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Effectiveness of bank audit in Bangladesh

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DOI: 10.1108/02686900210444833

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 Managerial Auditing Journal
Effectiveness of bank audit in Bangladesh
Javed Siddiqui Jyotirmoy Podder
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Javed Siddiqui Jyotirmoy Podder, (2002),"Effectiveness of bank audit in Bangladesh", Managerial Auditing Journal, Vol. 17
Iss 8 pp. 502 - 510
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 Effectiveness of bank audit in Bangladesh
Keywords
Audit, Banks, Default, Loans,
Effectiveness, Going concern
Downloaded by University of Manchester At 02:45 27 May 2016 (PT)
Abstract
The study examines the
effectiveness of financial audit of
banking companies operating
within Bangladesh. The scope of
bank audit has also been
examined. The audited financial
statements of 14 sample banking
companies have been considered.
The study identifies seven sample
companies that have actually
overstated their profits. In spite of
that, the firms auditing those
financial statements have failed to
issue qualified audit reports.
Therefore, the study questions the
level of independence, objectivity
and competence of the auditors
assigned for auditing banking
companies.
Managerial Auditing Journal
17/8 [2002] 502±510
# MCB UP Limited
[ISSN 0268-6902]
[DOI 10.1108/02686900210444833]
[ 502 ]
Javed Siddiqui
Department of Accounting, University of Dhaka, Dhaka, Bangladesh
Jyotirmoy Podder
Bangladesh Institute of Bank Management (BIBM), Dhaka, Bangladesh
Introduction
For the survival and growth of the banking
sector, it is imperative that the sector has the
confidence of the public. The confidence of
the public would depend on the financial and
operational performance of the bank. The
functioning of a bank would have to be
certified by an auditor who conducts the
audit in accordance with applicable ethical
and auditing standards, including
independence, due professional care,
objectivity and adequate planning and
supervision. Thus, the role of an auditor of a
bank is immense.
The banking sector of Bangladesh is
dominated by commercial banks with huge
debt burdens. Inefficiency in loan
sanctioning, extension of preferential loans,
and poor classification and administration of
loans has led to the slow recovery of credit
extended by the banks. To restore efficiency
and accountability in this sector, an effective
audit of the banks' operations have become
necessary. The objective of this study is to
examine the effectiveness of audit of
companies that fall under the purview of the
Banking Companies Act of 1991. The
provisioning procedure on classified loans
and its adequacy has also been taken on
board. The scope of audit and its proper
performance have been scrutinized.
For the purpose of this study, 14 sample
banking companies were selected from 40
commercial banks operating within
Bangladesh. The first hand information for
this study has been collected through
interviews with bank managers, accountants
and auditors. Audited financial statements of
the banks have acted as secondary source of
information. Non-availability of current-year
information of the banks has acted as a
constraint. Information was collected from
The current issue and full text archive of this journal is available at
http://www.emeraldinsight.com/0268-6902.htm
the annual reports of the sample banks for
the years 1999 and 1998.
Audit effectiveness
An audit of financial statements is conducted
to determine whether the overall financial
statements, the quantifiable information
being verified, are stated in accordance with
specified criteria. Auditing is the process by
which a competent, independent person
accumulates and evaluates evidence about
quantifiable information related to a specific
economic entity for the purpose of
determining and reporting on the degree of
the correspondences between the
quantifiable information and established
criteria (Arens and Loebbecke, 1998) In an
audit report, the auditor certifies that the
audited accounts are reasonably free from
material errors and irregularities, that the
certified quantitive information reflects a
``true and fair view'' of the state of the
business and also that the accounts have
been drawn in line with generally accepted
accounting practices followed in the
industry. Thus, an audit report is a means of
comparing the performance of an entity
against some established criteria.
An effective audit of financial statements,
i.e. the mandatory audit, should detect
irregularities involving the misuse of funds,
identify weaknesses in management control,
determine the reliability of the financial data
and identify patterns of waste and
inefficiency. Besides, it should provide
reliable data about project results as a basis
for future adjustments in plans, policies and
budget allocations (Havens and Larsson,
2000).
The International Organization for
Supreme Audit Institutions (INTOSAI, 1996)
has identified a number of factors that
contribute to effective audit of organizations
using public funds:
. Independence. An audit institution can
fulfill their tasks objectively and
 Javed Siddiqui and
Jyotirmoy Podder
Effectiveness of bank audit in
Bangladesh
Managerial Auditing Journal
17/8 [2002] 502±510
. Audit coverage. To meet the objectives of
. Professional skills and competence.
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effectively only if they are independent of
the audited entity and are protected
against outside influence. Independence
in auditing means taking an unbiased
viewpoint in the performance of audit
tests, the evaluation of the results and the
issuance of the audit report. An auditor's
objectivity must be beyond question. That
objectivity can only be assured if the
auditor is, and is seen to be, independent.
auditing, all revenues, expenses, assets
and liabilities of the entire entity must be
effectively audited.
Auditing is a profession that encompasses
a wide range of technical skills. The
auditor must be qualified to understand
. all statements required by the statutes are
included in the financial statements;
. the financial statements are prepared in
accordance with the accepted accounting
standards;
. there are no circumstances requiring the
addition of an explanatory paragraph or
modification of the wording of the report.
An unqualified report with explanatory
paragraph or modified wording meets the
criteria of a complete audit with satisfactory
results and financial statements that are
fairly presented, but the auditor feels it is
important to provide additional
requirements. Unqualified reports with
explanatory paragraphs or modified are
issued to indicate consistency exception,
departure from a promulgated principle

the criteria used and competent to know

the types and amount of evidence to
accumulate to reach the proper
conclusion after the evidence has been
examined. However, sometimes an audit
may require specialized knowledge in a
sector that the auditor may not possess.
For such cases, the auditors may need to
seek advice from other experts in
assessing the quality and reliability of the
work done by the client. Using the work of
others as a basis for reaching audit
conclusions is the subject of much
discussion among the audit profession.
Protection of shareholders' interest
The necessity of having auditors was felt
after the birth of the limited liability concept.
At that time, it was clearly felt that
legislation was needed to protect effectively
the interest of the shareholders from the
extravagance, inefficiency, ineptitude, and,
in some cases, the deceit of the active
stewards, i.e. the management (Woolf, 1992).
This led to the development of audit
profession. Auditors are employed by the
owners of an entity to certify the
performance of the management. The
stakeholders appoint the auditors to make
sure that their money, entrusted with the
management of a company, is being utilized
in an efficient manner.
Audit opinion
The purpose of audit is to produce an audit
report containing a opinion. The auditor's
opinion is based on the evidences extracted
during the course of audit. Depending on the
degree of ``material'' errors and
irregularities, the audit opinions may be
classified as ``unqualified'' or ``qualified''.
Unqualified audit report
The standard unqualified audit report is
issued when the auditor is satisfied that:
(Rule 203 of the AICPA Code of Professional
Ethics (AICPA, 1988)), emphasis on a matter
or reports involving other auditors.
Qualified audit report
Reports other than an unqualified report
may be classified as adverse opinion,
disclaimer of opinion and qualified opinion
depending on the degree of audit scope
limitations, material misstatements, fair
presentation and failure to follow generally
accepted accounting principles (GAAP).
Auditor's responsibility with respect to the
going concern assumption
The going concern assumption is a
fundamental principle in the preparation of
the financial statements. Management has a
responsibility to assess the entity's ability to
continue as a going concern, even if not
explicitly required in the financial reporting
framework. Management's assessment may
not always involve detailed analysis,
particularly when there is a history of
profitable operations and a ready access to
financial resources (see The International
Standards on Auditing 570, available at
www.ire.lu/isa/isa570.htm for more details).
The auditor's responsibility is to consider
the appropriateness of management's use of
the going concern assumption in the
preparation of the financial statements, and
consider whether there are material
uncertainties about the entity's ability to
continue as a going concern that need to be
disclosed in the financial statements.
Accordingly, the absence of any reference to
going concern uncertainty in an auditor's
report cannot be viewed as a guarantee that
the entity will continue as a going concern. In
planning the audit, the auditor should
consider whether there are events or
conditions, which may cast significant doubt
on the entity's ability to continue as a going
[ 503 ]
 Javed Siddiqui and
Jyotirmoy Podder
Effectiveness of bank audit in
Bangladesh
Managerial Auditing Journal
17/8 [2002] 502±510
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[ 504 ]
concern. The auditor also considers whether
management has taken into account all
relevant information that the auditor has
identified as a result of his or her audit
procedures (International Auditing Practices
Committee, 1999).
There are a number of symptoms, such as,
high gearing, inability to repay loans,
substantial recurring losses, slowdown in
loan collection rate from debtors etc. that
may be used to diagnose going concern
difficulties.
If an event or condition is identified that
may cast significant doubt on the entity's
ability to continue as a going concern, the
auditor reviews management's plans for
future action and seeks written
representation from them; and gathers
evidence to confirm or dispel whether or not
a material uncertainty exists. The auditor's
report would include either a matter of
emphasis paragraph, or a qualified or
adverse opinion, depending on whether or
not the financial statements fully disclose the
event and condition as well as the material
uncertainty about the entity's ability to
continue as a going concern. If the going
concern basis has been used to prepare the
financial statements when it is not
appropriate, the auditor would express an
adverse opinion (Revised ISA 570, effective
on or after December 31, 2000).
Audit of banks
Banks play a pivotal role in the economy.
They hold the savings of the public, provide a
means of payment for goods and services and
finance the development of business and
trade. To perform these functions securely
and efficiently, individual banks must
command the confidence of the public and
those with whom they do business. The
stability of the banking system, national and
international, has therefore come to be
recognized as a matter of general public
interest.
Banks' financial statements are also
subject to audit by external auditors. The
auditor's opinion lends credibility to such
statements and thereby assists in promoting
confidence in the banking system. As the
business of banking grows in complexity,
both nationally and internationally, the tasks
of both bank supervisors and external
auditors are becoming more and more
demanding.
The role of the bank's external auditor
Banks often derive a significant amount of
their funding from short-term deposits
(insured and/or uninsured). A loss in
confidence in a bank can quickly result in a
liquidity crisis. Banks also have fiduciary
duties in respect of the assets they hold that
belong to other persons. Banks therefore
need to establish operating procedures and
internal controls designed to ensure that they
deal with assets only in accordance with the
terms on which they hold them.
Governmental authorities regulate banks
and regulatory requirements often influence
generally accepted accounting and auditing
practices within the industry. Non-
compliance with regulatory requirements,
for example, concerning special valuation
rules for substandard assets, could have
implications for the bank's financial
statements.
The primary objectives of the external
audits are to provide the board of directors
and management with:
. reasonable assurance about the
effectiveness of internal controls over
financial reporting, the accuracy and
timeliness in recording transactions, and
the accuracy and completeness of
financial and regulatory reports;
. an independent and objective view of the
bank's activities, including processes
relative to financial reporting; and
information useful to directors and
management in maintaining a bank's risk
management processes (The Office of the
Comptroller of the Currency, 2000).
In auditing a bank, the auditor bases the
audit on the assessment of the inherent risk
of material misstatement, the assessment and
testing of the internal control systems
designed to prevent or detect and correct
material misstatements, and on substantive
procedures performed on a test basis. Such
procedures include inspection, observation,
inquiry and confirmation, computation and
analytical procedures. In particular, the
auditor is concerned about the recoverability
and consequently the carrying value of loans,
investments and related assets and about the
identification and adequate disclosure in the
financial statements of all material
commitments and liabilities, contingent or
otherwise (IFAC, 2001).
An auditor plans and conducts the audit to
obtain reasonable assurance that
misstatements in the bank's financial
statements, which, individually or in
aggregate, are material in relation to the
financial information presented by those
statements are detected. The auditor
considers materiality at both the overall
financial statement level and in relation to
individual account balances, classes of
 Javed Siddiqui and
Jyotirmoy Podder
Effectiveness of bank audit in
Bangladesh
Managerial Auditing Journal
17/8 [2002] 502±510
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transactions and disclosures. The assessment
of what is material is a matter for the
auditor's professional judgment, but it is
influenced by the auditor's perception of the
needs of the users of the bank's financial
statements.
In forming an opinion on the financial
statements, the auditor carries out
procedures designed to obtain reasonable
assurance that the financial statements are
prepared in all material respects in
accordance with an identified financial
reporting framework. The auditor plans and
performs his audit with an attitude of
professional skepticism, recognizing that
circumstances may exist which cause the
financial statements to be materially
misstated.
When the auditor discovers an error
material to the financial statements,
including the use of an inappropriate
accounting policy or asset valuation or a
failure to disclose essential information, the
auditor asks management to adjust the
financial statements to correct the error. If
management refuses to make the correction
the auditor issues a qualified or an adverse
opinion on the financial statements. Such a
report will have a serious effect on the
credibility and even stability of the bank, and
management therefore usually takes the
steps necessary to avoid it.
Auditors should take positive steps to
investigate the client company's post balance
sheet health before simply assuming that it is
viable as an on-going entity. This active
search is proposed as a requirement by the
SAS# 59 on going concern issued by ASB.
There are a number of symptoms that may be
used to diagnose going concern difficulties,
and most checklists drafted for this purpose
will incorporate some or all of the following:
. Loan repayments are falling due in the
near future, and refinancing facilities are
not immediately available.
. The company is heavily or increasingly
dependent on short-term finance.
. Normal purchases are being deferred.
. Substantial losses are incurring.
. The company is in an exposed position in
relation to future commitments.
. Current ratio is declining.
. Collection rate from debtors is slowing
down.
Should the presence of one or more of such
features cause the auditors concern, they
should, at the very least enquire into and
obtain written evidence of the steps (if any)
the client is taking in order to correct its
decline in fortunes. If the auditor cannot
satisfy himself that the client will remain in
business in the foreseeable future, then he
must consider the validity of the going
concern basis, and the need to qualify his
audit report in appropriate terms.
Banking structure in Bangladesh
The Bangladesh banking sector is made up of
nine government-owned banks, 20 domestic
private banks, and 13 foreign banks. This
includes four nationalized commercial banks
(NCBs), four development finance
institutions (DFIs), 18 private commercial
banks (PCBs), and 14 foreign commercial
banks (FCBs). DFIs are those financial
institutions that are involved in providing
long-term finance to priority sectors such as
industry and agriculture. Out of four DFIs,
two are involved in extending agricultural
credit and the rest are involved in providing
industrial credit. Out of a total of 5,896
branches (as on 31 December 1996), 3,612
branches are located in the rural areas,
which comprise 63 per cent, 28 per cent, and 9
per cent of NCBs, DFIs and PCBs
respectively. FCBs have no rural branch but
have 26 urban branches up to 31 December
1996 (Hussein et al., 1998). The Bangladesh
Bank regulates all banking institutions,
including the nationalized commercial banks
(NCBs), other government banks
(development finance institutions and
agricultural banks), domestic private banks
and foreign banks. Collectively, these banks
make up the ``scheduled'' banking system. As
in many countries, the central bank is
controlled by the Ministry of Finance; it is
not independent. A Governor, who reports to
the Secretary, Finance Division of the
Ministry of Finance, heads the Bangladesh
Bank.
Default culture
The banking sector in Bangladesh has been a
constant source of worries for the policy
makers. This sector is heavily influenced by
lack of transparency in the loan sanctioning
and repayment process. The huge amount of
default loans is taking the banking sector to
the verge of collapse. Realization of loans is
constrained by the inadequacy of
appropriate legal framework. According to
the figures provided by the banks more than
one-third of the loans are uncollectable
(Tables I and II). The actual condition may be
even worse because many bad loans are
repeatedly ``re-scheduled'' and the
accounting practice is to restore a
rescheduled bad loan to unclassified status
until it goes bad again (Munshi, 2000). Due to
[ 505 ]
 Javed Siddiqui and Table I
Jyotirmoy Podder Status of classified loans, sub-standard loans and bad/loss loans for all banks including DFIs
Effectiveness of bank audit in
Bangladesh (1997-2000)
Managerial Auditing Journal Classified loans Sub-standard
17/8 [2002] 502±510
Total classified as % of total loan as % of Doubtful loans Bad/loss loans
Year Total loans loans loans TCL as % of TCL as % of TCL
1997 462.27 173.32 37.49 7.88 11.70 80.42
1998 527.32 214.37 40.65 4.26 7.21 88.53
1999 580.83 238.79 41.11 5.26 8.27 86.47
2000 654.42 228.51 34.91 4.82 6.33 88.57
Notes: DFIs have been included in the classification system from 1997; in 1997, DFIs comprise BKB, BSB and
RAKUB; in 1998, BSRS was included in the above list; in 1999, BASIC was included in the above list. (Taka in
billion)
Source: Banking Regulation and Policy Department, Bangladesh Bank

Table II
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Classified loans and provisioning figures of commercial banks

% of
Total Total classified on Required Actual
outstanding classified outstanding provision provision
NCBs
1 SONALI 12,617.71 5,154.83 0.41 2,771.51 956.22 (1,815.29)
2 JANATA 7,314.78 2,363.62 0.32 1,071.86 302.29 (769.57)
3 AGRANI 7,252.05 2,936.85 0.40 1,179.83 513.75 (666.08)
4 RUPALI 3,246.39 1,258.36 0.39 1,278.49 342.82 (935.67)

PCBs
1 PUBALI 2,076.69 760.15 0.37 344.61 119.79 (224.82)
2 UTTARA 2,221.58 737.20 0.33 343.79 147.60 (196.19)
3 AB BANK 1,254.37 294.22 0.23 146.23 143.55 (2.68)
4 IFIC 1,589.55 613.08 0.39 301.45 320.09 18.64
5 ISLAMI 2,927.85 284.43 0.10 232.82 216.04 (16.78)
6 NBL 1,834.54 284.43 0.16 130.76 171.60 40.84
7 CITY BANK 984.87 394.28 0.40 190.67 106.31 (84.36)
8 UCBL 938.55 319.15 0.34 166.85 145.84 (21.01)
9 AL BARAKA 872.55 319.15 0.37 166.83 145.84 (20.99)
10 EBL 809.99 66.84 0.08 25.82 30.62 4.80
11 NCCBL 792.34 86.51 0.11 45.29 48.00 2.71
12 PRIME 766.66 11.01 0.01 10.85 15.82 4.97
13 SOUTHEAST 700.63 20.85 0.03 16.62 19.36 2.74
14 DHAKA 538.84 9.32 0.02 9.14 10.44 1.30
15 AL ARAFAH 370.95 62.06 0.17 21.96 21.96 ±
18,679.96 4,262.68 0.23 2,153.69 1,662.86 (490.83)
Source: Bangladesh Bank, as on 31 December 2000, Figures in crore Taka

poor loan recovery rate, this sector suffers
from severe liquidity crisis. As on 30 June
2000, the total amount of classified loan was
Taka 242.76[1] billion, which amounts for
39.70 per cent of the total advances made by
the banking sector (Moral et al., 2000).
A number of factors are responsible for the
growth of default culture in Bangladesh. The
factors include a rigidly controlled interest
rate structure, the extension of preferential
credit as a part of government policy,
absence of appropriate loan classification,
provisioning and accounting procedures. An
inadequate legal and judiciary framework
[ 506 ]
further intensified the problem (Choudhury
and Raihan, 2000).
The government banks and many local
private banks have a high percentage of non-
performing loans estimated at 35 per cent in
FY98 (The State Department, 2001). At the
government banks, this resulted from
directed lending, mostly to money-losing
parastatals, diverting credit from the private
sector. The banking system is impaired by a
web of weak balance sheets, weak demand
from creditworthy borrowers, and heavy
reliance on liquid asset-based lending.
Despite market reforms, such as the
 Javed Siddiqui and
Jyotirmoy Podder
Effectiveness of bank audit in
Bangladesh
Managerial Auditing Journal
17/8 [2002] 502±510
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liberalization of interest rates, the
Bangladesh government continues to
encourage its own banks to lend to ``sick''
industries, both parastatal and privatized,
and all banks to increase term lending. Donor
institutions are assisting with financial
sector reforms. Part of the reform effort is to
upgrade regulations and accounting
standards to international standards as far as
possible.
Classification of loans
In response to the default culture, the
Financial Sector Reforms Programme (FSRP)
was taken in 1990. The Bangladesh Bank
classified the loans as ``unclassified'',
``substandard'', ``doubtful'' and ``bad''.
Provisions for classified loans must be made
in accordance with the convertibility of the
securities.
However, the success of the FSRP remains
doubtful. Accounting procedures in the
banking sector were yet to achieve
international standards although the
Financial Sector Reform Programme (FSRP)
which was completed in 1996. A bank reform
committee was also formed as the FSRP
failed to achieve expected results which also
ignored the Development Finance
Institutions (Choudhury, 2001).
Basis of classification
Bangladesh Bank introduced new accounting
policies with respect to loan classification,
provisioning and interest suspense in 1989
with a view to attaining international
standard over a period of time. Revised
policy for loan classification and
provisioning was introduced from 1 January
1999. Revised policy calls for independent
assessment of each loan on the basis of
qualitative factors and objective criteria.
Each loan is branded with the worst level of
classification resulting from these
independent assessments.
If a continuous credit or a demand loan
remains non-performing for six months or
more it is classified sub-standard. It is
classified as doubtful if it remains non-
performing for nine months and classified as
loss if non-performing for 12 months or more.
In case of term loan, which is repayable
within a maximum period of five years, if
any installment is not repaid within the
specified period and if the time-equivalent of
such unadjusted balance is six months it is
classified sub-standard. Term loan is
classified doubtful and loss if the time-
equivalent of unadjusted balance is 12
months and 18 months respectively.
In case of a term loan, which is repayable
within a period of more than five years, if
any installment is not repaid within the
specified period and if the time-equivalent of
such unadjusted balance is 12 months it is
classified as sub-standard. It is classified
doubtful and loss if the time-equivalent of
unadjusted balance is 18 months and 24
months respectively.
The Bangladesh Bank has issued specific
instructions regarding provisioning for
classified loans (see Table III).
The subjective criteria for loan
classification are presented in Table IV.
However, such subjective criteria are rarely
used due to their lack of clarity.
Supervision activities were intensified to
expedite implementation of the new rules for
loan classification and provisioning effective
from January 1999. To bring about
transparency in loan operations and for
convenience of determining the actual
amount of loan, banks were required to
introduce new loan ledgers and show
balances of principal and interest separately.
Audit requirements under the
Banking Companies Act, 1991
The Banking Act of 1991 requires the profit
and loss account and financial report of a
banking company to be audited in
accordance with the balance sheet by an
independent auditor.
In addition to an audit opinion, the auditor
shall also state:
. whether or not the financial standing and
the profits and losses of the company in
the period concerned are truly reflected in
the financial report;
Table III
Rates of provision
Status of classification Rate of provision (%)
Continuous, demand and time
Unclassified 1
Sub-standard 20
Doubtful 50
Bad/loss 100
Short-term agricultural and micro
Doubtful
Sub-standard
Irregular and regular loans
Bad loss 100
Sources: Bangladesh Bank (1998) for loan
classification on objective criteria, and Bangladesh
Bank (2001) for loan provisioning
[ 507 ]
 Javed Siddiqui and . whether or not the financial report has
Jyotirmoy Podder been correctly prepared in accordance
Effectiveness of bank audit in
Bangladesh with the usual accounting methods;
. whether or not the financial report has
Managerial Auditing Journal
17/8 [2002] 502±510 been made in accordance with the current
rules and laws and the regulations issued
by the Bangladesh Bank with regard to
accounts;
. whether or not sufficient provisions have
been made for such advances and
property assets as are doubtful;
. whether or not the financial report, on
discussion with professional accountants
from Bangladesh, has been approved as
being in accordance with the regulations
for accounts issued by the Bangladesh
Bank;
. whether or not the reports and accounts
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obtained from the branch offices of a
banking company have been duly kept
and consolidated;
. whether or not the information and
explanations required by the auditor have
been found to be satisfactory;
. any other matter which the auditor
considers should be brought to the notice
of the shareholders of the company;
Where an auditor discharging his or her duty
as auditor of a banking company is satisfied
to the effect that:
. any provision of this Act has been
seriously transgressed or a serious
irregularity has occurred in fulfilling
those provisions;
. there has occurred a criminal offence of
fraught or dishonesty;
. on account of losses the capital has fallen
under 85 per cent;
. the payment of the creditors' demands is
no longer guaranteed or any other serious
irregularity has occurred; or
. there exists any doubt as to the sufficiency
of the company's assets to meet the
demands of the creditors;
he shall without any delay, inform the
Bangladesh Bank on those subjects (Banking
Companies Act, 1991).
Table IV
Subjective criteria for loan classification
Classification Characteristics
Sub-standard High degree of risk for non-payment of loans
Reasonable prospect that loan conditions can be improved
Doubtful Chance of recovery is uncertain
Bad or loss No security held and borrower not traceable
No hope of recovery of time-barred loan
Source: Bangladesh Bank (1998) for loan classification on subjective criteria, and
Bangladesh Bank (2001) for loan provisioning
[ 508 ]
Audit comments
Overall provisioning shortfall in the banking
sector of Bangladesh is alarming, as can be
seen from Table V.
For the purpose of this study, a sample of 14
banking companies including one NCB was
used. The case of Rupali Bank has been
mentioned as the sample representative of
the four NCBs that are currently operating in
Bangladesh.
The audit opinions found are shown in
Table VI.
The loan provisioning shortfall figure
indicates the difference between actual
provision for classified loans and provisions
for classified loans required by the
Bangladesh Bank. Of the 14 sample banking
companies, shortfall of provisions was found
in seven companies. However, of the audit
firms auditing these seven companies, none
expressed a qualified opinion and only three
expressed unqualified reports with modified
wording. Others issued clean audit reports.
Concluding remarks
An under-provisioning of provision for
classified loans automatically leads to an
over-statement of profit. Thus, the banking
companies that made inadequate provisions
for classified loans were misstating their
profits in their financial statements and the
firms auditing these organizations were
actually certifying that these financial
statements presented a ``true and fair view''
of the actual state of the companies' affairs.
The auditors are accountable to the
shareholders for commenting on the ability
of the organization they have audited to
continue as a going concern. One of the
symptoms of diagnosing going concern
difficulties is the slowdown in loan collection
from debtors. The auditors should also take
steps to investigate the company's post-
balance sheet health to assure the viability of
a bank as a going concern. Depending on the
degree of going concern difficulties, the
auditors may express opinions ranging from
issuing an unqualified opinion with modified
wording to expressing a qualified adverse
audit opinion that would have serious
implications. In this study, it is found that
auditors of only three out of seven ``default''
sample companies have issued a modified
opinion.
The loan provisioning requirements are set
by the Bangladesh Bank, the supreme
banking authority in Bangladesh. Thus, any
violation of these instructions would lead to
non-compliance with regulatory
 Javed Siddiqui and
Jyotirmoy Podder
Effectiveness of bank audit in
Bangladesh
Managerial Auditing Journal
17/8 [2002] 502±510
Table V
Trend of provisioning surplus/shortfall as a percentage of total required
Downloaded by University of Manchester At 02:45 27 May 2016 (PT)
requirements. The Banking Companies Act
requires the auditors to state, explicitly
whether or not the financial reports of the
bank under audit have been prepared in line
with the regulations issued by the
Bangladesh Bank. However, the auditors of
all the sample companies, including those
auditing the ``default'' companies, have not
reported any departure from the regulatory
requirements.
The auditors are also required to reveal
any other matter that they consider should
be brought to the notice of the stakeholders.
If the auditor feels that some events, that are
material, have not been reported in the
financial statements, it is his or her
responsibility to expose such affairs. The
assessment of materiality depends on the
professional judgment of the auditor and
should be influenced by the needs of the
users of the financial statements.
The auditors in Bangladesh are only
required to perform financial audit.
However, performance of management audit
of banks would point out the weaknesses in
the loan classification, sanctioning and
administering procedures that have
ultimately resulted in the current poor
financial state of the banks. A detailed
performance audit may result in the defining
of quality of loans, the evaluation of quality
of managing the process of crediting and
procedures of forming credit documentation,

provision for all clusters of banks excluding DFIs (1990-2000) financial analysis and the evaluation of
Year NCBs PCBs FCBs All banks collateral.
In the performance of audit, the objectivity
1990 ±83.12 ±66.79 ±4.59 ±76.65
of an auditor must be beyond question and
1991 ±7.24 ±64.21 9.51 ±20.59
1992 ±31.72 ±35.21 3.13 ±31.97 the auditor must be able to audit effectively
1993 ±25.09 ±66.65 4.40 ±39.51 all revenues, expenses, assets and liabilities
1994 ±33.05 ±54.26 3.20 ±39.82 of the entire entity. The scope of audit would
1995 ±51.19 ±53.20 20.40 ±50.69 be limited if the auditors were not in a
1996 ±51.18 ±45.61 22.46 ±49.41 position to comment on all areas of the affairs
1997 ±54.75 ±43.89 33.61 ±51.03 of the audited entity. To express an effective
1998 ±61.54 ±45.58 32.41 ±55.82 audit opinion, the auditors must possess
1999 ±64.11 ±39.23 21.45 ±56.55 sufficient technical skills and they must be
2000 ±62.65 ±32.52 22.57 ±46.10 qualified and competent enough to
understand the criteria used. Audits of banks
Source: Banking Regulation and Policy Department, Bangladesh Bank
involve the application of the highest degree

Table VI
Comments of the auditors about loan provisioning
Loan provisioning
shortfall
Bank Year (in crore Taka) Comment
Arab Bangladesh Bank 1999 (2.68) Provision has been made to the satisfaction of the
auditors
Al Arafah Islami 1999 ± Provision has been made to the satisfaction of the
auditors
Al Baraka Bank 1998 (20.99) Provision shortfall Tk.1,025,535,111
Dhaka Bank 1999 1.30 Adequate provision
Eastern Bank Ltd 1998 4.80 Adequate provision
IFIC Bank 1996 18.64 Adequate provision
Islami Bank 1999 (16.78) Adequate provision
National Bank 1999 40.84 Adequate provision
Prime Bank 1999 4.97 Adequate provision
Pubali Bank 1999 (224.82) Under provision Tk.2,310,886,613
Loans and advances of Directors' interests
Tk.39,213,718
Advances against Provident Fund Tk.668,567,175
Rupali Bank 1998 (935.67) Adequate provision
South East Bank 1999 2.74 Adequate provision
The City Bank 1999 (84.36) Debts considered bad or doubtful not provided for
amounting Tk.716,277,199
Uttara Bank 1999 (196.19) Adequate provision
Source: Bangladesh Bank and audited financial statements of the banking companies

[ 509 ]
 Javed Siddiqui and
Jyotirmoy Podder
Effectiveness of bank audit in
Bangladesh
Managerial Auditing Journal
17/8 [2002] 502±510
Downloaded by University of Manchester At 02:45 27 May 2016 (PT)
[ 510 ]
of professional competence. The accounts of
the banks involve many items that are
typical of banking companies and are rarely
found in the financial statements of other
companies. The auditors should be capable of
understanding special valuation rules for
assets used as ``collaterals'' and the loan
provisioning criteria. In addition,
performance of management audit would
assist in identifying the loopholes in loan
provisioning and control. Accountability in
the banking sector can be restored by
performance of audit, both financial and
performance-oriented, by specialized,
competent auditors, capable of performing a
full-scale investigation of all the items that
appear in the financial statement of a
banking company.
Note
1 Taka (Tk) is the Bangladeshi currency. As on
August 2000, US$1 = Tk.51.00 (Bangladesh
Bank, 2000, p. 76).
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