard to compare audits
between companies who have used different accountants.
D. $or smaller companies, hiring an accountant)firm to carry out an audit can be costly.
'. A bad audit can discourage investment.
E. %an be time consuming to answer the auditorCs 3uestions and the business may not wor5 to
maximum capacity.
Audit in 1anglades(
0n Bangladesh, the -ffice of the %omptroller and Auditor General >%GAG= is the supreme audit
institution and it is the only body entrusted to carry out the performance audit. The legal
authority of the %GAG to carry out the performance audit derives from two main sources*
Article 12H of the %onstitution of the People7s 2epublic of Bangladesh and the %omptroller and
Auditor General7s >Additional $unctions= Act 1&FD. Article 12H>1= state* ?The public accounts of
the 2epublic and all courts of law and all authorities and offices of the government shall be
audited and reported by the auditor general and for that purpose he or any person authori6ed by
him in that behalf IshallJ have access to all records, boo5s, vouchers, documents, cash, stamps,
securities, stores of other government properties in the possession of any person in service of the
2epublic.7 Additionally, the %omptroller and Auditor General7s >Additional $unctions= Act1&FD,
provides the %GAG with additional authorities such as introducing new rules and directions
pertaining to audits including 5eeping and auditing accounts of government, commercial
companies owned by the government, statutory bodies and local authorities. 0n today7s society
the exercise of an auditor7s to the economic and ethical leadership sets the bounding standard or
in other words e3uips an auditor in such a way that recogni6es him as a reliable body. Aith the
growing conscious recognition of the importance of financial data in the ordering of everyday
business and economic life, the need of basic economic facts is providing a constantly enlarging
opportunity for the accounting profession. The auditorsC reports have an especial capacity to
fulfill the need for reliable and authoritative financial material not only because of the reputation
or prestige of the certified statements, but also because of the significance generally attached by
the business man to the functions of the auditor and his reports. These functions, and the scope of
these reports, have in the past been definitely related to the character of and changes in business
activity. Audits and reviews are basically procedures performed on the financial statements of a
company, for the purpose of determining whether the financial statements include any material
misstatements. :isstatements are essentially wrong numbers due to numerical errors, fraud, or
errors in interpreting the accounting rules. :isstatements are material if they are large enough to
ma5e a difference to a user of the financial statements, such as a ban5 or investor. And the person
who involved in auditing is 5nown as auditor. 0t also provides the techni3ues necessary to
examine the internal control system of a company and perform operational or compliance audits
by internal or external auditors.
Types of Auditors Involved in t(e #urrent Day0s Auditing
There are two types of auditors who are basically involved with present day7s auditing practices*
Internal Auditor
0nternal auditors are employees of a company hired to assess and evaluate its system of internal
control. To maintain independence, they present their reports directly to the Board of ;irectors or
to Top :anagement. They provide functional operation to the concern. 0nternal Auditors are
employees of the company so that they can easily find out the frauds.
+&ternal Auditor
8xternal auditors are independent staff assigned by an auditing firm to assess and evaluate
financial statements of their clients or to perform other agreed upon evaluations. :ost external
auditors are employed by accounting firms for annual engagements. They are called upon from
the outside of the company.
Impact of internal and e&ternal audit in reality
A early research7s result in the context of Bangladeshi financial institutions exhibits that internal
and audit committee characteristics are an indispensable determinant of the external audit fee
>8A$=.
:ost importantly, the higher the contribution of the internal auditors to the financial statement
audit, the lower is the audit fee >Abbott et al 2KK=. This examination explores regarding the
factors influencing external audit fee. %oncurrently this research finding suggests that internal
audit contribution can bring in reduced 8A$s, and that the client firm can potentially affect
internal audit contribution by investing in internal audit 3uality, managing availability and
facilitating coordination between the internal and external auditors. The purpose of this study is
to better comprehend the relation between 0A$ contributions and 8A$s by ameliorating on the
simple proxies for 0A$ contribution in previous archival studies. Particularly this study reveals
that 8A$s levy on characteristics of the 0A$ identified by auditing standards as being relevant to
0A$ 3uality. 0t is also discovered from the research findings that the more time internal auditors
spend assisting the external auditor or performing financial" related tas5s, the lower is the
unexpected 8A$ earned.
This study also says that in view of the large corporate collapses which have demonstrated
problems with the 3uality of financial reporting and auditing. 0t shows that companies with
effective audit committees and internal audit functions also spend more on external auditing.
$urther, the findings indicate that it may not be appropriate to generali6e the results of overseas
studies to the Bangladesh environment. The tested results suggest additional opportunities for
further research. $or example, research that can provide insights into why the relation between
audit fees and external auditor reliance on the client7s internal controls appears to be significant
>9tein et al 1&&D= would enhance understanding of the audit production process. 2elatively, this
research establishes an inverse relation between internal audit contribution and the external audit
fee, but the authors cannot indicate whether the fee is decreased, because auditors have reduced
the charges or the 3uantity of their services. %oncurrently, the number of employees in internal
audit may not be a good measure of the use of internal audit as it does not ta5e into account the
use of outsourcing or of second of employees into internal audit on a temporary basis. The si6e
of the internal audit budget could be used in future research. There are also limitations with our
measures of audit committee effectiveness. :ore refined measures of independence, expertise
and diligence of audit committee members could be developed and used in future studies.
$urther, this research model does not indicate causality between the variables tested. 2esearch is
therefore needed to distinguish between supply1side and demand1side effects on audit fees and to
unravel the complex interrelationships between the various monitoring mechanisms.
T(e prevailing auditing practices
Today, auditors utili6e sampling techni3ues to test certain transactions during the performance of
an audit or review, since it would be nearly impossible and too expensive to test every single
transaction. The sampling may be aimed at the largest items or the items on the financial
statements that pose the most ris5 of misstatement. 0f material errors in the financial statements
are discovered, the auditors will direct management to correct them. Auditing has been the
bac5bone of the complicated business world and has always changed with the times. As the
business world grew strong, auditors7 roles grew more important. The auditors7 #ob became more
difficult as the accounting principles changed. 0t also became easier with the use of internal
controls, which introduced the need for testing, not a complete audit. 9candals and stoc5 mar5et
crashes made auditors aware of deficiencies in auditing, and the auditing community was always
3uic5 to fix those deficiencies. %omputers played an important role of changing the way audits
were performed and also brought along some difficulties. 9o how does fraud fit into the idea of
material misstatementsL :isstatements can be caused by either error or fraud. Auditors have
some responsibility for the detection of both errors and frauds that are material, but this
responsibility is not absolute. Auditors give Mreasonable .assurance that material misstatements
have been uncovered, but not total assurance. 8rrors are much more li5ely to be discovered
during an audit than are fraud. $raud schemes are crafted to purposely exploit the accounting
system and controls, and therefore it is more difficult for an auditor to find them. 9ince auditors
are not all15nowing beings, the assurance that the financial statements are correct can only be
.reasonableM assurance and not total assurance. Traditionally audits were mainly associated with
gaining information about financial systems and the financial records of a company or a
business. @owever, recently auditing has begun to include other information about the system,
such as information about environmental performance. As a result there are now professions that
conduct environmental audit in financial accounting( an audit is an independent assessment of
the fairness by which a company7s financial statements are presented by its management. 0t is
performed by competent, independent and ob#ective person or persons, 5nown as auditors or
Accountants, who then issue an auditorCs report on the results of the audit. 9uch systems must
adhere to generally accepted standards set by governing bodies that regulate businesses. 0t simply
provides assurance for third parties or external users that such statements present CfairlyC a
company7s financial condition and results of operations.
#(allenges t(at faces -(en implementing audit
The challenges of audit are a prominent issue in both private and public sectors. @owever, in the
public sector, the challenge of performance audit is an emerging issue that has received little
attention by researchers.
The challenges in the implementation phase of performance audit exist in the Bangladeshi public
sector. 0t suggests that the challenges exist over a number of auditing issues. These comprise
insufficient and incompetent manpower, unable to recruit consultant when needed, lac5 of
awareness and absence of pre1set goals among the auditees.
The purpose of government audit is to ensure transparency and accountability in the use of
resources in all types of government management. The ob#ective of audit wor5 includes
verification of statements of accounts and statement of income and expenditure to determine
whether these are prepared truly and correctly. Aith the emergence of !P: and Good
Government ideas, there has been a radical change in the approach to public sector auditing. The
focus has been shifted to traditional compliance and financial auditing to issues of performance
and results. !P: forces the public sector reform through transferring private sector management
principles to the public sector. 0n a #ournal it claims that the reform will simplify bureaucracy,
force innovation and improve public service efficiency and effectiveness. This also means that
organi6ation performance measurement is needed both in the !P: and public sector reform.
The ma#or concerns in the context of public financial management in Bangladesh have always
been to see how well the scarce public resources are utili6ed. The sta5eholders expect that the
audit office provide them with more information in the line of 8s >8conomy, 8fficiency,
8ffectiveness= of government7s programmers and services. The parliamentarians now a day7s not
only expect to have meaningful information on inefficiency, wastage, losses, or drainage of
resources of government departments, non1performance of many programmers and failures in
achieving targets in most pro#ects etc. but also demand recommendations suggesting remedial
measures.
4sually in Bangladesh, audit party goes to an institution, does its regular wor5, that is, performs
compliance or financial audit of government expenditure and receipt of a particular year or years
together , submits their reports to respective audit directorate and the wor5 is done . $rom those
reports less important financial irregularities and non recurring mista5es are discussed, brought
to the notice of higher authority and measures are ta5en to mitigate it from the respective audit
directorate. -nly serious financial irregularities are compiled together ministry wise and then
sent to -%AG and from there it is sent to PA% to be discussed and punitive measures are ta5en
from there. But performance audit is different in many aspects. 0t not only examines whether
rules and regulations are followed while expenditures are being incurred but whether the goals of
an institution are fulfilled and how economically, effectively and efficiently money is being spent
from government exche3uer. This whole endeavor re3uires well "e3uipped manpower, longer
time frame, more resources and greater involvement of both auditor and auditee. Performance
audit, unli5e other types of audit, recommends measures to be ta5en to achieve its goal at the end
of each report.
Performance audit or +alue1for1money >+$:= audit has been introduced in developed countries
and many developing countries over the last K years. The 9A0 of Bangladesh is also ma5ing
progress in implementing the concept and practice of performance audit in our public sector
auditing. Across the government, it is felt that auditing should be made more effective and useful
and should play an important role in promoting accountability and transparency in public
spending. The reform initiatives promulgated by !ew Public :anagement has brought the
change. Ae have to carry it forward. The present situation in this arena as viewed by the
researcher is mixed. The four variables discussed before give this opinion.