Audit Procedure of Hoda Vasi Chowdhury and Co
The report has been written with the intention o f providing its reader a clear idea of how an audit firm deals with the concept of audit procedure. Hoda Vasi Chowdhury & Co. is one of the top Chartered Accountant firm in Bangladesh which provides various services like statutory audit, consultancy, taxation services and many more.
Within the period of internship program, I was assigned in Rakeen Development Company (BD) as a junior auditor. I have worked in this report followed by the knowledge that I have gained from working, trainings and my personal experiences.
The first part of the report consist an introduction and description of the report. The second part of the report contains of background of Hoda Vasi Chowdhury & Co. In the third I briefly discussed my learning, in the fourth part I have tried to discuss about the audit procedure of Bangladesh followed by Hoda Vasi Chowdhury details in the fifth part. In the sixth part I discussed about my audit practice in Rakeen Development Company (BD) as well as an overview o f the company. Last but not the least I tried to focus on some o f the findings that I have found during these period o f internship and tried to recommend some solutions which will minimize the problems that I have mentioned in my findings. Later, I have tried to draw an overall conclusion o f the report.
History of H oda Vasi Chow dhury & Co:
Hoda Vasi Chowdhury (HVC) is one of the top and oldest professional services firms in Bangladesh. For about 50 years, HVC has provided high-quality financial, taxation and management services to a diverse and successful client base operating across various industry and business segment. It started its practice in this vision in 1962 under the name and style “A F Ferguson & Co”, a Scottish firm. Since then, as an innovative and highly professional public accounting and consulting firm, HVC serves as trusted auditor and valued advisor to over 1,000 clients by delivering objective, clear and practical advice to assist their client’s growth and succeed in their chosen field.
HVC is uniquely positioned to impart quality, cost-effective and practical advice to clients that include multinational corporations, private businesses, non-profit organizations, governmental entities, emerging or start-up firms, coupled with the personal relationship, value-based fee structure and service continuity.
In late ninety’s, HVC significantly expanded its management consulting services in order to meet the growing demands of their clients and the challenges of the promising Bangladesh economy.
HVC employs qualified professionals who work under the direct supervision of partners in the fields of auditing, accountancy, taxation, business advisory services, consulting and other special assignments. Presently, HVC has over 200 professionals in various fields in addition to 28 admin and support staffs.
Role of Personal:
Partners: The role of partners is to catch the attention of new clients for providing service and sometimes clients also come over to the firm themselves. The associates must make sure that the existing clients are provided the finest service.
Audit Managers: Audit managers must be Chartered Accountant who can assist partners in different way. He/she should analysis the audit report before signing the audit report.
It is not necessary for the supervisors to be a chartered account. He can also be a course complete student having huge experiences at the field of accountancy. He is being supervised by the audit manager when and where an audit activity is performed and how it is to be performed.
b) Senior Student:
An audit senior has some experience in the accountancy field before he is designated as the audit senior of the firm. He is under the direct supervision of audit manager and supervisor.
C) Semi- Senior Student:
A semi-senior student must complete 1 year of article ship in the firm. He is responsible to the senior student of the firm when he doing any fieldwork.
d) Junior Student:
Junior- Students are fresher who have joined the audit firm.
Audit Procedure in Bangladesh
General definition of audit process and procedure:
Each and every company maintains their own internal accounting system. Though they have their own accounting system but at the end of the day an independent audit firm checks all their workings and provides opinion about true and fairness of their accounts. Moreover, properly executed audits will identify various problems in a particular firm that is being audited. At the end of the audit, auditors will provide an audit report which shows that whether the company maintains a true and fair view in their reports or not.
It is a systematic order of steps followed by the auditor in the examination of client records. The audit process may vary upon various aspects, example- nature of the engagement, audit objectives provided by the client and types of audit assurance. Furthermore, the process includes understanding every particular client’s environment, conducting the auditing procedure and tests, appraising the audit results and communicating the results to interested parties.
It is auditor system in gathering evidence reviewing proof to substantiate the dependability of the accounting records. The inspector assesses whether the data displayed is consistent and sensible. Examples of auditing procedures are observing assets to verify existence and amount (e.g., fixed assets), collecting independent confirmations from external parties (e.g., bank confirmation), evaluating internal control, appraising management’s activities, and obtaining management representations. The review systems to be taken after on an engagement are shown in the review program. The work papers demonstrate what has been done on the review.
Audit process and procedure standards or guidelines in Bangladesh by ICAB:
Institute of Chartered Accountants of Bangladesh guided and regulated the firms of Bangladesh. ICAB has recommended and provided the firm with different subject regarding auditing. Like others it has suggested auditing procedures that can be followed by the audit firm in Bangladesh in its Audit Practice Manual.
Audit process suggested by Audit Practice Manual (APM) may be summarized as follows.
- Collection of evidence.
- Controlling and recording.
- Review and opinion
Before any work planning is essential which will lead to success. However, in our profession planning is the key measures. Unless you are very fortunate, any task is not planned will probably f wrong in various ways. Example: without planning the project may take too long to complete, it will not address the key risks and there will be no directions among the auditors.
It is a main requirement of International Standard Auditing 300 that all audits are planned properly. In Bangladesh the rules are also followed and became a standard rules for every firms to follow or to make a planning schedule beforehand. Planning helps the auditor to:
- Allocate appropriate attention to significant areas of the audit.
- Classify and resolve potential difficulties on a timely basis.
- Accurately organize and accomplish the audit engagement so that it is performed in an effective and efficient means.
- Identify audit risks.
- Select engagement team members with appropriate levels of skills and competence to respond to predicted risks, and the appropriate assignment of work to them.
- Direct and supervise engagement team members and to evaluate their work.
- Co-ordinate the work done by auditors of components and experts.
Bangladesh Standards of Auditing (BSA) also tells us that there should be a standard documentation of specific clients planning memorandum.
This planning memorandum is prepared according to the envisaged audit strategy and is based on cumulative audit knowledge and experience as well as important matters which have been brought to the attention of the auditors. Moreover, an understanding of the functioning of the organization need to be obtained, including how it is operated, managed and how accounting and other information are processed in the audit work.
It should be noted that the planning of an audit is a continuous process and that the strategy and planed audit approach may change as new information comes to auditor’s attention during the course of the audit.
The document should ensure that expectations of all relevant parties are met and that the strategy takes full cognizance of significant management concerns.
Furthermore, there are other information’s also which is provided under planning documentation. Planning document includes about the company and its business.
- What the entity does?
- How it conducts its business?
- What are the risks and where?
- How the auditors are going to audit the company?
These questions answer should be in the planning memorandum. However, to answer these questions auditors seek for different issues that need to be done accordingly.
Points for Consideration in Audit Planning:
Audit planning requires a high degree of discipline on the part of the auditor. In order to make the planning more meaningful, the auditor should take into consideration the following matters in relation to the audit engagement:
(a) Initial w ork to be done in addition to the actual Audit Work:
This will include such matters as inventory, cash count, debtors’ circularization and review of previous year’s working papers. This will remind the auditor of those matters brought forward from the previous year and any other points to be resolved in the current year or problems projected. Thus, checking each closing balances from last year is necessary to avoid fraud. Most of the time it has been seen that it does not matched with the opening balances of current year.
(b) Changes in rules or any Auditing Standards or Guidelines:
International standards of auditing (ISA) and also Bangladesh standard of auditing (BSA) brought with it a lot of changes in accounting and auditing requirements of companies. Such rules whether in respect of all companies or particular industrial group, must be followed as per as the laws. Auditors should look after that each clients they serve they fulfill those standards in making their financial statements or reporting requirements of the enterprise.
(c) Analytical Review of Available Management Accounts and Other Management Inform ation that Relate to the Accounts
If the auditor establish such analytical reviews then they will be able to know more about the reliability of the company’s accounts. For example, the computation payroll cost with the number of employees. An actual presentation of real life scenario will be discussed later on.
(d) Changes in the Business or Management
Creation of new sister concern or to establish a new product line can affect the business. That is why the audit plan will be tailored as per as circumstances. Changes in the head of management will also be a concern because the new management will implement new strategies.
(e) Changes in the Accounting System
The introduction of computers such that when a company introduces substantial deviations in its operating processes will be need a review and evaluation of the system of internal control. Moreover, the system software can be changed or the company buys a new and advanced accounting software for preparing their accounts. Example: ERP, SAP and Tally. Thus, reviewing those new software’s is essential.
(f) Deadlines Established for the Submission of Audit Report
Where a client has set deadlines for its statutory activities such as the annual general meeting, it is important for the auditor to work in line with such programs. However, there are more aspects that a firms particularly follows within or beyond the accounting standards:
Assessment o f risk and materiality:
As an auditor we had to check the company’s work with in a very short period of time. But the account of the clients we look after it may be interim or annually. Hence, auditors had to do their work efficiently and effectively. Materiality is definition means that it is the effect that missing or incorrect information has on the information contained within an entity’s financial statements. It is sometimes construed in terms of net impact on reported profits, or the percentage or dollar change in a specific line item.
“Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements. Materiality depends on the size o f the item or error judged in the particular circumstances o f 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.”
Thus, as an auditors we seek for those accounts which we think that it could be related with material or immaterial. Example: normally if expenses are increased in accounts we Debit that particular entry and credit the bank Account or payables. But it is rare to find expenses were accounted in credit and bank account is debited. That’s where we want to know what happened in that particular transactions to check materiality. However, the risk in particular is at core of the approach to audit set out in the BSA. Thus, we use sampling method to determine whether to check a transaction or not.
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 ACT (520.13). A chart of analytical review is shown in the appendix 1.
Auditor’s comments on the complexity and uncertainty of the business. They seek for evidence and cross check different elements so that they can comments on risk and materiality.
Under the old rules of Bangladesh standards of auditing (BSA) testing of internal control system was optional for the auditors. Whereas now it is mandatory to look after the clients internal system so that we can know that they are preparing proper accounts as per as the standards. The auditors can test the effectiveness of the clients system and establish an opinion on that.
- To understand the entity it is a requirement to evaluate the design and system of the clients’ accounts.
- Not only enquiry but also inspecting the documents or tracing a transactions will provide a clear picture of the system.
- Testing of the operational efficiency of internal controls is mandatory where the risk assessment includes an expectation that controls are operating effectively, or substantive tests alone do not provide sufficient evidence of their operation.
- Collection o f audit evidence:
The audit program manual describes how to get an effective collection of evidence from the clients. It is a very crucial task for the auditor to collect documents for the client because sometimes the internal management does not cooperate with the auditors. Sometimes there is a stereo type belief among the management that auditors will want more papers from them which ultimately leads to extra work pressure on them. However, some believes that it is the duty of the management to provide everything that an auditor needs for having a clear picture or having transparency in their Financial Statements.
Furthermore, from the perspective of auditors they suspect that if there is no problem in your system or misstatement, fraud then what is the problem to provide all the documents they required to check. To minimize the hassle auditors seek for sampling methods which helps them to work faster and to check efficiently and effectively.
Audit tests are referred to in practice by a variety of names. Generally, audit tests can be divided into two types, compliance and substantive tests:
- Compliance tests are those designed to provide evidence as to whether the internal control procedures are being operated as planned; and
- Substantive tests are those designed to substantiate the validity, accuracy and completeness of amounts appearing in the financial statements and related notes.
The question of how many transactions to test has always been a debatable question. That is why for the betterment of the work SAMPLING methods are used to check the transactions.
Tests design should vary from client to client. Tailoring the methods or drafting of programs using Audit program manual is essential. Clearly, any sample must be representative of the whole population and it must be sufficiently large to enable credible conclusions to be formed. The workout of decisions must finally determine the sufficiency of sample sizes. The use of intrinsic risk factors, materiality and population characteristics may give a useful theoretical initial point but ultimately decision must overcome. The standard risk model does at least provide a benchmark against which to assess the reasonableness of your decision.
Moreover, while sampling auditors choose also those documents which seems suspicious and also have a scope of doing fraud.
Consider internal control structure:
As per BSA-610, audit team can ask for support from internal auditors. Again internal control structure provides a complete impression about the threat that must be measured. If the client has a solid internal control then the audit risk can be reduced. And this will have an influence on sample size also. But if the client does not have an internal control system there may exists high prospect of material misstatement and audit risk, thus increase in sample size. To check internal control an internal control questionnaire is prepared. A standard internal control system checklist is given in the appendix 2.
Evaluation of internal control:
The auditor must satisfy himself on the records and books can be relied upon the basis for the preparation of the financial statements. The auditors must take a good review of the client’s internal control, book keeping systems and accounting. The evaluation of a client’s system of internal control enables the auditors to understand whether the system contains enough controls or not. If not there is a possibility of being fraud and misguide by the management.
To measure the effectiveness and efficiency of the internal control system auditors run test upon the system by seeking.
The basic controls are those controls built in to the system and which operate all the time in respect to enter transactions and create general ledger, trial balance and posting necessary records in the subsidiary accounts.
Disciplines over Basic Controls
This is basically for the management’s supervision and routine stock checks in the inventory and other areas by which one top managements can supervise their employees and their works.
The techniques employed to record and evaluate the system of accounting and internal controls are usually one or more of the following:
(i) The use of narrative, with an aide memoire or checklist;
(ii) The use of flow charts; and
(iii) The completion of an internal control questionnaire that includes questions designed to establish what the system is, as well as questions relating to the evaluation of the relevant controls, the first two being to record the system while the third is to evaluate the effectiveness of the system.
- Management letter:
After the auditor has completed his evaluation of the internal controls and the tests to confirm whether the appropriate internal control procedures are operating, he should report to the client on any internal control insufficiencies that have come to his attention and on any other matters (of an operational nature) which he considers relevant at this stage. If additional matters come to his attention later as a result of applying substantive tests, these should be reported to the client at that stage.
Evaluation of errors:
When errors found it must be evaluated to determine what actually has happened. What will the impact on the accounts as a whole? Auditors may try to find the necessary documents regarding those errors if not found they will note this in their observation. However, correcting any kind of fraud, misstatements and error is not the duty of an auditor.
- Controlling and recording:
The auditor supposed to have sufficient evidence against his clams or opinions otherwise the opinion is not justified. The auditing guidelines on audit evidence gives guidelines on what establishes satisfactory audit evidence.
Audit evidence is information, written or oral, obtained by the auditor to support the conclusions on which he bases his opinion on the financial statements. Sources of audit evidence include the client’s accounting system, and original documentation, tangible assets, management and other employees, consumers, dealers and other third parties who have dealings with, or information of, the client’s business.
The auditor’s judgment as to what constitutes relevant, reliable and sufficient audit evidence is influenced by such factors as:
(a) His knowledge o f the client’s business and the industry in which it operates; and
(b) The degree o f risk o f misstatements through errors or irregularities, this risk may be affected by such factors as:
■ The nature and materiality o f the items in the financial statements;
■ The auditor’s experience as to the reliability o f the client’s management and staff and o f its records;
■ The financial position o f the clients;
■ Probable management bias; and
■ Persuasiveness o f the evidence.
However, documented evidence is more likely to be reliable than oral evidence. The auditors seek for those documentation that satisfy his need not what the clients showed to the auditor. Sometimes, to check the transaction it is necessary to visit physically if it is possible. For example: in terms of inventory, auditors do not rely on papers rather the physically visit those warehouses and see whether the documented against inventory is reliable or not.
Assessment of Risk:
Audit risk is present in the giving of any audit opinion on financial statements. Elements of audit risk include those arising:
- from the business environment in which the entity operates;
- from the operation of the entity’s control systems; or
- From the failure of audit procedures, including ‘sampling risk’.
General risk assessment
General danger describes to the business and administrative environment in which the review of the clients works. It is likewise influenced by the business chances the element faces and an evaluation of the honesty of administration. This appraisal ought to help with deciding the risk of the engagement in general. The higher the obvious risk, they bring down the assessment chance that the reviewer is willing to take and the more noteworthy the review affirmation that is required.
Specific risk assessment
The assessment of specific risk achieves two objectives:
- It might be utilized as a part of the connection of the little organization to evaluate the degree to which the full review project procedure can be predestined in the specific circumstances of the review being referred to. This procedure should dependably be recorded and supported, not just connected without reason; and
- It might be utilized to pull together the different risks distinguished.
Vouching the total population
It may be that a total population is tested in the audit of very small companies. For example, it may be that a very small company has 12 invoices a year and that it has been decided to examine all 12. The inherent risk assessment will not be applied, and would make no difference, in these circumstances.
The general risk assessment must still be considered because the vouching of all 12 invoices cannot, on its own, provide all the audit evidence that we require forming a reasonable conclusion that all income has been completely and accurately recorded in the company’s accounting records. The risk assessment questioners prescribed by ICAB are shown in appendix 3.
BAS 320.3 emphasizes the accompanying meaning of materiality which is taken from the IASB ‘Framework for the Preparation and Presentation of Financial Statements’. ‘Data is material if its omission or misstatement could impact the monetary choices of clients tackled the premise of the budgetary articulations. Materiality relies on upon the measure of the thing or mistake judged in the specific circumstances of its exclusion or misquote. In this way, materiality gives a limit or cut-off point instead of being an essential subjective trademark which data must have in the event that it is to be helpful’. ‘Genuine and reasonable’ records are those free of “material” error. Hence most importantly others, an evaluation of materiality ought to dependably be made.
Materiality affects audit work in two ways.
- It is one of the factors which influences the nature and extent of the tests of detail.
- It influences decisions as to whether or not an auditor should seek adjustment for actual and projected errors and for assessing the significance of areas of disagreement on judgmental matters.
Audit procedure of Hoda Vasi Chowdhury and Co.
The basic motive of HVC is to provide the best solutions to the clients efficiently and effectively. During any audit engagement HVC provides their opinion on Financial Statements in accordance with Bangladesh Standards on Auditing (BSA) as well as International Standards on Auditing (IAS). Not only statutory audit services is provided by HVC rather it also seek to provide management consultancy services, tax services and other challenging services which highly tailored according to client’s needs and wants.
A chartered accountant firm could not just audit any organization they want there is a procedure regarding acceptance from both parties. Like the audit firm needs to consider all the conditions of a particular clients and then they decide whether to accept the proposal or not and vice versa. However, before doing any kind of audit procedure there are more works behind the scene after accepting any proposal which are audit engagement letter, team meeting and audit clearance.
Before starting any sorts of planning and procedure which will perform through the audit process the firm exchanges some letters between the clients. Normally a firm faces three kinds of situations in engagement process:
- Engagement with the existing clients.
- Clients willing to appoint HVC.
- Engagement with the new clients.
Existing clients o f HVC:
HVC exchanges engagement letters with the existing clients. As they are the loyal clients of HVC or the clients liked the way HVC provided services to them they are now willing to take more services for this year. The engagement letters that are exchanged between HVC and the existing clients are:
- Willingness letter of reappointment
Basically in through this letter HVC wants the clients to know that they want to continue their services in current year also and they can request for other conditions which they think is suitable for them like: increase in audit fees.
- Clients sends appointment letter
If the existing clients agrees with all the new or old proposals of HVC then the send this letter along with new additional conditions if they wants to.
- HVC accepts the appointment letter
After getting the confirmation letter they accept the proposal and finalize all the other necessary documents.
Clients willing to appoint HVC
If any organization or clients want to take services from HVC then they directly sends an engagements letter to HVC head office or directly to firms existing partners with all the terms and conditions regarding the services they wants from HVC. The firm analyzes the conditions and if they are in favorable positions then they accepts the proposals and sends a letter to the clients as an auditors.
Lastly, Engagements with new clients
There are basically four letters exchanged between HVC and the new potentials clients. The list of letters are provided below:
Clients requires for technical and financial proposal from the HVC: If any organizations wants to get an audit services then generally they give advertisement in different medium of news or they directly approach to a firm. If the clients directly approach to the firm they send a letter where the firm is asked to give a quotation for the cost of conducting audit of the client. They will also mentioned the time frame by which the firm needs to submit their quotations and completion date for the audit. Moreover, they also mentioned the key areas to audit and if any special services they want from the firm.
The technical and financial proposal is sent by HVC to the client: After analyzing the client’s proposal or the circular, the audit firms send a proposal letter which includes the cost quotations after considering the time frame they are allocated for competing their audit. Moreover, the firm also indicates that the cost is an approximate one which may changes due to variations of the project. However, HVC will consider and estimates its personnel costs and minimum hourly rate that is being prescribed by The Instituted of Chartered Accountants of Bangladesh (ICAB).
A letter of contract- Acceptance by the client on the basis of proposal of HVC: After analyzing all the quotations form the various firm the client then selects the one which is more profitable to them and it appoints the audit firm for the purpose of doing audit. From the letter, clients will understand the nature of the audit and they will provide the necessary access to their internal control system for the purpose of audit.
Confirmation letter send by HVC to the client: After receiving the acceptance letter from the client, HVC will provides necessary documents and confirmation letter which shall describes the firm’s willingness to serve the clients as per as the deeds or agreement between them.
Audit procedure followed by HVC:
HVC is basically inspired by the prescribed suggestions by ICAB in Audit practice Manual. There are mainly seven steps in the procedure that prescribed in Audit practice manual:
- Identify overall goals;
- Gather & evaluate initial information;
- Assess general risks;
- Assess account specific risk;
- Develop efficient and effective audit plan program;
- Conduct audit testing; and
- Evaluate and communicate audit results.
Identify overall goals:
The purpose of HVC in guiding an audit is to express an opinion as to whether the Financial Statements are prepared and presented in a true and fair view. It is also seen that whether the report follows the appropriate standards prescribed by the Bangladesh Accounting Standards (BAS). However, in formatting an opinion, the audit team also address the tasks for:
b) Irregularities and other matters; and
An entity can do errors in their accounts in many ways. Financial Statements of a company should reflect true and fair view which means there should be mistakes in the accounts. Hence, the audit team is required to design the audit to provide reasonable assurance of detection of material errors. Errors can be done intentionally or unintentionally. Now to find out whether the errors are intentional or not is completely depends how the auditors judge the materiality and it also depends on the auditors wholly. However, it is the duty of an audit team to ensure existence of assets and liabilities which are truly owned by the clients and disclosed properly in the Financial Statements. Some errors may arise for:
a) Mistakes in gathering or processing accounting data;
b) Incorrect accounting estimates arising from oversight or misinterpretation of facts; and
c) Mistakes in the application of accounting principles relating to amount, classification, and manner of presentation or disclosure.
Irregularities and other matters:
An accounting irregularity is an accounting term for practice that does not fit in to the normal laws, practices and rules of the accounting profession, having the measured determination to deceive or defraud. Accounting irregularities can consist of intentionally misstating amounts and other information in financial statements, or omitting information required to be disclosed. Thus, there is always a risk that material irregularities may occur and not be detected. This kind of risk may increase due to unrecorded transactions by the internal employee to mislead the accounts, problem in internal control system, fake invoices or documents and some others possible ways intended to do fraud. However, if necessary steps are taken against irregularities and mismanagement the problem can be reduced.
It is obvious that HVC wants to perform their jobs efficiently and effectively. However, the level of effort should not exceed the budget of the audit engagement. Accomplishment and efficient audit includes:
- Along with partners and managers should adequately plan and analyze the risks involved in the projects.
- Same audit team can be appointed if the client is an existing one so that the procedure can be easy to deal with rather than appointing a new team.
- Designing the combination of audit procedures based on the risk assessment that will efficiently reduce the risk of undetected material misstatements to an appropriately low level.
- Assigning work to adequately trained and supervised persons with appropriate experience and skill levels. Mostly the team consist of three members, one senior article student who leads the team, one junior article student and one provisional student or newly joined student in the firm.
- Evaluate and gather initial information’s:
Before doing anything perfectly one’s need to know everything about the project they are dealing with. Moreover, HVC also seek for the full information of the clients they are working with. To conduct the audit efficient and effectively they first request the client to provide some basic information of their company such as what is the business of the client? Who are there suppliers and customers? How their business is being operated? What sort of accounting software’s they are using? Etc. All these information will help HVC to understand the following issues:
a) Understanding the client’s activities and operation
b) Considering the internal control structure
c) Identifying client’s expectation
d) Considering materiality.
Understand the operation o f clients:
The auditor comprehends the elements and its surrounding should incorporate the data about each of the following types:
- Industry, administrative, and other external factors, including the relevant financial reporting outline.
- Nature of the entity.
- Selection and use of accounting approaches.
- Objective, tactical and related business threat.
- Measurement and review of financial performance.
- Entity’s internal control.
Considering the internal control structure:
According to BSA-610, from the internal auditors audit groups can ask for help. From internal control system an external auditor can know its risk which they can analyze for their own benefit. Moreover, if the client maintains a good internal system than those risks can be decreased and vise-versa. Material mismanagement and audit risk will be high and it will affect the sample size if internal accounts is not properly shown true and fair view. To check internal control system there is a standard check list or questionnaires is prepaid by the HVC which is show in appendix: 2.
a) Understand and Assess Internal Auditing:
For an external auditors, we should acquire enough knowledge of internal audit activities of the client that can help us in planning the audit and in developing an effective audit method. While creating an audit plan we should perform a basic risk assessment of the internal control system which can lead us in better understandings of the accounts that they have created.
Thus, a coordination between external and internal auditors is essential to know specific areas of auditing. Moreover, if the client is using any software then the external auditors should acquire enough knowledge from the internal auditors so that there can be more efficient approach in auditing.
b) Evaluate and Test the w ork of Internal Auditing:
External auditor’s main job is to verify the true and fair positions of the accounts. By doing so auditors need to measure internal auditing system. Moreover, these job is checked through test basis to check the accuracy of the accounts done by the internal auditors. It is important to assess the system to see whether the system is appropriate or not. This evaluation may include consideration of whether:
- The job is performed by a skilled person who have sound knowledge on accounting system as internal auditors and the work is being cross check by the concerned person and reviewed and documented.
- Enough audit evidence is obtained to afford a reasonable basis for the conclusions reached.
- Conclusions reached are appropriate in the circumstances and any reports prepared are consistent with the results of the works performed.
- Any unusual matters disclosed by internal auditing are properly decided.
- Lastly, the external auditors would record conclusions regarding the specific internal auditing work that has been evaluated and tested.
Identify client’s expectation:
External auditors identifies the needs and expectations of the clients and then the design the audit in such manner that they can fulfill the requirements of the auditors.
Information on material relates to the importance or significance of an amount, transection or discrepancy and so if it’s omitted or misstated it could affect the economic decision of the users on the basis of the financial statement. Moreover, materiality depends of the size of the item or error and so the judged on those omissions and misstatements. Materiality should be considered by the auditor when:
- Determining the nature, timing and extent of the audit procedure; and
- Evaluating the effect of the misstatements.
- Asses general risks:
The assessment of risk is accomplished using a “top-down” approach. The audit group concentrates at first on abnormal state data. The nature and degree of documentation will change overall in light of an organizational size, complications, ownership characteristics, and level of risk.
The capacity to distinguish, measure, and oversee danger is regularly characteristic of an association’s capacity to react and adjust to change. Risk evaluation in this way helps associations to rapidly perceive potential adverse events, be more proactive and forwardlooking, and build up suitable risk responses, thereby reducing surprises and the costs or losses associated with business disruptions. This is where risk assessment’s real value lies: in preventing or minimizing negative surprises and unearthing new opportunities.
The more real-time and forward-looking the analysis of potential risks, the more controllable the achievement of objectives becomes. During audit planning and risk assessment, we obtain initial audit evidence in order to:
- Effectively assess the inherent risk of potential financial statement misstatements,
- Identify indicators of possible going concern problems, and
- Identify account specific risk and design an overall audit approach to provide reasonable assurance of detecting material misstatements.
- Asses o f account specific risks:
Audit team has to consider the risk related to specific accounts in the Financial Statements. In general the first thing is done to compare with the previous year’s accounts so that we can see the deviations among the accounts in a particular head. For example: In operating and administrative expenses, cash and cash equivalents, other income and etc. Audit team can take help from the Audit program manual questionnaire for better understandings. Moreover, after running the calculation of variance analysis auditors analyze the head to determine any materiality among them. It is totally depend on the auditor’s skills and expertise that how he/she is going to select the material transactions.
However, the greater the deviations among the values the greater the risk affiliated with.
- Develop Efficient And Effective Audit Plan Program:
In this step, Job In charge makes an overall plan about how audit can be performed. The purpose of the overall audit strategy is to develop an effective response to the risk of material misstatement. The auditor considers what they found in preliminary planning activities such as client acceptance, ethical position of the audit firm and their understanding of the entity and its environment, including its internal control, to develop an effective and efficient overall audit strategy that will appropriately respond to assessed risks.
The overall audit strategy includes consideration of planned audit responses to specific risks through the development of the audit plan. The overall audit strategy also helps the auditor determine the resources required for the engagement, including engagement staffing.
Therefore, at a minimum the following matters should be included in the overall audit strategy:
- Applicable characteristics of the audit appointment, such as the reporting framework used in order to establish the scope of the commitment.
- Important dates for reporting and other communications
- Setting of materiality
- Initial risk assessment and whether internal controls are to be tested
- Consideration of resources available and how they are to be used.
- Conduct audit testing:
In this phase the field work starts. Throughout the fieldwork stage, audit evidence is collected by the auditor’s working systematically through the work plan or checklist, for instance interviewing staff, managers and other stakeholders associated with the client’s, reviewing client’s documents, printouts and information, observing client’s procedures in action and checking system safety outlines etc. Audit tests are performed to authenticate the evidence as it is collected. Audit work papers are prepared, documenting the tests performed.
The first part of the fieldwork naturally involves a documentation review. The auditor reads and makes notes about documentation relating to and arising from the client’s (such as the Statement of Applicability, Risk Treatment Plan, client’s policy etc.). The documentation consist of audit indication, with the audit notes being audit working papers.
Technical compliance tests may be essential to authenticate that IT systems are configured in accord with the organization’s information security policies, standards and guidelines. Automated configuration checking and vulnerability assessment tools may speed up the rate at which technical compliance checks are accomplished but potentially present their own security concerns that need to be taken into account. The output of this phase is an accumulation of audit working papers and evidence in the audit files.
- Evaluate and communicate audit results:
Once the auditor has finished gathering evidence relating to the financial statement assertions the audit enters the achievement phase. First the sufficiency and appropriateness of the evidence gathered is assessed. The primary assessments of the risk of material misstatement (as identified during the planning phase) are used to calculate the sufficiency and appropriateness of the evidence collected. The auditor shall acquire sufficient appropriate evidence in order to reach and validate a conclusion on the fairness of the financial statements.
Should the auditor determine that sufficient appropriate evidence was not obtained; additional substantive techniques need to be performed. Once the auditor is content with the sufficiency and appropriateness of the evidence, the completion phase can continue.
The next stage of this phase is to determine the final materiality figure and to evaluate all misstatements identified. The auditor can either accept the planning materiality figure as the final materiality figure or lower it. However, the auditor should never increase the planning materiality figure during the completion phase. The auditor then aggregates the total identified misstatements and determines if it causes the financial statements to be materially misstated.
The list of identified misstatements is discussed with the client, and the client is given the opportunity to correct some or all of the identified misstatements should they wish to do so. If the uncorrected misstatements are judged to be material, the auditor issues an opinion that explains that the financial statements are materially misstated. If the uncorrected misstatements do not cause the financial statements to be materially misstated, HVC may issue a report with an unqualified opinion. But if misstatements cause financial statements to be materially misstated, HVC may issue a report with other than unqualified opinion.
Findings and Recommendations
Every side of a coin has another side ~ M yron Scholes. Audit procedures are intended to detect material misstatements in the financial statements. Standards are being set to deal with audit by ICAB. Even there is a manual on auditing called “Auditing practice manual” .
Moreover, the auditors are surely skilled in their position even though there are some loopholes in the system that weakens the prestigious profession called Chartered Accountancy.
Now, I would like to share some of the loops that I encountered with during my workings as a junior auditor. I also would like to establish some recommendations regarding those disadvantages. I personally discussed with some of collogues and my supervisor about the loops that I have found and most of them agrees with my observations. The findings and recommendations are given below:
- Time Constraints
Findings: Our team has faced serious time limitations, as from the initial screening of the clients business we thought that we understood everything but later in turns wrong. W e consume huge amount of time just to understand their whole operations process basically accounts. Especially me as a junior auditor, I had to gobble huge information with in short period of time.
Recommendations: From my point of view, if the in-charge or the firm gave us a small training session about the client’s system then it would be lot easier to understand quickly in the field. They provided idea about their financial statements but they did not provide enough information about the clients systems.
- Work programs are not followed properly
Findings: An auditor should follow steps while doing audit as per as Auditing program manual prescribed by ICAB. But in reality I have seen that most o f the points are overlooked for some reasons. Thus, the laws are not followed properly by the auditors which means the auditors might miss some serious issues which was supposed to disclose in the financial statement.
Recommendations: Auditing is a learning continues learning process. I have observed that the senior were once juniors and they tend to follow their seniors. Thus, if those seniors overlook something than the juniors also adopt to those kind of mentality. Moreover, to breakout these traditional practice firms need to make the juniors to understand the importance of the audit manual properly so that the audit become more reliable and effective.
- Methods o f Sampling
Findings: M any auditors use different techniques of sampling to represent the whole population. Some might use weighted percentage techniques or someone might feel comfortable with variance analysis to determine which head to see. Moreover, the basic summary in the sampling methods are used to limit the number of transactions, cost effective, time efficiency and lastly to representative of the whole population.
However, the auditors might fail to detect a material fact in the financial statements.
Recommendations: There should be a specific techniques for sampling which will lead to a united efficiency regarding sampling. Moreover, it would be better to execute thorough testing as possible from the samples they choose out of the entire population.
- Audit evidence
Findings: I have realized after completing my audit in Rakeen Development Company (BD) that most of the auditors believes that audit evidence is persuasive than conclusive. Including me I have seen that we as an auditors grab as much documents we can as evidence. Thus, the size of the documents became huge. But it is not efficient as well as not effective. As an auditors we have to understand that at the end of the day only those transactions which have problems need evidence. That means if an auditor wrote in his observation that client put rent expenses under fuel expense than the only the supporting documents is needed because auditors might have to defense his findings.
Recommendations: A training program can be arranged by the firm before sending juniors in auditing. The training should pass the knowledge of how to take evidence effectively and most importantly to show a sample documents. So that, juniors can recognize or able to know how the documents looks like.
- Management Coordination
Findings: During my Auditing course in BRAC University I had learnt that there is a lack of coordination between management and auditors. I also leant that the management feels burden while the auditors seeks for information from them. Moreover, how the management bullies the auditors by not providing the necessary documents or by delaying. Now, I can truly relate what I had learnt from my university. I personally felt that some of the employees are actually delaying in providing the documents that I have asked for. Legally, they have to provide the documents we asked for but when the management felt of having extra load in work they tend to delay or neglect the auditors.
Recommendations: Some says it is an art to bring documents from the managements or employees. As it requires patience and selective techniques to do so. I believe that there should be a welcoming sessions where the auditors and the managements will get to know each other which will help to reduce the distance that they normally creates. Furthermore, it is the clients’ duty to look at their managements so that they actually provide us the necessary documents. Thus, if the top management regularly takes feedback from the auditors than the problem might resolve.
Chartered Accountancy is one of the most prestigious profession in all over the world. This profession requires to maintain standards and procedures in conducting audit consultancy, taxation etc. works. International standards on auditing provides basic guidelines that chartered accountants need to adopt. Apart from auditing procedures provided by International standards on auditing (ISAs) every Chartered Accountant firm has some discretion in their audit procedures depending upon the situation of the respective country and nature of clients.
In this report, I tried to the best of my knowledge to present the audit procedures followed by Hoda Vasi Chowdhury & Co. In conducting their audit works. Mainly, Hoda Vasi Chowdhury & Co. follows the audit procedures set by ICAB in most cases except for area that requires professional judgment. From my working experiences in Hoda Vasi Chowdhury & Co. it has been found that in some respects Hoda Vasi Chowdhury & Co. does not strictly follow the standard of audit procedures.
From the formation of Hoda Vasi Chowdhury & Co. contributes to a great extent in ensuring the transparency in the presentation of financial statements of various entities of various industries of Bangladesh. Proper adoption of standard audit procedures will lead Hoda Vasi Chowdhury & Co. to remain as the one of the top Chartered Accountant firm in Bangladesh.
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