An analysis on the costs

and benefits of the internal

audit or internal review
activities in,
Aramit Limited...

Prepared for:

Mr. rezvee rahman

Teacher
Bangladesh Institute of management studies

Curse name: BTEC Higher national certificate

Subject: research project
Student name: sarker asif iqbal
Student id: 1312
Letter of Transmittal

August 22, 2007

To
Rezvee Rahman

Teacher
Bangladesh Institute of Management Studies
2/6, Block B, Lalmatia, Mohammadpur, Dhaka- 1207.
Dear Sir,
With due respect and humble submission, I would like to state that I have completed my Research
Project on Auditing in a company of my choice.
In auditing in a company is a sophisticated area. I discussed the methodologies, questionnaires,
time schedule etc in this report. I also made recommendation to the company.
I expect your kind, concern and wise judgment on this report.
If you have any further enquiry concerning any additional information I would be very pleased to
clarify. Thank you.
Sincerely yours,

Sarker Asif Iqbal

ID: 1312
Date:

Acknowledgement

I begin by thanking the Almighty for the successful completion of the Higher National Certificate
by completing the Research Project on Auditing.

Secondly I would like to thank my parents who motivated me and gave me mental throughout the
course especially in the time of making reports.
I, then extend my heart-felt thank to our respected and cooperative Program Director Mr. Samiur
Rashid. His kind support and providing information and suggestion helped me to finish the course
in time.
I would like to thank my teacher Mr. Rezvee Rahman for allowing me to do such an interesting
and knowledgeable Project Report on Auditing in a company of my choice. I have done the
whole report based on the information that I got from primary and secondary data. His enormous
and continual effort and guidance made me successful in completion of the Report.
I would also like to thank each and every person of Bangladesh Institute of Management
Studies.

Executive Summary

Aramit Limited. Aramit Limited is a company which produces various kinds of products. These are
foot wear, clothes, tin, pipes, and cement. They purchase raw materials for their production and
supply the goods to market.
Aim of the audit

 Proper accounting records have been kept and proper returns adequate for the audit
received from branches not visited.
The accounts agree with the accounting records and returns.
All information and explanations have been received as I think necessary and Ihave had
access at all times to the companys book of accounts and vouchers.
Details of directors emoluments and other benefits have been correctly disclosed in the
financial statements.
Particulars of loans and other transactions in favor of directors and others have been
correctly disclosed in the financial statements.
The information given in the directors report is consistent with accounts.
I will report to the share holders of the company if anyone of the following is not true. I will
give a true and fair view of the company to shareholders of the company.

Learning activity-01
TASK-1
Research question
What are the purposes of auditing in Aramit Limited?
What are the impacts of the report in Aramit Limited?
What are the weaknesses within the systems of internal control in the company?
Justification

The audit report is usually done by external auditors, to know the truth and fairness of a companys
financial statements. This will not only make the shareholders benefited but also will help other
users or stakeholders of the company. An audit report is usually kept on for public records, with the
filed financial statements.
The purpose of external audit is to verify that the annual accounts provide a true and fair picture of
the organizations finances; and that the use of funds is in accordance with the aims and objects as
outlined in the constitution.
It is not the prime role of the audit to detect fraud, although this may of course come to light during
the checks that take place. Auditors have thus been described as watchdogs not bloodhounds.
Audit report describes the weakness and threats to the organization. It also gives explanation and
recommendation of these weaknesses and threats. Therefore, the stakeholders of the company
will be able to know different impacts of management decisions. Thus they can improve the
performance of management and as well as remove the threats of the company.
TASK-2
I will do the audit in such a way so that it will reach the main purposes of auditing. I will make the
audit report understandable to each and every stakeholders of the company.
I will make a questionnaire which will be asked to directors, managers and employees of the
company. I will make a time schedule for different tasks and will go through it.
We will collect the data through,
Qualitative research:
I will ask questions face - to face questions to different level of staffs and
then will relate those with the documents we have to judge the character
of staffs.
I will do telephone interviews in the case where can not reach the required
stakeholder.
I will try to show the behavior and decision making of different level of
staffs and will try to show the reasons behind
Quantitative research:
Quantitative research is a systematic research procedure to know the
actual situation of the managements working quantitatively.
To do this I will go through the sales day book, purchase day book, sales
returns day book, cash book, petty cash book, journals and will do random
sampling of the documents.
I can go to in-depth of interview, my observation will be clear and the
document review will look handsome.
I will assume a time dimension to perform or complete all the tasks properly and then will
segregate the total time for particular tasks according to tasks.
TASK-3

Date
14 08 07 to
16 08 07
17 08 07 to
20 08 07
21 08 07 to
28 09 07
29 08 07 to
03 08 07

04 08 07 to
12 08 07
13 08 07 to
16 08 07

17 08 07 to
18 08 07
19 08 07
20 08 - 07

Topic
Start and
introduction with
the company and
planning.
Receiving
previous audit
reports.
Meeting with
previous auditors.
Collecting recent
and previous
financial
statements and
go through the
statements.
Visiting different
units.
Meeting with
different level of
staffs.
Adding all the
data and
information.
Preparing a
report for the
stakeholders.
Presentation on
our findings.

Done with
Employees,
managers and
directors.

Remarks
A formal introduction with the employees,
managers, department directors and
board of directors.

Previous
auditors.

Previous two audit reports will be

collected and checked.

Previous
auditors.
Accounts director
and manager.

Discussion to view the companies

environment in sight of them.
Previous two financial reports will be
collected and matched with auditors
reports.

Managers.
Employees,
Department
directors,
Managers, Board
of directors.

Meeting will be done with them

separately. Question will be asked
critically.

To board of
directors.

TASK-4
Code of Ethics During and After the Research
A Code of Ethics is a comprehensive statement of the values and principles that shall guide the
conduct of members of staff in an organization.
During and after the research I will ask questions directly to different level of staffs. In that
case I will add the answers in my report but I will not disclose any name to anybody.

 Data handling and reporting will be appropriate to the task.

I will try my best to make trust, confidence and credibility.
I will not violate confidentiality of anyone related to report.
I will try my best to make the report using integrity. Integrity includes honesty, honesty,
truthfulness and candidness in the course of the work and in the relationships with the staff
of audited entities.
I will make the report independently with fulfilling the objectives and maintaining
impartiality.
Data presentations or interpretations will not be violated.
I will be politically neutral throughout the research.
I will provide advice and services other than audits to the audit clients by taking care so
that my advice does not lead to any conflict of interest.
I will perform my duty in a professional manner at all times and by applying high
professional standards in carrying out the work to enable affectivity, efficiency and
impartiality.
I will try to give recommendation to the company.
The report will not be disclosed in front of competitors and I will handover the copyright to
the company.
The report will be based on the actual situation of the company. No parts will be copied
from any source.

Learning activity-02
TASK-1
Questionnaire
We want to check the control system of Aramit Limited. We want to check that how efficiently or
perfectly their control system is working. We will check it through Internal Control Evaluation
Questionnaires (ICEQs).
Control Questions are as follows,

Sales are properly authorized?

Sales are made to reliable payers?
All goods dispatched are invoiced?
All invoices are properly prepared?
All invoices are recorded?
Invoices are properly supported?
All credits to customers accounts are valid?
Cash and cheque received are properly recorded and deposited?
Slow payers will be chased and that bad and doubtful debts will be provided against?
All transactions are properly accounted for?
Cash sales are properly dealt with?
Sundry sales are controlled?
At the period end the system will neither overstate nor understate debtors?

Resources used for secondary research

Reports of 2004-2005 and 2005-2006.
Internet.
Journals.
Media.
TASK-2
Research methodology
The methodology chosen by me will provide me enough information to carry out the research and
to prepare a report.
I will ask the research questions to related stuffs from lower level to upper level. It will help
me to get every ones view and comments. So, I can include those in the recommendation.
It will help me to find out fraudstars of the company. By adding all comments I can take
neutral decision.
Previous reports will give me the views given by the previous auditors. So, it will help me to
guess the limitations of the company.
I will get the historical views of the company from newspapers.
Internet, journals will help me to carry out the research in-depth.

Learning outcome -03

TASK-1
Date
14 08 07 to
16 08 07

Topic
Start and
introduction with

Monitoring Date

Date of Update

Agree/ Not
agree

17 08 07 to
20 08 07
21 08 07 to
28 09 07
29 08 07 to
03 08 07

04 08 07 to
12 08 07
13 08 07 to
16 08 07
17 08 07 to
18 08 07
19 08 07
20 08 - 07

the company and

planning.
Receiving
previous audit
reports.
Meeting with
previous auditors.
Collecting recent
and previous
financial
statements and
go through the
statements.
Visiting different
units.
Meeting with
different level of
staffs.
Adding all the
data and
information.
Preparing a
report for the
stakeholders.
Presentation on
our findings.

Supervisors name: _____________________

_________________________
Supervisors signature and date

TASK-2
Date
14 08 07 to
16 08 07

Topic
Start and
introduction with
the company and
planning.

Done with
Employees,
managers and
directors.

Changes

17 08 07 to
20 08 07
21 08 07 to
28 09 07
29 08 07 to
03 08 07

04 08 07 to
12 08 07
13 08 07 to
16 08 07

17 08 07 to
18 08 07
19 08 07
20 08 07

Receiving
previous audit
reports.
Meeting with
previous auditors.

Previous
auditors.

Collecting recent
and previous
financial
statements and
go through the
statements.
Visiting different
units.
Meeting with
different level of
staffs.

Accounts director
and manager.

Adding all the

data and
information.
Preparing a
report for the
stakeholders.
Presentation on
my findings.

Previous
auditors.

Previous audit reports collected,

checked and meeting done with the
previous auditor.
Collecting recent and previous financial
statements and go through the
statements.
Meeting with suppliers.

Managers.
Employees,
Department
directors,
Managers, Board
of directors.

Meeting will be done with them

separately. Question will be asked
critically.

Presentation on the findings.

To board of
directors.

Report handover.

I made a time schedule before. I was going through that schedule and finished some of my
required task early. Thats why I revised my scheduled work.

TASK-3 & 4
Scope of Audit
As an Auditor I will focus on various concerns, such as:

 Whether there is any discrepancy between the amount and quantity of raw materials
purchased and the bill placed against them.
Whether the materials purchased according to the specification.
Whether there is any discrepancy between the payment and bill submitted.
Whether posting is given in all relevant books of prime entry properly.
Whether financial statement is done properly e.g. any dissimilarity in expenditure, closing
balance in bank and cash in hand.
Materiality
I will consider small accounts very carefully so that they can not be repeated.
I will also check in quantitative aspect and qualitative aspect.
Changes to the level of materiality:
The level of materiality must be reviewed constantly as the audit progresses. Changes to audit
procedures may be required for various reasons.
I will alter the draft accounts that contain material error and therefore overall materiality
changes.
External factors cause changes in the control or inherent risk estimates.
Changes are caused by errors found during testing.

Effect of planning materiality on audit process

PLANNING
MATERIALITY based on draft
financial statements.
Compare and consider need for additional testing.

Apply planning materiality to

individual audit
objectives/balances.

Test all items

PLANNING MATERIALITY

Actual errors detected

Sample from remaining

Actual errors detected

Final materiality

Actual errors projected

Audit Risk:
Risk-centered approach will gave me an overall measure of risk, but at the same time it provided a
quantification of each stage of the audit. A diagrammatic view of the risk-based approach is given
below,

DETERMINE ACCEPTABLE AUDIT

RISK. WE TOOK IT AS 5%

INVESTIGATE AND DOCUMENT

INTERNAL CONTROLS.
CONSIDER INDUSTRY
AND OTHER
BACKGROUND
INFORMATION.

ASSESS THE COTROL RISK

TEST CONTROLS

ASSESS
INHERENT RISK

RE ASSESS CONTROL RISK.

CALCULATE DETECTION RISK.

DESIGN SUBSTANTIVE TESTS BASED

ON DETECTION RISK.

Audit Risk
Audit risk has three components;
Inherent risk.
Control risk.
Detection risk.

Audit risk is the risk that the auditors give an unqualified opinion on the accounts when they should
have given a qualified opinion (or vice versa) or give an opinion qualified for a particular reason
where that reason was not justified. Audit risk can never be completely eliminated.
During my work I have to deal with following risks,
Inherent Risk
This type of risk is by born. I can not cure it fully but it can be minimized. I pointed some inherent
risks here, for example,
Faulty raw materials,
Transposition error,
Control of credit
Sales.
Control Risk
This is the risk of misstatement. It can occur in an account balance or class of transactions. It can
be material. It can not be prevented, or detected but it can be corrected on a timely basis.
Fraudulent activities by fraudster.
Detection Risk
Detection risk is the risk that audit procedures will fail to detect material errors. Detection risk is the
risk that relates to the inability of the auditors to examine all evidence.
Audit Test
I carried out the following tests to examine the operational aspect of the company:

I checked that the references are being obtained for all new customers.
I checked that all new accounts on the sales ledger have been authorized by senior staff.
I checked that orders are only accepted from customers who are within their credit terms
and credit limits.
I checked that customer orders are being matured with production orders and dispatch
notes.
I checked the petty cash book.
I checked the payment slips to find out ghost employee.
I checked that the payment to debtor is properly recorded or not.
I checked that the loans taken by the manager is recorded correctly or not.
I checked the stock.
I checked that whether the control system made by the company is following by the
employees properly or not.
I checked that whether the financial statement is maintained properly or not.

I checked whether income statement and balance sheet are prepared by proper
accounting system.
I checked the previous audit reports.

Some typical contents of sample working paper

The name of client.

The balance sheet date.
The file reference of the working paper.
The name of the person preparing the working paper.
The date the working paper was prepared.
The subject of the working paper.
The name of the person reviewing the working paper.
The date of the review.
The objective of the work done.
The source of information.
The work done.
A key to any audit ticks or symbols.
The results obtained.
Analysis of errors or other significant observations.
The conclusions drawn.

Working papers
Client name: Aramit Limited.

Prepared by
AS
Date: 18.08.2007

Reviewed by
MS
Date: 20.08.2007

SL8332

Subject: Debtors
Year ended: 31st December 2006

Objective
Work done
Results

Conclusion

To ensure sales ledger balance fairly stated.

Selected a sample of trade debtors as at 31 December and reconciled the
customers statement to the year and sales ledger balance.
See SL-8332.
One debit note relating to Bishwash Builders Ltd. has not been accounted
for. An adjustment is required.
Debit: Bishwash Builders Ltd. 600000 Tk.
Credit: Sales account
600000 Tk.
Another error is found, which was immaterial, and which the fault of the my
client was.
The client management system should check statement reconciliation as
supplier at least on the ledger account.
After making the adjustment note above sales ledger balances are fairly
stated as at 31st December 20X6

Client Name: Aramit Limited

Subject: Creditor
Year ended: 31st December, 2006.

Objective
Work done
Results

Conclusion

Prepared by
AS
Date: 18.08.2007

Reviewed by
MS
Date: 20.08.2007

SL3442

To ensure purchase ledger balance fairly stated.

Selected a sample of trade creditors as at 31 December and recorded the
suppliers statement to the year and purchase ledger balance. Vouched
any reconciliation items to source documentation.
See 3442
One credit note related to EURASIA LEATHER has not been accounted
for. Adjustment is required.
Debit: Trade creditors
20, 00000 TK.
Credit: Purchases
20, 00000 TK.
Another error was found. Which was immaterial and which was the fault of
the supplier.
In view of the error found, however, I should recommend that the client
management checks supplier statement reconciliations at least on the
large accounts.
After making the adjustment noted above, purchase ledger balances are
fairly stated as at 31st December, 2006.
SL-8332
Prepared by
AS
Date: 18.08.2007

Reviewed by
MS
Date: 20.08.2007

Client name: Aramit Limited.

Subject: Debtors
Year ended: 31st December 20X6
Client

Sales
ledger

Customers
Statement

Difference

Agreed

Reconciling
item

Bishwash
Builders
Ltd.
Sheltech
Ltd.

600,000

600,000

OK

500,000

475,000

25,000

NO

25,000

Debit not
yet
received

1,100,000

SL-3442
Client Name: Aramit Limited
Subject: Creditor
Year ended: 31st December, 2006.

Client

Purchase
ledger
2,000,000

EURASIA
LEATHER
IQBAL
1,470,000
BROTHERS
TANNERY
3,470,000

Prepared by
AS
Date: 18.08.2007

Reviewed by
MS
Date: 20.08.2007

Supplier
statement
20, 00000

Difference

Agreed

OK

Reconciling
item
.

14, 55000

15, 000

NO

15, 000

Flow chart for Bishwash Builders Ltd.

SL3442

.
Credit note
not yet
received.

B.B. Limited

1. Order received from

B.B. Ltd.
2. 5-part order
acknowledgement
created

Sales Dept.

Order
From
B.B.
Ltd.

Accounts

2 3

Dispatch

Credit
ratings

3. Checked for credit

worthiness
4. 3-part dispatch note
created and 1 part is
sent with goods to B.B.
Ltd. (DN)

Credit Control

Sales
Ledger
clerk

A
2

1
DN

B.B. Ltd.
B
2

5. 2-Part invoice
created (INV)

2
1

To B.B. Ltd.
With goods

6.(Monthly) statement
sent to B.B.Ltd.

1
INV

Sales
ledger

N
Customer

Statement

B. B. Ltd.

Flow chart for Eurasia Leather

Purchase system Chart 1 Ordering and receiving of goods.

x
T

Eurasia Leather

Op.
No.

Requisition of goods is
signed by warehouse
and given to Eurasia
1
Leather. Order quantity is
predetermined.
Aramit Limited checked
2
the authorization of
requisition.
Purchase order prepared 3
using suppliers latest
price list.
Mailed to Eurasia
Leather.
File of outstanding
purchase orders scanned
weekly for overdue
deliveries.
When goods arrive,
quantity is checked
against the purchase
order. Goods are in
sealed condition. If
obviously damaged, the
quantity of delivery is
refused.
If goods are short
delivered a shortage
memo is raised at the
same time and cross
referenced to the GRN.
Filed in GRN numerical
order.
Filed in shortage memo
in numerical order.

Warehouse

Buyer

Goods Inwards

Reqn

Suppliers price
list

X X

PO

GRN

Shortage
memo

PO

7
P
2
8

X
To warehouse with
goods as next
requisition

P
2

9
10

Eurasia Leather Purchase system Chart 2 Ordering and receiving of goods.

Op
No.

Goods Inwards

Buyer

Purchase ledger Clark

P
2

P
1

P
1
Shortage
memo

Direct from supplier

(via mail room only)

P
1
PO

Invoice

GRN

Matches and checks

signature on GRN, quantity
and description of goods.
Invoice given sequential
numbers and stamped with
a grid for approval.
Invoices filed until goods
arrive.
Invoices matched with
GRN and purchase order.
If unmatched buyer retains
until goods received.
Checks quantity, price and
discount terms.
Enters accounting code
and signs approval grid. If
price and quantity incorrect
notes this on invoice and
raises debit note. Debit
notes are referenced to
supplier invoice.

Check all costs and

extensions on invoices
over 20,000 TK and 10%
of all invoices under
20,000TK.
Reviews invoices to see
that package is complete
and approval grid fully
signed.

11
12
13

14

15

Debit
note

X
To supplier

16

Invoi
ce

GRN
PO
Debit
Note

Shorta
ge
memo

17
P
3

Learning Activity 04

P
3

TASK- 1, 2, 3 & 4

AS & Co
Certified Accountants
52 Borobagh,
Mirpur, Section-2,
Dhaka-1216.
The Board of Directors,
Aramit Limited.
53 Kallurghat Heavy Industrial Estates,
P.O. Mohara,
Chittagong - 4208.
Financial statement for the year ended 31 st December 20X6
In accordance with normal practice, I set out in this letter certain matters which arose as a result of
my review of accounting system and procedures operated by your company during my recent
interim audit.
I would point out that the matters dealt with in this letter came to my notice during the conduct of
my normal audit procedures which are designed primarily for the purpose of expressing my opinion
on the financial statements of your company. In consequence my work did not encompass a
detailed review of all aspects of the system and can not be relied on necessarily to disclose
defalcations or other irregularities or to include all possible improvements in internal control.
Purchase: Ordering Procedures
Present system
During the course of my work I discovered that it was the practice of the stores to order certain
goods from IQBAL BROTHERS TANNERY orally without preparing either a purchase requisition or
purchase order.
Implications
There is therefore the possibility of liabilities being set up for unauthorized items and at a noncompetitive price. An d I found there a liability of 15,000 TK.
Recommendations
We recommend that the buying department should be responsible for such orders and, if they are
placed orally, an official order should be raised as confirmation.

 Purchase Ledger Reconciliation

Present system
Although your procedures require that the purchase ledger is reconciled against the control
account on the nominal ledger at the end of every month, this was not done in December or
January.
Implications
The balance on the purchase ledger was short by some 25,000 TK of the nominal ledger control
account at 31st January20X6 for which no explanation could be offered. This implies a serious
breakdown in the purchase invoice and or cash payment batching and posting procedures.
Recommendations
It is important in future that this reconciliation is performed regularly by a responsible official
independent of the day to day purchase ledger, cashier and nominal ledger functions.
Preparation of payroll and maintenance of personnel records
Present System
Under your present system, just four members of staff are entirely and equally responsible for the
maintenance of personnel records and preparation of the payroll. Furthermore, the only
independent check of any nature on the payroll is that the chief accountant confirms that the
amount of the wages cheque presented to him for signature agrees with the total of the net wages
column in the payroll. This letter check does not involve any consideration of the reasonableness of
the amount of the total net wages cheque or the monies being shown as due to individual
employees.
Implications
It is a serious weakness of your present system, that so much responsibility is vested in the hands
of just four people. This situation is made worse by the fact that there is no clearly defined division
of duties as between the four of them. In my opinion, it would be far too easy for fraud to take place
in this area and or for clerical errors to go undetected.
Recommendations
Some person other than four wages clerks be made responsible for maintaining the
personnel records and for periodically checking them against the details on the payroll;
The four wages clerks are allocated specific duties in relation to the preparation of the
payroll, with each clerk independently reviewing the work of other.
When the payroll is presented in support of the cheque for signature to the chief
accountant, that he should be responsible for assessing the reasonableness of the overall
charge for wages that week.
My comments have been discussed with our finance director and the chief accountant and these
matters will be considered by me again during future audits. I will look forward to receiving your
comments. If you need further more information please dont hesitate to contact me.

This letter has been prepared for the sole use of your company and it will not disclose to third party
with out written consent. No responsibility is assumed by me to any other person.
I should like to take this opportunity of thanking your staffs for their co-ordination and co-operation
during the course of the audit.
Cordially yours,
---------------------Sarker Asif Iqbal
On behalf of,
AS & Co.