University of Jahangir Nagar

Institute of Business Administration

BBA Programme 27th Batch

Auditing and Taxation
Study Material-3
Lecture 5, 6, 7 & 8
Auditor of a Limited Company and Auditor’s Report
Vouching and Verification
Auditors’ Report

Course Teacher:
Shish Haider Chowdhury
Shish.1965@gmail.com
Cell: 01819 225594

10 June 2020
What is an auditor?

An auditor is a person who makes an independent report to a company's members as to whether

the company has prepared its financial statements in accordance with company law and the
applicable financial reporting framework. The report must also state whether a company's accounts
give a true and fair view of its affairs at the end of the year.

How does an auditor appointed?

An auditor must be appointed for each financial year, unless the directors reasonably resolve
otherwise on the ground that audited accounts are unlikely to be required. The rules are different
for public and private companies.

For public companies, the directors appoint the first auditor of the company. The auditor then holds
office until the end of the first meeting of the company at which the directors lay its accounts before
the members. At that meeting, the members of the company can re-appoint the auditor, or appoint
a different auditor, to hold office from the end of that meeting until the end of the next meeting at
which the directors lay accounts.

For private companies, the directors appoint the first auditor of the company. The members may
then appoint or re-appoint an auditor each year at a meeting of the company's members, or by
written resolution, within 28 days of the directors sending the accounts to the members. If they do
not do so for a particular year, however, the appointed auditor remains in office until the members
pass a resolution to reappoint him or to remove him as auditor (5% of members, or fewer if the
articles say so, can force the consideration of a resolution to remove an auditor). This provision
about remaining in office, however, does not apply if the auditor’s most recent appointment was by
the directors or the company’s articles require annual appointment.

Appointment of an auditor

According to paragraph 210 of Companies Act 1994

 Every company shall, at each annual general meeting appoint an auditor or auditors to hold
office from the conclusion of that meeting until the next annual general meeting and shall within
seven days of the appointment, give intimation thereof to every auditor so appointed: Provided
that no person can be appointed auditor of any company unless his written consent has been
obtained prior to such appointment or re-appointment;
 Every auditor appointed shall, within thirty days of the receipt from the company of the
intimation of his/her appointment, inform the Registrar in writing that he has accepted, or
refused to accept, the appointment;

 At any annual general meeting a retiring auditor, by whatsoever authority appointed, shall be
reappointed, unless-

**(a) he is not qualified for re-appointment; or (b) he has given the company notice in writings
of his unwillingness to be re-appointed; or (c) a resolution has been passed at that meeting

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 appointing somebody else instead of him or providing expressly that he shall not be re-
appointed.

 if an appointment of an auditor is not made at an annual general meeting, the Government

may appoint a person to fill the vacancy;
 The company shall, within seven days of the Governments power under above sub-section
becoming exercisable, give notice of that fact to the Government; and, if a company fails to
give such notice, the company, and also every officer of the company who is in default, shall
be punishable with fine which may extent to one thousand take;
 The first auditor or auditors of a company shall be appointed by the Board of Directors
within one months of the date of Registration of the company, and the auditor or auditors
so appointed shall hold office until the conclusion of the first annual general meeting:
Provided that-
(a) the company may, at a general meeting remove any such auditor or all or any of such
auditors and appoint in his or their place any other persons or persons who have been
nominated for appointment by any member of the company, and or whose nomination
notice has been given to the members of the company not less than fourteen days before
the date of the meeting: and
(b) if the Board of Directors fails to exercise its powers under this sub-section, the company
in a general meeting, may appoint the first auditor or auditors.

 The Board may fill any casual vacancy is the office of any auditor, but while any such vacancy
continues, the remaining auditor or auditors, if any, many act:
 Any auditor appointed in a causal vacancy shall hold office until the conclusion of the next
annual general meeting.

***Removal of an auditor:

According to paragraph 210(9) any auditor appointed under section 210 may be removed from office
before the expire of his term only by a special resolution of the company in the general meeting.
AGM(annual general meeting)/EGM(extraordinary GM)

Remuneration of an auditor

According to paragraph 210 (10) the remuneration of the auditors of a company-

(a) in the case of an auditor appointed by the Board or the Government, shall be fixed by the
Board or the Government respectively; and

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 (b) subject to clause (a), shall be fixed by the company in the general meeting or in such manner
as the company in the general meeting may determine.

for the purposes of sub-section (10), any sums paid by the company in respect of the auditors
expenses shall be deemed to be included in the expression "remuneration".

Qualification and disqualification of auditors

According to paragraph 212 no persons shall be appointed an auditor of any company unless he is a
"chartered accountant" within the meaning of the Bangladesh Chartered Accountants Order, 1973,

***None of the following persons shall be qualified for appointment as auditor of a company
namely-
(a) an officer or employee of the company where he works;
(b) a person who is partner, or who is in the employment of an officer or employee of the company;
(c) a person who is indebted to the company for an amount exceeding one thousand taka, or who
had given any guarantee or provided any security in connection with the indebtedness of any third
person to the company for an amount exceeding one thousand taka:
(d) a person who is director or member of a partner company, or a partner of a firm, which is the
managing agent of the company;
(e) a person who is a director, or the holder of shares exceeding five percent in nominal value of the
subscribed capital, of anybody corporate which is the managing agent of the company.

A person shall not be qualified for appointment as an auditor of a company, if-

(a) he/she is disqualified for appointment as auditor of any other body corporate which is that
company's subsidiary or holding company or a subsidiary of that company's holding company;
(b) he/she would be disqualified for such appointment, had the said body corporate been a
company.

Power and duties of auditors

According to paragraph 213:

 every auditor of a company shall have a right of access at all times to the books and
accounts and vouchers of the company, whether kept at the head office of the company or
elsewhere and shall be entitled to require from the officers of the company such information
and explanation as the auditor may think necessary for the performance of his duties as
auditor;
 the auditor shall, in particular inquire into following namely:

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 (a) Whether loans and advances made by the company on the basis of security have been
properly secured and whether the terms on which they have been made are not prejudicial to
the interests of the company or its members:
(b) Whether transactions of the company which are represented merely as book-entries are
prejudicial to the interests of the company;
(c) where the company is not an investment company or a banking company, whether so much
of the assets of the company as consist of shares, debentures and other securities, have been
sold at a price less than at which they were purchased by the company;
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and paper of the company that any shares have been allotted
for cash, whether cash has actually been received in respect of such allotment, and if no cash
has actually been so received, whether the position as stated in the account books and the
balance sheet is correct, regular and not misleading.

 The auditor shall make a report to be presented in the annual general meeting of the
company on the accounts, examined by him and the report shall state whether, in his
opinion and to the best of his information and according to the explanation given to him, the
said accounts give a true and fair view-
(a) in the case of the balance sheet, of the state of the company's affairs as at the end of its
financial year;
(b) in the case of the profit and loss account, of the profit or loss for its financial year.

 Others.

*****Auditor’s independence

Auditor independence refers to the independence of the internal auditor or of the external auditor.
It is essentially an attitude of mind characterized by integrity and an objective approach to the audit
process. The concept requires the auditor to carry out his work freely and in an objective manner.

Independence of the internal auditor means independence from parties whose interests might not
be totally aligned with an effective risk management, an effective internal control, and an optimal
governance.

Auditor independence is commonly referred to as the cornerstone of the auditing profession since it
is the foundation of the public’s trust in the accounting profession.

There are three main ways in which the auditor’s independence:

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  Programming independence
 Investigative independence

 Reporting independence

Programming independence essentially protects the auditor’s ability to select the most appropriate
strategy when conducting an audit. Auditors must be free to approach a piece of work in whatever
manner they consider best. As a client company grows and conducts new activities, the auditor’s
approach will likely have to adapt to account for these. In addition, the auditing profession is a
dynamic one, with new techniques constantly being developed and upgraded which the auditor may
decide to use. The strategy/proposed methods which the auditors intend to implement cannot be
inhibited in any way.

While programming independence protects auditors’ ability to select appropriate strategies,

investigative independence protects the auditor’s ability to implement the strategies in whatever
manner they consider necessary. Basically, auditors must have unlimited access to all company
information. Any queries regarding a company’s business and accounting treatment must be
answered by the company. The collection of audit evidence is an essential process, and cannot be
restricted in any way by the client company.

Reporting independence protects the auditors’ ability to choose to reveal to the public any
information they believe should be disclosed. If company directors have been misleading
shareholders by falsifying accounting information, they will strive to prevent the auditors from
reporting this. It is in situations like this when auditor independence is most likely to be
compromised.

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 Vouching and Verification

Voucher:

Voucher refers to the documentary evidence of any expenditure incurred.

Vouching:

Vouching means and includes the examination of every business transaction with its supporting
documentary evidence. The checking of such evidence enables the auditor to satisfy him or her on
the following:

 Whether the transaction is in order

 Whether it has been properly authorized
 Whether it has been correctly allocated
 Whether it has been entered in books of accounts

Extent of Vouching:

The extent of vouching should be based on either complete check or on test check.

The extent of carrying out the vouching may depend on many factors. But the most important factor
is the soundness of internal control system. If the internal control system is sound, the auditor may
consider him or his team to ahead with test check basis.

On the other hand, if the system of internal control is loose or does not exist at all, the auditor or his
team will be running at a risk without complete checking.

Techniques of Vouching:

At the time of vouching, some of the important points must be borne in the mind of the auditor
which is as under:
1) In order to ensure the savings of valuable time, the client should produce to the audit team
all vouchers arranged in order.(number/date)
2) The auditor and his team must satisfy themselves about the date written on the voucher
which is recorded in the books of accounts fall in the year under review.
3) The auditor must be satisfied in respect of head of accounts from which amount is debited
or to which amount is credited. (jei kajer jonno jei taka oi kaj krte hbe. Garir taka diye boi
kina jabe na)
4) While examining the documentary evidence, it should be carefully seen by the auditor that
the transaction pertains to the business.
5) **Every voucher must be passed for payment by authorized officials.
6) Complete notes should be taken in respect of certain items which may require further
clarification. For example, partnership deed, lease deed, M/A, A/A, minutes book, service
contract etc.

Cash Book Items:

 Cash sales
 Cash received against A/R

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  Interest income
 Dividend income
 Rents received
 Commission received
 Sale of securities
 Sale of fixed assets
 Cash purchases
 Cash paid against A/P
 Payment of supplies
 Payment of wages & salaries
 Capital expenditure
 Deferred revenue expenditure
 Dividend paid
 Investment
 Loans

Verification:

(bastob e jachai) According to Companies Act 1994, the auditor is to discharge some legal duties
including conveying his/her opinion to the shareholders of a company. In order to discharge the legal
duties, it is imperative to carry out some work concerning assets and liabilities, those are:

a. Date of acquisition
b. Estimated economic life
c. The rate of depreciation
d. Redemption of liabilities
e. Maturity of any liability
f. Discount on premature payment

In carrying out such duties and responsibilities, the auditor is to exercise his/her competence with
due commitment. This entire process is called verification.

***Techniques of Verification:

1. Physical Existence:
The auditor must obtain satisfaction on the existence of an asset or liability to ensure,
a) Physical count, weight and measurement. (goods er quantity)
b) Verification of all documentary evidences including acquisition process.
Is the auditor the verifier of physical existence?

According to various case decisions there are two schools of thought:

i. He is not a verifier
ii. He is as he has to satisfy himself about physical existence

2. Ensuring that assets and liabilities are correctly valued:

 Acquisition price
 Date of acquisition
 Erection cost, if any
 Estimate an economic life
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  Method of charging depreciation
 Any further acquisition disposal within the period
 Method of valuing inventory

3. Ascertaining whether the question of ownership is valid and true in respect of assets or liability:
 Physically seeing the ownership title
 Physically examining the conformity of share certificate
 The ownership of a bank account-the account involved should be cross checked

4. Satisfaction in respect of the fact that full disclosure is ensured for assets and liabilities:
 To verify the legal requirements
 To check the balances of assets and liabilities against the books of original entry

5. Finding out whether any of the assets of the company is suffering from any type of charges:
 To verify all the charge documents
 To examine the company decisions
 To examine the legal requirements

6. To see that there exists proper authorization for any acquisition or disposal or any other form of
movement in respect of assets and liabilities:
 Delegation of financial power
 Verification of M/A and A/A
 Company decisions (Certification of minutes books)

*Verification of assets:
1. Goodwill 9. Preliminary expenses
2. Buildings 10. Accounts receivables
3. Plant and machinery 11. Loans and advances
4. Furniture and fixture 12. Bills of exchange
5. Patents 13. Investments
6. Trademarks and designs 14. Cash and other balances
7. Vehicles 15. Contingent assets
8. Inventory

Verification of liabilities:
1. Share capital
2. Reserve
3. Debenture
4. Secured and unsecured loans
5. Proposed dividends and Unclaimed dividends
6. Accounts payable and Bills payable
7. Provision for taxation
8. Contingent liabilities

**International Standards of Auditing.

As per the book of Khawja Amjad Sayeed

Audit Report

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An auditor is appointed by the shareholders to check the accounts and to report to them regarding
the state of affairs of the company. It is the duty of an auditor which has been imposed upon
him/her by section 213 (2), (3), (4) of Companies Act 1994. Audit report refers to the statement
made by an independent auditor after completion of his/her audit work. The statement is addressed
to the members of the company. After the report is signed by the auditor, it is forwarded to the
company secretary who is responsible for taking necessary steps for the approval of the AGM.

Elements of Audit Report

1. Title
2. Addressee (jaake adrs kora hoy)
3. Identification of the financial statements audited
4. A reference to the auditing standards or practices followed
5. An expression or disclaimer of opinion on the financial statements
6. Signature
7. Auditor’s address
8. Date of the report

***Contents of Audit Report

1. Whether or not they have obtained all the information and explanations which to the best of
their knowledge and belief were necessary for the purposes of the audit.

2. Whether or not in their opinion proper books of account as required by the act have been
kept by the company,

a) All sums of money received and expended by the company and the matters in respect of
which the receipt and expenditure takes place

b) All sales and purchases of goods by the company

c) All assets of the company

d) All liabilities of the company

e) In the case of a company engaged in production, processing, manufacturing or mining

activities, such particulars relating to utilization of material or labor or to other inputs or
items of cost as may be prescribed if such class of companies is required by the
Authority by a general or a special order to include such particulars in the books of
accounts.

3. Whether or not in their opinion the balance sheet or profit or loss account have been drawn
up in conformity with the Ordinance and are in agreement with the books of accounts.

4. Whether or not in their opinion and to the best of their information and according to the
explanations given to them, the said accounts give the information required by this Act in
the manner so required and give a true and fair view:

a) In the case of balance sheet, of the state of company’s affairs as at the end of its
financial year

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 b) In the case of the profit and loss account or the income and expenditure account or the
profit or loss or surplus or deficit, as the case may be for its financial year

c) In the case of the statement of changes in financial position or sources and application
of funds of a listed company, of the changes in the financial position or the sources and
application of funds for the financial year.

5. Whether or not in their opinion:

a) The expenditure incurred during the year was for the purpose of the company’s
business; and

b) The business conducted, investments made and expenditure incurred during the year
were in accordance with the objects of the company.

6. Whether or not there's any other act concerned with the income and expenditure of the
company.

True and Fair

There is no statutory definition of the words “true and fair”. However, true and fair has been taken
to mean the following:
1. Free from prejudice or bias
2. Presentation of an objective picture
3. In accordance with generally accepted accounting principles
4. Consistent and having clarity
5. Not misleading but understandable by the reader of financial statements
To facilitate the role of an auditor to express his opinion, it is necessary that he should follow the
accounting and auditing standards. His effort should be as objective as is possible.

***Types of Opinion of an Auditor

1. Unqualified Opinion: (100% 0k) If the auditor is satisfied with all his findings in
conducting the audit including the true and fair view of the state of affairs of the
company he writes a clean report. Such expression is called unqualified opinion;

2. Qualified Opinion: (1-2ta chara shob ok) Whenever the auditor is not satisfied with
any explanation or information given to him or if he thinks that the profit and loss
account and balance sheet do not exhibit a true and fair view of the state of affairs
and if he is unsuccessful in persuading the directors to act to correct the deviations,
the auditor includes these observations in his report. It is called the qualified
opinion;

3. Adverse Opinion: (shob vulbhal kora) In an adverse opinion, the auditor states that
in his opinion, the financial statements do not give a true and fair view at all;

4. ***Disclaimer of Opinion: (proper info nai. Documents dicche na company/pawa

jacche na. So, opinion dewa possible hocche na/auditor dibe na) In a disclaimer of
opinion, the auditor states that he is unable to form an opinion as to whether the

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 financial statements give a true and fair view. The reason may be inability to get
access into the books of accounts of the company.

What does an auditor’s report include? (not imp.)

The auditor’s report must include:

 An introduction identifying the accounts that were the subject of the audit
 A description of the scope of the audit identifying the auditing standards used and the
financial reporting framework used in the preparation of the accounts

 A statement as to whether in the auditor’s opinion the accounts have been prepared in
accordance with the Companies Act 1994;

 A statement as to whether they give a true and fair view of the company’s or (in the case of
group accounts) group’s financial affairs

 A statement as to whether the directors’ report is consistent with the accounts

 If the auditors are of the opinion that the company has not kept adequate accounting
records, a statement to that effect

 If the company has not provided the auditors with all the information they need to complete
the report, a statement to that effect

The auditor’s report must be either unqualified or qualified and include a reference to any matters
to which the auditors wish to draw attention by way of emphasis without qualifying the report. The
auditors will qualify the report where either there has been a limitation on the scope of the auditors’
work or where there is a material disagreement between the company and the auditors about the
accounts.

*Who is responsible for signing the auditor’s report?

The auditors must sign and date the report they provide to the company upon completion of the
audit.

Where the auditor is a firm, the senior statutory auditor must sign the original auditor’s report in his
own name on behalf of the firm. He must also date the signature. The company must state the name
of the senior statutory auditor in copies of the auditors’ report which it publishes. Copies of the
auditor’s reports delivered to the registrar must state the names of the audit firm and the senior
statutory auditor but need not be signed.

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