CHAPTER-01

CHAPTER-01:
STUDY BACKGROUND
1.1 INTRODUCTION
In today’s world academic education is not adequate to enable a student to compete with confidence and reach his goal without having experience with the outside world. Internship program is where student can gain soft skill in real scenario and experience of the practical and professional world. Thus, we are required to take internship program in any organization.
As a part of MBA Program, the internship program gave the opportunity to have a practical knowledge on auditing procedure. The assignment was how a chartered accountancy firm performs an audit and also to gain a knowledge and practical experience on how audit work is performed in corporations, companies and non-profit making organizations.

To face much more complex and challenging business world in the challenging business areas, practical knowledge is essential to expand our theoretical base. To gather this practical knowledge, we were forwarded different organization after completing MBA Program.
This study gave an opportunity to observe and perform real world knowledge about the audit procedure, which is followed by the chartered accountancy firm. In the internship period I could relate the theoretical knowledge of auditing to practical exposure.

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1.2 OBJECTIVE OF THE STUDY
In below mentioned the core objective behind the study:
To gather knowledge audit procedures of M.N. Islam ; company.

Getting practical knowledge from the organization directly.

Gaining practical knowledge and experience on how a chartered accountancy firm performs an audit and how a audit work is performed in corporations, companies and non-profit making organizations.

How to accumulate and process evidences to make an audit report.

To know how a draft and final audit report is handed over to client.

1.3 METHODOLOGY OF COLLECTION OF INFORMATION
In order to prepare the assigned project paper collected necessary information from two types of source as follows:
Primary sources information.

Secondary sources information.

Primary sources information:
Collected primary information by working with different audit team.
Discussing with engagement partner, audit manager, audit staff and articled student.

Secondary sources information:
Collected secondary information like annual audit report, management audit report, accounting system ; audit working papers, Bangladesh Standards of Auditing (BSA).

The information was obtained from various corresponding files of the firm.

1.4 SCOPE OF STUDY
I have been assigned in M. N. ISLAM ; COMPANY. that gave tremendous scope to familiarize with the audit procedure of the organization. Major parts of scope are point out below:
Background of the host organization and also their position.

Audit procedure, which is followed by the organization for performing any audit.

Nature and importance of it has depicted in this study.
Audit methodology of the firm, which is followed by the organization for performing any audit.

Audit administration of the firm, which is followed by the organization for performing any audit.

1.5 LIMITATIONS OF THE STUDY
The study is conducted with an objective to make a thorough study of external audit procedure. I have availed many facilities and faced some obstacles during my study. These obstacles may be termed as limitation of the study. These limitations are as follows:
Scheduled time span was not sufficient to cover all information.

As an independent audit firm the information of the case study is not adequate for this study.

To some extend the exact audit procedure is not followed due to time and other constrains.

As the internship was the first practical experience, it was not possible for me to know all and everything of audit procedure.

CHAPTER-02:
OVERVIEW OF M. N. ISLAM ; COMPANY
2.1 PROFILE OF THE FIRM
Name of the Audit Firm :M. N. ISLAM ; COMPANY
Chartered Accountants
Date of Establishment :1979
Address of the firm :123/4, Tejkunipara, Tejgaon, Dhaka – 1215.

Phone :+ 088-2-9113528, 01733982927
E-mail : [email protected]
2.2 BACKGROUND
Founded in 1979 M. N. ISLAM ; COMPANY ; Co. At present the partnership comprises with other one partner. The firm has one office in the capital city of Bangladesh with three different Divisions to manage its day to day activities. The divisions are:
Auditing,
Income Tax and,
Consultancy Services.
2.3 EXISTING PARTNERS AND THEIR AREA OF SPECIALIZATION
Name Area of Professional
Primary Secondary
Mr. Nazrul Islam FCA Audit/ Consultancy Taxation
2.4 HUMAN RESOURCES
Qualified Members : 01
Sr. Manager : 01
Manager : 03
Consultants : 04
Computer Operator : 03
Officer/Staff : 04
Article Students : 22
Course Completed Students : 150
Students Under Probation Period: 05
Number of qualified personnel in the firm (including partners) and their professional affiliation:
Partners – 1,
All are members of the Institute of Chartered Accountant of Bangladesh;
We have ample equipment and appliances in our stock to give logistic support to our clients’ enhanced requirements.

Office space :1600 sft.

Desktop Computer :05 nos.

Laptop : 3 nos.

Laser Printer : 2 nos.

2.5 LOGISTIC SUPPORT
List of important industries in which the firm has experience
Government Organization (Ex. PDB, REB etc.)
Textile,
Spinning Mills,
Non Government Organization (NGO).
Liaison Office,
Medicine,
2.6 QUALITY CONTROL AND INDEPENDENCE
Training of staffs on the firm’s audit procedures:
M. N. ISLAM ; COMPANY. gives out training about firm audit procedure, office procedures to the newly recruited staffs. Also, through the weekly training classes’ partners / managers briefed new staffs about the firm and its procedures. The firm also makes available the information about current developments in professional technical standards to all professional staffs through office circulars and notice board display.

Activities performed by M. N. ISLAM & COMPANY to recognize that the quality is essential when performing the engagement:
Partners personally work on the assignment, sometimes on a full time basis.

Disciplinary action is being taken in case of non-compliance of the uniform standards followed by the firm.

Students and staffs with quality performance are appreciated and assigned to important and quality clients.

Students and staffs who are guilty of non-compliance are subject to disciplinary action.

Review of the work performed:
Supervisors, managers as well as partners perform field visits, review of work papers and make a list of review points.

M. N. ISLAM & COMPANY follows the professional standards issued by the International Federation of Accountants (IFAC) as adopted by the Institute of Chartered Accountants of Bangladesh (ICAB).
2.7 ROLE OF THE PERSONNEL
Partners:
The role of a partner is to get new clients and also sometimes the clients approach the partners themselves. The partners also make sure the existing clients are provided with the best possible service. Partners guide their employees to prepare a proposal which is to be submitted to the client depending on what kind of service the client requires.

Audit manager:
An audit manager is a Chartered Accountant assists the partners in various ways. He/ she review reports before signing by the engagement partner.

Supervisor:
A supervisor may or may not be a Chartered Accountant. He has to complete the course and having some years experience in the field of accountancy therefore he designated as the Audit Supervisor of the firm. Audit manager briefs the audit supervisor on where and when an audit has to be performed and how the job is to be carried out.

Senior student:
An audit senior has some years of experience in the accountancy field therefore he has been designated as the audit Senior of the firm. Audit senior is briefed by the audit manager and supervisor about where and when an audit has to be performed and how the job is to be carried out.

Semi-Senior Student:
A semi-senior student has to complete at least one year of article ship in the firm. Every time he is liable to his assigned senior/s.

Junior Student:
Junior Students are the fresher who have just joined as an articled to the firm.

2.8 NON PROFESSIONAL STAFF
The numbers of non professional staffs involved with the firm are as follows:
Manager, Administration
Computer Operator
Office Boy
Receptionist.

CHAPTER- 3:
AUDIT PROCEDURE OF M. N. ISLAM & COMPANY
3.1 ENGAGEMENT PROCEDURES
Before discussing the Audit Procedures followed by M. N. ISLAM & COMPANY, I try to focus on the engagement procedures through which M. N. ISLAM & COMPANY is engaged/ recruited by the client to perform the audit. M. N. ISLAM & COMPANY. faces three kinds of situations in engagement process:
Engagement with new client.

Engagement with existing client.

Directly appointed by the client.

Before starting the audit work, some letters are exchanged between M. N. ISLAM & COMPANY and clients.

In case of new client:
4 (four) letters are exchanged between M. N. ISLAM & COMPANY and client including acceptance letter of appointment at the time of involving with the new client. Following stages are followed by both M. N. ISLAM & COMPANY and client:
STAGE – 1: Client requires for technical and financial proposal from the M. N. ISLAM & COMPANY.

STAGE – 2: The technical and financial proposal is sent by M. N. ISLAM & COMPANY to the client.

STAGE – 3: Acceptance by the client on the basis of proposal of M. N. ISLAM & COMPANY – A letter of contract.

STAGE – 4: A letter is sent by M. N. ISLAM & COMPANY to the client confirming to work with the client – Confirmation Letter.

In case of last year’s client
Three letters are exchanged between the M. N. ISLAM ; COMPANY and client:
Willingness letter for reappointment: In this letter M. N. ISLAM ; COMPANY wants to audit this year. It can request to increase audit fee or change some other conditions.

Client sends appointment letter.

M. N. ISLAM ; COMPANY accepts this appointment.

In case of directly appointed by the client
If the client is interested to work with M. N. ISLAM ; COMPANY then it directly sends an appointment letter to the firm which includes all terms and conditions. If all terms and conditions are favorable to the M. N. ISLAM ; COMPANY then it accepts the appointment and sends a letter to the client as an auditor.

3.2 AUDIT PROCEDURES FOLLOWED BY M. N. ISLAM ; COMPANY
The primary goal of M. N. ISLAM ; COMPANY at the time of involving in any audit engagement is to provide the opinion on Financial Statements in accordance with Bangladesh Standards on Auditing (BSA) as well as International Standards on Auditing (ISA). We also seek to provide auditing and business consultancy services that are innovative, efficient and most importantly responsive to our client’s business needs.
There are seven steps involved in the procedures that come one after another. Steps are as follows:
Identity Overall Goals
Gather & Evaluate Initial Information
Assess General Risks
Assess Account-Specific Risks
Develop Effective and Efficient Audit Plan/Work Program
Conduct Audit Testing
Evaluate and Communicate Audit Results
3.2.1 IDENTIFY FIRM’S OVERALL GOALS
The goal of our firm in conducting an audit is to express an opinion as to whether the financial statements are prepared and presented fairly in accordance with Generally Accepted Accounting Principles (GAAP). The Firm’s policies on Generally Accepted Accounting Principles are contained in Accounting Standards. The audit team considers these standards in formulating an opinion. In forming an opinion, the audit team also addresses responsibilities for:
Errors
Irregularities and other matters
Efficiency
Client value
Errors
Errors are unintentional misstatements or omissions of accounts of disclosures in financial statements and may involve:
Mistakes in gathering or processing accounting data from which financial statements are prepared.

incorrect accounting estimates arising from oversight or misinterpretation of facts and;
mistakes in the application of accounting principles relating to amount, classification, manner of presentation or disclosure.

The audit team is required to design the audit to provide reasonable assurance of detection of material errors. The In-charge of an audit team is responsible to ensure that the following matters are considered at the time of audit:
Existence or occurrence: Assets or liabilities of the entity exist at a given date and recorded transactions have occurred during a given period.

Completeness: All transactions and accounts that should be presented in the financial statements are so included.

Accuracy: Transactions and account balances are accurately recorded.

Valuation: Assets are stated at realizable value, and liabilities are stated at expected settlement amounts.

Rights and obligation: Assets are the rights of the entity and liabilities are the obligations of the entity at a given date.

Presentations and disclosure: Particular components of the financial statements are properly classified, described and disclosed.

Irregularities and other matters
Irregularities are intentional misstatements or omission of amounts or disclosures in financial statements, including fraudulent financial reporting and misappropriation of assets. So there is always a risk that material irregularities may occur and not be detected. This risk is increased by the possibility of management’s override of internal controls, collusion, forgery, or unrecorded transactions. Thus, while the audit team is required to design the audit to provide reasonable assurance of detection of material misstatements regarding irregularities, the following matters must be considered by the In-charge of the audit team:
Detection of Material Irregularities
Detection of Material Misstatements resulting from illegal acts having a direct effect on the Financial Statements.
Alertness for the Unsupported Transactions.
Efficiency
The audit team should design audit procedures that accomplish the overall goals discussed above in the most efficient manner. Performing an efficient audit involves:
Performing front-end risk assessment and planning with adequate partner and manager involvement.

Designing the combination of audit procedures based on the risk assessment that will efficiently reduce the risk of undetected material misstatements to an appropriately low level.

Assigning work to adequately trained and supervised persons with appropriate experience and skill levels.

Client Value
It has long been a tradition of our firm to provide enhanced value to clients as an integral part of our audits. This strategy has allowed us to differentiate our approach from that of other firms. Delivering added value as an integral part of an audit and effectively communicating the added value information to top management, directors etc. is a key factor in building and maintaining a sound client relationship.

Most clients and most of our personnel would agree that we achieve differentiation from other firms and communicate the value of M. N. ISLAM ; COMPANY audit by consistently stressing the following:
Sound working relationship
Understanding our client’s business.

3.2.2 GATHER & EVALUATE INITIAL INFORMATION
After involving with the client, our first task is to collect and evaluate the relevant and necessary information related to the client’s business for the purpose of:
Understanding the client’s business
Considering the internal control structure
Identifying client expectation
Considering materiality.

Understand the client’s business
Before involving in an audit, the auditor should understand the client business properly. Proper planning and designing of an audit is dependent on proper understanding of client’s business. So after appointing by a client, we, the members of an audit team use various sources to gain an understanding of client business. Differences sources which provide us client’s business information are as follows:
Annual report
Minutes
Internal Reports
Discussion with client.

Consider internal control structure
Every business has some kind of accounting system by which transactions are processed, and records of those transactions maintained. That ‘system’ should incorporate control features and is normally referred to as the system of ‘Internal Control’.

The existence of a reliable system of internal control can be a great help to the auditor, because the objectives of the system should be:
ensuring that the records are complete, accurate and properly authorized;
detecting errors and fraud.

After involving with a client, we try to understand the internal control structure of the client business as much as possible because understanding of client’s internal control structure helps us to determine the extent of our audit tasks.

So our first task in relation to the client’s system of internal control is to ascertain record and evaluate it. Then we can use this knowledge of the client’s system to plan his audit tests.

We consider the activities of internal auditing and their effect, if any, on external audit procedures. So we try to:
Understand and Assess Internal Auditing
As external auditors, we should obtain a sufficient understanding of internal audit activities of the client that assists us in planning the audit and developing an effective audit approach. During the course of planning the audit, we should perform a preliminary assessment of the internal audit function when it appears that internal auditing is relevant to the external audit of the financial statements in specific audit areas.

Evaluate and Test the Work of Internal Auditing
To use specific work of internal auditing, we evaluate and test the work of internal auditing to confirm its adequacy for the external auditing purposes.

The evaluation of specific work of internal auditing involves consideration of the adequacy of the scope of work and related programs and whether the preliminary assessment of the internal auditing remains appropriate. This evaluation may include consideration of whether:
The work is performed by persons having adequate technical training and proficiency as internal auditors and the work of assistants is properly supervised, reviewed and documented;
Sufficient appropriate audit evidence is obtained to afford a reasonable basis for the conclusions reached;
Conclusions reached are appropriate in the circumstances and any reports prepared are consistent with the results of the work performed; and
Any exceptions or unusual matters disclosed by internal auditing are properly resolved.

The external auditor would record conclusions regarding the specific internal auditing work that has been evaluated and tested.

Identify client expectation
As external auditor, we should identify the client’s expectation and design and perform the audit to meet the client expectation.

Consider materiality
Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement.
In designing the audit plan, we establish an acceptable materiality level so as to detect quantitatively material misstatements. However, both the amount (quantity) and nature (quality) of misstatements need to be considered.
Materiality should be considered by the auditor when:
Determining the nature, timing and extent of audit procedures; and
Evaluating the effect of misstatements.
Quantifying Materiality
A common rule of thumb for materiality is 5 to 10 percent of pretax income. Items less than 5 percent are considered immaterial, whereas items that are more than 10 percent are material. For items between 5 and 10 percent, judgment is applied.

3.2.3 ASSESS GENERAL RISKS
During audit planning and risk assessment, we obtain initial audit evidence in order to:
effectively assess the inherent risk of potential financial statement misstatements,
identify indicators of possible going concern problems, and
identify account specific risk and design an overall audit approach to provide reasonable assurance of detecting material misstatements.

The assessment of risk is accomplished using a “top-down” approach. The audit team focuses initially on high level information. The nature and extent of documentation will vary significantly based on an entity’s size, complexity, ownership characteristics, and level of risk.
Key Factors
Significant background information and business, economic and industry conditions that provide an indication of the level of risk for an engagement are mentioned in items 1-15 listed below:
Understanding client business: Can be obtained from various sources, e.g. annual report, minutes, internal reports, previous year audit work papers, discussion with client;
Management’s style, outlook;
Significant Current Events and Reporting Issues;
Results of Financial Performance Review;
Industry Conditions and Issues;
Management Control Environment;
Accounting System – Policy, Procedure ; Manual;
Materiality Consideration;
Limitations of the engagement, if any, e.g. documents lost, post dated appointment, no inventory, no cash count was done;
Processing Methods- The processing methods used by the entity for significant accounting applications;
EDP control: The audit team should obtain, analyze and conclude on the appropriate control of EDP hardware, software, data management, and access; input and output verification;
Audit Inherent Risks: Audit areas likely to cause problems or require unusual attention, e.g. a) Financial Statements items likely to require adjustments;
b)Conditions likely to require modification of audit tests, such as related party transaction, going concern problem or possible fraud;
xiii.Overall audit approach;
xiv.Coordination and timing;
3.2.4 ACCOUNT-SPECIFIC RISK ANALYSIS
Specific Risk Analysis (SRA) builds on information obtained during General Risk Assessment (GRA) and is completed after consideration of the evaluation of the internal control system. SRA is done to design the nature, and extent of substantive tests on account level. SRA includes three functions-
Assess Account Specific Risks:
Identify accounts to be addressed
Describe the potential risks/ frauds per GRA -Inherent Risk
Describe the potential risks as per SRA assessment -Inherent Risk
Determine whether the I/C for those accounts are adequate- Control Risk (EICS)
Determine whether to perform test of control or not (EICS)
Assess the risk of potential fraud
Develop Audit Plan
Select substantive audit procedures- Detection Risk
Develop work programs
Perform engagement administration
3.2.4.1 At the Account Balance and Class of Transaction
For the account balance and class of transaction level risk assessment the following major account heads should be considered:
Cash
Bank
Inventory
Fixed Assets
Accounts Receivables
Accounts Payables
Revenue
Expense
Payroll
Net Assets, Retained Earnings, or Fund balances
Other Assets
Other Liabilities
Investment
Loan.

We generally assess the risks at account balance level in view of the following items:
Financial statement accounts likely to the susceptible to misstatement
The complexity of underlying transactions and other events which might require using the work of an expert.

The degree of judgment involved in determining account balances.

Susceptibility of assets to loss or misappropriation.
The completion of unusual and complex transactions, particularly at or near period end.

Transactions not subjected to ordinary processing.

3.2.4.2 Audit Risks
In determining the nature, timing and extent of substantive procedures required to reduce audit risk to an acceptably how level, we, the auditor consider the assessed levels of inherent and control risks. In this regard we consider:
The nature of substantive procedures,
The timing of substantive procedures, and
The extent of substantive procedure.

Illustration of the Interrelationship of the Components of Audit Risk
The following table show how the acceptable level of detection risk may vary based on assessments of inherent and control risks
Auditor’s assessment of control risk is
High Medium Low
Auditor’s assessment
of inherent risk High Lowest Lower Medium
Medium Lower Medium Higher
Low Medium Higher Highest
The shaded areas in this table relate to detection risk.

3.2.4.3 Consideration of Fraud and Error
We have a professional responsibility for materially misstated financial statements resulting from errors and irregularities. As auditors, we must provide reasonable assurance that such materials errors and irregularities are detected.

In planning the audit, the in charge of an audit team discusses with other members of the audit team the susceptibility of the entity to material misstatements in the financial statements resulting from fraud or error.

The potential for financial statement fraud exists on every engagement. To address the risk of potential fraud we must:
Assess the risk of potential fraud
Design our audit procedures to respond to identified risks
We must consider varying the nature, timing and extent of our work in areas with the most potential for manipulation
We need to perform our audit with appropriate professional skepticisms and due processional care.

There are many different ways in which financial statements can be intentionally misstated. We generally consider the following four types:
Generating and recognizing revenues where none exists
Inappropriate acceleration of revenue recognition
Transactions with related parties valued either below or in excess of equivalent transactions with unrelated parties.

Understatement of and shifting of costs and expenses.

3.2.4.4 Inquiries of Management
When planning the audit, we make inquiries of management:
To obtain an understanding of:
Management’s assessment of the risk that the financial statements may be materially misstated as a result of fraud; and
Management has put the accounting and internal control systems in place to address such risk;
To obtain knowledge of management’s understanding regarding the accounting and internal control system in place to prevent and detect error;
To determine whether management is aware of any known fraud that has affected the entity or suspected fraud that the entity is investigating; and
To determine whether management has discovered any material errors.

3.2.4.5 Assessment of Inherent Risk and Control Risk
When assessing inherent risk and control risk, we generally consider how the financial statements might be materially misstated as a result of fraud or error. In considering the risk of material misstatement resulting from fraud, the auditor should consider whether fraud risk factors indicate the possibility of either fraudulent financial reporting or misappropriation of assets.

3.2.4.6 Assessment of Detection Risk
Based on the assessment of inherent and control risks, we design substantive procedures to reduce the detection risk to an acceptably low level. In designing the substantive procedures, we address the fraud risk factors that have been identified as being present.

3.2.4.7 Documentation
If during the performance of the audit, fraud risk factors are identified that cause the auditor to believe that additional audit procedures are necessary, the auditor should document the presence of such risk factors and the auditor’s response to them.

3.2.4.8 Management Representations
The auditor should obtain written representations from management that:
It acknowledges its responsibility for the implementation and operations of accounting and internal control systems that are designed to prevent and detect fraud and error.

It has disclosed to the auditor the results of its assessment of the risk that the financial statements may be materially misstated as a result of fraud.

3.2.4.9 Communication
When the auditor identifies a misstatement resulting from fraud, or a suspected fraud, or error, then auditor’s responsibility is to communicate that to management, those charged with governance and, in some circumstances, to regulatory and enforcement authorities.
3.2.5 DEVELOPMENT OF EFFECTIVE AND EFFICIENT AUDIT PLAN
Work program is a list of procedures that are needed to be performed to conduct the audit. The program may also contain the audit objectives for each area and should have sufficient detail to serve as a set of instructions to the assistants involved in the audit, and as a means to control the proper execution of the work.

In M. N. ISLAM ; COMPANY we use work programs for different types of account head. Work programs were developed for different types of business and for different types of account heads. Usually an audit program contains
Client procedures and background information.

Audit objectives.

Audit procedures.

Performance and results of work.

Conclusions.

Work programs help the auditors to ensure the quality of the audit tasks as it provides necessary guidelines about how to carry out their audit tasks and how to analyze all the account heads in a proper way. So when a new student is registered as articled student in M. N. ISLAM ; COMPANY it is the responsibility of managers/supervisors to introduce him/her with different types of work programs.

As the audit proceeds, the in-charge may change, modify or develop a new work program due to changes in the following:
Client accounting procedures
Client internal controls
Unexpected results in the testing.

3.2.6 CONDUCT AUDIT TESTING
After completing work program, the audit team conducts two types of tests which we mentioned in our earlier discussion. Two tests are:
Test of Controls
Substantive Test
3.2.6.1 Test Of Controls:
Based on the GRA, SRA and evaluation of internal control system, we decide whether to perform test of control.
The audit team should test any internal controls upon which reliance is placed to reduce the likelihood of misstatements in the financial statements and the reduced substantive test has been decided.
For the effectiveness and efficiency of audit work, we conduct Test of Control at least in the following three major accounting areas, which in turn will cover most of the account level tests in any client.
Type of Test Account level test covered
1) Cash Receipts Test Cash, Bank, Sales, Revenue, Receivables.

2) Cash Disbursement Test Cash, Bank, Inventory, Purchase, Fixed Assets, Payables, Expenses.

3) Payroll Test Payroll expenses, cash, bank.

Control Outlines
Items included in the three tests of control forms can be modified to include additional items, to delete some non- applicable items and also to customize the test for each and every different type of client specific procedures. Following groups of Internal controls may be considered while developing the forms for internal control tests.

Authorization controls are prevention-oriented. That is, they are designed to prevent misstatements from occurring as a result of unauthorized or improperly authorized transactions.
Transaction processing controls are also prevention-oriented. They are designed to prevent misstatements from occurring during the processing of transactions and generally consist of a hierarchy of related controls.

Substantiation and evaluation controls are detection-oriented (i.e., they are designed to detect misstatements that have occurred during processing and ensure that they are corrected). They ordinarily address account balances or groups of transactions rather than individual transactions.

Physical safeguard controls are prevention-oriented and consist of segregation of duties and other techniques to limit access to assets, records, forms, and processing areas and procedures.

3.2.6.2 Substantive Tests
Substantive tests are procedures performed to detect misstatements in financial statement balances. We perform the following two types of Substantive Tests:
Analytical Procedures
Detail Tests
“Analytical procedures” means the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or deviate from predicted amounts.

Analytical Procedures are the testing of financial information by evaluating actual vs. expected relationships among financial and non-financial data, e.g. utilities, rent, payroll. Analytical procedures may be used as a substantive test of balances and for a final review of year end financial statements.

The auditor should apply analytical procedures at the planning and overall review stages of the audit. Analytical procedures may also be applied at other stages.

Analytical procedures include the consideration of comparisons of the entity’s financial information with, for example:
Comparable information for prior periods.

Anticipated results of the entity, such as budgets or forecasts, or expectations of he auditor, such as an estimation of depreciation.

Similar industry information, such as a comparison of the entity’s ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry.

Analytical procedures also include consideration of relationships:
Among elements of financial information that would be expected to conform to a predictable pattern based on the entity’s experience, such as gross margin percentages.

Between financial information and relevant non-financial information, such as payroll costs to number of employees.

We generally apply analytical procedures at or near the end of the audit when forming an overall conclusion as to whether the financial statements as a whole are consistent with the auditor’s knowledge of the business.

When analytical procedures identify significant fluctuations or relationships that are inconsistent with other relevant information or that deviate from predicted amounts, we then investigate and obtain adequate explanations and appropriate corroborative evidence.

Detail Tests
Detailed tests may include the following:
Confirmation of third parties- Bank, A/P, A/R
Observation of asset – Inventory count, FA, Cash Count, Payroll cheque distribution
Tests of reconciliation- bank reconciliation
Analysis of account
Vouching
Cut off tests
Inquire
Valuation tests
Reading of FS
Reading of minute of meeting of stockholder, directors and committee.

Confirmations
In some situations, audit evidence from external sources is more reliable than audit evidence generated internally, and that written audit evidence is more reliable than audit evidence in oral form. Accordingly, audit evidence in the form of written responses to confirmation requests received directly by the auditor from third parties who are not related to the entity being audited, when considered individually or cumulatively with audit evidence from other procedures, may assist in reducing audit risk for the related assertions to an acceptably low level.

3.2.7 EVALUATE AND COMMUNICATE AUDIT RESULTS
At the last stage of audit, the audit team communicates the result of the audit to the management and the stakeholders of the company. The audit team issues two types of reports:
External Report which is commonly known as the “Auditor’s report”
Internal Report which is known as “Management Letter”.

We therefore have three areas to deal with:
the unqualified audit report;
qualifications in audit reports;
the management letter (also known as letter of weakness or letter of comment).

3.2.7.1 External Report/ Auditor’s report:
Basic Elements
The auditor’s report includes the following basic elements, ordinarily in the following layout:
Title;
Addressee;
Opening or introductory paragraph
Identification of the financial statements audited;
A statement of the responsibility of the entity’s management and the responsibility of the auditor;
Scope paragraph (describing the nature of an audit)
A reference to the BSA;
A description of the work the auditor performed;
Opinion paragraph containing
A reference to the financial reporting framework used to prepare the financial statements: and
An expression of opinion on the financial statements;
Date of the report;
Auditor’s address; and
Auditor’s signature.

Modified Reports
In addition to unqualified or qualified, we sometimes provide modified audit report. An auditor’s report is considered to be modified in the following situations:
Matters That Do Not Affect the Auditor’s Opinion
emphasis of matter
Matters That Do Affect the Auditor’s Opinion
qualified opinion,
disclaimer of opinion, or
adverse opinion.

Matters That Do Not Affect the Auditor’s Opinion
In certain circumstances, an auditor’s report may be modified by adding an emphasis of matter paragraph to highlight:
a material matter regarding a going concern problem.

a significant uncertainty (other than a going concern problem)
The addition of a paragraph emphasizing a going concern problem or significant uncertainty is ordinarily adequate to meet the auditor’s reporting responsibilities regarding such matters. However, in extreme cases, such as situations involving multiple uncertainties that are significant to the financial statements, the auditor may consider it appropriate to express a disclaimer of opinion instead of adding an emphasis of matter paragraph.

Matters That Do Affect the Auditor’s Opinion
(Qualifications in audit reports)
The nature of the circumstances giving rise to a qualification of opinion will generally fall into one of two categories:
where there is an uncertainty which prevents the auditor from forming an opinion on a matter (uncertainty); or
where the auditor is able to form an opinion on a matter but this conflicts with the view given by the financial statements (disagreement).

In a ‘Except for’ opinion the auditor effectively disclaims an opinion on a particular matter which is not considered fundamental or auditor expressed an adverse opinion on a particular mater which is not considered fundamental.

In a disclaimer of opinion the auditor states that he is unable to form an opinion as to whether the financial statements give a true and fair view.

In an adverse opinion the auditor states that in his opinion the financial statements do not give a true and fair view.

List of Examples
Forms of qualified audit report
Form Circumstances, Examples
(i) Uncertainty – material but not fundamental; Except for –scope
Except for – scope No stock count at a branch
Acceptance of management assurances (small business)
(ii) Fundamental Disclaimer – scope
Disclaimer – inherent uncertainty Inability to substantiate cash transactions
Valuation of long-term construction contracts
(iii) Disagreement – material but not fundamental; Except – departure from BAS
Except – disagreement as to facts Failure to apply BAS
No provision for doubtful debt.

(iv) Disagreement – Fundamental; Adverse – disagreement as to facts Goodwill no longer justified at balance sheet amount.

3.2.7.2 Internal Report/ Management letter
As a value added service to the client M. N. ISLAM ; COMPANY gives a Management Letter to its audit clients. The main purpose of the letter of management is to draw the attention of management to areas of weakness requiring rectification. It is also possible for the auditor to suggest areas where economies or improved efficiency are possible. Such a letter is, of course, no substitute for a qualification in the audit report. It will usually deal with matters not serious enough to justify an audit qualification.

Purposes of Management Letter:
The principal purpose of a report to management is to enable the auditor to give his comments on the accounting records, systems and controls that he has examined during the course of his audit. Significant areas of weakness in systems and controls that might lead to material errors should be highlighted and brought to management’s attention.

As a secondary purpose, a letter to management may also be used to provide management with other constructive advice. The auditor might, for example, be able to suggest areas where economies could be made or where resources could be used more efficiently.

A letter to management is also a useful means of communicating matters that have come to the auditor’s attention during the audit that might have an impact on future audits.

Contents:
Generally the following matters, arising out of the audit, will be included in a letter to management:
weaknesses in the structure of accounting systems and internal controls;
deficiencies in the operation of accounting systems and internal controls;
unsuitable accounting policies and practices;
Non-compliance with accounting standards or legislation.

Points made in previous years’ management letter should be reviewed. Where they have not been dealt with effectively, the auditors should enquire why appropriate action has not been taken. If the auditors consider the points still to be significant, they should include all these points again in their current letter. In addition, recommendations made by internal audit which have not been implemented by management, may need to be included.

Management response
The auditor should request a reply to all the points raised, indicating what action management intends to take as a result of the comments made in the management letter. It should be made clear in the report that the auditor expects at least an acknowledgement of the letter or, where he considers it appropriate, the directors’ discussion of the letter to be recorded in the board minutes.

Basic Elements of the Management Letter
The management letter includes the following basic elements, ordinarily in the following layout:
Addressee;
Transmittal Letter
Title;
Background Information
Scope of Work, e.g.

Compliance;
Authorization;
Accuracy;
Monitoring;
Safeguarding
Findings: Each finding consists of four different sections, as under:
Fact (What it is)
Effect (What harm was caused by not complying with the criteria)
Recommendation (That corrects the cause and the condition as applicable)
Management Response
Date of the report;
Auditor’s address; and
Auditor’s signature.

CHAPTER-4:
THE CASE STUDY OF NETRAKONA PALLI BIDYUT SAMITY
4.1 OVERVIEW OF NETRAKONA PALLI BIDYUT SAMITY
The Samity has been Registered with Bangladesh Rural Electrification Board (BREB) as Netrakona Palli Bidyut Samity under BREB Ordinance 1977 (Ordinance L.I of 1977) on 6th March 1994. The Samity is doing business of buying and selling of electricity in the rural areas of 11 (Eleven) Upazilas (Netrokona, Purbadala, Barhattah, Atpara, Kenduya, Durgapur, Kalmakanda, Madan, Mohonganj, Khaliyazuri and Darmopasa) and provides electric services for the consumer of the same areas.Netrokona Palli Bidyut Samity is playing a vital role in Agricultural, Industrial and Socio-Economic development of Netrokona District. The Rural Electrification Program conducted by Netrokona Palli Bidyut Samity has acted a leap-forward in the development of socio-economic structure of rural areas in Netrokona District as well as entire Bangladesh. It has significant and sustained impact on agricultural growth, industrialization and business ; commercial activities in the rural areas. It is a consumer owned entity organized on the basic principles of Co-operative for distribution of electric power to its members and operates on No Loss – No Profit basis for the mutual benefits of all its Members.
4.2 AUDIT HELD ON NETRAKONA PALLI BIDYUT SAMITY
4.2.1 Technical and Financial Proposal
At first M.N. Islam ; Company send technical and financial proposal to Bangladesh Rural Electrification Board. This Proposal contains are given below:
Over view of audit firm.

Area of Assignment.

Scope of work.

Methodology of the work.

Professional Fees.

4.2.2 Appointment Letter
Bangladesh Rural Electrification Board accept technical and financial proposal. They assign M.N. Islam ; Company external auditor of Netrakona Palli Bidyut Samity. This letter contains are given below:
Area of Assignment.

Audit Fees.

Duration of Filed work.

Deadline of Audit Report submission.

4.2.3 Engagement Letter
M.N. Islam ; Company should send an engagement letter to clients soon after their appointment as auditors and, in any event, before the commencement of the first audit assignment. The engagement letter must document and confirm the auditor’s acceptance of the appointment, and include a summary of the responsibilities, the scope of the audit and the form of any reports. The form and remaining content of audit engagement are given below:
The objective of the audit of financial statements.

Management’s responsibility for the financial statements.

The form of any reports or other communication of results of the engagement.

4.2.4 Identify Firm’s Overall Goal
Netrakona Palli Bidyut Samity engaged M. N. ISLAM & COMPANY in conducting an audit and to expressing an opinion as to whether the financial statements are prepared and presented fairly in accordance with Generally Accepted Accounting Principles (GAAP). Our audit team considered these standards in formulating an opinion taking into accounts the errors, irregularities and efficiency of Netrakona Palli Bidyut Samity.

4.2.5 Gather and Evaluate Initial Information
After our audit team got engaged in NPS audit project, we have collected some basic information of the Netrakona Palli Bidyut Samity . We went through what their basic business are, to understand their operations, considered their internal control structure and also identified their expectations.

4.2.6 Assess General risks of clients
During audit planning and risk assessment, we obtain initial audit evidence in order to:
Effectively assess the inherent risk of potential financial statement misstatements,
Identify indicators of possible going concern problems, and
Identify account specific risk and design an overall audit approach to provide reasonable assurance of detecting material misstatements.
4.2.7 Risks Area
CASH
Risks
Cash transactions may not be recorded accurately
Cash may not exist
Steps
Confirm selected bank accounts and special arrangements
Review confirmation replies
Test accounts where there is no confirmation
Test bank reconciliations
ACCOUNT RECEIVABLE
Risks
The accounts receivable listing or individual balances may be inaccurate
Accounts receivable balances may not exist
Accounts receivable may not be collectible
Sales transactions may be processed in the wrong period
Steps
Agree a detailed listing of accounts receivable to the summary
Positively confirm selected accounts receivable balances
Review confirmation replies
Test accounts where there is no confirmation
INVENTORY
Risks
Inventory records may not be complete
Inventory transactions may be processed in the wrong period
Inventory items may not exist
Inventory carrying values may not be realizable
Steps
Observe physical inventory
Examine receiving and issuing activity
Test obsolete, slow-moving, scrapped or damaged listing
Test client’s costing of inventory detail
ACCOUNTS PAYABLE
Risks
The accounts payable listing may not be accurate
There may be unrecorded accounts payable balances
Accounts payable transactions may be processed in the wrong period
Steps
Agree detailed accounts payable listing to summary
Test for unrecorded liabilities
4.2.8 Assess Account Specific Risk
In this step, audit team determined the risk related to specific account like sales, account receivables, payroll and personal file, acquisition and payment cycle, inventory and cash balances. There is also a guideline from the APM questionnaire for the assessment. By having the answers in the questionnaire, audit team can assess how much risk is related to that specific account.

4.2.9 Develop Efficient and Effective Audit Plan Program
Job In charge made an overall plan about how audit can be performed. Audit strategy is to develop an effective response to the risk of material misstatement, considering what we found in preliminary planning activities such as client acceptance, ethical position of the audit firm and their understanding of the entity and its environment, including its internal control, to develop an effective and efficient overall audit strategy that will appropriately respond to assessed risks.

4.2.10 Authorization Letter
Authorization letter include name of audit team which are engaged conducting audit of Netrakona Palli Bidyut Samity. Audit team include of Team Leader, Audit manager, Aditor-1, and Auditor-1.

4.2.11 Entry Meeting With the Netrakona Palli Bidyut Samity Management
First day of audit, audit team and management of Netrakona Palli Bidyut Samity arrange of a meeting. Audit team and top management Netrakona Palli Bidyut Samity are attending this meeting. Purpose of meeting is:
Introduce the audit team members.

Define the objective and scope of the audit.

Define the methodology used during the audit.

Co-ordinate staff and facilities.

4.2.12 Conduct Audit Testing
In this stage the field work started. During the fieldwork phase, audit evidence is gathered by working methodically through the work plan or checklist, for example interviewing staff, managers and other stakeholders associated with the client’s, reviewing client’s documents, printouts and data (including records of client’s activities such as security log reviews), observing client’s processes in action and checking system security configurations etc. Audit tests are performed to validate the evidence as it is gathered. Audit work papers are prepared, documenting the tests performed.

4.2.13 Evaluate And Communicate Audit Results
After gathering evidence relating to the financial statement assertions the audit enters the completion phase. First the sufficiency and appropriateness of the evidence gathered is evaluated by using the risk of material misstatement. The auditor then justifies a conclusion on the fairness of the financial statements. The auditor then aggregates the total identified misstatements and determines if it causes the financial statements to be materially misstated. This step is not yet done and the work is in progress at M. N. ISLAM ; COMPANY.

The list of identified misstatements will be discussed with the Netrakona Palli Bidyut Samity, and they will be given the opportunity to correct some or all of the identified misstatement. Based on this, the auditor will issue an opinion that explains that the financial statements are materially misstated or not. M. N. ISLAM ; COMPANY thus issue a report with an unqualified opinion or report with other than unqualified opinion.

4.2.14 Outcome of Audit at Netrakona Palli Bidyut SamityAfter conducting our audit we have found weakness in internal control system and accounting system. However, due to confidentiality issue, I am not in a position to share all the observations. A few observations along with fact, effect and recommendation is given below:
System Loss 13.67% of Electricity Power Input
Fact: Loss in KWH: 3,30,86,683 kwhrs equivalent to Irrecoverable National Loss of Tk. 14,58,35,357 Electricity Power Input delivery recorded by Power Grid Company Ltd. Netrakona, on behalf of BPDP 24,24,07,861 kwh contrary to the output received by the Samity kwh volume 20,93,21,178 kwh electric energy as per sub-station meter during the fiscal year 2017-2018.

Risk: Prior year system loss 12.35% increased to 13.67% in the current year which shows a tendency to increased loss to the Samity imposed upon for no value consideration to the extent of an amount of Tk. 145,835,357 shown in the fact above.

Recommendation: Damages of insulations at Line Transformer Connection Point, Overhead Conductor Joints, Pole Tower Joints and Lines occurring in-between output receiving Sub-Stations End ; the Grid Meter End be cautiously strapped up and kept under constant vigilance to prevent leakages and unscrupulous ; unauthorized use of electric energy. Unusual adverse variation noticed between the two must be inquired into promptly and remedial measures be undertaken.
Schedule of Plants
Fact: Consolidated value of asset given in group wise cannot be taken as a fair value disclosure unless supporting subsidiary statement describe each individual plant or equipment forming part of the group value as to when put to actual use and where in the economic use and its cost as to facilitate spot physical verification.

Risk: Plant/Equipment in use beyond economic life need major repair or to retire from the line operative support. Negligence to such activities may cause risk of damage to properties and valuable lives. Value disclosed cannot be taken as transparent as is stated.

Recommendation: Action plan may be drawn-up for inquiry and examination of age-old Pole Tower, Line transformers, Sub-Station equipments ; meters and constant vigilance over lines and equipments shall have to be exercised as a routine matter and report to the General Manager of action taken sub-station wise be kept updated.

Lack Of Documentation in Maximum Cases
Fact: During the course of our audit we observed a significant weakness in document keeping system. Transactions are recorded in the ledger without attaching proper supporting documents.
Risk:
Scope of fake expense; and
Risk of misappropriation of fund.

Recommendation: This organization should develop document keeping system and prepare voucher with supporting before posting in the ledger.

Non Availability of Supporting Documents With Vouchers
Fact: During the course of our audit, we have observed that several numbers of vouchers kept without attaching supporting documents.

Risk:
Transactions are not verifiable;
Risk of misappropriation of fund;
Risk of excess/short payment; and
Risk of improper head of accounts.

Recommendation:
Supporting should be attached to respective voucher;
If expenditure is accrued by passing journal entries, then the actual invoices should be attached to the respective journal voucher, and at the time of actual payment to vendor money receipt/acknowledgement with appropriate stamp attached to it should be obtained;
In case of payment of advance money receipt/acknowledgement of vendor should be obtained; and
Every money receipt should mention the work order contract reference number, mode of payment, mention of advance or final settlement amount etc.

4.2.15 Exit Meeting With The Management Of Netrakona Palli Bidyut SamityAt the last day of audit, audit team and management of the samity arrange a formal meeting. Purpose of the exit is overall discussion of audit, Observation of audit, management opinion of this observation.
CHAPTER-5:
FINDINGS, RECOMMENDATIONS AND CONCLUSION
Audit procedures are designed to detect material misstatements in the financial statements and focus on the financial aspects of transactions and events. Despite of this there are numerous loopholes in the system that undermines the prospects of this glorious profession. In this report, on my behalf, I would like to share some of the complications that I observed during my working as an audit staff and would like to recommend some solutions according to my point of view. The findings and recommendations are discussed below.

Finding no. 1: Limited time to complete an audit engagement.

Fact:
Our team has faced serious time limitations, as from the initial screening of the clients business we thought that we understood everything but later in turns wrong. We consume huge amount of time just to understand their whole operations process basically accounts. Especially junior auditor, I had to gobble huge information with in short period of time.

Recommendations:
From my point of view, if the in-charge or the firm gave us a small training session about the client’s system then it would be lot easier to understand quickly in the field. They provided idea about their financial statements but they did not provide enough information about the clients systems.

Finding no. 2: No training facilities available for new students.

Fact:
In M. N. ISLAM & COMPANY there is a rule that all the new students must be trained by the supervisors/ managers of the firm. So, they can be familiar with the audit work and it will help them to carry out their audit tasks. But in practical the training facilities are not provided to the new students. So, new students are involving with audit engagement without having practical knowledge about audit.

Recommendation:
Supervisors/ managers/ seniors of the firm may take initiative to start the training program again for the new students.

Finding no. 3: Involving in an audit engagement without having proper knowledge of client’s business.

Fact:
In most cases, when the firm gets a new client, partner/partners select one of the managers as the supervisor of the audit team. Then supervisor selects some of the students as the members of the audit team for such audit engagement and the most senior student is selected as the in charge of the team. Sometimes supervisor does not give all the members of the team an overall idea of the client, nature of its business, its operation etc. Only in charge is informed about the client and in charge also does not discuss the details of the client’s business and its nature before going to the client.

Recommendation:
Before going to the client, supervisor or in charge should give some brief idea about the client’s business to all the members of the audit team.

Finding no. 4: Lack of supervision.

Fact:
According to the audit standards, all the audit tasks must be supervised properly. Appropriate supervision ensures the quality of the audit engagement. But practically, this does not happen in M. N. ISLAM ; COMPANY. In most of the cases, in charge distributes different account heads to different students and gives them some idea about such heads. But later, in charge does not supervise his juniors’ works properly.

Recommendation:
In charge of an audit team must be ordered and properly instructed to supervise the work of his juniors.

Finding no. 5: Rotation from one audit engagement to another very quickly.

Fact:
In some cases, juniors are rotated from one audit engagement to another very quickly. One student involves in one audit engagement and he may be called on any time to join in another audit engagement.

Recommendation:
Supervisor of an audit engagement should try to include unoccupied students in his audit team.

Finding no. 6: Difficulties in obtaining required audit evidences.

Fact:
Auditing standard suggests that sufficient and competent audit evidences must be collected and must be analyzed properly. Because of time limitation, it is not possible to test all the transactions. We identify some transactions having significant amounts or we feel significant, and test them and provide our opinion on the basis of such transactions. So, we try to collect all the evidences related to those transactions. But in some cases, management of clients are not interested or do not want to provide all the necessary or required documents because of their lack of knowledge about audit or they want to hide some illegal or wrong works done by them. Sometimes, we have to wait 2/3 days to get our required documents. Sometimes, client lost the documents that are helpful for our tasks.

Recommendation:
Higher authority of the client must order or instruct the management to provide us the required documents.

Finding no. 7: Use of Sampling.
Fact:
Auditors apply sampling techniques to limit the number of transactions and balances selected for audit testing in order to perform the audit efficiently and cost effectively. The results may not however be representative of the entire population and may fail to detect a material misstatement in the financial statements due to the inability of auditors.
Recommendations:
Auditors need to perform as detailed testing as possible, from the samples they choose out of the entire population of transactions and balances. So the result is more accurate and fair.

CONCLUSION
Audit Procedure describes the step by step instructions of a financial statement audit. This procedure is sufficient for M. N. ISLAM & COMPANY. If all these steps are followed properly, it is possible to ensure a proper conduct of financial statement audit. But as I stated above, in some cases the auditors of M. N. ISLAM & COMPANY violates some audit standards and not carry out their audit tasks properly. As a result, the quality of audit work cannot be ensured all the time. But if all these problems can be removed, M. N. ISLAM & COMPANY will be able to maintain its present status and improve its position to the client. So all the partners and the articled students of M. N. ISLAM & COMPANY must be conscious about this matter.

BIBLIOGRAPHY
Audit Practice Manual, The Institute Of Charted Accountants Of Bangladesh.

Assurance, Study manual, The Institute Of Charted Accountants Of Bangladesh.

Bangladesh standards on Auditing (BSA).

Bangladesh Accounting Standards (BAS).

http://www.icab.org.bd/http://netrokonapbs.org

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