Methodology Benefits and Challenges of A

The University of Dhaka
Intern Report on
METHODOLOGY, BENEFITS & CHALLENGES OF
AUDITING IN BANGLADESH
Submitted To:
Bilkis Akter, ACMA
Assistant Professor, EMBA Program,
Accounting Information System Department
Faculty of Business Studies,
University Of Dhaka
Submitted By:
Al Amin Redwanur Rahman

ID: 113 25 043
EMBA Program, Department of AIS
University Of Dhaka
Spring 2016
LETTER OF TRANSMITTAL
30 April 2016
Bilkis Akter, ACMA

Asst. Professor,
EMBA Program, AIS Department,
Subject: Submission of intern report on “Methodology, Benefits and Challenges of

Auditing in Bangladesh”.
Dear Madam,
As part of the requirement of obtaining MBA degree from Accounting Information
System department under Faculty of Business of Dhaka University, I am submitting my
intern report on the topic “Methodology, Benefits and Challenges of Auditing in
Bangladesh”. The report is prepared based on my learning at MBA, experience while
working for A. Qasem & Co. chartered Accountants, information collected from different
books, articles, journals and other secondary source of data.
The report mainly focused on requirement of auditing, methodologies that auditors

employ during auditing, different types of audit report, benefits of having an audit and
challenges auditors face while conducting audit. It was really exciting to work on such a
topic. This paper gave me an opportunity to combine my theoretical knowledge and
practical experience.
I sincerely hope that you will find the report satisfactory and I shall be most obliged to
clarify and defend my report.
Sincerely,

ID: 113 25 043
EMBA, Department of AIS,
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DECLARATION
I hereby declare that the internship report on “Methodology, Benefits and Challenges
of Auditing in Bangladesh” prepared and submitted by me after the completion of
internship in spring 2016 semester.
I also declare that this paper is my original work. I have prepared the paper based on
my experience while working for A. Qasem & Co. chartered accountants and learnings
from different classes and courses of MBA. However, I have also used information from
different secondary sources which I have mentioned in the Reference and bibliography
section.
I have prepared this only for academic purpose for my MBA program completion and
thus may not be used for commercial purpose.
_______________________________
ID: 113 25 043
EMBA, Department of AIS,
ACKNOWLEDGEMENT
At first I would like to express my gratitude to almighty Allah who has given me the
opportunity to go through the total process of internship and to write a report in this
regard.
I would also like to express my appreciation to my colleagues who have extended their
wholehearted cooperation in developing intern topic and developing ideas for
incorporating in the report. I would like to take this opportunity to give my special
thanks to Mr. Mohammed Ariful Hoque, FCA, Director, A. Qasem & Co. Chartered
Accountants and Mr. Md. Hamidul Isalm, FCA, Partner, A. Qasem & Co. Chartered
Accountants who has helped me tremendously by allowing time to complete my intern
report during busy audit schedule.
Last but not the least, I would like to acknowledge my deepest gratitude to the
instructor Bilkis Akter, ACMA, Asst. Professor of the University of Dhaka who guided
and encouraged me to work on such topic and helped me to complete my report.
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Contents
Executive Summary ........................................................................................................................... 4
Part-A: Preface ................................................................................................................................. 6
1. Origin of the report ..................................................................................................................... 6
2. Objective of the study ................................................................................................................ 6
3. Scope of the report...................................................................................................................... 6
4. Organization of the report ....................................................................................................... 7
5. Source of information ................................................................................................................ 7
6. Limitations ..................................................................................................................................... 7
Part-B: Definition & Methodology of Audit ............................................................................ 8
7. Introduction ................................................................................................................................... 8
8. Definition of audit ....................................................................................................................... 9
9. Origin of audit ............................................................................................................................. 10
10. Objective of audit ....................................................................................................................... 10
11. Classification of audit............................................................................................................... 12
12. Auditing environment in Bangladesh ............................................................................... 14
13. Audit methodologies ................................................................................................................ 15
14. Risk based audit methodology............................................................................................. 18
14.1. Client Acceptance.......................................................................................................... 18
14.2. Planning & risk identification.................................................................................. 19
14.3. Audit strategy & risk assessment .......................................................................... 22
14.4. Executing audit & Obtaining audit evidence..................................................... 24
14.5. Reporting & communicating audit results......................................................... 29
Part-C: Benefits and Challenges of Audit .............................................................................. 36
15. Benefit of being audited .......................................................................................................... 36
15.1. From management point of view ........................................................................... 36
15.2. From investors’ point of view ................................................................................. 40
15.3. Other advantages .......................................................................................................... 42
16. Challenges in Auditing ............................................................................................................. 44
16.1. In-house challenges ..................................................................................................... 45
16.2. Outdoor challenges ...................................................................................................... 50
Part-D: Recommendations & Conclusion.............................................................................. 56
17. Findings and Recommendations ........................................................................................ 56
18. Area of Further Studies ........................................................................................................... 57
19. Conclusion .................................................................................................................................... 58
Part-E: References & Bibliography ......................................................................................... 59
20. References & Bibliography:................................................................................................... 59
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Executive Summary
The word audit is derived from a Latin word "audire" which means "to hear". Auditing
refers to a systematic and independent examination of books, accounts, documents and
vouchers of an organization to ascertain how far the financial statements present a true
and fair view of the concern.
Auditing is very much common in Bangladesh. Companies and the NGO have statutory
requirements to have an audit. Apart from that, other organizations undergo auditing
process for ensuring better corporate governance. Auditor’s responsibility to
shareholders in particular and Stakeholders in general is really important. Auditor
should always keep in mind that their requirement according to laws, regulations and
public expectation is very high. Auditors conduct their audit following the Bangladesh
Standards of Auditing and confirm that financial statements are prepared in accordance
with the Bangladesh Reporting Standards (BRFSs). Auditors ensure that auditing
standards has been complied. In case of non-compliance, auditors provide suggestion to
the management of client to provide necessary adjustments. If management is unwilling
to provide adjustments, auditors issued modified audit report.
There are different types of audit available in Bangladesh. Statutory audits are the most
common types. But internal audit, interim audit and compliance audit is also prevalent
in Bangladesh.
Audit activities start from client acceptance to issuance of audit report. Auditors do not
accept clients if they are not appointed properly. At the time of client acceptance,
auditors communicate with previous auditors to obtain professional clearance. After
accepting clients, auditors make audit plan and identifies risk areas. Based on these,
auditors make risk assessment and develop audit strategy. Audit strategy is followed at
the time of execution of field work. Auditors obtain sufficient and appropriate audit
evidence at the time of audit field work.
Based on the audit work and audit evidence collected, auditors form audit opinions.
Audit opinion is two types; modified and unmodified. Unmodified audit reports are
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good report which states financial statements are prepared following BFRS. Whereas,
modified audit report states the opposites.
Audit provided numerous benefits to the organization. Audit brings new expertise to the
organization and indicates the weakness or loopholes that exist in the control system.
Audit increases credibility and acceptance of the financial statements. Audited financial
statements are perceived less risky compared to the un-audited financial statements.
Banks and financial institutions rely on the audited financial statements at the time of
loan approval decision.
Although audit provides numerous benefits to the organization, there are many
challenges auditors’ faces. Some of the challenges are arises from internal sources and
others are from external sources. Example of internal challenges are staffing problem,
lack of expertise, self-interest and threat to the independence. On the other hand,
external challenges arise most from the client, users and regulators. Example of outdoor
challenges is client pressure, requirement of regulations, changes in regulatory
environment, expectation gap.
Auditors need to adopt different types of safeguards to overcome the challenges. These
safeguards will eliminate the challenges completed or reduce to an acceptable level. The
challenges facing the auditing profession are both complex and many in number.
However, given the rigor of the education and training process, the rigor of the
qualification process, the technical competence of auditors, their multidisciplinary
knowledge and experience, and a process of continuous learning and development,
there is no doubt that the auditor will be able rise to the challenge and succeed.
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Part-A: Preface
1. Origin of the report

This report is prepared to fulfill the requirement for the completion of the Master of
Business Administration (MBA) degree under the evening program of Accounting
Information System (AIS) department of Faculty of Business Studies, Dhaka University.
The internship program is carried on to provide the students an on the job exposure
and to match up the theoretical concepts with the real life situation. I was placed for
the internship program under the guidance of Mrs. Bilkis Akter, ACMA, Assistant
Professor, Faculty of Business Studies, and The University of Dhaka.
As a requirement of the completion of the internship program I had to submit the

report. Being employed in an audit firm, I have decided to prepare a report relating to
audit process and practice in Bangladesh. With permission from my intern supervisor, I
have selected “Methodology, Benefits and Challenges of Auditing in Bangladesh” as
topic of my intern report.
2. Objective of the study

Objectives of this intern report are:
To obtain brief idea about audit practice in Bangladesh.
To understand responsibilities of organization and auditors in an audit.
To illustrates the steps followed by the auditors for an audit.
To identify the challenges faced by the auditors and audit profession.
To identify the benefits of audit for the organizations.
To provide some recommendations on the existing audit practice.
3. Scope of the report

The report gives a narrative overview of audit practice in Bangladesh and methodology
followed by the auditors to conduct the audit. The report identified some issues arises
during audit. The report also illustrates the benefits which organization obtains
through having an audit.
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4. Organization of the report
The report consists of six (6) parts. The first part, Preface, talks about the origin and
the background of this report. Definition and Methodology of Audit, which is the
second part of this report, defines what is audit and step by step procedure of
conducting audit in Bangladesh. The third part, Challenges and Benefits of Audit,
illustrates the problem arises while performing audit and the benefits organization can
for having an audit. The fourth part is about findings of the study, its recommendation
to solve the identified issues. The fifth part of the report show the source of
information used in the report. Finally, sixth and the last part of the report contain the
annexures which are not directly involved to the study but useful to understand the
report.
5. Source of information
To complete the report, both primary and secondary information has been used.
Primary information is mostly my own experience from auditing and interview with
different personnel from the audit firm A. Qasem & Co. Chartered Accountants.
Secondary source of information includes journals published by ICAB, study manuals of
ICAB, ACCA, different books, online journals, Global Audit Methodology (GAM) of Ernst
& Young LLP, newspaper, magazines, websites and many more.
6. Limitations
Work pressure at the audit firm is very high. Being an employee of the firm, I had to
share time for the report work with my daily responsibilities as an employee.
Moreover, resource related to the study was limited because there is not much work
done in the field of audit and audit practice in Bangladesh. There were lots of resources
used in the report without mentioning proper source. This is because the resources
was obtained by my during my audit work under the condition of strict confidentiality.
According the auditor-client privilege and ethical requirement of professional bodies
like ICAB, IFAC and IESBA and the audit firm, I am restricted to disclose these
information.
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Part-B: Definition &
Methodology of Audit
7. Introduction
Auditing has become such a common phenomenon in the corporate and the public
sector that academics started identifying an "Audit Society". The word audit is derived
from a Latin word "audire" which means "to hear". During the medieval times when
manual book-keeping was prevalent, auditors in Britain used to hear the accounts read
out for them and checked that the organization's personnel were not negligent or
fraudulent.
Auditing refers to a systematic and independent examination of books, accounts,

documents and vouchers of an organization to ascertain how far the financial
statements present a true and fair view of the concern. It also attempts to ensure that
the books of accounts are properly maintained by the concern as required by law. The
auditor perceives and recognizes the proposals before him/her for examination,
obtains evidence, evaluates the same and formulates an opinion on the basis of his
judgment which is communicated through his audit report.
Any subject matter may be audited. Audits provide third party assurance to various
stakeholders that the subject matter is free from material misstatement. The term is
most frequently applied to audits of the financial information relating to a legal person.
Other areas which are commonly audited include: internal controls, quality
management, project management, water management, and energy conservation. As a
result of an audit, stakeholders may effectively evaluate and improve the effectiveness
of risk management, control, and the governance process over the subject matter.
In Bangladesh Audit is made compulsory for every company through the Companies
Act, 1994. Every private/ public limited company need to have a statutory audit once in
every financial year of the company.
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8. Definition of audit
The term auditing has been defined by different authorities.
 Spicer and Pegler: "Auditing is such an examination of books of accounts and

vouchers of business, as will enable the auditors to satisfy himself that the balance
sheet is properly drawn up, so as to give a true and fair view of the state of affairs
of the business and that the profit and loss account gives true and fair view of the
profit/loss for the financial period, according to the best of information and
explanation given to him and as shown by the books; and if not, in what respect he
is not satisfied."
 Prof. L.R.Dicksee. "Auditing is an examination of accounting records undertaken

with a view to establish whether they correctly and completely reflect the
transactions to which they relate.
 The book "an introduction to Indian Government accounts and audit" "issued by
the Comptroller and Auditor General of India, defines audit “an instrument of
financial control. It acts as a safeguard on behalf of the proprietor (whether an
individual or group of persons) against extravagance, carelessness or fraud on the
part of the proprietor's agents or servants in the realization and utilization of the
money or other assets and it ensures on the proprietor's behalf that the accounts
maintained truly represent facts and that the expenditure has been incurred with
due regularity and propriety. The agency employed for this purpose is called an
auditor."
From the above definitions, audit can be defined as an objective examination and
evaluation of the financial statements of an organization to make sure that the records
are a fair and accurate representation of the transactions they claim to represent.
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9. Origin of audit
The term audit is derived from the Latin term ‘audire,’ which means to hear. In early
days an auditor used to listen to the accounts read over by an accountant in order to
check them. Auditing is as old as accounting. It was in use in all ancient countries such
as Mesopotamia, Greece, Egypt, Rome, United Kingdom (UK) and India. The Vedas
contain reference to accounts and auditing. Arthasashthra by Kautilya detailed rules
for accounting and auditing of public finances.
The original objective of auditing was to detect and prevent errors and frauds. The
objective of audit shifted and audit was expected to ascertain whether the accounts
were true and fair rather than detection of errors and frauds.
Auditing evolved and grew rapidly after the industrial revolution in the 18th century
with the growth of the joint stock companies the ownership and management became
separate. The shareholders who were the owners needed a report from an
independent expert on the accounts of the company managed by the board of directors
who were the employees.
With the increase in the size of the companies and the volume of transactions the main
objective of audit shifted to ascertaining whether the accounts were true and fair
rather than true and correct. Hence the emphasis was not on arithmetical accuracy but
on a fair representation of the financial efforts.
10. Objective of audit

According the ISA 200 of the International Standards on Auditing, is 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. (ISA 200)
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Its objectives can be classified into two groups which are given below:
Primary Objectives Of Audit
The main objectives of audit are known as primary objectives of audit. They are:
 Examining the system of internal check.

 Checking arithmetical accuracy of books of accounts, verifying posting etc.
 Verifying the authenticity and validity of transactions.
 Checking the proper distinction of capital and revenue nature of transactions.
 Confirming the existence and value of assets and liabilities.
 Verifying whether all the statutory requirements are fulfilled or not.
 Proving true and fairness of operating results presented by income statement
and financial position presented by balance sheet.
Subsidiary Objectives Of Audit
These are such objectives which are set up to help in attaining primary objectives. They
are as follows:
 Detection and prevention of errors:
Errors are those mistakes which are committed due to carelessness or
negligence or lack of knowledge or without having vested interest. Errors may
be committed without or with any vested interest. So, they are to be checked
carefully.
 Detection and prevention of frauds

Frauds are those mistakes which are committed knowingly with some vested
interest on the direction of top level management. Management commits frauds
to deceive tax, to show the effectiveness of management, to get more
commission, to sell share in the market or to maintain market price of share etc.
Detection of fraud is the main job of an auditor.
 Under or over valuation of stock

Normally such frauds are committed by the top level executives of the business.
So, the explanation given to the auditor also remains false. So, an auditor should
detect such frauds using skill, knowledge and facts.
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 Other objectives
Other objective induces:
• To provide information to income tax authority.
• To satisfy the provision of company Act.
• To have moral effect
11. Classification of audit

Audit is mainly conducted on financial statements and financial information. Therefore,
audit is mainly classified based on financial perspective. However, there are also
examples of non-financial audits. Some types of audit are explained below:
a) External Audit:
External audit is conducted with the purpose of reporting to the parties external to
the organization. External audits are mainly conducted by the external or
independent third parties. These auditors are not under the payroll of entity being
audited. Organizations are often required to have an audit by independent third
parties. This requirement may come from statutory requirement, Governing body
and Stockholders, Investors or creditors of the entity. Management then hires
external auditors to conduct an audit. Audit report provided by the external
auditors is shared with the external parties. Users of these entities' financial
information, such as investors, government agencies, and the general public, rely on
the external auditor to present an unbiased and independent audit report. External
audit most of the time fulfils the requirement of statutory audit. However, external
audit can be conducted even if there is not statutory requirement. External audit
mainly focuses on whether the financial statements are prepared according to the
applicable accounting standards and provides a true and fair view of the financial
information. It also ensures that financial statements do not contain significant
misstatements caused by error or fraud.
b) Internal Audit:
Internal Audit is mainly conducted for internal purposes. Management and
governing body are interested to make sure that the internal control environment
is operating effectively and efficiently. Therefore they conduct internal audit to test
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the internal control system. Persons who conduct the internal audit are called
internal auditors. These auditors might be employee of the organization or third
party appointed for the purpose of internal audit. Internal audit report is submitted
to the governing body of the organization indicating the status of current internal
control environment, deficiencies it might have and possible way outs to overcome
the deficiencies. Internal audit report is not shared or published outside of the
organization. However, external auditors and statutory auditors might use internal
audit report to perform their audit.
c) Annual Audit
Internal audit is the audit conducted each year after the end of accounting period.
Annual audit may be conducted to comply with the requirement of regulations or to
meet requirement of governing body. Annual audit may be conducted even if there
is no requirement of conducted an audit. Statutory audit and external audits are
generally conducted on annual basis. Therefore annual audit may also mean the
external audits and the statutory audits.
d) Interim Audit
Interim audits are audit conducted as part of statutory audit but before the year
end. For long and complex audits, auditor start audit before the year end. They
conduct audit on several months so that the pressure on year end audit decreases
significantly. Interim audit therefore are conducted to ease the statutory audit and
reduce the time pressure and complexity during statutory audit.
e) Quarterly Audit
Quarterly audits are audit conducted at the end of each quarter of a financial year.
Quarterly audit is also a form of interim audit as it is conducted as part of statutory
audit but before the year end. For some organizations, there are requirement to
conduct quarterly audit on a regular basis.
f) Statutory Audit
Statutory audits are the audit which has been made mandatory by the legislations.
These audits are conducted following the requirement of laws. Management of
entity hires external third parties to conduct the audit. In Bangladesh there is a
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statutory requirement to conduct audit for Companies, Liaison offices, Branches,
NGOs etc. Statutory audits are conducted once in a financial year.
g) Compliance Audit
Compliance audits are conducted to confirm compliance with rules and regulation,
organizational policy, various internal and external restrictions imposed on the
organization. Compliance audit reassures the management of the organization
regarding their compliance with the requirement.
h) Quality Audit
Quality audits are mostly prevalent in the manufacturing and service industries.
Organizations are very keen to confirm that at least minimum quality standards
have been maintained. Some organizations have this audit as part of compliance
audit. Quality audits can also be conducted in industries other than service and
manufacturing industries. Quality audit can be conducted for particular line of
activities or particular product or operation process.
i) Forensic Audit
A forensic audit is an examination and evaluation of a firm’s or individual’s financial
information for use as evidence in court. A forensic audit can be conducted in order
to prosecute a party for fraud, embezzlement or other financial crimes. In addition,
an audit may be conducted to determine negligence or even to determine how
much individual expenses an individual will have to pay for.
12. Auditing environment in Bangladesh

In Bangladesh, Financial audits are conducted mostly in compliance with the
requirement of the companies act and regulation of the NGO affairs bureau. According
to the law, only Chartered Accountants are eligible to perform statutory financial
audits. Chartered Accountants are the qualified personnel and experts in the field of
auditing and accounting. They are the members of the Institution of Chartered
Accountants of Bangladesh (ICAB). Members of ICAB operated lots of chartered
accountants firm which provides assurance and consultancy services to the clients.
ICAB, oversee these firms and ensure audit quality has been maintained by these firms.
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Auditors in Bangladesh conduct their audit following the requirement with the
Bangladesh Standards on Auditing (BSAs) and compare the fairness of the financial
statements in accordance with the Bangladesh Financial Reporting Standards (BFRSs).
The Institution of Cost and Management Accountants (ICMAB), another professional
body of the accounting professional are empowered to perform cost audit in five
different sectors. However, they are not empowered to perform statutory audit. In
2015, members of ICMAB have been allowed to audit transfer pricing activities of
companies and issue a transfer pricing certificates.
Chartered Accountants enjoy a monopoly in case of audit as only they are empowered
through different legislations. By taking this opportunity, some firms have decreased
their audit quality and issues incorrect audit report. There have been many incidences
that auditors did not perform their responsibilities. In recent times, ICAB, the regulator
of the chartered accountants has taken many punitive actions against those auditors.
However, the events of issuance of improper audit report have not vanished.
To solve the issue, government has decided to establish a supervisory body to monitor
and control the activities of the auditors. In that purpose, through the Financial
Reporting Act (FRA), 2015, government has established a council called Financial
Reporting Council (FRC). Primary responsibilities of the FRC are:
 Issuance of auditing and accounting standards;
 Issuance of practice certificate to the auditors;
 Monitor the activities of the auditors;
 Imposition of penalty to the auditors; and
 Suspending or cancellation of practicing certificate in case of non-
compliance.
13. Audit methodologies

Auditor is required to obtain sufficient appropriate audit evidence to form reasonable
conclusions and on the same conclusions auditor base his opinion. Auditors obtain
sufficient appropriate audit evidence by selecting appropriate audit methodology or in
other words audit approach. Selecting the right audit approach is important in many
aspects and is selected by the auditor by considering many factors including nature of
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audit engagement and the circumstances surrounding the engagement, cost-benefit
analysis, time, resources and skills available etc. There are different approaches to
conduct the audit which are as follows:
 Substantive approach
 Systems-based approach
 Transaction cycle approach
 Directional testing
 Risk-based approach
Approach/methodology will determine what needs to be found, done or executed
whereas, procedures are the tasks that will find, do or execute what was determined in
accordance with the approach. Audit procedures are the tasks that are carried out after
a particular methodology is selected. Procedures are applied or executed in the form of
confirmation, recalculation, re-performance, inquiry, observation etc. Simply put,
procedures are defined on the basis of the methodology adopted by the auditor.
a) Substantive approach
In substantive approach auditor right from the beginning will go detailed testing
which will surely involve substantive procedures. However, substantive procedures
can be applied even if substantive approach is not selected. For example if auditor
is following risk based approach and he establishes that internal control system is
working efficiently and effectively then he will apply procedures to test the system
i.e. test of controls and just to confirm that his preliminary risk assessment was
correct he will apply substantive procedures alongside tests of controls.
b) Systems-based approach (SBA)

System based audit focuses on the existing operation system established in the
organization. In SBA, auditors make assessment and audits on the key area. This
approach comes to the fore when systems are fragile but the environment hasn’t
yet put pressure on the system’s weaknesses. For example, by looking at the system
that produces the product, the auditor makes an assessment of the operator’s
ability to consistently achieve the required output standard. The products have all
met the requirements so far but problems might arise if just one small thing falls
out of place – say a key person leaves the company. (Parsons, 2012)
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c) Transaction cycle approach
This approach involved testing the controls operating within transaction cycles.
Standard internal control questionnaires were developed for each of the business
cycles, and the results that the chances of discovering fraud or potential fraud
areas. An auditor who uses a transaction cycle approach to assessing control risk
most likely would test control activities related to transactions involving the sale of
goods to customers.
d) Directional testing
Directional testing is an auditing technique that has based the same principle to
audit the financial statements. It is known that for every debit “effect” in books of
account there must be a credit effect with the equal amount. Thus if trial balance is
agreeing and the debits are correctly done, then more chances are that credits are
also done correctly. So, if auditor confirms the debit amounts then corresponding
credit amount will be checked also. (Fazal, Directional testing, 2011)
e) Risk-based approach
A risk-based audit approach is designed to be used throughout the audit to
efficiently and effectively focus the nature, timing and extent of audit procedures to
those areas that have the most potential for causing material misstatement(s) in the
financial report. Auditing standards set out the risk based audit approach, with
other auditing standards containing specific risk-related principles and procedures
appropriate to their subject matter.
The risk-based approach requires the auditor to first understand the entity and its
environment in order to identify risks that may result in material misstatement of
the financial report. Next, the auditor performs an assessment of those risks at both
the financial report and assertion levels.
The assessment involves considering a number of factors such as the nature of the
risks, relevant internal controls and the required level of audit evidence. The result
of the assessment effectively categorizes the audit into a) areas of significant risk of
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material misstatement that require specific responses and b) areas of normal risk
that can be addressed by standard audit work programs.
Having assessed risks, the auditor then designs appropriate audit responses to
those risks in order to obtain sufficient appropriate audit evidence on which to
conclude. Risk assessment continues throughout the audit and the audit plan and
procedures are amended where a reassessment is necessary. (Susan Fraser, 2011)
14. Risk based audit methodology

Risk based audit methodology involves analyzing risks factors, selecting appropriate
audit procedure and applying those audit procedures so that risks can be evaluated
and any deficiency in risk management may be reported to the persons responsible for
establishing control environment. Risk based auditing (RBA) as a methodology that
links auditing to an organization’s overall risk management framework. RBA allows
audit to provide assurance to the board that risk management processes are managing
risks effectively, in relation to the risk appetite. An auditor, who follows risk based
audit approach, follows the steps below:
14.1. Client Acceptance

Risk based auditing starts with the client acceptance. Before a new audit client is
accepted, the auditors must ensure that there is no independence or other ethical
issues likely to cause significant problems with the ethical code. If the client had other
auditors in earlier years, new auditors should ensure that they have been appointed in
a proper and legal manner. Furthermore, auditor shall ensure professionally qualified
to act. They should consider whether they are disqualified on legal or ethical grounds,
for example if there would be a conflict of interest with another client. If there is any
conflict with other client, auditor should adopt different safeguard to reduce conflict. If
conflict cannot be reduced to acceptable level, auditor shall not accept the new client.
Another important factors auditor needs to consider the human resource. Auditor will
need to understand the time, number of persona and technical expertise required to
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perform the audit. Without adequate human resource, auditor will not be able to
maintain acceptable audit quality. In that case, auditor shall not accept the engagement.
In addition audit shall make personal inquiries about the persons responsible to
establish control environment. Sometimes persons in governing position create risk
factor for the audit. Auditor should enquire about the directors if they are not
personally known.
After making enquiries about the directors, auditors shall communicate with previous
auditors and obtain professional clearance. Auditor shall communicate with previous
auditor upon taking approval from the management. But if management does not
approve communicate with previous auditor, new auditor shall consider the reason for
such refusal. If new auditor does not get any comfort, auditor shall not accept the new
client. However, if there is any valid reason, new auditor shall consider the fact.
Final decision making factor for accepting new client is the audit fee. Audit fee is the fee
that auditor will charge in exchange of providing assurance service. Audit fee shall be
sufficient to cover the cost associated with the service provided to the client. Audit fee
shall be at least equal to the cost of service. If audit fee is significantly lower, auditor
will not be able to provide adequate service. In any case auditor should not decrease
their service quality. If fee is not adequate, auditor shall reject the engagement.
Otherwise, new client should be accepted. If new client is accepted, auditor shall set the
terms of engagement and issue an engagement letter. When management and the
auditor both agree on the terms of engagement, audit-client relationship is established.
From that moment auditor initiate the audit activities.
14.2. Planning & risk identification

Actual audit activities start after client is accepted. First activity of audit is making
planning about the audit engagement and conducting risk assessment. This step is
followed for any client whether the audit engagement is new or old. In this step,
auditors decide about the timing of audit to be started, number of person to be
employed and expertise that audit team should possess. Following activities are
conducted at the planning stage of audit.
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 Identifying those charged with governance of the entity
 Understanding the service requirements and expectations of management
and those charged with governance
 Determining preliminary audit scope
 Communicating auditor responsibilities and preliminary audit scope to
those charged with governance.
 Defining responsibilities of the partner in charge of the audit
 Establishing audit team
 Managing, directing and supervising audit team
Auditor needs to understand the business they will conduct auditing to that they
understand the full process of operation and identify the risky areas. For obtaining an
understanding of the entity, auditors perform the following activities:
 Obtaining an understanding of the nature of the entity and its environment.

 Obtaining understanding of the related party relationships and transactions.
 Obtaining an understanding of management’s going concern assessment.
 Obtaining an understanding of the role of IT in the entity.
 Determining risks of material misstatement.
 Determining significant risks.
 Identifying inherent risks & significant risks to the financial statements.
 Considering the information obtained in prior periods.
 Obtain understanding by performing review, inquiry, analytical procedures,
observation and inspection.
Auditors’ understanding of the entity and its environment assists the auditors in
the identification of risk factors. They determine whether these risk factors are
inherent risks (i.e., risk factors that may give rise to risks of material misstatement).
If these risks are inherent risk, auditors assess the effect these have on their
assessment of inherent risk for the financial statements, individual accounts and
relevant assertions.
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Audit assertions are Existence or occurrence, Completeness, Accuracy, Valuation,
Rights and obligation, Presentations and disclosure. These assertions are explained
below:
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.
Cut-off:
Transaction of occurred in a period is recorded in that period. It ensures that
transactions from other period are not included in current period and current
period transactions are not recorded in other period.
Based on the understanding, auditors make combined risk assessments and in

designing substantive procedures to respond to the assessed risks of material
misstatement. In addition, auditors determine if any of the inherent risks that they
have identified in their understanding of the entity and its environment are
significant risks.
Obtaining an understanding of the entity and its environment is a continuous

process of gathering and analyzing information throughout the audit and is
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fundamental to planning and executing an effective risk-based audit. Auditors
obtain their understanding of the entity and its environment during the planning of
audit and update our understanding during the team planning event, the post
interim event and performance of substantive procedures.
Auditors’ understanding of the entity and its environment assists them in:
 Determining level of planning materiality/significance for error & omission.
 Identifying significant accounts and relevant assertions;
 Assessing risks of material misstatement within the financial statements
 Responding to the assessed risks of material misstatement, including
designing and performing substantive procedures to obtain sufficient
appropriate audit evidence
 Developing expectations for use when performing substantive analytical
procedures
 Evaluating the sufficiency and appropriateness of audit evidence obtained,
including the appropriateness of management’s assumptions and of
management’s oral and written representations
Auditors need to identify risk factors and make the audit plan systematically as it sets a
framework for further audit activities.
14.3. Audit strategy & risk assessment

Audit strategy is the formulation of the general strategy for the audit, which sets the
scope, timing and direction of the audit and guides the development of the audit
execution plan. In developing audit strategy, auditors identify significant classes of
transactions (SCOTs), significant disclosures processes and related IT applications.
This is achieved by identifying transactions recorded in significant accounts and
identifying the IT applications that support the transactions and significant disclosure
processes in producing electronic audit evidence. Significant transactions are the
transaction which are infrequent or which amount exceeds the audit materiality level.
Auditors obtain an understanding of the significant transactions to identify and
understand the risks of material misstatement at the assertion level and to identify and
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understand the controls over the risk areas. Understanding of significant transaction is
achieved by:
• Considering the effect of the control environment on auditors’ understanding of
significant transactions and significant disclosure processes;
• Considering the effects of IT on significant transactions & disclosure processes;
• Identifying probable effect of risk in the significant transactions;
• Determining preliminary audit strategy;
• Identifying controls that are relevant to the audit;
• Being aware of specific considerations for understanding the different nature of
significant transactions.
In order to obtain understanding, auditors also perform inquiry, observation and

inspection procedures. Obtaining our understanding of SCOTs and significant
disclosure processes is a continuous process. When auditors perform audit procedures
and identify changes in SCOTs or significant disclosure processes, they update their
understanding.
Auditors’ understanding of SCOTs and significant disclosure processes, including effect
of risk factors and controls over risk areas assists them to customize the nature; timing
and extent of their substantive procedures to address the identified risks of material
misstatements to evaluate the control environment. It also assists them in making
combined risk assessments (CRA) for each relevant assertion for each significant
account and disclosure.
Likelihood Consequences
Insignificant Minor Moderate Major Catastrophic
Almost certain Higher Higher Highest Highest Highest
Likely Moderate Higher Higher Highest Highest
Possible Lower Moderate Higher Highest Highest
Unlikely Lower Lower Moderate Higher Highest
Rare Lowest Lower Moderate Higher Higher
Table 1: Level of risk in significant account and transactions
In order to perform Combined Risk Assessment, auditors assess inherent risk,

preliminary control risk and then combine the assessment of inherent risk and control
risk to arrive at a CRA for each significant account and disclosure. Then auditor focuses
on address detection risk by designing substantive procedures. Level of detection risk
can be understood from the following risk matrix:
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Control risk
High Medium Low
High Lowest Lower Medium
Inherent risk Medium Lower Medium High
Low Medium High Highest
Table 2: Detection risk from inherent and control risk
After preparation of CRA, auditors design procedures for internal control test and
substantive test. Then they plan and perform general audit procedures to address
areas that are not directly related to financial statement account for example entity’s
compliance with laws and regulations, litigation and claims by or against the entity,
minutes and contracts, consideration of going concern, related party relationships and
transactions. Finally, auditors document their overall audit strategy for future
reference purpose.
14.4. Executing audit & Obtaining audit evidence

Audit execution is the core activities of audit. This enables an auditor to execute the
strategy developed for audit. Through this process auditors test the control system,
documents, accuracy and authenticity of the transaction through performing various
audit procedures. This step also helps auditors to obtain evidence of audit exceptions
and sufficient appropriate audit documents to support their audit opinion.
Executing Tests of Control:

Audit execution starts with testing internal control system of the entity. Internal
control system may be established over daily operation, financial transactions and
financial reporting and corporate governance. They perform tests of controls to
evaluate the operating effectiveness of controls for each relevant financial statement
assertion for which they tries to rely on. If auditors identify control exceptions, they
assess the effect of the control exception and respond appropriately. Tests of controls
enable auditors to obtain sufficient appropriate audit evidence as to the operating
effectiveness of relevant controls. Auditors determine whether a control is operating
effectively through a combination of procedures such as inquiry, observation,
inspection, recalculation and re-performance.
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Evaluate the results of our tests of controls:
Design tests of Execute tests of

Select controls to test
controls controls
Address control exception and Any exception

Yes
evaluate effectiveness of control discovered?
Control system is
effective?
Yes
No
No
Don’t rely on controls Rely on Controls
Figure 1: Decision flow chart for relying on controls
Auditors evaluate the results of their tests of controls and determine whether their
tests of controls provide reasonable assurance about the operating effectiveness of the
relevant controls to prevent or detect and correct material misstatements, including
responding to any significant risks. Outcome of the tests of controls directly related
with the level of substantive test to be conducted by the auditors.
Their evaluation on internal control system helps to decide whether to rely on the
internal controls or not. If auditors find internal controls to be effective, they will
perform substantive test in a minimal level. Whereas if it appears to the auditors that
the internal control system are not effective, auditor will perform through substantive
test to obtain reasonable assurance.
Performing substantive test:

Auditors perform substantive procedures so that the combination of their procedures
including tests of controls provide sufficient appropriate audit evidence to reduce audit
risk to an acceptably low level and enable us to draw reasonable conclusions on which
to base their opinion. Auditors obtain evidence and reduce risks to acceptable level by
executing substantive procedures, addressing identified misstatements and concluding
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on the results of their substantive procedures. As mentioned earlier, nature and extent
of substantive test depends on the outcome of evaluation of tests of control.
Figure 2: Level and extent of substantive test
During execute of substantive procedures, auditors may identify misstatements.

Misstatement is the difference between the amounts, classification, presentation or
disclosure of a reported financial statement item and the amount, classification,
presentation or disclosure that is required for the item to be in accordance with the
applicable financial reporting framework. Misstatements can arise from error or fraud.
Auditors generally classify misstatements as reclassification, factual, projected or

judgmental misstatements to help them in evaluating the effect of misstatements
accumulated during the audit and communicating misstatements to management and
those charged with governance. One of most important audit responsibilities for the
auditors is the identification and accumulation of misstatements. It is critical in
enabling them to formulate their audit opinion.
Before they execute their substantive procedures, Auditors determine whether any
factors have come to their attention since they designed their substantive procedures
that cause them to add, remove or update their planned substantive procedures.
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Substantive test can be classified as Analytical procedure and Test of details. In
analytical procedures, auditor analysis the financial statements, account balance
transaction in order to identify areas with significant change, reason of change and any
inconsistency in the transactions. Example of analytical analysis is fluctuation analysis,
trend analysis Z-score analysis (test for going concern) and ratio analysis.
On the other hand, test of details is to test the authenticity and appropriateness of
supporting documents. For example, confirming presence of invoice, goods/service
receipt note, payment approval, record of payment instrument and acknowledgement
money receipt for supporting a payment record.
It is not possible for auditors to check details of all the transactions. Therefore auditors
perform sampling to select items to be tested in details. Auditors ensure that their
selected samples are representative. Sampling techniques includes materiality
sampling, block sampling, random sampling, and systematic sampling etc.
Apart from these auditors collect direct confirmation from third parties as part of
substantive test. In general, third party confirmations are sent to bank for confirming
cash at bank balance, to the vendors and customers for confirming outstanding
balances with them and to the lawyers and consultants in regards to the status of legal
and other disputes. Other substantive procedures auditor employs includes
 Evaluation of the accounting estimates.
 Roll-forward procedures for new items
 Selecting and auditing ‘not significant’ accounts
 Observation of asset - Inventory count, FA, Cash Count, Payroll cheque
distribution
 Tests of reconciliation- bank reconciliation, inter-co reconciliations
 Vouching
 Exception tests
 Cut off tests
 Inquire
 Valuation tests
 Reading of FS
 Reading of minute of meeting of stockholder, directors and committee
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Collection of audit evidence:
When auditors execute tests of controls and substantive test, they also assess the
relevance and reliability of information that they have obtained as audit evidence.
When using information produced by the entity, they evaluate whether the information
provided is sufficiently reliable for their purposes. Purpose of auditors includes
obtaining audit evidence about the accuracy & completeness of the information and
evaluating whether the information is sufficiently precise and detailed.
The reliability of information to be used as audit evidence is influenced by its source

and nature and the circumstance under which the evidence is obtained. The following
factors influence the reliability of audit evidence:
• The reliability of audit evidence is increased when it is obtained from
independent sources outside the entity;
• The reliability of audit evidence that is generated internally is increased when
the related controls imposed by the entity are effective;
• Audit evidence obtained directly is more reliable than audit evidence obtained
indirectly or by inference;
• Audit evidence in documentary form, whether paper, electronic, or other
medium, is more reliable than audit evidence obtained orally
• Audit evidence provided by original documents is more reliable than audit
evidence provided by photocopies or fax, or documents that have been filmed,
digitized or otherwise transformed into electronic form.
If auditors have doubts over the reliability of information obtained as audit evidence or
they obtain audit evidence from one source that is inconsistent with another source,
auditors treat this as a potential control exception, determine the appropriate audit
response and assess the effect on other areas of the audit.
Auditors maintain professional skepticism when determining the reliability of audit

evidence to be used in their tests of controls, recognizing the possibility that a material
misstatement due to fraud could exist.
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14.5. Reporting & communicating audit results
Concluding and reporting is the last stage of audit activities. In this stages auditor
wraps us their field work and finalize documents necessary for forming opinion and
provide the audit opinion in the audit report. Auditors also communicate other issues
which are relevant for management for updating internal control system and decision
making.
Auditors need to finalize their audit works before the issuance of auditors’ report.
While wrapping up the field works, auditors need to:
 determine remaining procedures to complete the audit;

 reevaluate the significant risks, including risks of material misstatement;
 respond to misstatements that may be indicative of fraud;
 Conclude on risks not identified by the entity’s risk assessment process;
 Assessing the entity’s ability to continue as a going concern;
 Revisit the audit strategies memorandum for skipped audit activities;
 Perform subsequent events procedures.
Preparing summary of audit differences:

As mentioned earlier, identification and resolution of misstatements is one of the most
important responsibilities of auditor and is a critical step in the formulation of audit
opinion on the entity’s financial statements.
At the end of an audit, auditors accumulate the misstatements identified at the time of
planning, risk assessment and executing audit. They evaluate nature and magnitude of
the identified misstatements and communicate the misstatements with those who are
charged with governance of the organization.
Auditors request management to correct all misstatements as those misstatements are

identified. Auditors expect that management will make necessary adjustments in the
financial statements, unless the amounts are clearly trivial. Clearly trivial represents
misstatements that are clearly inconsequential, whether taken individually or in
aggregate and whether judged by any quantitative and/or qualitative criteria.
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Preparation of work papers and Performance of overall review:
Auditors document the important audit results and conclusions, highlighting major
issues from their audit, while avoiding duplicating documentation in their work papers.
Auditors also document their conclusions about whether they have obtained sufficient
appropriate audit evidence to support their opinion and evaluation of whether the
financial statements as a whole are free of material misstatements. These working
papers are reviewed by the senior auditors, managers, directors, partner in charge and
quality reviewers. Upon satisfactory review, partner in charge and quality reviewers
provides approval for completion of audit and issuance of audit report. Evidence of
approval of the final conclusions by the partner in charge and engagement quality
reviewer is also documented in the working papers.
Forming audit opinion:

Upon review of the audit working papers, audit opinion is formed. The auditor shall
form an opinion on whether the financial statements are prepared, in all material
respects, in accordance with the applicable financial reporting framework. In order to
form that opinion, the auditor shall conclude as to whether the auditor has obtained
reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error. That conclusion shall take into
account:
a) The auditor’s conclusion whether sufficient appropriate audit evidence has
been obtained;
b) The auditor’s conclusion whether uncorrected misstatements are material,
individually or in aggregate; and
c) The evaluations whether the financial statements are prepared, in all material
respects, in accordance with the requirements of the applicable financial
reporting framework.
This evaluation shall include consideration of the qualitative aspects of the entity’s
accounting practices, including indicators of possible bias in management’s judgments.
In particular, the auditor shall evaluate whether, in view of the requirements of the
applicable financial reporting framework:
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a) The financial statements adequately disclose the significant accounting policies
selected and applied;
b) The accounting policies selected and applied are consistent with the applicable
financial reporting framework and are appropriate; The accounting estimates
made by management are reasonable;
c) The information presented in the financial statements is relevant, reliable,
comparable, and understandable;
d) The financial statements provide adequate disclosures to enable the intended
users to understand the effect of material transactions and events on the
information conveyed in the financial statements; and
e) The terminology used in the financial statements, including the title of each
financial statement, is appropriate.
The auditor shall evaluate whether the financial statements adequately refer to or
describe the applicable financial reporting framework
Audit opinion:
An audit opinion refers to a certification to the accompanying financial statements and
is provided by the independent accountants involved in auditing of a company‘s books
and records. The audit opinion is about whether or not the financial statements
present an accurate reflection of the organization‘s financial condition. The auditor
shall express an unmodified opinion when the auditor concludes that the financial
statements are prepared, in all material respects, in accordance with the applicable
financial reporting framework.
If the auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or if the auditor is
unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement, the auditor shall modify
the opinion in the auditor’s report.
If financial statements prepared in accordance with the requirements of a fair

presentation framework do not achieve fair presentation, the auditor shall discuss the
matter with management and, depending on the requirements of the applicable
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financial reporting framework and how the matter is resolved, shall determine
whether it is necessary to modify the opinion in the auditor’s report.
When the financial statements are prepared in accordance with a compliance

framework, the auditor is not required to evaluate whether the financial statements
achieve fair presentation. However, if in extremely rare circumstances the auditor
concludes that such financial statements are misleading; the auditor shall discuss the
matter with management and, depending on how it is resolved, shall determine
whether and how to communicate it in the auditor’s report. Based on the situation
auditors’ opinion will differ. Following table shows classification of audit opinions.
Modified
Unmodified
/unqalified
Emphasis of Qualified
Adverse Disclaimer
Matter (Except for)
Figure 3: Types of audit opinion
Unmodified/unqualified opinion:
The unqualified opinion has no reservations concerning the financial statements. This
is also known as a clean opinion meaning that the financial statements appear to be
presented fairly.
Modified opinion:
Modified audit opinions are provided when everything is not right in the financial
statement. Depending on the magnitude of non-compliance, different types of audit
opinion is provided. Modified opinion requires modification in the audit report.
Emphasis of Matter:
Emphasis of matter is still a clean opinion. In this case, auditors draw attention of the
reader to a particular fact that management has disclosed in the financial statements.
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Qualified opinion:
This means that the auditor has taken exception to certain current-period accounting
applications or is unable to establish the potential outcome of a material uncertainty.
This opinion is provided when some item or a particular transaction has non-
compliance but it does not affect the overall financial statements.
Adverse opinion:
The opinion is provided when according to the auditor the financial statement varies
significantly from reality. Auditors provide a negative opinion that the financial
statements do not provide a true and fair view.
Disclaimer opinion:
Disclaimer opinions are rare in general. In this case, auditors do not provide any
opinion and disclaim any liability from loss suffered by user depending on the
accompanying financial statements.
Audit reports are often called according to the types of opinion provided in it. For
example, a qualified report is the report which contains qualified audit opinion.
Issuance of reports
At the last stage of audit, the audit team communicates the result of the audit to the
management and the stockholders of the company. The audit team issues two types of
reports:
1. Report for external purpose (Auditor‘s report in the financial statements)
2. Report for internal purpose (Management Letter indicating deficiencies in
internal control system)
Auditors’ report:
Audit reports are the reports provided on the financial statements. The report is
extremely standardized and attached before the financial statements. Auditor’s reports
are provided at the end of an audit. It is generally a single page report printed in the
letter head of the auditors. The reports indicate the activities performed, standards or
criteria used for making judgment, responsibility of management, responsibility of the
auditors and the audit opinion. Audit opinion provides assurance to the user of the
statements.
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An audit report contains following elements:
1. Title of the report;
2. Addressee of the report;
3. Opening or introductory paragraph
i. Identification of the financial statements audited;
ii. A statement of the responsibility of the entity‘s management and the
4. responsibility of the auditor;
5. Scope paragraph (describing the nature of an audit)
i. A reference to the BSA;
ii. A description of the work the auditor performed;
6. Opinion paragraph containing
i. A reference to the financial reporting framework used to prepare the
financial statements: and
ii. An expression of opinion on the financial statements;
7. Date of the report;
8. Auditor‘s address; and
9. Auditor‘s signature.
Management Letter:
As a value added service to the client, Auditors 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 for including in audit opinion.
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.
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Scope of management letter:
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.
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:
a) Addressee;
b) Transmittal Letter
c) Title;
d) Background Information
e) Scope of Work, e.g.
• Compliance;
• Authorization;
• Accuracy;
• Monitoring;
f) Safeguarding Date of the report;
g) Auditor‘s address; and
h) Auditor‘s signature.
i) Details of findings: Each finding consists of four different sections, as under:
• Fact (What it is)
• Implication (What harm was caused by not complying with the criteria)
• Recommendation (actions necessary for correction)
• Management Response
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Part-C: Benefits and
Challenges of Audit
15. Benefit of being audited
Auditing has become a compulsory task in the business organization. All the
organizations like business, social, industries and trading organizations make audit of
books of accounts. Now-a-days, owner of business and its management are separate.
So, to detect and prevent frauds, auditing has become essential. This is one of the
advantages of audit. But apart from this there are other advantages. The advantages of
benefit can be classified from management point of view, investor point of view, and
other advantages.
15.1. From management point of view

1. Detection of errors and frauds
An auditor's main duty is to detect errors and frauds, preventing such errors and
frauds and taking care to avoid such frauds. Thus, even though all organizations do not
have compulsion to audit, they make audit of all the books of accounts. While
performing audit, auditor considers the risk of material misstatement in the financial
statements due to fraud or error.
2. Audit helps to obtain loan

While applying for bank loans, organization has to submit the financial statements to
show the financial stability and financial performance. Banks require those financial
statements to be audited by the qualified independent auditors. Banks and other
financial institutions rely on the audited financial statements as they are inspected by
third parties and perceived to be presented fairly. By analyzing the audited financial
statements banks make lending decisions as they can understand organizations
financials stability and ability to make the repayment.
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3. Indicates deficiencies in the control system and provides warning for fraud:
Auditors make evaluation of internal control environment while performing audit
activities. They analyze effectiveness and efficiencies in the control environment and
regular operations. They also identify the risk areas for fraudulences activities. At the
end of audit, auditors issue reports the management indicating the identified and
suspected frauds.
They also reports the deficiencies identified in the control system during the audit. Also
when employees know that an independent audit is to be made, they take care to make
fewer errors in performing the accounting function and are less likely to
misappropriate company assets.
4. Builds reputation:
Audit helps to address and reduce the cases of material misstatements in the financial
statements and suggest probable improvements in the internal control system.
Organizations which audit on a regular basis are expected to have regular
improvement in the control environment and financial reporting process. Those
organizations are sure of receive unmodified/unqualified/clean report from the
auditors. In general organization which receives unqualified audit opinions builds
reputation as they are perceived to be transparent in providing financial information,
providing discloser and in financial reporting process.
5. Proper valuation of assets:

At the time of audit, auditors work on different assertions. Some of the assertions are
existence, rights and obligations, valuations, arithmetic accuracy and cut-off. These
assertions enable auditors to confirm physical existence of the assets and ownership by
the organizations. While following the assertions, auditors also confirms that they have
been recognized at the cost or at the fair value.
Auditors also checks whether deprecations are charged on these assets following the
usage or consumption pattern of the assets. They also re-perform the depreciation
calculation to confirm that the depreciation has been charged properly and the written
down value of the asset is shown accurately. Audit also confirms that assets are
recognized at the period in which assets is ready for use.
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6. Government acceptance:
For some organizations, audit is required by the law of land. Securities & Exchanges
Commissions and other regulatory authorities also require an audit of the financial
statements. Audited financial statements are required to be filed to the registrar of
joint stock companies and other regulatory institutions like stock exchanges. Also
Audited accounts are readily accepted in Government authorities like income Tax
Dept., Sales Tax dept., and Land Revenue departments etc.
7. Lower cost of capital:

Audit helps to identify risks and provides solution to address the risk areas. Therefore
organizations that undergoes an audit likely to be less risky. Therefore banks and
financial institutions trends to rely upon the financial statements. As the audited
financial statements minimize risks and risks are the key factor is the determinant of
the interest rates, creditors may offer lower interest rates, and investors may be willing
to accept a lower rate of return on their investment.
8. Maintain account regularly:

During audit, auditor goes through all the transactions and checks the supporting
documents of the transactions. Auditors also confirm that all transactions are reported
properly in the financial statements. An auditor raises questions if accounts are not
maintained properly. Auditors state the fact when accounts are not prepared properly.
So, audit gives moral pressure on maintaining accounts regularly.
9. Helps to get compensation:

If there is any loss in the property of business, insurance company provides
compensation on the basis of audited statement of valuation made by the auditor.
Without the valuation by the auditors, insurer does not acknowledge the insurance
claim made by the policyholders. Auditors review the loss which has been suffered by
the policyholders and confirms the claim figures to be received from the insurer. This
way insurer can be assured that they are paying the right amount of claim in
compliance with the insurance policy.
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10. Suggestions for improvement:
The independent auditor identifies different misstatements whether due to fraud or
error during audit field work. They also identify the deficiencies in the internal control
environment. They report these issues to the management with proper suggestions to
improve controls and achieve greater operating efficiencies within the client’s
organization.
11. Useful for agency

Audit facilitates the agency-principal relationship. Principals need to know the
whereabouts of the activities and performance of the agents. However, principals may
not have time to physically monitory agents’ activities. Moreover, he might not have
proper technical skills to understand the activities and reports provided by the agents.
An independent third party who has similar knowledge and expertise are able of
understand and evaluate the performance and reports of the agents. Those
independent third parties can confirm the principal that agents are functioning
accordingly. These independent third parties are the auditors who can assist the
principal by providing reasonable assurance on the financial statements and assist the
management by providing suggestion to improve the business operation process.
12. Addition of new expertise

Organizations always add expertise in their arsenal all the time. But this expertise
becomes obsolete or out of date with time. Organization can’t always update that
expertise because it might be expensive. Moreover, some activities like accounting
functions are not the core activities of the organization. Therefore sufficient expertise
might not be available in the organization in the accounts department. But organization
undergoes auditing procedures each year. Auditors are external people with sufficient
and up to date accounting knowledge and expertise reviews the financial statements,
control and supporting documents. These experts can suggest what organizations need
to do. Through audit, organization can have new expertise with much less cost.
13. Increase credibility.

Financial statements are prepared by the management. Management might be bias
during preparation of the financial statements. Auditors are the independent reviewer
who reviews the financial statements for fair presentations. As the statements are
reviewed by third party, financial statements become more credible.
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15.2. From investors’ point of view
1. Protects interest:
In modern days, ownership has been separated from the management of the
organizations. Owners may not have time or expertise to operate the business.
Therefore, managements are entrusted with the wellbeing of the organizations.
However, owners need to be assured that the management is doing their jobs properly.
An audit of accounts ensure the shareholders that accounts have been properly
maintained, funds are utilized for the right purpose and the management have not
taken any undue advantage of their position. If management takes any undue
advantages, auditors are most likely to identify the misconduct and report to the
owners so that owners can take appropriate actions.
2. Accuracy of information
A businessman wants to know profit or loss of his business after a certain period of
time. Management of the organization provides financial information to the owners.
However, those financial statements or information may be biased or misrepresented.
Management might disguise some facts in the financial statements. Auditors make sure
that financial statements are prepared following the standards and provide a true and
fair view. So, the owner of the business can rely on the information reported in the
audited financial statements.
3. Moral check
Regular audit of account create fear among the employees in the accounts department
and exercise a great moral influence on clients staff thereby restraining them from
commit frauds and errors.
4. Proper valuation of investments

Audit ensures that all financial information has been incorporated in the financial
statements. All assets are valued properly and all rights and obligation has been
illustrated properly. From the audited financial statements, investors and creditors can
obtain their required information. An investor can know the total book value of the
assets, working capital organization has employed and the net book value of
assets/equity. Investors can also identify the capital structure of the organization.
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5. Assesses risks, economy, efficiency and quality
All business has its own risks. Auditors conduct and through risk assessment
procedure during audit. They also assess economy and efficiency in the business
operations. These activities increase the overall quality of the financial reporting. On
behalf of the investors auditors perform risk assessment, economy and efficiency in
operations.
6. Draws attention to the deficiencies in the information

Among the many activates, auditors reviews the financial information discloser
process. They review the adequacy, accuracy and appropriate of the financial discloser.
If necessary discloser isn’t made in the financial statements, auditor will indicate that
in the audit report and management letter. Auditors also suggest what discloser should
be incorporated in the financial statements.
7. Helps to adjust account of deceased partner

Valuation of all the assets and liabilities of the business is made by the auditor while
auditing books of account. Such valuation helps to clear the amount of deceased
partner.
8. Helps to increase goodwill

Audit helps to report financial performance and stability in the financial statements. It
ensures consistency and fair presentation in the financial statements. It also shows the
accurate profitability and financial position of an organization which creates faith of
public over the business. Thus, auditing helps to increase goodwill of an organization.
9. Audit facilitates the sale of business

Valuation of assets is made by the auditor during the audit. An audited financial
statements, presents assets and liabilities properly. On the basis of valuation of assets
and liabilities, businessman can sell his business. It helps to determine the price of
business.
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10. Helps to amalgamate the company
Sometimes, same nature of organization may be amalgamated. Auditing makes
valuation of assets and liabilities which helps to amalgamate the company. Purchaser
of the company can accept such business organization on the basis of valuation made
by the auditor.
11. Admission of new partner:

In the event of admission of a new partner, audited accounts will facilitate the
formation of terms and conditions for joining the new partner. Previous audited
accounts and balance sheet will give a general idea about the growth and financial
position of the business to the new partner.
15.3. Other advantages

1. Evaluate financial status:
The audit of accounts by a qualified auditor also help the management to understand
the financial position of the business and also it will help the management to take
decision on various matters like report in internal control system of the organization or
setting up of an internal audit department etc.
2. Settlements of claims
In the event of loss of property by fire or on happening of the event insured against,
Audited accounts help in the early settlement of claims from the insurance company.
Audit also identifies the claim which could be made against in the organization and
proper provision is kept in the financial statements. Audits also evaluate the claim
made by the organization. They ensures the claims are well justified and proper
amount has been claimed.
3. Evidence in court
If any case is filed against the auditor regarding negligence, auditor can present audited
report as a proof to settle such case. Also audited financial statements are more
credible as evidence in the eyes of law. In case of any financial dispute or insolvency
case, court will go through the financial statements and rely on the information
reported in it.
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4. Settlement of dispute:
If the accounts have been audited by an independent person, disputes between the
management and labor unions on payment of bonus and higher wages can be settled
amicably.
5. Facilitates taxation
Tax authorities assess taxes on the basis of profit reported in the audited financial
statements. Authorities make deductions and allow tax deductions based on the
information from the financial statements. In the same way sales tax authority
calculates sales tax on the basis of sales shown in the audited statement.
6. Helps to prepare future plan

All the audited statements remain true and correct. Such true and correct account
creates a basis for fluctuation analysis and forecasting regarding of the future financial
performance. Audit may also review the forecasted financial statements.
7. Facilitates To Compare
An auditor instructs an accountant in the same way which helps to compare books of
accounts of current year with the accounting of the previous year. They ensure
consistency in maintained while preparing the financial statements. So, comparing the
accounts of current with previous years helps to detect errors and frauds.
8. Access to Capital Market:

Public limited companies must satisfy audit requirements under the Securities and
Exchange Commission in order to register securities and have they traded in the
securities markets. Without audits, companies would be denied access to these capital
markets. Audited financial statements are useful to the users or investors in making
investment decisions.
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16. Challenges in Auditing
Auditing has evolved from a routine checking of the books of account to a vital part of
the governance process of companies. Factors such as the volume of transactions,
information technology, globalization and the constant increase in the complexity and
number of laws, regulations and standards governing entities and their auditors have all
impacted drastically on the evolving role of the registered auditing profession. The
corporate collapses, business failures and fraudulent financial reporting scandals of the
late 1990s and early 2000s led to a very turbulent time and resulted in a credibility
crisis for the auditing profession. One of the consequences of this was the demise of
Arthur Andersen and the resultant decrease in the number of big audit firms from five
to four. A further consequence was the drastic interventions by governments, regulators
and the auditing profession itself, which have given rise to various and onerous new
laws, regulations and standards that govern financial reporting and the auditing thereof.
The period 2000 through 2006 has been a very turbulent time for the auditing
profession, a period that witnessed numerous scandals and their aftermath (Enron,
WorldCom, Parmalat), strident calls for changes in the way that auditors practice their
profession, and regulatory initiatives that significantly change the way the profession is
governed. Long-held attitudes and customary practices have been challenged and found
to be deficient by the media, the investing public, and those charged with regulating
financial reporting and auditing. Issues of auditor independence, the role of corporate
governance, the responsibilities of management, the appropriateness of consulting
services, and the overall professional obligations of auditors have all been discussed and
debated by a broad array of interested groups and individuals. The theme linking these
debates has often been ‘what is wrong with the auditing profession?’ and its close
relative ‘what can be done to improve the auditing profession?’ As a result, this period
has probably resulted in more substantive changes to the auditing profession than any
other period in modern day business history.
Challenges auditor and overall audit profession faces can be classified as in-house
challenges and outdoor challenges. In house challenges are challenges internal to the
auditors and the auditing profession whereas outdoor challenges comes from the
external sources on which auditors and audit profession has no control over.
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16.1. In-house challenges
In house challenges are challenges internal to the auditors and the auditing profession.
Some of these challenges can be controlled by the profession or the audit firm itself.
Whereas there are some challenges those are internal to the profession but out of
control. Those challenges are inherent challenges. Audit firms and profession
frequently adopts different safeguards to overcome these challenges or to reduce them
to an acceptable level. Most of the in-house challenges are described below:
1. Limited number of employees

Auditing firms are experiencing significant shortages of trainee accountants and
qualified staff. Audit firms have the added challenge of transformation and targets to
deal with. Accordingly, there is a high demand for staff amongst auditing firms, and
especially as regards attracting and retaining skilled trainees and accountants. This
shortage of auditing staff has driven up salary costs, and consequently audit costs and
audit fees.
In past, number of professional degrees was not that rampant. Students who wished to
pursue professional degrees used to join audit firms to achieve professional degrees on
accounting and auditing. In that time, firms were unable to accommodate all willing
students. However, with time and globalizations, people now have access to various
professional degrees without undergoing hard training for years. Therefore, people are
losing interest to peruse chartered accountancy and to join in audit firms. They have
alternative route to become accounting professionals.
Furthermore, human resource costs are fixed costs. Audit firms have to pay them even
if there is no revenue is earned. Audit firms are mainly dependent of providing client
services but there are no guaranty, especially for the small audit firms, that client will
be available round the year. Firms therefore try to maintain human resources to an
acceptable level. For that reason firms faces shortage of staffs when client increases at
a particular period in a year.
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2. Lack of motivation in human resources
In audit firms, most of the activities are similar and repetitive. Auditors have to work in
extreme pressure and meet the deadlines set by the client and partners of the firm.
Furthermore, they have to adjust with different situations and conditions while
performing audit field works. Sometimes auditors have to face bitter experience due to
improper behaviors and accusation by the personnel from client management.
However, being a client facing organization, auditors have to bear with it.
Again people in the audit firms don’t enjoy different types of leaves provided to the
employees of companies. Compensation in the audit firms are significantly lower
compared to the employee compensation paid to the employees of companies. For
most of the audit firms there is no option for provident fund, gratuity fund, payment in
exchange of leaves. However, they have to work round the year. Sometimes they have
to work extra hours without any overtime bonus and in holidays.
Many firms do not provide any training to the audit staffs regarding current
developments or new technical skills. Staff themselves has to develop expertise. And
when staffs do something extraordinary, firms do not provide any appreciation to
them. Overall situations causes demotivation to the audit staffs and which ultimately
negatively impacts the audit activities and quality of audit.
3. Lack of expertise in audit staffs

Audit firms normally recruits fresh graduates. They have the theoretical knowledge but
lack the practical knowledge. They develop expertise by matching prior knowledge
with on-job experience. However, most of the time there expertise are limited to their
level of educational qualification.
An auditor needs to have diverse expertise other than expertise in accounting and
audit. The skills requirement of auditors has also undergone significant changes over
the last number of years. Nowadays auditing staff face many new challenges, and in
order to overcome these they should be schooled and trained in techniques that
surpass traditional accounting and auditing procedures. These include, inter alia,
computer skills, communication and presentation skills and professional and business
ethics.
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4. Familiarity or self-interest threats
Most of the audit clients are obtained through references. Partners and senior audit
staffs was connection with the senior personnel from the client management.
Furthermore, junior auditors might have close family relationship or financial
relationship with persons from the clients. This raises a risk of familiarity and self-
interest threats.
5. Cost in excess of revenue

Auditors sometime have to charges fee even if the cost of the service is far greater than
the fee of the audit. Sometimes these engagements are to maintain certain level of
client portfolio, or to infiltrate new industry where the firm has not audited yet.
Sometime due to close relationship with client, auditor is requested to provide
assurance service at a significantly lower cost. Auditors have to honor the request for
the sake of long term relationship and in expectation of future benefits.
6. Testing is used
A financial statement covers all the transactions occurred during the year. However, At
the time of audit, auditors do not oversee the process of building the financial
statements from start to finish. Assurance providers may sometime not test the entire
item in the every subject matter. Auditors use different types of sampling techniques
and use representative samples to test and provide opinion on the basis of the outcome
of the tests.
7. Inherent limitations:
The accounting systems on which assurance providers may place a degree of reliance
also have inherent limitations. 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. For that reasons, assurance providers does not provide absolute
assurance. Rather, auditors provide a reasonable level of assurance. In the field of
audit, reasonable assurance is the highest level of assurance. Some users misinterpret
the reasonable level of assurance with absolute level of assurance. This is called the
expectation gap which has been covered in the outdoor challenges.
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8. Persuasive audit evidence
Most audit evidence is persuasive rather than conclusive. That means audit evidences
do not provide a clear cut conclusion about the financial statements. Rather, the
evidences provides an indication or basic understanding a about the financial
statements. Auditors have to use their own judgment to conclude the outcome of the
audit and provide assurance on the basis of their judgment.
9. Audit costs and audit fees

The cost of performing audits has increased significantly over the past number of
years. This is attributed to factors such as the drastic increase in staff salaries,
professional indemnity insurance, increasing technology costs, as well as the impact of
changing audit methodologies and new accounting standards, which are time
consuming to understand and to audit. At the other end of the scale are the clients who
are often reluctant to accept increases in audit fees in excess of inflation. These forces
auditors to do extra work without being paid for it, this in the long run will affect the
firm’s ability to retain such clients.
Efficiency is one thing, but audit fees have been so drastically reduced by factors such
as bidding and price competition that firms have been forced to think of ways to reduce
the time spent working on audits. Accountants are under pressure to fit the expenses of
the job into the fees they can charge. Many of the firms involved in the continuing high-
profile accounting scandals had their work papers done by firms that easily passed
peer review. The auditors probably did their jobs efficiently, but didn’t have the luxury
of thinking about what might be wrong. Auditing fees should be high enough so that
auditors can think on the job instead of quickly and mindlessly doing paperwork that
will pass inspection.
10. Subjective provision of assurance

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. Some items in the subject matter may be estimates and
are therefore uncertain. It is impossible to conclude absolutely that judgmental
estimates are correct.
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11. Auditor independence and the provision of non-audit services
The provision of non-audit services by auditors to audit clients has had a significant
impact on auditors’ independence and the profitability of their firms. Usually these
non-audit services are very profitable and sought after, with the resultant effect that in
the past auditors were tempted to succumb to management pressures on external
audit issues in order to retain the audit engagement, and so to provide the very
profitable non-audit services. The various regulations issued and legislation passed
since Enron, as well as the various corporate governance codes, now all include
stringent rules that either prohibit, or strictly control, non-audit services rendered by
auditors to their audit clients.
12. Fraudulent financial reporting and audit failures

Various corporate collapses occurred in the late 1990s and early 2000s many of which
were the result of fraudulent financial reporting, and these resulted in significant
losses for creditors and serious hardship for shareholders. Many of these business
failures were also seen as audit failures, and the auditing profession stood accused of
not performing its ‘watchdog function’ effectively and with objectivity. Questions were
also asked about the auditing profession’s ability to self-regulate, and governments
responded by issuing new laws to regulate the auditor’s work. The auditing profession
also implemented vigorous self-regulatory processes such as practice review, as well as
other forms of auditor control, as discussed below. Lastly in this regard it is interesting
to note the cynical comment that is sometimes heard that the auditors, through failure
to perform their responsibilities with diligence and care, actually created more work
for themselves and benefited substantially from their clients’ demise.
According to an article in the Wall Street Journal, the Big Four accounting firms KPMG,
PricewaterhouseCoopers (PwC), Deloitte & Touche and Ernst & Young (EY) are more
powerful than ever. The scandal that brought down US-based accountancy firm Arthur
Andersen, gave rise to an increase in work generated by the stricter accounting and
auditing standards in the Sarbanes-Oxley Corporate Governance Act. The increase in
work combined with limited resources in turn delivered greater leverage for
demanding and winning higher fees at the Big Four. So great is the demand that they
are turning away work especially when the risks seem to outweigh the potential
rewards.
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16.2. Outdoor challenges
There are some challenges relevant to the auditor and audit professions which are not
directly internal to the firms and has no or significantly lower control over them. These
challenges are the outdoor challenges which are caused mostly from the side of readers
or users of the financial statements, management of the clients, governments and
regulatory bodies. These challenges are detailed below:
1. Expectation gaps:
The audit expectation gap, being a difference in opinion or understanding among the
participants in the financial reporting process as to what are management’s duties and
responsibilities regarding the financial statements, as opposed to those of the auditor,
still exists and poses a very real threat to auditors. It is a very common and one of the
oldest challenges of auditing. Expectation gaps is the difference between what auditors
do or the responsibilities of auditor and the perception of the users or users of the
financial statements regarding what auditors do or that auditors’ responsibilities are.
For example, auditors responsibilities is to draw an opinion whether the financial

statements provides a true or fair view in compliance with applicable accounting
frameworks and regulations. For the purpose of audit, auditors use different sampling
techniques and perform audit test to draw an opinion. Whereas, most of the time,
readers of the financial statements think that auditors check each and every items and
areas of the financial statements and auditors are responsible for ensuring that
organization is doing ok. However it is the responsibilities of the management for
reporting all aspects of the financial statements and ensuring organization is doing
well. This is a classic example of expectation gap in audit.
With the changing business environment, new laws and regulations and the ever
increasing occurrence of fraud, auditors are often blamed for not detecting fraud,
errors or non-compliance with laws and regulations, responsibilities that originally
reside with management. Such misunderstandings not only result in a loss of
confidence in the auditing profession, but also often give rise to lawsuits against audit
firms, resulting in legal fees and productive management and auditors’ time lost in the
litigation processes.
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2. Client pressure
Client pressure is one of the key challenges in auditing in Bangladesh. Most of the
client has strict deadline within which audit report is required to be issued. However,
most of the client invites auditors to commence fieldwork just few days earlier than the
deadline. Sometime clients appoint the auditors just before the end of financial year. In
these cases, auditors have to start field work and wrap up the audit works as soon as
possible. Due to the short time, auditors don’t get the chance to make proper audit
plan, audit strategy and risk assessment. As auditors has to finish audit works without
this, quality of audit works decline. Moreover, auditors can’t thoroughly analyze the
financial statements and operation of the organization to identify risk areas. Hence
auditor can’t suggest area of improvement in the organization. This ultimately causes
retention of problematic areas in the organization which might affect organization’s
operation and financial reporting process.
3. Client is not cooperative

Cooperation of the management of client is very much essential for successful
completion of audit. However, this is not the cases. Sometime personnel form client
management are not that much cooperative. Management refuses to provide access to
all information and documents to the auditors. Furthermore, personnel from client
misbehave with the auditors and provides document with much delay. Common
problem auditors face when management acknowledges the requisition of auditor and
assigns a junior personnel to provide the documents. However, junior personnel are
does not want to provide the documents without approval from senior personnel. They
revert back to the senior personnel for approval. This bureaucratic behavior hampers
audit activates and waste lots of times. This becomes even more challenging when
auditors are facing a strict deadline.
4. Excess feeding of information

Excess feeding of information means providing more information than required. This is
in contrast to the uncooperative behavior of management. In this cases client provide
excessive, unnecessary and irrelevant information. This causes auditors to lose track of
the audit trail and to be distracted. As a result auditors can’t execute their audit
strategy or audit plan.
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Example of excess feeding of information is providing all payment vouchers to the
auditors. Auditors do not require checking all the payment documents. They need to
check on the selected transaction in audit samples. If all the payment vouchers are
provides, auditors has to search for the payment documents by themselves and at the
time of searching they stumble upon other payment documents which are irrelevant.
5. Misguiding or misrepresenting information

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. 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. If management or any
person from client hides any transactions or does not properly disclose to the auditors,
it is extremely difficult for the auditors to identify those transactions. From proper
presentation and inclusion of all transactions, auditors have to depend on the
management of the client.
6. Regulatory requirement
As mentioned earlier, primary and basic role of auditors is to express and opinion
about the fair presentation of the financial statements. However, in recent years,
different legislations are imposing additional responsibilities to the auditors. For
example, in Bangladesh, auditors of the listed companies have to ensure that all
expenses are incurred for the purpose of business. Auditors of bank companies have to
ensure that all loan loss provision has been kept properly. Increasingly, legislations are
addition different requirement which has become a matter of challenges to the
auditors. In case of non-compliance or improper execution of requirement, auditors
might be penalized as per those legislations.
7. Intimidation by management or others

Intimidation is one of the serious challenges of auditing. There are lots of incidents and
example that client has tried to intimidate the auditors when client identified any
serious issues for getting a clean audit report or suggesting the auditors to skip the
identified matter. Intimidation by management can come in various forms. Sometime
clients become more hospitable to the auditors and provide gifts to the audit staffs.
Sometimes, clients offer audit staffs a position in the management in exchange of
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skipping an audit observation. There were also evidence that client has intimidated
audit staffs by threatening them. Offering bribe or different financial or non-financial
facilities are also prevalent as a way of intimidation.
8. Auditing is expensive:
For smaller companies, hiring a firm to carry out an audit can be costly. Small
companies especially the ones at the startup phase perceives audit as an added burden.
Again at the time of audit, management needs to provide a space for auditors to work.
Management rents the spaces for their own activities but when auditors are allocated
particular space, management faces a loss as they can’t use the space. Furthermore, if
auditors issue a negative report, client may face different penalty.
9. Inherent dependency:
Audit is often called a tri-party agreement where shareholders and management has
agent-principal relation. Auditors are there to check activities of management on behalf
of the shareholders. Auditors are appointed by the shareholders in AGM and auditors
reports to the shareholders. However, in reality, auditors are mainly selected and
recommended by the management and at the AGM, shareholders approves those
appointments recommended by the management. Management negotiates audit fee,
time table and other matter with the auditors. Auditors are dependent on the
management for the appointment as auditors. However, at the time of audit, auditors
review the activities of management. Auditor might not report issues against the
management fearing that management might not select the auditors for the next audit.
10. New legislation, regulations and standards

The response by governments and regulators to the corporate collapses and perceived
audit failures gave rise to various new statutory requirements, regulations and
standards that were aimed at strengthening the auditors’ independence and improving
the quality of their work. Examples of these are the Sarbanes-Oxley Act in the USA,
CLERP 9 in Australia and the Auditing Profession Act, Corporate Laws Amendment Act
and Companies Amendment Act in South Africa.
In South Africa, the new Auditing Profession Act was seen to give effect to
Government’s intention to ensure that the auditing profession performed its
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monitoring function and that it could be held accountable for any future corporate
bankruptcies. The Auditing Profession Act provided much stricter requirements
regulating registered auditors and audit firms and more stringent reporting
requirements for reportable irregularities. The Act expanded the practice review
requirement of individual registered auditors to that of audit firms, with the result that
every registered auditor performing the attest function and every registered audit firm
would receive a practice review by Independent Regulatory Board for Auditors (IRBA)
at least once every five years. These new requirements were all aimed at improving the
quality of audits, but consequently also gave rise to increasing costs for the profession.
The International Federation of Accountants (IFAC) issued new auditing standards that
introduced a risk-based audit methodology and more stringent documentation and
reporting requirements. The new regulations, requirements and increased legal
exposure of auditors are also often criticized and blamed for harming the auditing
profession’s ability to attract and retain staff.
Following the global trend, Bangladesh Government has also introduced a new
legislation to supervise the auditors. Through the Financial Reporting Act, 2015,
Government has established a Financial Reporting Council (FRC) to ensure quality of
auditing is maintained. Main functions of the council is to issue accounting and auditing
standards following the global standards, monitor practicing professional accountants,
ensuring quality has been maintained and imposition of penalty in case of non-
compliance.
11. Domination of large firms:

The challenges facing the auditing profession are enormous, and conventional wisdom
would suggest that the only ones capable of tackling them head-on are the large firms,
due to their size, the extent of knowledge- and information-sharing implicit in their
global network, and the resultant economies of scale.
Study shows that the market for statutory audits of large and very large companies is
highly concentrated and dominated by the Big-4 networks. Moreover, the structure of
this market is unlikely to change much in the coming years. This is because middle-tier
firms face a number of barriers to entry into the market. Such barriers are reputation,
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capacity and breadth of their networks, and the exposure to unlimited liability in most
due to limited professional insurance availability. As a result, over the foreseeable
future, middle-tier networks are unlikely to become a major alternative to the large
firms especially the Big-4 firm networks.
Large firms have their own client network but still focus to increase their revenue by
increasing their respective market shares. They provide various services other than
audit services. Most of the small firms cannot provide all those services and compete
with the large firms. They try to charge lower fees than the large firms to win a client
but sometimes large firms cut their fees too low that small firms can’t afford to do so. If
however any small firms lower their fees, they have to provide fee by making a loss.
This is not sustainable in the long run. This will hamper the overall audit profession as
the number of audit firms will decrease.
12. Increased IT Risks:

With globalization, world has become more digitalized and use of computers have
become widespread. Almost all of the companies and other audit clients use computers
to maintain accounting and other operating information. With the increase uses of IT,
risk of misuse of IT has also increased. In recent times there are lots on incidents of
hacking, virus attacks and malfunction of the accounting software.
Although accounting software are designed to be accurate and help management of

organization in keeping records properly, but the management can manipulate the
software to misstate or misrepresent the reports. Moreover, unauthorized access to the
accounting software can cause breach of confidentiality and loss of valuable
information.
Auditors have the responsibility to address and indicate all the risks organizations are
facing or will face in the near future. For these reasons, auditors have to consider the IT
control system and relevant IT risks. In order to do so, Now-a-days auditors has to have
IT expertise which is not the core expertise of auditors. As a result organization might
face IT risks which are beyond auditors’ knowledge and expertise. But in case of any
occurrence, auditors’ activities and authenticity of auditors’ report will be questioned.
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Part-D:
Recommendations &
Conclusion
17. Findings and Recommendations
This study has found that auditing is very much common in Bangladesh. Companies and
the NGO have statutory requirements to have an audit. Apart from that, other
organizations undergo auditing process for ensuring better corporate governance.
Auditors conduct their audit following the Bangladesh Standards of Auditing and
confirm that financial statements are prepared in accordance with the Bangladesh
Reporting Standards (BRFSs).
There are different types of audit available in Bangladesh. Statutory audits are the most
common types. But internal audit, interim audit and compliance audit is also prevalent
in Bangladesh.
Audit activities start from client acceptance to issuance of audit report. Auditors do not
accept clients if they are not appointed properly. At the time of client acceptance,
auditors communicate with previous auditors to obtain professional clearance. After
accepting clients, auditors make audit plan and identifies risk areas. Based on these,
auditors make risk assessment and develop audit strategy. Audit strategy is followed at
the time of execution of field work. Auditors obtain sufficient and appropriate audit
evidence at the time of audit field work.
Based on the audit work and audit evidence collected, auditors form audit opinions.
Audit opinion is two types; modified and unmodified. Unmodified audit reports are
good report which states financial statements are prepared following BFRS. Whereas,
modified audit report states the opposites.
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Audit provides numerous benefits to the organization. However, there are many
challenges auditors’ faces. Some of the challenges are arises from internal sources and
others are from external sources. Example of internal challenges are staffing problem,
lack of expertise, self-interest and threat to the independence. On the other hand,
external challenges arise most from the client, users and regulators. Example of outdoor
challenges is client pressure, requirement of regulations, changes in regulatory
environment, expectation gap.
Auditors need to adopt different types of safeguards to overcome the challenges. These
safeguards will eliminate the challenges completed or reduce to an acceptable level.
Some safeguards auditors may adopt are:
Challenge Safeguard
• Lack of employee motivation  Provide proper rumination and training.
• Shortage of audit staff  Recruit and retain the audit staffs.
• Threat to independence  Change partner or reject the client.
 Use engagement letter to ensure
management understand respective
• Expectation gap
responsibilities. Also inform general
users regarding the activities of auditors.
 Take necessary time at the time of
• Client pressure engagement. Include more audit staffs in
the audit engagement.
18. Area of Further Studies

This study creates a framework for further studies on value addition process of auditing
to the organization. One can try to understand how audit helps to achieve operating and
financial efficiency and effectiveness. They may also try to understand perception of
management to the auditors and auditing activities. It is also possible to identify how
adequately management can grab the benefits and implement suggested by the
auditors.
Page | 57
Expectation gap is another area on which further study is possible. Through further
research, gap between auditors performance and perceived performance can be
analyzed. Reason of expectation gap and way out could be identified through an
extensive research.
19. Conclusion
Auditors play a vital role for a country. Auditor’s responsibility to shareholders in
particular and Stakeholders in general is really important. Auditor should always keep
in mind that their requirement according to laws, regulations and public expectation is
very high. At present most of the auditors as well as client conscious about the
applicable standards, laws, rules, and regulations. Auditors ensure that auditing
standards has been complied. In case of non-compliance, auditors provide suggestion to
the management of client to provide necessary adjustments. If management is unwilling
to provide adjustments, auditors issued modified audit report.
Audit provided numerous benefits to the organization. Audit brings new expertise to the
organization and indicates the weakness or loopholes that exist in the control system.
Audit increases credibility and acceptance of the financial statements. Audited financial
statements are perceived less risky compared to the un-audited financial statements.
Banks and financial institutions rely on the audited financial statements at the time of
loan approval decision.
The challenges facing the auditing profession are both complex and many in number.
However, given the rigor of the education and training process, the rigor of the
qualification process, the technical competence of auditors, their multidisciplinary
knowledge and experience, and a process of continuous learning and development,
there is no doubt that the auditor will be able rise to the challenge and succeed.
Page | 58
Part-E: References &
Bibliography
20. References & Bibliography:

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http://www.investopedia.com/terms/a/audit.asp
 CA, S. F. (2011, December 22). The risk-based audit approach. Retrieved from
www.charteredaccountants.au:
http://www.charteredaccountants.com.au/news-media/charter/charter-
articles/audit-and-assurance/2011-07-the-risk-based-audit-approach.aspx
 Challenges of the global internal audit function. (2013, May 01). Tapestry
Networks. Inc(23), 1.
 Fazal, H. (2011, May 06). difference between Audit Procedure and Audit
Methodology. Retrieved from Pakaccountants.com:
http://pakaccountants.com/difference-audit-procedure-audit-methodology/
 Fazal, H. (2011, May 06). Directional testing. Retrieved from

www.pakaccountants.com: http://pakaccountants.com/what-is-directional-
testing
 IIA, T. (2014, October 08). Chartered Institute of Internal Auditors. Risk based
internal auditing.
 ISA 200. (n.d.). Overall Objectives of the Independent Auditor and the Conduct of
an Audit In Accordance With International Standards on Auditing.
 Marx, B. (2009, March 01). CHALLENGES FACING THE MODERN DAY AUDITING
PROFESSION. Retrieved from Accountancy SA:
http://www.accountancysa.org.za/challenges-facing-the-modern-day-auditing-
profession/
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 Minh. (n.d.). Approaches to auditing. Retrieved from Wattpad:
https://www.wattpad.com/1647990-approaches-to-auditing
 Objectives Of Audit. (n.d.). Retrieved from Accounting-Management :
http://accountlearning.blogspot.com/2012/01/objectives-of-audit.html
 Parsons, D. (2012, October 20). Systems Based Auditing. Retrieved from THE
REGULATOR'S LOT: https://theregulatorslot.com/tag/systems-based-auditing/
 Rusel. (2015, May 05). Advantages and disadvantages of auditing. Retrieved from
Bank of Infor: http://bankofinfo.com/advantages-and-disadvantages-of-
auditing/
 Sam. (2012, May 24). Advantages of Auditing audit. Retrieved from

hubpages.com: http://hubpages.com/business/Advantages-of-Auditing
 Strategic Opportunities and Challenges for the Auditing Profession. (2014,

December 08). Retrieved from pcaobus.org:
http://pcaobus.org/News/Speech/Pages/12082014_Doty_AICPA.aspx
 Study Manual on Advanced Audit & Assurance. (n.d.). The Institute of Chartered
Accountants of Bangladesh (ICAB).
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Bangladesh (ICAB).
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Accountants of Bangladesh (ICAB).
 Susan Fraser, C. (2011, December 22). The risk-based audit approach. Retrieved
from http://www.charteredaccountants.com.au/:
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articles/audit-and-assurance/2011-07-the-risk-based-audit-approach.aspx
 The evolution of auditing: An analysis of the historical development. (2008,

December). Journal of Modern Accounting and Auditing, ISSN1548-6583, USA,
4(12), 43.

 Knechel, R.W., Salterio, S.E. & Ballou, B. (2007). Auditing Assurance & Risk. 3rd
edition. Canada: Thomson South Western.
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Business: 38-40.
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2006). Reportable Irregularities. Irbanews: 6.
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about education roles. Business Day, pages 1-2.
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Institute of Directors in Southern Africa. Johannesburg.
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June 2008 (2008).
Page | 61

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The University of Dhaka

Al Amin Redwanur Rahman

Bilkis Akter, ACMA

Subject: Submission of intern report on “Methodology, Benefits and Challenges of

The report mainly focused on requirement of auditing, methodologies that auditors

Al Amin Redwanur Rahman

1. Origin of the report

As a requirement of the completion of the internship program I had to submit the

2. Objective of the study

3. Scope of the report

Auditing refers to a systematic and independent examination of books, accounts,

 Spicer and Pegler: "Auditing is such an examination of books of accounts and

 Prof. L.R.Dicksee. "Auditing is an examination of accounting records undertaken

10. Objective of audit

Primary Objectives Of Audit

 Examining the system of internal check.

Subsidiary Objectives Of Audit

 Detection and prevention of frauds

 Under or over valuation of stock

11. Classification of audit

12. Auditing environment in Bangladesh

13. Audit methodologies

b) Systems-based approach (SBA)

14. Risk based audit methodology

14.1. Client Acceptance

14.2. Planning & risk identification

 Obtaining an understanding of the nature of the entity and its environment.

Based on the understanding, auditors make combined risk assessments and in

Obtaining an understanding of the entity and its environment is a continuous

14.3. Audit strategy & risk assessment

In order to obtain understanding, auditors also perform inquiry, observation and

Table 1: Level of risk in significant account and transactions

In order to perform Combined Risk Assessment, auditors assess inherent risk,

Table 2: Detection risk from inherent and control risk

14.4. Executing audit & Obtaining audit evidence

Executing Tests of Control:

Design tests of Execute tests of

Address control exception and Any exception

Figure 1: Decision flow chart for relying on controls

Performing substantive test:

Figure 2: Level and extent of substantive test

During execute of substantive procedures, auditors may identify misstatements.

Auditors generally classify misstatements as reclassification, factual, projected or

The reliability of information to be used as audit evidence is influenced by its source

Auditors maintain professional skepticism when determining the reliability of audit

 determine remaining procedures to complete the audit;

Preparing summary of audit differences:

Auditors request management to correct all misstatements as those misstatements are

Forming audit opinion:

If financial statements prepared in accordance with the requirements of a fair

When the financial statements are prepared in accordance with a compliance

Figure 3: Types of audit opinion

Purposes of Management Letter:

Basic Elements of the Management Letter

15.1. From management point of view

2. Audit helps to obtain loan

5. Proper valuation of assets:

7. Lower cost of capital:

8. Maintain account regularly:

9. Helps to get compensation:

11. Useful for agency

12. Addition of new expertise

13. Increase credibility.

4. Proper valuation of investments