Audit Planning Framework of Chartered Accountants
Specially Focus on Hoda Vasi Chowdhury & Co.
Audit Planning is the fundamental phase where necessary consideration is given to the indispensable areas at the beginning of audit process. During the whole process of audit planning, it is important to keep in mind that the predetermined risks must be taken care to the best of the ability. Risks may appear in ways such as inappropriate representation of financial statements, misstatements of assets, poor or lack of internal control within the organization, non-compliance of corporate governance, market and economy oriented risks, etc. All these should be known prior to the audit engagement so that the auditor is well aware about what to look into and what to watch out for.
Bangladesh, being a developing economy and belonging to the middle income group of countries, is a prospective place for businesses to foster. As different industries are booming, the demand for auditing and financial services is also increasing rapidly. At the same time, rigorous rules and guidelines are being set by the authorities. Therefore, the need for superior financial reporting is irrefutable and unavoidable.
Hence, the dedicated services of the chartered accountants, whose elementary work in trade starts with audit planning.
Objective of the report
The primary objectives of the report are:
- To have basic understanding about the practices of chartered accountants for audit and other financial services
- To learn in details about how audit planning is designed, conducted, and implemented
- To ascertain different elements of audit planning, risks and materiality, and corporate governance
The secondary objectives of the reports are:
- To provide explanations of audit findings and observations and give recommendations accordingly
- To relate theoretical learning with practical work experience
Scope of the report
Audit planning is a crucial part of audit program. It needs constant updating as audit procedures advance.
Furthermore, it is a framework that is adopted by most chartered accountants in order to maintain high auditing standards and to assure proper management integrity. Therefore, this report can be used for the purpose of learning the know-how of audit planning, along with other supplements like corporate governance, risk elements, and ethical rationales. It may successfully serve as a secondary source of information for later studies.
Methodology of the report
Data of the report has been obtained through a couple of sources: Primary source and Secondary Source.
- Practical statutory audit experience (audit procedures)
- Observation and findings from client
- Discussions with audit team and management of the respective client
- Audit Practice Manual (APM) of Institute of Chartered Accountants of Bangladesh (ICAB)
- Study Material of ICAB (Assurance)
- Annual Reports of the client
- Company website
- Other relevant documents such as previous reports
Although I received adequate cooperation from my teammates and the management of the respective client, time constraint has been a challenge all through. Getting necessary documents in due time has remained a strenuous issue as well. Moreover, some of the observations and conclusions were drawn wholly based upon my level of understanding, comprehension, and interpretation of a particular statement due to insufficient evidence from the client. Therefore, any error that may have arisen in the report is subject to inadequate information and time lags. Nonetheless, in spite of all these limitations, I have tried with utmost sincerity to minimize discrepancies and errors.
Hoda Vasi Chowdhury & Co. is a chartered accountants firm. It is a USAID approved Audit Firm (in 1993, Regional Inspector General/Singapore accorded approval HVC as eligible Auditors to perform USAID project in Bangladesh). Currently, they have 3 offices including their National Office located at Kawran Bazar in the capital of Dhaka. They also have other local offices: one in Dhaka and one in Chittagong. It is a partnership form of business, mainly run by 7 active partners.
To uphold the reputation and recognition as one of the best professional service provider in this region
To excel with relentless efforts for the steady growth of their clients and to keep pace with global growth and development technology and professionalism with high ethical standards.
Areas of service
In order to help the clients keep pace with competitive and fast moving business environment, HVC offers wide range of services. Its expertise extends into different areas of financial, taxation, management and advisory matters. The most valued services fall under 4 main categories:
- Business Advisory
Further breakdown of services under each category are as follows:
Audit and Assurance
- Statutory/Annual Audit
- Special Purpose Audit/Review
- Agreed Upon Procedures Work
- Negative Assurance
- Interim Review
- Internal Audit
- Operational Audit
- Performance and Compliance Audit
- Corporate Governance
- US GAAP/ UJS GAAS Reporting
- Corporate Governance
- Basel II Implementation
Fiscal and Taxation
- Corporate Tax
- Value Added Tax (VAT)
- Other Indirect Tax
- Individual Tax Including Expatriate Tax
- Tax Advisory Services
- Tax Planning & Tax Compliance
- Tax Due Diligence
- Transfer Pricing
Business Advisory and Transaction Services
- Due Diligence
- Business Valuation
- Corporate Restructuring
- IPO Assistance
- Capital Market Advisory
- Joint Venture and Business Collaboration
- Feasibility Study
- Technical Collaboration
- Company Formation and Corporate Services
- Setting up Liaison / Branch Office
- Enterprise Risk Management
- Information Security and Risk Management
- Setting up Provident, Gratuity, Pension Funds
- Market Research, Survey and Studies
Management Consulting and Other Special Services
- Development Project Management
- Donor Funded Project Assistance
- IT Systems Design and Implementation
- Executive Search and Selection
- Immigration Verification Services
- Foreign Remittance
- Forensic Investigation
- Salary survey
- Training & Capacity Building
- Financial System Design
- Accounting Manual and Chart of Accounts Preparation
- Health & Nutrition Surveys
- Outward Remittance Certification
- Cash Incentive / Subsidy Certification
- Salary & Benefit Survey
- Work Permit & Visa Processing for Expatriates
Business Process Outsourcing (BPO)
- Payroll Management
- Book-keeping & Accounting
- Secretarial Services
- Personal Tax
- VAT, TDS
- Airlines Remittance services
- Provident Fund accounting
- Statutory return preparation & filing
- Quarterly return preparation & filing
- Document Management and record keeping
- Disaster Recovery and Business Community Support
HVC has a number of associate consultants to work on special projects and services, namely
- Health & Nutrition
- Human Resources
- Material Surveyor
The Corporate Governance is at the initial stage in our country. In the changing landscape of the regulatory and business environment, HVC stands well positioned to provide quality advice and other services on Corporate Government matter to a diverse client base. The vast and broad array of resources enables HVC to bring value and prospect for our clients. Detailed discussion is provided in the later part of the report with references available in the appendix.
Audit Planning and Risk Management
International Financial Reporting Standards (IFRS) defines Audit Planning as the crucial stage at the beginning of audit process which ensures that required attention is given to the necessary areas, probable problems are predetermined to be analyzed thoroughly in course of audit process, audit task is completed effectively and efficiently, and work is properly coordinated between the engaging parties.”
For an audit to be successful, sound planning between the auditor and the client is essential in order to maintain a productive and communicative environment. It must be noted that ethical standards be maintained at all times and no compromise must be made under any circumstances. In accordance to Assurance Study Manual of ICAB (2009), the following are the key steps in audit planning:
There are six major steps in an audit:
Step 1: Client Acceptance and Retention: Client is accepted and retained through:
- Ensuring professional qualification as per laws and regulations
- Ensuring availability of adequate resources
- Communicating with present auditors
Once the above mentioned steps have been conducted, an Audit Engagement Letter is issued to the client.
Step 2: Audit Planning: The basis of planning should focus on what the organization does, how it conducts its operations, what are the risks that must be taken into account, and how will the audit be conducted; next section details ‘Audit Planning’.
Step 3: Test of Control: This is required to comprehend the implementation of internal controls that are associated with audit.
Step 4: Substantive Procedure: This is a test that creates conclusive evidence regarding the components in the financial statements.
Step 5: Opinion Formulation: An independent audit opinion is the final outcome of an audit. Special attention to some areas such as inadequate books and records, lack of information from different branch offices, doubt over going concern, etc may be required.
Step 6: Audit Completion Files: A number files starting from the Audit File Index till the final analytical review are documented and stored for a certain period of time (as stated in laws and international standards).
While planning an audit, the auditor and the client discuss over issues such as scope and objective of the audit, the availability and accessibility of information’s and other vital resources, evaluation of existing controls, and other remaining steps of audit. The Audit Practice Manual (2009) emphasizes on the fact that continuous risk assessment is required, especially for statutory audits As mentioned earlier, the client is notified about the acceptance of audit through an engagement letter.
The letter contains scope and objective of the audit, key personnel, auditor’s responsibilities, terms and conditions, audit fees, and other relevant information’s and disclosures.
In an initial meeting the client puts forward the units or areas that are to be examined along with available resources such as personnel, equipments, other facilities, etc. It is important that the client recognizes the special areas that will need to be looked at. This makes the audit process more effective.
In a preliminary engagement activity the auditor gathers important information’s about the organization to have a general view of the operations. The information may be obtained through previous reports, files, documents, or even through interactions with different employees.
After the preliminary engagement activity, comes the Internal Control Review. This is one of the core rudiments in overall audit process. It is quite time consuming and might as well be a lengthy process depending on the type and size of the organization. For instance, the auditor gathers information about non-current assets, current assets, capital and reserves, long term liabilities, current liabilities, etc. This review assists the auditor to identify the areas of risks and ways to work out through those risky units by designing an efficient fieldwork. The preparation of audit program concludes with preliminary survey.
Further, it spots out the necessary fieldworks, and takes auditing to the next phase i.e. fieldwork.
Coming to fieldworks, it focuses on transaction testing and informal communications. Various tests for verification and validation of information are run. Random sampling, block sampling, etc are used. It is used to determine whether the internal controls are running as per what has been stated by the client. It wraps up with a list of significant findings that will be incorporated in the draft audit report.
Once fieldwork is successfully completed, a summary i.e. Management Letter for control issues and immaterial items, is prepared by the auditor that is inclusive of findings, recommendations, and conclusions. The working papers keep track of all findings and notes how it may be dealt with. The draft report is discussed and reviewed by the auditor as well as the management of the organization so that necessary amendments from the part of the client can be brought about before the final audit report is prepared, signed, and published.
Three most important factors to be mindful of during auditing are:
- Ethical Position: As mentioned earlier, audit is based largely on value judgment. Therefore, compromising with ethics at any point will violate the code of conduct. It must be kept in mind that an auditor is independent and is free to give reasonable judgments based on facts, and they are accountable to stakeholders like government, shareholders, and society as a whole.
- Risk Assessment: The degree of risk associated with numerous elements of internal control (usually measured on a scale of low, medium, high)
- Materiality: The threshold or cutoff point after which financial information plays a crucial role in decision making. Determining the extent of materiality is of high importance.
Sampling: Engaged management may determine the size of the sample in accordance to the sampling table provided in the Audit Practice Manual. Sample size is determined based on the correlation of population size and materiality. For instance, if the population size is BDT 10 million and corresponding materiality is BDT 1 million, it brings us to the conclusion that population size is ten times of materiality. With this, we refer back to the table (risk level on the column and proportion of materiality on the rows) to determine the projected sampling size.
Audit Planning Summary
Approval of Planning, Review of Planning at Completion Stage, and Acceptance Procedures-
Audit Planning Summary serves as a foundation of pre-auditing and post-auditing work. The vivid guideline is available both in the Audit Practice Manual (2009) and Assurance Study Manual (2009). It includes three major parts:
Approval of planning: Approval of planning precisely chalks out a list of strategies and standards, below is a standard format of Approval of planning as designed by Institute of Chartered Accountants of Bangladesh (ICAB) and is widely used by all practicing members of ICAB as per the standards set in 2009. Once the abovementioned document is checked and sanctioned by the audit engagement partner, it is passed on to the respective manager and audit seniors who shall be in charge of monitoring, managing, and working through the functional areas. Conventionally, an audit engagement involves one audit partner, one manager, and one or more seniors depending on the size of the organization and volume and complexity of tasks that are to be undertaken.
Review of planning at completion stage: Following this, comes the review of planning at completion stage. This is a statement declaring that all the procedures and standards, as per audit planning approval, has been properly implemented and followed and no discrepancies have been made. Similar to approval of audit, this document is a part of audit planning file and is enclosed at the end with the signature of the audit engagement partner.
Acceptance Procedures: According to Companies Act 1994, “a Chartered Accountant shall not accept appointment or continue as auditor if the firm has any interest likely to conflict with carrying out the audit properly” and BSA 2004 requires compliance with ICAB and IFAC Code of Ethics.
Based on the aforementioned declaration of code of conduct and practice, a questionnaire is prepared and answered for assessment in order to justify the legitimacy for accepting the audit appointment. The questionnaire presupposes knowledge of ICAB/IFAC Code of Ethics.
It is mandatory to have it filled annually for all clients to make certain that the standards have been complied with. Note to be made: audit is a task that calls for high integrity and strong ethical standards. As mentioned time and again, any form of incongruity in terms of ethics is absolutely prohibited.
If any of the above questions has been answered with a ‘yes’, specification of the safeguard must be provided as a means of justification to preserve integrity and independence, and to ensure the availability of resources and the ability to perform the audit properly.
Once all these documentation has been successfully completed, the engagement partner signs a final declaration, stating the satisfaction about the procedures regarding the acceptance and continuance of engagement with the client for the particular financial year, and that the conclusion reached in this regard is appropriate and have been properly documented. All relevant information has been obtained from the firm (along with network firms, where applicable) to determine and evaluate circumstances and relationships that may create a threat to independence. Furthermore, evaluation on breaches of information has been run, if any, of the firm’s independence policies and necessary measures have been taken to eliminate any threat and to bring it back to an acceptable level by applying safeguards.
Conclusion on independence and other relevant issues is discussed within the firm which is essential to support the view. Finally, the client is notified of all significant facts and matters that bear upon the firm’s objectivity and independence.
This particular piece of declaration is reviewed and signed by a second partner of the firm for authentication.
From this part of the observation and learning in the context of audit planning, it can be seen that integrity, uprightness, and highest ethical standards are the backbone of chartered accountants and the entire audit practice largely counts on the precision and diligence of the auditor.
Ethical Issues –
For an audit to be acceptable to all stakeholders, the looming threats must be considered in advance so that it can be scrutinized as per need for the audit report to be flawless to the utmost extent. For such, a safeguard form is prepared where nature of probable threats is highlighted and feasible response to those threats is suggested and noted. As per the set rule in Bangladesh Standards on Auditing, the extent of threat is ranked as high, medium, or low. The suggestive measures to surpass the threats are ticked out.
What more, the form provides a framework for assessing the extent of any threat to the firm’s independence from the provision of accounting as well as tax compliance services. Therefore, it must be illustrated that the form provides only an indication of the service of any threats and the possible safeguards that are suitable to be applied. The specific safeguards that are to be applied and their sufficiency is a matter of professional judgment and are subject to variance.
Nature of Threats
- Preparation of statutory accounts from management accounts where little or no adjustment is required and the client approves any adjustments and narratives in accounts
- Preparation of statutory accounts from trial balance or management accounts where significant adjustments are required but where the client approves those adjustments and narratives in the accounts
- Preparation of statutory accounts from books of original entry where significant adjustments are required but where the client approves those adjustments and narratives in the accounts
- The firm maintains the accounting records and or prepares management accounts
- The firm completes VAT returns
- The firm prepares the tax computations that are routine with little need for any judgment
- The firm prepares the tax computations where there are contentious items whose treatment may be disputed by NBR
Response to Threats
- If any threats are insignificant, no action is required
- The file contains evidence that the possible threats have been considered and the treatment of relevant matters have been discussed and agreed in principle with the client
- In addition to the file notes, different staffs were used to carry out the non-audit works
- In addition to the file notes, different managers/partners were responsible for non-audit works
- There will be a second partner review of at least the statutory accounts, planning, completion and any contentious areas where judgment was required by the auditor
- The file will be subject to external hot review
Once this checklist of threats and combats are prepared, it is approved by the engagement partner with the verification that appropriate safeguards have been applied in relation to the threats which have been identified under various ranges, and that the stated solutions are sufficient to safeguard the firm’s independence.
Analytical Review –
During the audit engagement at the respective client, the analytical review was prepared by audit executive under the guidance and supervision of job in-charge and was reviewed by the manager. With reference to the analytical review prepared for the above mentioned client, it can be stated that, “The auditor should apply analytical procedures as risk assessment procedures to obtain an understanding of the Company and its environment (BSA 520.8). The auditor should apply analytical procedures further at or near the end of the audit when forming an overall conclusion as to whether the financial statements as a whole are consistent with the auditor’s understanding of the Company.”
From my practical audit engagement experience, it may be reasonable to put forward that analytical review is not widely used to the extent it should be. For smaller companies, analytical review is not necessarily conducted. A form of final analytical review in general is carried out but it may be of little use to direct audit procedure towards the areas of importance by the time it is prepared. Thus, it remains only as a matter of formality and compliance rather than a useful facet.
Tests of controls
Bangladesh Standards on Auditing (BSA) require a much greater consideration of the client’s system of internal control than what was required as per old standards. In the light of the “old school” the testing of internal control was entirely optional. But, that is no longer the case as per new regulations.
As a part of understanding the entity and its environment, it is essential to weigh up and observe the design and implementation of all controls which are relevant to the audit. This needs more than mere enquiry; it needs further elaborate work such as inspecting documents, tracing transactions, etc. The testing of the operational effectiveness of internal controls (compliance testing) is compulsory where:
- The risk assessment includes an expectation that controls are operating effectively, or
- Substantive tests alone do not provide adequate evidence of their operation
The initial stage in this process is to complete the Internal Control Questionnaire (ICQ) to determine the controls that run over the major business processes. During the statutory audit of the respective client for the year ended 2014-2015, a complete ICQ was prepared to be documented in the planning file, as well as specific ICQs in regards to the main items of financial statements such as non-current assets, sales and trade receivables, purchase, inventory and trade payables, and cash and cash equivalents were prepared for each of the separate document files. Where there is a need for test of controls or where a decision is made to do so, the ICQ allows the auditor to record how the operation of controls will be tested.
The reliance on the controls based on findings and considerations should also be recorded therein.
Fraud risk assessment is conducted as part of audit planning in order to determine:
- Risk factors relating to misstatements arising from fraudulent financial reporting
- Risk factors relating to misstatements arising from misappropriation of assets
In the context of my audit experience at the mentioned listed company, it may be remarked that a high possibility of incorrect financial reporting and misstatements of assets value may be embarked on by the companies for the purpose of increasing earnings per share and making investment in the company look lucrative. However, this gives a false picture to the stakeholders, particularly to the existing and potential shareholders. Their unawareness about the actual financial position of the company may cause them to take wrong investment decisions, which eventually will lead to an extreme state of loss. at this point, we can consider the example of Enron; an American company which had to cease operation upon being found to have published overstated profit and share price. The auditor of the company was also held responsible for this decisive act and had to face penalty set by the court. This has remained as one of the biggest scandals of all time in the global finance market. It sets an example as to what the consequences of a fraud may turn out to be. Therefore, keeping forth all ethical standards, fraud risk assists to determine the chances of scope of any such fraud which may hamper the reputation of the company as well as the auditor, and harm the stakeholders.
According to the definition of Bangladesh Standards on Auditing, which is adopted from IASB framework for the purpose of Preparation and Presentation of Financial Statements, Materiality means:
“Information is material if its omission or misstatements could influence the economic decisions of the users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful.”
Audit work is affected in two ways in regards to materiality:
- It is of the factors which influences the nature and extent of the tests of detail.
- It influences decisions as to whether or not auditor should seek adjustment for actual and projected errors and assessing the significance of areas of disagreements on judgmental matters.
For accounts to be true and fair, it must be free of material misstatements. No basis should be applied blindly and the level of materiality in general should be correlated with the size of the business. However, under certain circumstances items can be material by nature despite its size or magnitude.
It is conventionally perceived that for trading entities, auditing will include turnover-based materiality; for investment entities, auditing will include asset-based materiality.
In the light of the risks discussed above, it can be said that regardless of the industry and type of business, certain risks are inherent to the business and has to be managed in order to avoid any adverse effects. For measuring risks, facets like financial analysis such as ratio analysis, vertical analysis (measuring items as a percentage of sales on statement of profit or loss and other comprehensive income and as a percentage of totals assets on statement of financial position), and horizontal analysis (percentage change between two or more number of years) may be used. Knowing the company’s own strengths, weaknesses, opportunities and threats are very important. For that, having vivid knowledge about the company’s own internal control is very crucial. Simultaneously, keeping track of industry information and rival companies is also important. This enables the company to make use of its strengths, work on its weaknesses, convert some of the strengths into opportunities, reap benefits from the existing opportunities, and to eradicate the threats to the utmost extent. Nowadays, all industries are dynamic and organizations are volatile. Therefore, for risk management the organization must have proper control over its operations and performance, and be adaptive.
The company must maintain good terms with third parties and stakeholders like suppliers, dealers/distributors, customers, shareholders, and so on. It relates to both financial and non-financial performance of the company. A positive word of mouth can play a significant role in determining the market positioning of a business. During times of unrest such as political turmoil, recession, environmental hazards, etc the organization must be able to recover within the shortest possible time. For that, having strong disaster recovery system is essential. Along with all these, staying updated about rules and regulations set by different regulatory bodies is needed. The world is a global village and the organizations are part of the society.
Therefore, keeping the benefit of all in mind, the businesses should abide by the rules. That not only makes them more compliant, but also elements a number of risks which otherwise would pose as threats and backfire.
Corporate Governance –
Corporate Governance is the framework of rules, regulations, and practices with the help of which a board of directors ensures accountability, fairness, and transparency in a company’s relationship with all its stakeholders such as financiers, customers, management, employees, government, the community, etc.
On the other hand, corporate governance has got some limitations and challenges which need to be tackled. They are identified to be as follows:
- Adoption of a standard framework: The first challenge is to adopt corporate governance in line with standard framework in making the management accountable and responsible to the Board and the Board to the shareholders/stakeholders.
- Function of independent wings: In corporate governance framework, there are several independent internal and external branches for ensuring accountability in organizing resources and reporting thereof. The question arises regarding the biasness of the board of directors. The selection and appointment of independent directors arises as a requirement of Securities and Exchange Commission (SEC) Corporate Governance Guidelines. The Board appoints such directors, which is subject to approval at the Annual General Meeting (AGM).
- Transparent disclosures: The top-most challenge in the context of Bangladesh for implementation of corporate governance is the disclosure of adequate and appropriate information in the financial statements. Only few companies as listed with Stock Exchanges, excluding some large reputable companies, disclose information correctly. If we look at the similar pattern of reporting on the same information as required by law, Bangladesh Financial Reporting Standards (BFRSs), and regulations of regulators, most of the companies are found to be varied in presentation with adequate and appropriate information from each other, with the exception to banks and financial institutions.
- Protecting shareholders’ interest: In the motion of protecting the interest of the shareholders, challenges come up in order to ensure compliance of laws and policies. The nomination committee may be biased to nominate any directors instead of someone who may act for the interest of shareholders. Such biasness is not merely against corporate governance but is also a part of Internal Control Questionnaire (ICQ) and management integrity.
- Focus on short term profit: The Board has a propensity to make profit. Therefore, it operates with strategies to confine and uphold market position under all circumstances through diversified products and service qualities and other strategies for accomplishing competitive advantage.
In a developing country like Bangladesh, fighting against challenges is quite intricate because of:
- Different forms of business i.e. proprietorship, partnership, or limited liability companies have capital market participation but has a knack to hold supremacy in the form of family business control.
- Government’s political participation in the Board of state-owned banks, financial institutions, or any other state-owned organizations.
- Obsolete laws to administer and gratify corporate governance framework and the failure to face the challenges on numerous justifications, in conjunction with establishing the rule of law.
- Inferior human resources or inadequately cultured workforce that is not dynamic and fails to adapt to changes or recognize challenges which are aligned with professional integrity and ethical values.
Certification of Compliance of Corporate Governance Guidelines
Certification of Compliance of Corporate Governance Guidelines is a report on the compliance of conditions of the Corporate Governance Guidelines. For each fiscal year, the compliance of Corporate Governance Guidelines is reviewed by Chartered Accountants.
Based on the examination, the responsible member of Institute of Chartered Accountants of Bangladesh (ICAB), is required to provide a certificate about whether the company is in line with the said conditions of Corporate Governance. The certification is published in the annual report for the company for public disclosure.
The examination is conducted with the intention of providing a certification which is confined to the procedures including implementation as espoused by the organization to make sure that the compliance of the stated conditions abides by Corporate Governance Guidelines and correct reporting of the status of the compliance. The certificate is prepared on the basis of the collected evidence and representation gathered through inspection.
Nonetheless, it is important to bear in mind that it is neither an audit nor an expression of opinion on the financial statements of the organization. This declaration is clearly stated on the certificate for precise understanding of the stakeholders.
Report on compliance of Corporate Governance Guideline of BSEC
The presentation on the status of compliance with the conditions imposed by the Bangladesh Securities and Exchange Commission’s Notification dated 7th August 2012, issued under section 2CC of the Securities and Exchange Ordinance, 1996 is referred to as the Report on compliance of Corporate Governance Guideline of BSEC.
The report comes in a specific format as per the guideline. It focuses on a number of key areas such as:
Board of Directors (BoD)
- Independent Directors
- What “Independent Director” means
- Qualification of Independent Directors (ID)
- The additional statements to be accompanied with the Director’s Report
- Pattern of Shareholding and name wise details (disclosing aggregate number of shares)
- Appointment/Re-appointment of a director
Chief Financial Officer, Head of Internal Audit, & Company Secretary
- Constitution of the Audit Committee
- Chairman of the Audit Committee
- Reporting of the Audit Committee
- Reporting to the Board of Directors
Duties of Chief Executive Officer (CEO) and Chief Financial Officer (CFO)
Reporting and Compliance of Corporate Governance
In the light current perspective, it may be said that the need for intensifying corporate governance comes with a global demand for a sound and transparent corporate world system.
Previously, corporate governance was viewed as an overall coordination or control mechanisms, for both external and internal purposes, which provided an effectual means of good corporate behavioral process. This process ensures accountability of those who matter most in maximizing the value for the shareholders in a fully transparent manner. The laws in Bangladesh has been be updated to cater corporate governance structure and to make the board of directors accountable and devoted to the compliance of the Corporate Governance code meticulously. The regulators, Securities and Exchange Commission (SEC), Bangladesh Bank, Insurance Regulatory and Development Authority (IRDA), etc has enhanced their capacity to monitor the corporate governance compliance.
However, my personal audit experience discloses that a significant number of investors are unaware about the basic components of corporate governance. Simply based on the market hype, they are investing their money into the stock market without having much knowledge about the imperative factors such as those associated with corporate governance. This ultimately results in unfavorable market conditions such as the stock market crash in Bangladesh in 2010. Therefore, as much as it is the responsibility of the auditor to check and evaluate the corporate governance compliance, it is also the responsibility of the stakeholders, more essentially the shareholders, to be well aware about the different components of corporate governance and about its compliance. Otherwise, the certification will not ultimately be beneficial.
Challenges and Way Forward
While working with the statutory audit team of Hoda Vasi Chowdhury & Co in audit engagement for the year ended 30 June 2015 at publicly listed company, numerous and frequent challenges had to be dealt with. Some of these challenges arose because of the limitations of the client, while the others came about because of the limitations of third party. Either way, the responsibility to identify the challenges and to find reasonable solutions is on the part of the auditor. In regards to the problems, the company cooperated to mitigate the problems and to come to a rational solution upon the request of the auditor. Some of the key problems and possible remedies are as follows:
To be on time
It has happens almost all through the audit process, that collecting required and relevant documents is time consuming and strenuous. As per the rule of most companies, each document that is being asked from the organization for verification and validation, a requisition has to be submitted, normally to the Deputy General Manager (Accounts and Finance) or other personnel in charge for approval. Once approved, it is forwarded to the responsible personnel in the accounts and finance department to deliver necessary documents. All these formalities take up a lot of time. Because of the delay, the audit team has to face troubles with time management. On certain days the productivity of the team members were fairly low because of inadequate supporting documents, while on other days they were absolutely employed with excess work load. Had the problem of these time lags not remained, the work could have paced up.
Remedy: To overcome the problem of getting all documents and rudiments in due time, job responsibility is allocated among different team members. Based on the portion of task that is taken up by each team member, requisitions are submitted and respective documents are received when delivered by the client.
In case if the client is taking more than anticipated time, gentle reminders are given to the particular personnel to ensure that the documents are in hand by the earliest time possible. If the documents are unavailable due to some technical reasons, the team members sit in person with the personnel in-charge and take updates which are noted on the working paper.
Getting all relevant documents
Even though the client documents all information to prepare financial statement as per Bangladesh Accounting Standards (BASs) and Bangladesh Financial Reporting Standards (BFRSs), some of the documents were difficult to track down. This was mainly because of technical and operational reasons.
For instance, getting the bank balance confirmations from all the banks where the company maintains an account was a setback. Not all bank confirmations came on time. Problems included failure to deliver the request letter for bank confirmation which has been sent by the auditor with the approval of the Chief Financial Officer (CFO) of the client and the Engagement Manager of the auditor. One reason for delivery failure was marked to be inaccurate address of the bank to which the letter was sent. Another problem arose because of Error of Transposition i.e. the back account number was incorrect. As a result, bank failed to provide a bank balance confirmation. Besides these, some of the documents could not be obtained initially due to delay in updating the information’s for the respective period. Such was the case in case of contingent liabilities. It is an off-balance sheet item and was not updated when the first draft of financial statements were provided to be worked out with.
Hence, it could only be treated precisely till almost towards the end. Furthermore, some of the documents could not be obtained because the company failed to trace them and declared them as lost.
Remedy: To overcome the challenge of getting all relevant documents, the audit team members run a cross checking process between the documents that have already been received and that are yet to be received. Based on the findings, the accounts and finance department officials are consulted. Additional documents may also be required to meet auditor’s need. For example, to complete vouching, associated vouchers are needed along with the ledgers. Thus, they are sought from the client. In case of any discrepancies such as bounced back request letter for bank confirmation and so on, firstly the auditor informs the client about the issue, followed by suggestive measures put forward by the auditor to alleviate the problem. A drawback of this solution is related to identification of critical problems.
Complex issues may have to be addressed and solved collaboratively by the auditor and the client. Auditor’s requirements are third party dealings and demands to be backed up by client to extract information from all pertinent parties.
Updating audit planning documents and other working papers
Initially, all workouts are run as per the first draft of financial statement that is provided by the client.
Later, if there are any changes the revised draft of the financial statement is provided. Hence, figures have to be adjusted all over again. At times it becomes difficult, particularly if it happens towards the end of the audit. Time is constricted and the volume of paperwork is high. Not all the data can be updated in due time. As a consequence, some of the figures remain unadjusted in the audit planning file and on the working papers.
Remedy: To mitigate the problem of updating audit planning documents and other working papers, it can be said that this is an inherent challenge. As mentioned above, in the light of the first draft of financial statement, documents and files are updated. Nonetheless, draft financial statement is subject to adjustments in most of the cases. Some of these adjustments are a result of auditor’s findings; some are simple updates made by the client. Whichever cases it may fall under, the auditor have to bear with it and aim to fulfill the undertaken task to the utmost extent. They simply have to put in extra effort to cover up and bring about as many alterations as possible within extremely short period of time. These inherent risks are a part of Assessment of Audit Risks, a core part of audit planning.
Coordinating with other departments
For certain clarifications, other departments along with accounts and finance department and/or internal audit department have to be consulted. For example, to verify legal expenses, the legal department has to be consulted for authenticity. In case if the company has any litigations or law suits from previous fiscal year(s) the current status can be verified as per the supporting documents which are in possession of the legal department. For other purposes, marketing, sales, or commercial department may have contributions to make. However, this coordination is also subject to protocols. Proper channel for effective communication is created only through engaged accounts and finance department personnel. Once again, time lag comes down as a challenge.
Remedy: This challenge can be easily toned down through proper cooperation of the accounts and finance department officials. It is needless to say that within the organization, the departments are well connected and can communicate to a deeper extent than external parties like statutory auditors. Therefore, if the accounts and financial department is fully engaged to aid the audit team with resources from other departments, a great deal of problem is resolved without much challenge and worry from the side of the auditor.
Resources and supplies such as computers, access to the computerized system, and such like may prove to be a challenge. It reduces productivity and makes work process lengthy. Proper safety measures such as active antivirus may also be missing.
Remedy: The problem of inadequate resources can be dealt with in a couple of ways.
The auditors can take their own charge and make arrangements on their accord such as carrying their own laptops or get laptops from firm’s head office.
The auditor can request the client to make arrangements that is essential to facilitate audit process. They may be asked to provide access to the computerized system. If that is not possible then alternate modes have to be managed. This is effective, provided that the client is accommodative enough to help out the auditors.
In order to overcome the diagnosed problems, several strategies are formulated by the statutory auditors. Provided that a properly chalked out timeline is set by the auditor in collaboration with the client(s), they have deadlines to meet. Therefore, they take up the challenge to get past all hurdles in an ideal and professional manner. As mentioned earlier, problems may arise because of either party. Nonetheless, it is the auditor who needs to take charge to get the job done. The audit team can discuss problems among themselves and get observations and feedbacks from engaged partner and manager.
The above mentioned remedies are not flawless, as a matter of fact. Besides being time consuming, it may also call for harmony between the auditor and the client(s). It must be kept in mind throughout the audit process that such kind of work can only be done efficiently and be effective if the client is dynamic and is open to changes. If the client is steadfast at criticizing the auditor, it will only make auditor’s job further difficult and their productivity will fall significantly, which in turn, may hamper the quality of reporting.
For that reason, if the client is willing to get an audit report of high standard and get over the negative chain reaction, they should sign up to combine forces with the auditor. Maintaining good faith and mutual understanding can be commanding enough to curtail many trials and tribulations.
Hoda Vasi Chowdhury & Co is a well recognized and well reputed organization, serving the financial sector for decades. They are valued both in country and abroad for their high quality services to local and multinational organizations belonging to several of sectors including textiles, power and utilities, banks, insurance, cement and building materials, and many more.
Professional services like audit, tax consultancy, and business advisory services are aided to public limited companies and to other forms of businesses. Qualified professionals and highly trained workforce is contributing to its massive progress.
Their dedication in serving the clients with utmost sincerity and by complying with all standing rules and regulations is their key to success. Display of high professionalism at all times has made them an epitome in the society.
In this report, I try my best to explain the mechanism of audit planning and how it is being put into practice by leading chartered accountants. Audit planning is an essential component in standard audit engagements. It is used for the purpose of ascertaining the level of audit risk in the perspective of internal control of the client, risk of fraud and error in reporting, and misstatement of figures and disclosures in the financial statements. An efficient audit planning is powerful enough to eradicate audit risks to the maximum extent. Independent analysis and examination of the data eliminates the scope of “questionable integrity” and ensures transparency from both management and owners. Auditors are responsible for ensuring that the respective parties are not engaged with any form of illegitimate act in order to serve their own goals. Auditing determines the accuracy of financial statements by studying the numbers and the reliability of the financial statements by investigating both numeric and non-numeric factors. This provides more authentic information to the stakeholders.
In today’s complex and dynamic business environment, there is no alternative to quality information for decision making because even a slightest variance can bring about a big difference. Hoda Vasi Chowdhury & Co believes that quality control can be ensured through transparency and proper practice of profession. Therefore, firm supervision and observation of the auditors can alleviate the threat of fraudulent activities, if not completely eliminated.