Course Code: 416; Course Title: Auditing

Reference books:
1.Alvin A. Arens, Randal J. Elder : Auditing and
Assurance Services, Prentice Hall.
2.Assurance–Study Manual : CA Professional Stage
Knowledge Level, ICAB, Dhaka.
3.Audit and Assurance–Study Manual: CA Professional
Stage Application Level, ICAB, Dhaka.

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 SCOPE OF THIS COURSE
Owners / External
Users of FSs
i.e. stakeholders

Auditor issues
report relied upon
Company owned by users/owners
by Shareholders and Owners hire Auditor
it is govern by agency through AGM / BoD /
i.e. BoD/Management Management

Auditor issues report based

Upon information provided
By Management
Client i.e. company Auditor

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 Agency Relationship

Entrust resources

Investors Managers
Required periodic reporting
on use of resources

Verification
by independent expert
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 Audit and auditor
Audit: Audit is the examination or inspection of the underlying
internal controls and various books of accounts of a business
enterprise to make sure that all departments are following
documented system of recording transactions. It is done to
ascertain the accuracy of financial statements provided by the
organization.

Auditor:"Auditor" is used to refer to the person or persons

conducting the audit, usually the engagement partner or other
members of the engagement team.
• An audit team implies that more than one auditor is involved in
conducting the audit engagement.
• Audit engagement refers to the process of agreeing to a contract
for the services of an external auditor.

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Duties Audit Team/engagement team

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 Definition of Auditing

Auditing is a systematic process of

objectively obtaining and
evaluating evidence regarding
Financial Statements assertions about economic actions
(including footnotes)
and events to ascertain the degree
of correspondence between the
assertions and established criteria GAAP
and communicating the results to
Persons who rely on interested users. Auditor's Report/
the financial reports Other Reports
•Creditors
•Investors
•Stakeholders, etc
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 The important terms of this definition
• Systematic process — audits are structured activities;
• Objectivity — freedom from bias;
• Obtaining and evaluating evidence — allows the
auditor to determine the support for assertions or
representations;
• Assertions about economic actions and events —
describe the subject matter of an audit;
• Degree of correspondence…established criteria — the
purpose of the audit is to determine conformity with
some specified criteria; and
• Communicating results — the results must be
communicated to interested parties.
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 HISTORY OF THE AUDIT FUNCTION
• Audits have been performed at least since the
thirteenth century.
• Audits until the early 1900s focused on the company’s
solvency and the detection of fraud and error.
• Since the 1940s: the overall objective of auditing has
been the expression of an opinion as to whether the
financial report is materially misstated.
• Audits from early 1900s to 1940s: added objectives of
verification of financial report accuracy and attestation
to financial report credibility.

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 Historical Background
• The role of auditor goes back many hundreds of years.
There are records from ancient Egypt and Rome, showing
that people were employed to review work done by tax
collector and estate managers.
• The emphasis was very much on the detection of fraud and
other irregularities.
• Stewardship requires an outsider with sufficient
independence and objectively to review the accounts of
stewardship and to express an opinion as to their honesty
or otherwise.
• STEWARDSHIP is responsibility for taking good care of
resources entrusted to one, e.g., Boards of Directors must
show good stewardship towards the company for which
they are a board member.

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 DEVELOPMENT OF MODERN AUDITING
• Modern auditing as developed since the concept of a company
as a separate legal entity came into existence in the late
ninetieth century.
• This led to the separation of ownership (shareholders) from
control (directors) and consequent need to safeguard the
interests of the owners, who in all but the smallest of business
were not involved in the day to day decisions made by the
management.
• In previous years it was part of the appointed auditor duties to
discover fraudulent misrepresentations, the detection of fraud
and error become the major objective of company audits.
• However in later part of nineteenth century, there was a
growing school of thought that the prevention of fraud and
error (as opposed to its detection) should be the major
objective of the auditor (both external and internal) and that
the management of a company should play a greater part and
accept a larger degree of responsibility in this respect.
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 Objectives of AUDITING
The auditor’s overall objectives:
• To obtain reasonable assurance about whether the
financial statements as a whole are free from material
misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether
the financial statements are prepared, in all material
respects, in accordance with an applicable financial
reporting framework; and
• To report on the financial statements, and communicate
as required by the ISAs, in accordance with the auditor’s
findings.

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 Audit Process
• Phase I - Client Acceptance
• Phase II - Planning
• Phase III - Testing and Evidence
• Phase IV - Evaluation and Judgment

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 Phase I Client Acceptance
Objective:
The client acceptance phase of the audit plan, Phase I,
involves deciding whether to accept a new client or
continue with an existing one.
Procedures:
(1) Evaluate the client's background and reasons for the audit.
(2) Determine whether the auditor is able to meet the ethical
requirements regarding the client.
(3) Determine need for other professionals.
(4) Communicate with predecessor auditor;
(5) Prepare client proposal.
(6) Select staff to perform the audit, and
(7) Obtain an engagement letter.
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 Phase II Planning the audit
Objective:
Determine the amount and type of evidence and review
required to give the auditor assurance that there is no
material misstatement of the financial statements.
Procedures
(1) Perform audit procedures to understand the entity and its
environment, including the entity’s internal control;
(2) Assess the risks of material misstatements of the financial
statements.
(3) Determine materiality; and
(4) Prepare the planning memorandum and audit program,
containing the auditor’s response to the identified risks.
Audit plan: A document used by the auditor to record the
auditor's plans to conduct an audit.

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 Phase III Testing and Evidence
• Objective: Test for evidence supporting internal
controls and the fairness of the financial statements.
• Procedures:
(1)Tests of controls: An audit procedure designed to evaluate the
operating effectiveness of controls in preventing, or detecting and correcting,
material misstatements at the assertion level.

(2)Substantive procedures: An audit procedure designed to

detect material misstatements at the assertion level. Substantive procedures
comprise:
(i) Tests of details (of classes of transactions, accounts balances, and disclosures
(ii) Substantive analytical procedures.

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Phase IV, Evaluation and Reporting
Objective:
Complete the audit procedures and issue an opinion.
Procedures:
(1) Evaluate governance evidence;
(2) Perform procedures to identify subsequent events;
(3) Review financial statements and other report material;
(4) Perform wrap-up procedures;
(5) Prepare Matters of Attention for Partners;
(6) Report to the board of directors; and
(7) Prepare Audit report.

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 TRUE AND FAIR VIEW
In Bangladesh, the auditor will normally express his/her
audit opinion by reference to the ‘true and fair view’,
which is a requirement of the companies Act 1994. Whilst
this term is at the heart of the audit, ‘true’ and ‘fair’ are
not defined in law or audit guidance. However, for
practical purposes, the following definitions are generally
accepted.

True: Information is factual and conforms with reality, not

false. In addition, the information conforms to required
standards and laws. The accounts have been correctly
extracted from the books and records.
Conform-obedience to some standards is considered normal by the majority.
Confirm-to provides support for the truth or validity of sth.
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 True and fair view contd…..
Fair: Information is free from discrimination and bias in
compliance with expected standards and rules. The
accounts should reflect the commercial substance of the
company’s underlying transactions.

A true and fair view has become a term of art. It is

generally understood to mean the presentation of
accounts drawn up according to accepted accounting
principles using accurate figures as far as possible and
reasonable estimates otherwise, and arranging them so as
to show within the limits of current accounting practice as
objective picture as possible free from willful bias,
distortion, manipulation or concealment of material facts.
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The key elements of an audit engagement:
1. Three people or groups of people involved
– The practitioner (Chartered Accountant)
– The intended users (stakeholders)
– The responsible party (the person(s) who prepared
the subject matter i.e. management)
2. A subject matter
As we shall see below, the subject matter of an audit
engagement may vary considerably.
However, it is likely to fall into one of three categories:
– Data (for example, financial statements or business
projections)
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 The key elements of an audit engagement contd………
– Systems or processes (for example, internal control
systems or computer systems)
– Behavior (for example, social and environmental
performance or corporate governance)

Assertions : Representations by management, explicit

or otherwise, that are embodied in the financial
statements, as used by the auditors to consider the
different types of potential misstatements that may
occur.

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 The key elements of an audit engagement contd…….

3. Suitable criteria
Criteria The benchmarks used to evaluate or measure
the subject matter including, where relevant,
benchmarks for presentation and disclosure.
Criteria can be formal or less formal. There can be
different criteria for the same subject matter.
The person providing the auditing service must have
something by which to judge whether the
information is reliable and can be trusted. For
example, in an audit engagement relating to
financial statements, the criteria might be
accounting standards, auditing standards etc.
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 The key elements of an audit engagement contd.
The practitioner will be able to test whether the financial
statements have been put together in accordance with
accounting standards, auditing standards.

Characteristics of Suitable Criteria :

(a)Relevance: Relevant criteria contribute to conclusions
that assist decision-making by the intended users.
(b)Completeness: Criteria are sufficiently complete when
relevant factors that could affect the conclusions in the
context of the engagement circumstances are not omitted.

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 The key elements of an audit engagement contd.

(c ) Reliability: Reliable criteria allow reasonably consistent

evaluation or measurement of the subject matter
including, where relevant, presentation and disclosure,
when used in similar circumstances by similarly
qualified practitioners.
(d) Neutrality: Neutral criteria contribute to conclusions
that are free from bias.
(e) Understandability: Understandable criteria contribute
to conclusions that are clear, comprehensive, and not
subject to significantly different interpretations.

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 The key elements of an audit engagement contd…….
4. Sufficient appropriate evidence to support the
audit opinion
The practitioner must confirm the opinion that he
draws in order that the user can have confidence that
it is reliable. The practitioner must obtain evidence as
to whether the criteria have been met.
Evidence : Evidence includes all the information
contained within the accounting records underlying
the financial statements and other information
gathered by the auditors, such as confirmations from
third parties, observations etc.

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The key elements of an audit engagement contd……

5. A written report in appropriate form

Lastly, auditors issued an audit report in a
written and prescribed form. It is required
that audit reports are provided to the
intended users in a written form and contain
certain specified information.

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The Distinction Between Accounting and Auditing
Accounting is the recording, classifying, and
summarizing of economic events for the
purpose of providing financial information
used in decision making.
Auditing is determining whether recorded
information properly reflects the economic
events that occurred during the accounting
period.

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Difference between Accountants and Auditors
• To be an accountant, it is necessary to have
accounting knowledge.
– Understand business transactions
– Know what information to capture
– Know controls needed for activity and
information
– Be able to report it for various purposes
– Be able to record it according to accounting
standards
• To be an auditor, it is also necessary to have
accounting knowledge, and must have knowledge
about audit processes and financial reporting etc.
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 Difference in Accountants and Auditors
contd…..
When accountants’ work finished then auditors
work start.

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– Directors ADVANTAGES OF AUDIT
 Assurance that statutory responsibilities concerning accounts have been carried
out
 Assistance with statutory responsibilities concerning accounts
 Availability of expert professional advice
 The letter of weakness
– To shareholders
 Assurance that accounts show a true and fair view and comply with statutory
requirements
 Assurance that directors have fulfilled their statutory responsibilities for books
and accounts, and the safeguarding of assets
 Assurance that directors have fulfilled their statutory responsibilities for books of
accounts and the safeguarding of assets
 Assurance that all directors remuneration has been disclosed
– Other organization with published accounts
 Assurance to all users of accounts , that the accounts show a true and fair view
and comply with statute
 Assurance that ‘stewards’ have fulfilled their accounting and financial
responsibilities
– Private organizations such as partnerships
 Assurance that accounts are reliable
 Reasonable assurance that all fraud of consequence has been disclosed.
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– In addition they provide reliable accounts to regulatory bodies such as the
 DISADVANTAGES OF AUDIT
– The audit involves the client’s staff and
management in giving time to providing
information to the auditor. Professional auditors
should therefore plan their audit carefully to
minimize the disruption, which their work will
cause.

– The audit fee, clearly the services of an auditor

must be paid for. It is for this reason that few
partnership and even fewer sole trader are likely to
have their accounts audited. The accountant’s role
as the preparer of financial statements, as tax
adviser and general financial adviser, becomes
much more important to such concerns.
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•
Value of
To society: capital markets benefit
an Audit
• To owners and prospective owners: remote ownership, complex transactions,
investment decisions
• To corporate governance, the Board of Directors and audit committee:
representing shareholders’ interests
• To management
– running the company with good information
– cost of and access to capital
– operating efficiency and effectiveness
– credibility of performance indicators
– properly accounting for complex transactions
• Constituents: society, owners and prospective owners, corporate governance,
management
• All of these constituents need good information. Even nonpublic companies
elect to have audits, although they are not required to do so by any law or
regulation.

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 Types of Audits
Operational Audit
 Involves evaluation of any part of an organization’s
operating efficiency and effectiveness.
 Not limited to accounting areas.
Compliance Audit
Determine whether the auditee has complied with
specific procedures, rules, or regulations set by some
higher authority.
Financial Statement Audit
 Determine whether overall financial statements are
stated in accordance with specified criteria.
 Generally accepted accounting principles are normally
the criteria, although other basis of accounting are at
times used. 32
Operational Audit
Example Evaluate computerized payroll system for efficiency and
effectiveness
Information Number of records processed, cost of the department, and
number of errors
Established Company standards for efficiency and effectiveness in payroll
Criteria department
Available Evidence Error reports, payroll records, and payroll processing costs

Compliance Audit
Example Determine whether bank requirements for loan continuation
have been met
Information Company records
Established Criteria Loan agreement provisions
Available Evidence Financial statements and calculations by the auditor

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 Financial Statement Audit
Example
Annual audit of Boeing’s financial
statements
Information
Boeing's financial statements
Established Criteria
Generally accepted accounting
principles
Available Evidence
Documents, records, and outside
sources of evidence

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 Types of Auditors
 External or Independent Auditors – CAs are the only
group permitted to provide financial statement
audits. Such audits are required of all publicly traded
companies.
 Internal auditors – Auditors who are employees of
the companies.

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 TYPES OF AUDIT
• Statutory Audit: Carried because the law
requires them. Statutes include Companies Act
• Private audits: Because of desire and not
because of law e.g. sole trader and partnership
• Internal audits: It is the one conducted by an
employee of a business into any aspect of its
affairs.
• Management audit: It is an inquiry into
efficiency and effectiveness of management
• Public sector audit: Contract audit , computer
audit etc

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 INTERNAL AND EXTERNAL AUDITING
It is important to understand and recognize the
differences and commonalities between internal
and external audit.
Internal and external auditor should work closely
together, in particular to coordinate activity and
maximize effectiveness and where appropriate
external audit may rely on the work of internal
audit. However, there are number of
fundamental differences in their objectives,
scope and responsibility.
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 INTERNAL AND EXTERNAL AUDITING
Internal auditing External auditing
Objectives To advise management on whether To provide an opinion on
the organization has sound systems whether the financial statements
of internal controls to protect the provide a true and fair view
organization against loss
Legal basis All areas of the organization, Financial focus
operational as well as financial
Scope All areas of the organization, Financial focus
operational as well as financial
Approach Increasingly risk base Increasingly risk based
Assess risks Test underlying transactions that
Evaluate system of controls form the basis of the financial
Test operation of system statements
Make recommendation for
improvements
Responsibil To advice and make To form opinion on whether the
ity recommendations
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on the internal financial statements provide a
 Prohibited Services to Audit Clients
The following services are prohibited to an audit client:
1) bookkeeping and related services
2) design or implementation of financial information
systems
3) appraisal or valuation services
4) actuarial services
5) internal audit outsourcing
6) management or human resources services
7) investment or broker/dealer services
8) legal and expert services (unrelated to the audit)

Professional service firms may provide client tax services

(with some restrictions) and other non-prohibited
services to audit clients if the company’s audit
committee has approved them in advance.
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 Expectation Gap
Expectations gap – meaning that there is a gap between
what the assurance provider understands he is doing and
what the user of the information believes he is doing.
•It can lead to difficulties arising from the difference
between what shareholders expect to achieve and what is
designed to achieve.
•The public increasing expect the following types of
questions to be answered:
Is the company a going concern?
Is the company managed effectively?
Is there an adequate system of controls?
Is the company susceptible to fraud?
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 Expectation Gap contd.
• This is defined as: ‘the gap between society’s
expectations of auditors and auditors’ performance as
perceived by society.’
• There are three components of this expectation gap:
– The reasonableness gap between what society expects auditors
to achieve and what they can reasonably be expected to
accomplish;
– The performance gap arising from deficient standards; and
– The performance gap arising from deficient performance by
auditors.

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 LIMITATION OF AUDIT
The limitations of assurance services include:
• The fact that testing is used – the auditors do not oversee the process of building the
financial statements from start to finish.
• The fact that the accounting systems on which assurance providers may place a degree of
reliance also have inherent limitations.
• The fact that most audit evidence is persuasive rather than conclusive.
• The fact that assurance providers would not test every item in the subject matter (this would
be prohibitively expensive for the responsible party, so a sampling approach is used – see
later).
• The fact that the client's staff members may collude in fraud that can then be deliberately
hidden from the auditor or misrepresent matters to them for the same purpose.
• The fact that assurance provision can be subjective and professional judgments have to be
made (for example, about what aspects of the subject matter are the most important, how
much evidence to obtain, etc).
• The fact that assurance providers rely on the responsible party and its staff to provide
correct information, which in some cases may be impossible to verify by other means.
• The fact that some items in the subject matter may be estimates and are therefore
uncertain. It is impossible to conclude absolutely that judgmental estimates are correct.
• The fact that the nature of the assurance report might itself be limiting, as every judgment
and conclusion the assurance provider has drawn cannot be included in it.

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Positive Thinking

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 NONAUDIT SERVICES

Other Management
Consulting

Certain Accounting and

Management Non-assurance
Consulting Bookkeeping
services

Tax
Services

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