Taxation & Auditing

ACC-4704
Audit and Other Assurance Services
Definition of Audit:

It Is difficult to give a precise definition of audit in a word or two, originally its meaning and use
was confined merely to cash audit and the auditor had to ascertain whether the person
responsible for maintenance of accounts had properly accounted for all the cash receipts the
payment on behalf of his principle. But the word, audit, had a wide usage and it now means a
through scrutiny of the books of accounts and its ultimate aim is to verify the financial position
disclosed by the balance sheet and the profit and loss account of a company.

The following are the some of the definitions of audit given by some writers:

F.R.M De Paula: An audit denotes the examination of balance sheet and profit and loss account
prepared by others together with the books of accounts and vouchers relating there to in such a
manner that the auditor may be able to satisfy himself and honestly report that, in his opinion,
such balance sheet is properly drawn up so as to exhibit a true and correct view of the sate of
affairs of the particular concern according the information and explanations given to him as
shown by the books.

Spicer and Pegler: Audit such an examination of books of accounts and vouchers of a business,
as will enable the auditor to satisfy himself that the balance sheet is properly drawn up, so as to
give a true and fair view of the sate of affairs of the business, and whether the profit and loss
account gives a true and fair view of the profit and loss for the financial period according to the
best of his information and explanations given to him and as show by the books, and if not, in
what respect he is not satisfied.

It is clear from the above definitions that.

• auditing is the systematic and scientific examination of the books of accounts and records
of a business,
• enables the auditor to judge that the Balance Sheet and the Profit and Loss Account are
properly drawn up, so it exhibits a true and fair view of the financial state of affairs of the
business and profit or loss for the financial period.

The auditor will have to go through various books and accounts and related evidence to satisfy
himself about the accuracy and authenticity to report the financial health of the business.
Objectives of Audit:

The objective of an audit is to express an opinion on financial statements. The objectives of the
audit can be categorized into (i) primary objectives and (ii) subsidiary objectives.

Primary Objectives of Audit

The main objectives of the audit are known as the primary objectives of the audit.

They are as follows:

1. Examining the system of internal check.

2. Checking arithmetical accuracy of books of accounts, verifying posting, casting,
balancing, etc.
3. Verifying the authenticity and validity of transactions.
4. Checking the proper distinction between capital and revenue nature of transactions.
5. Confirming the existence and value of assets and liabilities.

Subsidiary Objectives of Audit

These are such objectives that are set up to help in attaining primary objectives.

They are as follows:

1. Detection and prevention of errors.

2. Detection and prevention of fraud.
3. Under-or over-valuation of stock.

Economic Benefits of an Audit

Some specific economic benefits accrue from audits. Among the economic benefits of financial
statement audits are the following:

1. Access to Capital Market: Public limited companies must satisfy audit requirements under
the Securities and Exchange Commission to register securities and have them traded in the
securities markets. Without audits, companies would be denied access to these capital markets.

2. Lower Cost of Capital: Because of the reduced information risk associated with audited
financial statements, creditors may offer lower interest rates, and investors may be willing to
accept a lower rate of return on their investment.

3. Deterrent to Inefficiency and Fraud: 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. Control and Operational Improvements: The independent auditor can often make
suggestions to improve controls and achieve greater operating efficiencies within the client’s
organization.

Concept of Bookkeeping, Accounting and Auditing:

Book-keeping: May be defined as the act of recording financial transactions of an independent

unit in suitably ruled books, whether maintained manually or electronically, kept for the purpose
of each accounting cycle.
Book-keeping is concerned with maintaining a regular, correct and automatic record of day-to-
day financial transactions of economic unit. It is a work of a more or less mechanical nature and
does not require knowledge of the principles of accounting. Bookkeeping includes (i) entering
the financial transaction in various books (ii) summarizing the same in the relevant ledger
accounts, (iii) casting such accounts and striking the balance, (iv) proving the arithmetical
accuracy of ledger, and (v) providing financial data for the preparation of financial statements.

Key Differences Between Accounting and Auditing

The following are the major differences between accounting and auditing:

1. Accounting is an art of orderly, keeping the records of the monetary transactions and
preparation of the financial statements of the company. Auditing is an analytical task which
involves the independent evaluation of the financial information in order to express an opinion
on true and fair view.
2. Accounting is governed by Accounting Standards, whereas Standards on Auditing
governs Auditing.
3. Accounting is a simplified task, which is performed by the Accountants, but Auditing is a
complex task, so Auditors are required for performing it.
4. The main purpose of accounting is to reveal the profitability position, financial position
and performance of the organization. Conversely, auditing is to check the correctness of the
financial statement.
5. Accounting is a continuous activity. Unlike Auditing, which is a periodic activity.
6. End of Accounting is the start of Auditing.

Assurance Services: An assurance engagement is one in which a partitioner expresses a

conclusion designed to enhance the degree of confidence of the intended users other than the
responsible party about the outcome of the evaluation or measurement of a subject matter against
criteria.
The key Element of an Assurance Engagement are as follows:

1. Three groups of people involved

-The practitioner

-The intended users

-The responsible party (the person(s) who prepared the subject matter.

2. A Subject Matter: The subject matter of an assurance engagement may vary considerably.
However, it is likely to fall into one of the three categories:

-Data (for example, financial statements or business projections)

-Systems or process (for example, Internal Control Systems or computer systems)

-Behavior (for example, social and environmental performance or corporate governance)

3. Suitable Criteria:

The person providing the assurance must have something by which to judge whether the
information is reliable and can be trusted. So, for example, in an assurance engagement relating
to financial statements, the criteria might be accounting standards. The practitioner will be able
to test whether the financial statements have been put together in accordance with accounting
standards, and if they have, then the practitioner can conclude that there is a degree of assurance
that they are reliable.

In the context of company behavior, suitable criteria is to judge whether something is reliable
and can be trusted might be the combined code on Corporate Governance, or, if the company
has one, its published code of Practice.

4. Sufficient appropriate evidence to support the assurance opinion: The practitioner must
substantiate the opinion that he draws in order that the user can have confidence that it is reliable.
The practitioner must obtain evidence as to whether the criteria have been met.

5. A written Report in Appropriate Form:

Lastly it is required that assurance reports are provided to the intended users in a written form
and contain specified information. This adds to the assurance that the user is being given, as it
ensures that key information is being given and that the assurance given is clear and unequivocal.

Levels of Assurance:

The definition of an assurance engagement comes from the International Framework for
Assurance Engagements, which is issued by the International Federation of Accountants (IFAC),
a global organization for the accountancy profession, which works with its member
organizations to protect the public interest by encouraging high quality practices around the
world. ICAB is member of IFAC.

The ICAB has adopted International Standards on Auditing (ISAs). However, Bangladesh has
not currently adopted the general international standards on assurance provision, and the
international framework although these represents good practice anywhere in the world.

The framework identifies two types of assurance engagement:

>>Reasonable Assurance Engagement

>>Limited Assurance Engagement

Reasonable Assurance: A high, but not absolute, level of assurance.

The reason that there are two types of assurance engagement is that the level of assurance that
can be given depends on the evidence that can be obtained by the practitioner.

The key differences between the two types of assurance engagement are therefore:

1. The evidence obtained

2. The type of opinion given.

The key point about evidence is that in all assurance engagements, sufficient, appropriate
evidence must be obtained. A lower level of evidence will be obtained for a limited assurance
engagement.

The opinion given in an assurance engagement therefore depends on what type of engagement it
is. There are two levels of assurance expressed positively and negatively.

Say, for example, that a practitioner is seeking to conclude whether the report issued by the
chairman of a company in the financial statements is reasonable or not. He could seek evidence,
conclude that the statement is reasonable and state in a report something like this: “In my
opinion, the statement by the chairman regarding X is reasonable”. (+ve)

This is a positive statement of his conclusion that the statement is reasonable. Alternatively, he
could state in a report something like this:

“In the course of my seeking evidence about he statements by the chairman, nothing has come to
my attention indicating that the statement is not reasonable”. (-ve)

The conclusion is less certain, as it implies that matters could exist which cause the statement to
be unreasonable, but that the practitioner has not uncovered any such matters. This is therefore
called negative assurance. It is the conclusion that a practitioner gives when he carries out a
limited assurance engagement and seeks a lower level of evidence.

Summary of Types of Engagement

Types of Engagement Evidence Sought Conclusion Given
Reasonable Assurance Sufficient and Appropriate Positive
Limited Assurance Sufficient and Appropriate (Lower Level) Negative

Examples of Assurance Engagement:

The key example of an assurance engagement in Bangladesh is a statutory audit. Other example
of assurance engagement includes other audits which may be specialized due to the nature of the
business, for example:

Local Authority Audits

Insurance Company Audits

Bank Audits

Pension Scheme Audits

Charity Audits

Solicitor’s audits

Environmental audits

Branch audits

Benefits of Assurance:

The key benefit of assurance is the independent, professional verification being given to the
users. In addition, assurance may have subsidiary benefits.

Although an assurance report may only be addressed to one set of people, it may give additional
confidence to other parties in a way that benefits the business. For example, audit reports are
addressed to shareholders, but the existence of an unqualified audit report might give the bank
more confidence to lend money to that business, in other words, it enhances the credibility of the
information.

The existence of an independent check might help prevent errors and frauds being made and
reduce the risk of management bias. In other words, the fact that an assurance service will be
carried out might make people involved in preparing the subject matter more careful in its
preparation and reduce the chance of errors arising. Therefore, it can be seen that an assurance
service may act as a deterrent.

In addition, where problem exists within information, the existences of an assurance report draw
attention to the deficiencies in that information, so that users know what those deficiencies are.

Assurance is also an important in more general terms. It helps to ensure that high quality, reliable
information exists, leading to effective markets that investors have faith in and trust.

Limitations of Assurance:

A key issue for accountants is that there are limitations to assurance services, and therefore there
is always a risk involved that the wrong conclusion will be drawn.

The limitations of assurance services include:

• The fact that testing is used-the auditors do not oversee the process of building the
financial statements from start to finish.

• The fact that the accounting system on which assurance providers may place a degree of
reliance also have inherent limitations.

• The fact that most audit evidence is persuasive rather than conclusive.

• The fact that assurance providers would not test every item in the subject matter.

• The fact that client’s staff members may collude in fraud that can then be deliberately
hidden from the auditor or mispresent matters to them for the same purpose.

• The fact that assurance provision can be subjective and professional judgements have to
be made (for example, about what aspects of the subject matter are the most important,
how much evidence to obtain, etc.)

• The fact that assurance providers rely on the responsible party and its staff to provide
correct information, which in some case may be impossible to verify by other means.

• The fact that some items in the subject matter may be estimates and are therefore
uncertain. It is impossible to conclude absolutely that judgmental estimates are correct.

• The fact that the nature of the assurance report might itself be limiting as every
judgement and conclusion that assurance provider has drawn cannot be included in it.
Audit: An Audit is historically the most important type of assurance service in Bangladesh. This
is because all Limited Liability companies registered with the Registrar of Joint Stock
Companies have been required by law to have an audit.

Definition: The objective of an audit of financial statements is to enable the auditor to express an
opinion whether the financial statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework.

The key criteria of an assurance engagement ca be seen in an audit as follows:

>> Three Party Involvement

-The shareholders (users)

-The board of directors (the responsible party)

-The audit form (the practitioner)

>> Subject Matter

-The Financial Statements

>> Relevant Criteria

-Law and Accounting Standards

>> Evidence

- Sufficient and Appropriate evidence is required to support an assurance opinion.

>> Written Report in a Suitable Form

True and Fair View: In Bangladesh, the auditor will normally express his audit opinion by
reference to the ‘true and fair view’ which is an expression of reasonable assurance. Whilst this
term ‘true and fair’ are not defined in law or audit guidance. However, for practical purposes
following definitions are generally accepted:

True: Information is factual and conforms with reality, not false. In addition, the information
conforms with required standards and law. The accounts have been correctly extracted from the
books and records.

Fair: Information is free from discrimination and bias in compliance with expected standards
and rules. The accounts should reflect the commercial substance of the company’s underlying
transactions.
Auditors in Bangladesh:

Auditors in Bangladesh are subject to both legal and professional requirements. The legal
requirements are currently contained in the Companies Act 1994. The Companies Act 1994
requires that auditors must be a member of the Institute of Chartered Accountants of Bangladesh.
The ICAB is a Recognized Supervisory Body under the Ministry of Commerce of the
Government of Bangladesh. Professional qualifications are a prerequisite of membership in
ICAB. ICAB has also the responsibility to implement procedures for monitoring its licensed
auditors. The Companies Act 1994 also sets out factors which make a person ineligible for being
a company auditor, for example, if he or she is:

i. an officer or employee of the company.

ii. a partner or an employee of any officer, employee to the company.

iii. a person who is indebted to the company exceeding Tk. 1,000.

iv. A person who is a director or member of a private company, or a partner of a firm, which is
the managing agent of the company.

v. a person who is a director or holder of shares exceeding 5% of the subscribed capital.

The Institute of Chartered Accountants of Bangladesh (ICAB):

In Bangladesh the responsibility for issuing auditing standards is with the ICAB, which has
adopted international standards.

ICAB is also responsible for issuing Ethical Standards (ESs) in relation to the independence,
objectivity and integrity of auditors. ICAB is an autonomous body under the Ministry of
Commerce, to whom the Bangladesh Government has delegated the task of independent
monitoring of the Bangladesh Accountancy profession. The standards set professional
requirements for auditors.

The Institute of Cost and Management Accountants of Bangladesh (ICMAB):

The Institute of Cost and Management Accountants of Bangladesh (ICMAB) is the national body
of the professional Cost and Management Accountants of Bangladesh. It is managed as an
autonomous professional body under the Ministry of Commerce. Established with the prime
objective of promoting and regulating the Cost and Management Accounting profession in the
country, the Institute offers education and training to the students interested to pursue career in
this field and provides highly recognized CMA degree on fulfillment of requisite qualification.
The Institute undertakes research in relevant fields and is the sole authority to issue practicing
license to its members.
Certified Public Accountant:

Certified Public Accountant (CPA) is the title of qualified accountants in numerous countries in
the English-speaking world. It is generally equivalent to the title of chartered accountant in other
English-speaking countries. These professionals offer financial statement audits and other
attestation services to help inform investors about the financial health of organizations. They
provide individuals and families with valuable knowledge and advice on taxes and financial
planning.

Types of Audits:
A. External Audit: An external audit is that which is concerned with the critical review of the
representations made in published financial statements. It is compulsory for all Companies which
are registered under the Companies Act, 1994 to have their accounts audited by the professional
auditors. This type of audit is conducted by the auditor at different timings. From the point of
view of timings, the audit may be classified as Continuous Audit, Periodic/Final Audit and
Interim Audit. These are described as under: --
a) Continuous Audit
Under continuous audit an auditor is required to attend at regular intervals during financial year,
say monthly, or quarterly and examine the books of accounts. This audit is conducted in the
following cases:
i. Where the audit accounts are required immediately after the close of financial year viz.,
in case of banks or other financial institutions.
ii. Where monthly audited accounts are required throughout the year.
iii. Where there is no satisfactory internal control system in force.
iv. Where a concern is large and numerous transactions are to be checked.

b) Periodical/Final Audit
A final or periodical audit is that which is commenced at the end of accounting year when all
accounts have been closed and final accounts have been prepared and is carried on until the audit
work for the entire period is completed.
Where applicable: This type of audit is especially applicable for comparatively small concerns.

c) Interim Audit
This type of audit is conducted when the management of an organization desires to know the
trading results of the business in order to declare interim dividend, or where audited financial
statements are required to be issued soon after the close of the financial year.
B. Internal Audit
Internal audit is a continuous process of reviewing and appraising all business activities
pertaining to accounting, financial and other operations. It is conducted for providing a day-to-
day information to the management, so that an appropriate action can be taken immediately
before it has become too late. The Chief Internal Auditor and other staff of the Internal Audit
Department are appointed by the management itself. Hence they are directly responsible to the
management. The main aim of internal audit is to build up sound and satisfactory internal control
system in the organization and consequently minimize the audit work of the external auditor.
However, in general its features are:
i. It is a part of management and control of the concerned enterprise
ii. Its scope and function is determined by concerned management.
iii. It may include management audit with financial audit
iv. It is continuous in nature
v. Such auditors are the permanent staff of the organization
vi. It helps external auditor
C. Government Audit:
The government audit is an instrument of financial control. It is mainly concerned with the audit
of:
i. Receipts
ii. Expenditures
iii. Sanctions
iv. Provisions of funds
v. Rules and orders
vi. Debt and remittance transactions
vii. Stores and stock.
The main function of government audit is to examine the government accounts under prescribed
government audit rules and to inform the government concerned regarding his findings and
suggestions. It is the responsibility of the government to examine his suggestions and to take
remedial action for promoting the economy of the country.
D. Statutory Audit:
Where undertakings are formed under statue or specific law, audit for such undertakings are
made compulsory under that statue or law. An audit under that statue is called statutory audit.
Examples of statutory audit are company audit, cooperative society audit, public undertakings
audit, insurance company audit, public charitable trust audit. Statutory is to be performed by
professional certified accountant or accounts officer as per requirement of respective legal
provision.
E. Private Audit:
Private enterprises, where audit is not compulsory under relevant Acts may also prepare audit of
their accounts to ensure proper use of fund, check and control misappropriation, frauds and
assurance as to proper reporting in financial statements. Such audit is found in case of
partnership, sole trader ship, club, etc. The nature of such type of audit is voluntary and scope is
subject to terms of appointment, but attention is required to the professional obligations and
guidance, if it is done by professional auditor.
Classification based on Dimensional Viewpoint:
Financial Audit: Audit conducted to examine financial statements as to proper recording of
transactions, keeping books of accounts, preparing financial statements and examining these
documents in order to report as to fairness and truthfulness of representation is called financial
audit.
Operational Audit: The concept of Operational Audit is a contemporary development. It aims at
improving overall performance of an organization by helping to improve future business
operation. Practically, it is seen to review any part of business operation to:
a) assess organization’s operating procedure and methods as to efficiency and effectiveness.
b) improve profitability by pointing out laps thereof; if any
c) examine other important operational and management aspects
d) develop recommendations for overall future development, actions aim in at better
performance
Compliance Audit: A compliance audit is one where audit involves obtaining and evaluating
evidence to determine whether certain financial or operating activities of the enterprise conform
to specified condition, rules and regulations.
Cost Audit: Cost Audit is concerned with the verification and examination of books of cost
accounts in order to ensure whether these have been correctly maintained in accordance with the
system of cost accounting employed by the company. Moreover, it is also aims at detections of
errors and preventions from frauds and misappropriations.
Management Audit: It is an audit to examine, review and independently appraise the various
policies of the management on the basis of objectives standards. Its aim is to reveal the short
comings or irregularities in management and suggest ways and means to management for
improving operational profitability and organization viability. It aids management for effective
use of resources economically and increase its efficiency at all levels throughout the
organization.
Forensic Audit: A forensic audit is one which is conducted for the direction or deterrence of wide
variety of fraudulent activities. Such audit has grown significantly in recent years in response to
major frauds in some big business in western countries and collapse of some due to these big
frauds. The objective of this audit is to-identify frauds and persons/activities involved, trace out
fund and assets thereof, and offer recommendations to prevent such fraud in future. Some
examples where forensic audit can be done Business or employee fraud, criminal investigations,
ownership dispute, business economic losses, matrimonial dispute.
Classification based on Scope:
Standard Audit: Standard audit is defined as complete check and analyses of certain items and
contingent upon effective internal check and test check on remaining items, in accordance with
general standards.
Partial Audit: When audit scope is made limited by virtue of terms of appointment and the
auditor is asked to check certain books or accounts then it is called partial audit.

Types of Auditors:

The person doing the audit and who is ultimately responsible for the result of the audit is called
Auditor. The auditor is concerned with the financial statements of an enterprise. He is also
involved in providing his expert services in areas like tax planning, tax compliance, cost
reduction, information systems. The auditor generally does one or more of the following
functions besides auditing of financial statements-

a) Tax Auditing b) Management and Operational Auditing c) Cost Auditing d) Internal Auditing,
Concurrent Auditing e) Information Systems Auditing f) Quality Auditing g) Energy Auditing

The different Engagement of Auditor in Audit of Financial Statements-

i. Statutory Auditor: The auditor in doing the audit function of the financial statement may be
rendering his services as a statutory auditor. As a statutory auditor, he may be doing the attest
function of the whole entity or may be doing the attest function of a unit or branch of the entity.
In the later case he will be called a branch auditor.

ii) Branch Auditor: The auditing of branches by a person different from the auditor of the whole
entity would call for matters meriting attention.

iii) The practice of appointing more than one auditor to conduct the audit of large entities has
been in vogue for a long time. Such auditors, known as joint auditors, conduct the audit jointly
and report on the financial statements of the entity.