[Specific Audit Program– Fraud]

Client Period-end
[XYZ Limited] [31 December 2014]
Prepared by Date W/P reference
[XXXXXX] [XXXXX] [E1.1]

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[Audit procedure – 1]
We have planed the formal risk assessment procedure at the kick off meeting on Nov 2014. the
following persons were present in the meeting:
 Engagement Partner : XXXXX
 Engagement Manager : XXXXX
 Audit- in-charge : XXXX

[Audit procedure – 2]
 We have reviewed client/engagement acceptance and continuance process.
 Analytical procedures performed at the planning stage of the audit considering unusual or
unexpected relationship.
 We have reviewed related parties and related party transaction throughout our Process Analysis
Phase of the audit.
 We have discussed regarding the internal control procedure of the company.

[Audit procedure – 3]
 Incentives and pressures

Excessive pressure to meet third party expectations

Factors Comments with rationale

whether factor is Present (P) or Not present (NP)
Unrealistic profitability NP. as on 31/12/14 actual profit is Tk. 1,271 million
expectations which resembles budgeted profit.. Now management
takes a lot of step to ensure control over expense.
Transaction without economic NP. We observed all transactions are business
justification related and justifiable
Listed entity pressure NP as the company’s P/E ratio is above the
competitors’ and average of industry.
Critical need for funding to P, which is evident from the client’s Positive working
stay competitive or to repay capital (WC) of Tk.XXX million as on 31 December
debt 2014 and equity financed position.
Overly optimistic press release NP. As the company does not have any public
announcement in 2014.
Potential to adversely impact NP. As we have not identified any such transactions.
pending transactions.

 Excessive pressure to meet financial targets

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Factors Comments with rationale

whether factor is Present (P) or Not present (NP)
Excessive pressure to meet NP as attainable sales and financial targets are set in
targets through sales or consultation with departmental heads. Our past
profitability incentives evaluation of management’s performance indicates that
targets and goals were easily attained and not managed
by crisis. Besides, compensation arrangements for
senior management are of fixed nature. Annual
performance bonus is paid on annual performance.

 Threats to financial stability or profitability

Factors Comments with rationale

Competition/Market saturation NP. The pharmaceutical industry is very competitive
Cash/funding gap
Declining industry
Vulnerability to change
Bankruptcy/takeover threat
Unusual growth/profitability NP. Because growth and profitability are usual.
New accounting, statutory or NP. As the company has adopted all relevant
regulatory requirements
whether factor is Present (P) or Not present (NP)
due to existence of rival competitors. The company’s
existing market position in the industry is satisfactory.
We have investigated the detail sales, also we have
performed cut off procedure and checked detailed
customer wise sales and compared with customer order
on test basis, but nothing came to our attention
regarding fraud indication. Moreover, market
saturation with new entrants is unlikely due to
involvement of huge capital and complexity in
formulation of pharmacetucials industry. But there is
no indication of fraud found
P, which is evident from positive WC and net cash
flow from operation as on 31 December 2014.
NP. Industry is not declining, sales has been increased
by 15 % in 2014 due to price increase, introduction of
new category of customers and introduced new
business unit called Fertilizer.
NP as it relates to technological changes. XYZ Limited
has its own Research and Development (R&D) wing,
so any changes in formulating drug processing and
other technology is adopted outright, if necessary,
considering market size and location. Changes in
interest rates do not affect the client adversely, as it is
mostly equity financed.
NP. Though the company has burden of long term
bank/institutional debt, it is unlikely to be bankrupt
being supported by financial institutions. Besides,
takeover threat is also unlikely being of its big set up.
Accounting Standards as per IAS and IFRS. Besides,
no significant changes have occurred in local laws and
regulatory environment.

 Threats to personal financial position of management and those charged with governance

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Factors Comments with rationale

Significant financial NP. Because of the followings:
interests/personal guarantees
whether factor is Present (P) or Not present (NP)
 None of those charged with governance has
significant financial interest in the entity or has
provided personal guarantee for the entity’s debts.
 Prevalence of insider trading i.e., large individual
sales of the entity’s shares by senior management
are absent which we have confirmed through
observation of share transactions in the stock
exchange.

Compensation contingent on NP.

aggressive targets

 Opportunities

 Nature of the industry or entity’s operation

Factors Comments with rationale

whether factor is Present (P) or Not present (NP)
Significant, unusual, or NP as on 31/12/2014.
highly complex transactions
Significant cross-border NP. XYZ Limited procure significant portion of its raw
operations materials from outside of the country along with a small
portion of export . There is no indication of fraud as
procurement was made by negotiated price and
agreement
Overly complex banking NP. Various bank accounts are for specified operational
arrangements purposes. Though the company has long-term loan
arrangements with bank, they are not overly complex
being specified covenants in the agreement.
Significant related-party NP. The entire finished goods of Unit-2 and 3 and 80%
transactions of Unit-1 of XYZ Formulations Limited are transferred
to XYZ Limited. There is no indication of fraud as the
procurement was made at negotiated price.
Dominating position in the NP.
industry
Estimates involving P. All the year the company has passed journal entries in
significant judgment the system. During our review, we have not found any
fraud indication in this regard cause all the journal
entries at first reviewed by the Corporate Finance
Manager
Use of intermediaries NP.
Non-standard practices NP. The entire activities of the company have been
guided by proper standard group policies local
standards.

 Complex or unstable organization structure

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Factors Comments with rationale

whether factor is Present (P) or Not present (NP)
Controlling interest unclear NP as evident from shareholding position.
Directors/Sponsors 36.81%, Institutions 37.48% and
General shareholders 25.71%
Overly complex corporate NP as the corporate structure is understandable. Ref:
structure planning document.
Unexplained turnover of NP.No significant turnover in senior management was
senior management observed in 2014.

 Ineffective monitoring of management

Factors Comments with rationale

Dominance/aggressive
management style
Ineffective oversight of those
charged with governance
Ineffective internal audit (IA)
whether factor is Present (P) or Not present (NP)
NP.
NP as BOD (no Audit Committee) members is
independent from management. They are of financial
literacy, management skills and experience.
P. As there is a ineffective internal audit department.

 Internal control components are deficient

Factors Comments with rationale

whether factor is Present (P) or Not present (NP)
Ineffective systems and NP. As there is :
controls  Adequate monitoring and controls over external and
internal reporting.
Ineffective  Development in the suspected areas that are
monitoring/ineffective vulnerable to fraud and previously reported to those
application of controls charged with governance.
 Adequate policies relating to the prevention of
illegal acts and compliance with laws and
regulations.
History of significant NP.
adjustments
Ineffective staff NP. As turnover rates of staff is insignificant and staff
are also recruited through formal processes followed by
well-designed training program to make them efficient.

 Attitudes/rationalizations

Factors Comments with rationale

whether factor is Present (P) or Not present (NP)
Ethical values not embedded NP. As we have:
 Evaluated the appropriateness of values or ethical
standards communicated (Code of Ethics) by
management.
 Ensured the implementation of those

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Preoccupation with selection
of accounting policies
History of illegal practices
Maintaining stock prices
Aggressive forecast
Failure to correct known
control weaknesses
Minimizing reported earnings
for tax reasons
Low morale / lack of skills
and experience
Personal vs. business
transactions
Shareholder disputes
Inappropriate accounting and
restatements
Management / auditor
relationship strained
[Specific Audit Program– Fraud]
communications (COE).
 Inquired for disciplinary actions regarding non-
compliance with the communicated values or Code
of Ethics.
NP. As no new accounting policies has been adopted
during 2007. We also have evaluated the
appropriateness of the basis for previously selected
accounting policies and ensure that there is no non-
financial management’s excessive participation in or
preoccupation with these.
NP. Because there is no known history of violations of
local laws and regulations, or claims against the entity,
its senior management, or those charged with
governance alleging fraud or violations of laws and
regulations.
NP as there is no excessive interest by management in
maintaining or increasing the entity’s stock price or
earnings trend. However, market driven stock price of
the company is in an upward trend.
NP. As there is no practice by management of
committing to analysts, creditors, and other third parties
to achieve overly aggressive or unrealistic forecasts.
Moreover during 2014 there was no public
announcement.
NP. Because we have not identified any significant
control weakness in previous years.
NP as management always employs appropriate means
to provide adequate amount of tax and it has no
intention to evade tax.
NP. As we have not found any indication of low morale
among senior management whose quality did not arouse
suspicion over last few years.
NP. As there is clear distinction between personal and
business transactions and since inception of our audit we
have not come across any such indication in the
company.
NP as it is a DSE (Dhaka Stock Exchange) and CSE
(Chittagong Stock Exchange) listed public company
which shareholders are easily identifiable.
NP as there was:
 no attempts by management to justify marginal or
inappropriate accounting on the basis of materiality.
 no failure to take appropriate action in response to
significant restatements (for example, dismissal of
key individuals involved or the installing of
appropriate controls).
 no indication that a financial statement restatement
may have been due to a possible intentional
manipulation.
NP.
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Earnings management and NP. As there was no indication that management has
inaccurate estimates provided unreasonable, unreliable or inaccurate
estimates or other representations, or management has
been less than forthright.
Questions of integrity NP. As there are no issues regarding the integrity of
individuals who have significant influence over
financial reporting or are expected to sign the
representation letter.
Unduly influencing the NP. We did not come across any significant finding over
reporting findings last few years.

 We considered the information that we have obtained in understanding the entity and its
environment including its internal control to determine whether any fraud risk factors are present
there.

 Debt repayments and covenants

The company has long term loan from Bank. They have also borrowed short term loans
and over draft facilities from the bank. We have reviewed loan agreement and relevant
communication with facilities providers when debt repayments are due, the entity’s
ability to make such payments and how close the entity is to breaching any covenants
attended to their borrowing. We have not identified any indication of fraud risk as the
company is able to pay their obligation.

 The regulatory environment:

We have reviewed the relevant communication with regulators (Register of Joint Stock
Company). Nothing came to our notice which cast doubt about fraud risk indication
cause the company always trying to comply with the local regulation as it is required by
their Code of Ethics.

 The entity’s budgeting and forecasting process:

We considered, how budgets are prepared, who inputs to the process and express to the
concern if aggressive financial target have been set. We also considered whether the
culture is such that failure to meet target is not tolerated or meeting target is linked to
compensation/promotion. We have not identified any fraud indication as 40% of sales
have been made against cash/PO/DD and the credit sales have been made against credit
term but the payment status of those customers are very good.

 Third Party’s expectation of the entity’s financial Performance:

Except shareholder the term third party relates to the customers, suppliers, bankers, employees
etc. Basically customers expect quality products at reasonable price, and XYZ also does not
compromise with quality to upkeep its brand image.

Suppliers want the customers to be financially strong with stable growth, which can easily be
attributed to XYZ.

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Bankers/financers also want clients to be of stable growth and financially strong. XYZ has good
mutual relations with its banks.

Employees expect the company will give them good training, corporation exposure, and adequate
compensation package, which will boost up social status and dignity for working with XYZ.
Management is well aware of these expectations of them.

 Compensation arrangement for senior management and key employees in financial reporting.

We have reviewed compensation arrangement for senior management and key

employees in financial reporting and obtained a clear understanding of management’s
compensation arrangement. This arrangement is not link to the entity’s financial
performance. No indication of fraud was observed during our investigation.

 Share price, share ownership and share option activity:

Per share was issued at Tk. XX. It is a publicly traded company which is owned by
corporate and individual. There is no share option activity.

 Employee turn over at senior management level and internal audit:

During the year under review, no changes in senior management level took place. There
were some normal resignations, not unusual. We spoke to the Head of HR and reviewed
their personal files. The company has an internal audit department.

 Review analysis report:

We have reviewed the analyst’s report and we have not found any indication regarding
fraud.

 Review Communication to the Public, Analyst and Investors:

We have reviewed the communication to the Public, Analyst and Investors and we have
not found any indication regarding fraud.

 Price/Earning ratio:

Price/earning ratio for the year 2014 is XXX

 Large individual sales of the entity’s shares by Senior Managers:

Not present

 Trends in stock prices:

Upward

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 [Specific Audit Program– Fraud]

 Trends of reported earnings versus consensus earning:

N/A

 Further procedures for US SEC registrants:

N/A
[Audit procedure – 4]

We have to evaluate the suitability of the design of “broad programs” and controls to prevent, deter
and detect fraud, including whether they have been implemented.

 Setting a proper tone at the top and crediting a positive work place environment:

We have evaluated the words and action of the management, whether they set a proper example
with zero tolerance for unethical behavior. We evaluate the qualities of the working environment
i.e., autocratic versus participating management style. Unreasonable budget explanation or the
financial targets fear of delivering ‘bad news’ to management etc. We evaluate the programs
initiated by the HR department designed to create a positive workplace environment, for example,
the recognition and reward system, equal employment opportunities, as well as other program and
process within the organization providing an opportunity for reporting on a confidential basis
actual or suspected working or potential violation of the Code of Ethics.

 Having the right people at right place:

We have reviewed back ground checking conducted on the individuals are being considered for
employment. Particularly, senior management positions, periodic training of all employees about
ethical values and Code of Ethics, fraud awareness training program, fair recognition and reward
system etc.

 Specific policies and monitoring activities:

The company has well laid down credit, procurement, HR management, fixed assets management
etc. developed by the group. There is a credit committee to monitor sales and collection. In
addition that:

 There is no insider trading.

 Conflicts of interest:

We have reviewed Code of Ethics of the company relating to conflicts of interest. Code of Ethics
has been communicated and is easily accessible and used as reference source when needed.

 Travel, entertainment and legal expenses: We have reviewed travel, entertainment and legal
expenses incurred during the year.

 Related party transaction: We have reviewed related party transactions during the year.
Followings are the related parties:

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 [Specific Audit Program– Fraud]

 XYZ Formulation Limited

 XYZ Salt Limited
 Apex Leathercraft Limited
 Flyban Insecticides Limited
 XYZ Pure Flour Limited
 XYZ Foods Limited
 XYZ Agrochemicals Limited
 Creative Communications Limited
 XYZ Motors Limited
 Premiaflex Plastic Limited
 Tetley XYZ Bangladesh Limited
 Asian Consumer Care (Pvt) Limited
 XYZ Godrej Agrovet private Limited

 Personal use of company assets: We have reviewed asset utilization of the company and
ensured that all assets are used for business purposes and not for personal use.

 Illegal acts: Policies and controls ensured effective compliance with laws and regulations
including regulatory compliance, for all areas that have a direct and material impact on
financial reporting.

 Receiving and responding to complaints and other confidential submission of concerns about
questionable accounting and auditing matters:

XYZ is keeping with its commitment to live the values that characterize them as an
organization collaboration, leadership and integrity, reviewed its Code of Ethics (COE),
making it more relevant to employees’ day to day dealings and relationships within and
outside the organization.

 Taking appropriate action in response to actual, suspected or alleged fraud:

The Code of Ethics process has been properly set-up, communicated and checked in
practice.
The mechanism is available for employees to report violations of law or repot
misconduct and it has been properly publicized.
The mechanism is available for external parties to raise concern or repot misconduct (i.e.
customer help lines). Policies have been established for senior management to be alerted
when serious allegation of fraud and misconduct are reported.

Proper policies have been established to investigate alleged violations of law and misconduct.
Action is taken when actual, suspected or alleged fraud is discovered (e.g. the allegation is
investigated, the person is suspended.)

 The entity’s fraud risk assessment process and system and controls in place to prevent, deter or
detect fraudulent activity.

The company has proper fraud risk assessment process and this process is good enough
for identifying and responding to the risks of fraud in the entity.

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Appropriate controls have been implemented in the areas, which were identified as
posing a higher risk of fraud as well as controls over the entity’s financial reporting
process (e.g. Finance Controller’s review at local and group etc.).

The group audit committee quarterly reviews the management’s process for identifying and
responding to the risks of fraud in the entity and on the internal control that management
established to mitigate the risks.

 The appropriateness of the oversight exercised by management, those charged with governance
and through internal audit activity.

The audit committee are independent of management, are aware of their oversight
responsibilities and through the knowledge and experience to perform their duties.

Audit committee meets quarterly and exercise effective oversight. Audit committee
meets privately with auditors.

Audit committee maintain a high level of interaction and involvement with senior
financial management and internal auditors, are supplied with appropriate information on
a timely basis to be able to exercise effective oversight.

Audit committee has put in place and monitors a mechanism for the receipt, retention and
treatment of complaints regarding accounting and auditing matters, both from employees
and party’s external to the company, and any special investigations is appropriately dealt
with.

Audit committee devote an acceptable amount of time to control insure and take appropriate steps
to ensure effectiveness of the tone as the top of the organization.

 Discuss possible or actual policy violations and absence of controls with appropriate parties.

We discussed possible or actual policy violations or abuses of controls and how those are
dealt with. In particular, we asked whether the whistle – blowing inquired of head of HR
about any policy violation or abuses of controls that have come to their attention.

We focused the discussion on incident held during the audit period or subsequent events on
warning letters issued and on complaints letters received.

 Review a summary of deported instance or concerns of misconduct or unethical behavior,

including questionable financial reporting matters, and determine whether additional procedures
are necessary to follow up on reported instances.

 We have reviewed summary of reported instances or concern of misconduct or unethical

behavior, including questionable financial reporting matters and found nothing of such instances
in the report.

 Commutation of the absence of or deficiencies in broad programs and controls.We did not
identify any deficiencies in broad program and controls related to the prevention and detection of

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 [Specific Audit Program– Fraud]

fraud during the audit.

[Audit procedure – 5]
The team fraud discussion was held on XX March 2015 and the following team members were
participated:

a. Engagement partner
b. Engagement manager
c. Audit in-charge

Agenda of the meeting:

a. Professional skepticism and client susceptibility of fraud.

b. Indications of earnings management.
c. Sharing insights.
d. External and internal factors that may crate an incentive or pressures for
management and others to commit fraud.
e. Entity’s broad programs and controls to prevent deter and detect fraud.
f. Pervasive and specific fraud risk factors.
g. Inquiry plan.

From this meeting the following factor was found

Fact Accounts head Comments with rationale

whether factor is Present (P) or Not
present (NP)
Reasons for reconciling Cash P, for comments with details please see
differences given as fraud related procedure attached with
‘cash-in-transit’. audit program of O Cash and bank
balance
suppression of credit Revenue P, One of transcation. Checked all credit
information code maintaining system. Instance are
described in management letter page
number 31

For details please refer to meeting minutes and Fraud risk document for cash, investment and
revenue.
[Audit procedure – 6]
Name of interviewer: XXXXX, Engagement Manager

XXXXXX, Audit in-charge

Name of interviewee: Mr. XXXXX, Financial Controller

Md.XXXXXX, Corporate Finance Manager

Department : Finance & Accounts

Date of interview: :XX 2015

General nature of inquiries:

 About knowledge of any actual, suspected or alleged fraud affecting the entity.

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 About the entity and its environment including its internal control.
 Management’s assessment of the risk that the financial statements may be materially misstated
due to fraud.
 Management’s process for identifying and responding to the risks of fraud in the entity,
including any specific risks that management has identified balances , clauses of transactions or
disclosures for which a risk of fraud is likely to exist.
 Management’s communication, if any, to those charged with governance regarding its process
for identifying and responding to the risks of fraud in the entity.
 Management’s communication, if any, to employees regarding its views on business practices
and ethical behavior.

Name of interviewer: XXXXXX, Engagement Manager

XXXXXX, Audit in-charge

Name of interviewee: Mr. XXXXXX- Director Marketing & Sales

Mr. XXXXX- Marketing Manager

Department : Sales & Marketing

Date of interview : XXX 2015

General nature of inquiries:

 About knowledge of any actual, suspected or alleged fraud affecting the entity.
 About the entity and its current market position.
 Group pressure on top management to achieve the target
 Top management pressure on mid level regarding the target
 Management’s assessment of the risk related with sales and receivable due to fraud.
 Management’s process for identifying and responding to the risks of fraud in the entity,
including any specific risks that management has identified balances, class of transactions or
disclosures for which a risk of fraud is likely to exist.
 Management’s communication, if any, to those charged with governance regarding its process
for identifying and responding to the risks of fraud in the entity.
 Management’s communication, if any, to employees regarding its views on business practices
and ethical behavior.
 Management process regarding the recoverability of debtors outstanding since long.
 Improvement of debtors’ reconciliation with challan and invoice.
 Implementation of new credit policy.

Name of interviewer: XXXXXXX, Engagement Manager

XXXXXXX, Audit in-charge

Name of interviewee: Ms. XXXXXX –Director, Corporate Affairs

Mr. XXXXXX- Assistant Manager, Human Resource
Department : Corporate Affairs
Date of interview : XX 2015

General nature of inquiries:

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 About knowledge of any actual, suspected or alleged fraud affecting the entity.
 About the entity and its current position regarding procurement.
 Management’s assessment of the risk related with procurement and employee turn over
 Employee retention scheme
 Management’s communication, if any, to those charged with governance regarding its process
for identifying and responding to the risks of fraud in the entity.
 Management’s communication, if any, to employees regarding its views on business practices
and ethical behavior.
 Management process regarding the recoverability of debtors outstanding since long.

Disclaimer: Dummy audit working files have been prepared and published to
improve the quality of audit documentation of member firms providing audit
services in Bangladesh. Member firms providing audit services should not
assume these dummy working files as absolute benchmark for the purpose of
preparing and keeping audit documentation. Every audit client has unique
characteristics and risks. International Standards on Auditing (ISA) also
requires to exercise engagement partner’s judgment on a number of areas in
conducting the audit of an entity. Therefore, member firms should use their
professional knowledge, skill, experiences along with these dummy working files
to keep adequate and appropriate working papers for each audit engagement.
The preparers do not assume any liability for drawing an inappropriate audit
opinion based on the working papers prepared on the basis of these dummy
working files.

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