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Audit: An Audit may then be said to be such an examination of the books, accounts and

vouchers of a business, as shall enable the auditor to satisfy himself whether the balance
sheet is properly drawn up, so as to give a true and fair view of the state of the business,
and that the profit and loss account gives a true and fair view of the profit or loss for the
financial period, according to the best of his information and the explanations given to
him as shown by the books; and if not, in what respects he is not satisfied.
ISA 1: entitled Objective and Basic Principles Governing an Audit has defined audit as
under-
An audit is the independence examination of financial statements or related information
of an entity, whether profit oriented or not, and irrespective of its size, or legal form,
when such an examination is conducted with a view to expressing an opinion thereon.
ISA 1 lays down that the auditor is responsible for forming and expressing his opinion on
the financial statements.

Difference between Auditing and Accounting:


Accounting Auditing
1. it means maintaining the books of 1. It means examining the accounts and
accounts reporting on their accuracy
2. The spade work is done by the 2. the auditors work begins, where the
accountant to enable the auditor to give a accountants work ends
finishing touch
3. The accountant prepares the financial 3. Audit entails preparation and submission
statements of report on the checking and examination
of the accounts etc.
4. No prescribed qualification are legally 4. It is mandatory that an auditor of a
required to be possessed before public limited company must be a chartered
appointment of an accountant is made accountant
5. The job of an accountant is generally 5. The auditor of a public limited company
entrusted to him by management and he is is appointed by shareholders.
expected to perform the same

ISA 3: has given emphasis on integrity, objectivity, independence, confidentiality, skills


and competence. In this respect relevant material is reproduced below:
Integrity, Objectivity and Independence- The auditor should be straightforward, honest
and sincere in his approach to his professional work. He must be fair and must not allow
prejudice or bias to override his objectivity. He should maintain an impartial; attitude and
both be and appear to be free of any interest which might be regarded, whatever its actual
effect, as being incompatible with integrity and objectivity.
Confidentiality- The auditor should respect confidentiality of information acquired in the
course of his work and should not disclose any such information to a third party without
specific authority or unless there is a legal or professional duty to disclose.
Skills and Competence- The audit should be performed and the report prepared with due
professional care by persons who have adequate training, experience and competence in
auditing.
The auditor requires specialised skills and competence which are acquired through a
combination of general education, technical knowledge obtained through study and
formal courses concluded by a qualifying examination, and practical experience under
proper supervision. In addition, the auditor requires a continuing awareness of
developments including relevant international and national pronouncements on
accounting and auditing matters, and relevant regulations and statutory requirements.

Objects of an Audit:
ISA-1 contains objectives of an audit which is as follows:
“The objective of an audit of financial statements prepared within a framework of
recognised accounting policies, is to enable an auditor to express an opinion on
such financial statements.
The auditor’s opinion helps establish the credibility of the financial
statements. The user, however, should not assume that the auditors opinion is an
assurance as to the future viability of the entity nor an opinion as to the efficiency
or effectiveness with which management has conducted the affairs of the entity.”
The objects of an audit are classified as under:
1. The detection and prevention of errors or mistakes
2. The prevention and detection of loss to the client by reason of fraud or
misrepresentation resulting in the accounts being false or incomplete
3. Expression of independent opinion on accounts.
4. Moral check
1. The detection and prevention of errors and mistakes-
a. Clerical Errors:
(i) Errors of Ommission- These occur where the transaction has been
either omitted wholly or partially. Such errors do not affect the
accuracy of the trial balance. A searching eye and a critical scrutiny of
the accounts only can uncover such errors. For example, scrutiny of
salaries account in the general ledger may indicate that salaries for
only 11 months have been accounted for and the outstanding amount
for the 12th month has not been provided for.
(ii) Errors of Commission- These consists of incorrect additions, wrong
postings and entries. Some of the examples of these are:
a. Errors in additions- carry forwards in the books of original entries or
ledgers
b. Errors or incorrect postings- debit amount posted to credit, wrong
amount posted to an account, an amount posted twice, omission to post
an amount from a book of original entry to the ledger
c. Errors in taking out balances of the ledger accounts
(iii) Compensatory Errors- It is an error which is counter balance by
another error of same amount in the opposite direction. For example an
over-casting of an account by Tk. 500 may be counter balanced by
under-casting of another account to the same extent.
(iv) Trial Balance Errors- These may consist of casting error in the trial
balance omission of a balance while extracting balance from the books
of accounts or entering an amount incorrectly or on the wrong side.
2. The Detection and Prevention of Fraud:
a. Embezzlement of Cash- Misappropriation of cash takes place by omitting
to enter receipts or by entering fictitious payments or by under-casting the
receipt side of the cash book or by over-casting the payments side of the
cash book or by committing a theft of the cash in hand. Twelve instances
in respect of fraudulent practices relating to cash are given below:
1. Cash received in respect of sales, accounts receivable
previously written off as bad debts and from other income
accruing sources may be understated and the unrecorded
cash may be embezzled.
2. cash refunds arising out of the invoice overpayments may
not be recorded and amount misappropriated
3. Receivable may not be recorded and cash received against
the same embezzled.
4. False credits may be passed in customers accounts relating
to discounts, returns allowances or bad debts and an
equivalent cash received may be stolen.
5. Misappropriation of cash drawn in respect of wages may be
done by either inserting dummy names in the wages sheet
or by overcasting the wages sheet.
6. Proceeds of bills discounted may be misappropriated and
the bills still shown on hand.
7. Cash received in respect of goods sent on sale or return or
under VPP system may be pocketed and goods shown
having been returned.
8. Vouchers once approved and paid may be used in support
of further reimbursements
9. Cheques
b. Misappropriation of Goods:- Goods purchased may be stolen or used for
personal benefits. Proper method of keeping accounts in respect of
purchases, sales, consumption, stock-taking, periodical-physical checking
of stocks etc., and the checking thereof with the records would help in
preventing such loss.
c. Fraudulent manipulation of accounts:- This type of fraud is comparatively
more difficult to detect than those discussed above, as this is usually
committed by directors or the management with the object of either
showing more profits or less profits than they actually are. With these
objectives, certain beneficial strings are linked. Some of the examples of
such frauds are:
1. Inflation or suppression of sales
2. Inflation or suppression of purchase
3. over-valuation or under-valuation of assets and liabilities
4. utilization of secret reserves during a period when the
concern has made less or no profit without disclosing this
facts to the shareholders
5. Not providing any depreciation or providing less or more
depreciation.
The auditor must carry out the routine checking, vouching and
verification and make searching enquiries intelligently to detect such
fraudulent manipulations.
3. Expression of independent opinion on accounts:
After the audit has been completed, the auditor should submit his report, the contents
of which will depend upon the requirements of his clients except in the case of
limited companies in which the contents of his report to the shareholders are laid
down in the Companies Act, the Insurance Act and the Banking Act govern the
inclusion of additional matters in the auditors report in the case of an insurance and
banking company respectively.

4. Moral Check:
The visits of an auditor have considerable moral check on the staff of the client as
they are aware that the accounts will be checked. A regular audit, therefore, tends to
keep the books of accounts up-to-date, and assists in exercising a great moral
influence on the staff so as to help in preventing fraud and errors.

SCOPE OF AUDIT
ISA 1 Contains lucid discussion in respect of Basic Principles governing an Audit scope
of audit. These are as follows:
1. The scope of an audit of financial statements is normally
determined by the requirements of ISAs, relevant professional bodies, legislation,
regulations, and where appropriate the terms of the audit engagement, and
reporting requirements.
2. The audit should be recognised to cover adequately all
aspects of the entity as far as they are relevant to the financial statements being
audited. The auditor should determine whether the information contained in the
underlying accounting records and other sources data is reliable and sufficient as
the basis for the preparation of the financial statements.
3. The auditor should obtain a sufficient understanding of the
accounting and internal control systems to plan the audit and develop an effective
audit approach. The understanding of the accounting and internal control systems,
together with the inherent and control risk assessments and other considerations,
enables the auditor to:
• identify the types of potential material misstatements that could occur in
the financial statements;
• consider factors that effect the risk of material misstatements; and
• design appropriate substantive procedures.
4. Judgements permeates the auditors work; for example, in
deciding the extent of audit procedures and in assessing the reasonableness of the
judgements and estimates made by management in preparing the financial
statements.
5. In forming an opinion on the financial statements, the
auditor carries out procedures designed to obtain reasonable assurance that the
financial statements give a true and fair view or present fairly in accordance with
the relevant national standards or international accounting standards or IFRS in all
material aspects.
6. The auditor determines whether the relevant information is
properly communicated by:
• comparing the financial statements with the underlying accounting records
and other source data to see whether they properly summarise the
transactions and events recorded therein; and
• considering the assertions that management has made in preparing the
financial statements.
7. Constraints on the scope of the audit of financial statements
that impair the auditor’s ability to express an unqualified opinion on such
financial statements should be set out in the report, and a qualified opinion or
disclaimer of opinion should be expressed, as appropriate.

FUNDAMENTAL PRINCIPLES AND TECHNIQUES OF AUDITING


The fundamental principles of auditing are the principles on which is founded the whole
art of auditing and which govern the objects of audit. The techniques of auditing consists
of the methods adopted for achieving those objects. These principles ate the decision of
errors and fraud and the verification of accuracy of accounts. They must remain
unchanged whatever technique is adopted to give effect to them.
Auditing is closely related to accountancy. Therefore any changes and improvements in
methods of accounting result in corresponding changes in the techniques of auditing. The
techniques of auditing are also affected by changes in the law, particularly in relation to
the accounts of the limited company. Such changes in the law usually impose increased
duties and responsibilities of auditors and require some revision in the method of his
works.

THE OPERATION OF AUDIT:


The audit work is operated with the help of the following techniques:
8. Ticking- Ticking indicates the placing of a mark against an
entry in the books to denote that it has been examined by the auditor for a certain
purpose. Variously shaped marks are used to denote checking of additions,
posting, carry-forward, tracing, extraction of balances etc.
9. Casting- Casting refers to the checking of additions of
books of accounts and financial statements. It is essential that arithmetical
accuracy be checked so that frauds or errors (if any) may be detected.
10. Calling-over- Calling-over is a sizable part of the work of
audit consists of the comparison of entries in two or more books or of an entry in
a book with its supporting evidence or voucher. This is usually carried out by two
clerks, one reading the item to the other.
11. Vouching – The function of the voucher is to authenticate
an entry and the auditor must satisfy himself that it does exist. it must correspond
in date and account to the entry in the books. It must be in respect of the client
and the entry must be correctly passed in the books. The act of vouching consists
of checking the documentary evidence as should establish the accuracy and
truthfulness of the entries appearing the books of account.
12. verification- When an auditor has vouched the entries
appearing in the books of accounts, his duty is not thereby fully discharged. If
appointed for audit under the act, he has to report whether or not the balance sheet
exhibits a true and correct view of the state of affairs of the company. For this
purpose, he should satisfy himself on the following points:
(i) That each asset and liability is correctly valued and correctly stated in
the balance sheet.
(ii) That the assets actually existed at the date of the balance sheet
(iii) That they are property of the business.
(iv) That they are not suffering from a charge except that disclosed in the
balance sheet
The technique of audit carried out to achieve the foregoing objective is known as
‘verification’
13. Reporting: An auditors should submit a report to the
management by disclosing the information regarding findings, recommendation
and compliance of accounting techniques. Modern trends follow the under-noted
sequence:
(i) Examination of the accounting system
(ii) Evaluation of internal controls
(iii) Sample checking of vouchers
(iv) Verification of assets and liabilities
(v) Submission of auditors report.

PROCEDURES AFFECTING AUDIT


Compliance Procedures----These tests are designed to obtain reasonable assurance that
those internal controls on which audit reliance is to be placed are in effect.
Substantive Procedures----- These are designed to obtain evidence as to the
completeness, accuracy and validity of the data produced by the accounting system.
These are of two types:
(1) Tests of details of transactions and balances
(2) Analysis of significant ratios and trends including the resulting investigation
of unusual and items.
Analytical Review Procedures----- These are used to describe the analysis of significant
ratios and trends including investigation of unusual fluctuations and items.

CONDUCT OF AUDIT
From the point of view of the conduct of audit, it may be classified as Continuous audit,
Final audit, Interim audit. These are now explained:
1. Continuous audit- It is also known as running audit. Under such type of audit, an
auditor is required to visit a business house at intervals (which may be fixed or
otherwise during the financial year and check the books to date as far as possible.
This type of audit is practicised. When it is desired that the audited final accounts
should be ready immediately after the close of financial year as in the case of
banking companies; when a business is extra-ordinarily large and numerous
transactions are to be checked; when in a business house, monthly or quarterly
final accounts are required throughout the year.
Advantages:-
i) Easy rectification of errors
ii) Check on frauds
iii) Quick completion
iv) Closer contract with the business
v) Proper attention
vi) Interim dividend
Disadvantages:
i) Alteration in figure
ii) Interruption in work
iii) Inconvenience
iv) Expensive
2. Final Audit- A final or complete audit is one which is started after the close of the
accounting year of a business and it is carried out until completion. It is also
called balance sheet audit or periodical audit. The advantages of this type of audit
are as follows:
(1) The auditor is supplied with the full facts relating to the year
under review and he can peruse the books and accounts duly completed in
respect of that particular year.
(2) There is less danger of manipulation and alteration of figures
after they have been checked
(3) Thread of the work is not likely to be lost, as the whole work is
performed at one stretch.
The final audit works satisfactorily in case of small concerns but in case of large
businesses, it takes more time to check accounts and to submit the report to the
shareholders.
3. Interim audit- Interim audit lies midway between final audit and continuous audit.
In order to know the reliable trading results of a business or a part of the year, the
proprietor may arrange for the carrying out of an interim audit to be carried out
during the year, i.e. monthly, quarterly or half-yearly. For example, if the
directors of a particular company desire to pay the interim dividend after a certain
period, say nine months after the date of financial closing, an interim audit may be
conducted.
Interim audit has the following advantages:
(1) It enables the final audit to be completed soon.
(2) Auditors suggestions can be implemented quickly in an interim
audit satisfactorily done by staff along with the advice of auditors
(3) In the audit of a large and important concern, some form of
interim audit is almost indispensable in order that a sufficient amount of
detailed checking may be done.
This type of audit to be adopted depends upon the magnitude and requirements of
the business.
AUDIT PLANNING
ISA 4 deals exclusively with planning. Relevant portions are reproduced below:
(1) Planning should be continuous throughout the engagement and involves:
(a) developing an overall plan for the expected scope and conduct of the
audit; and
(b) developing an audit programme showing the nature, timing and extend of
audit procedures.
Changes in conditions or unexpected results of audit procedures may cause
revisions of the overall plan and of the audit programme. The reasons for
significant changes should be documented.
(2) Adequate audit planning help to ensure that appropriate attention is devoted to
important areas of the audit, potential problems are promptly identified, and the
work is completed expeditiously. Planning also assists in proper utilisation of
assistants and in coordination of work done by other auditors and experts
(3) The extent of planning will vary according to the size and complexity of the audit,
the auditor’s previous experience with the client, and his knowledge of the
client’s business.
(4) The auditor may wish to discuss elements of his overall plan and certain audit
procedures with the client’s management and staff to improve the efficiency of
the audit and to audit procedures with work of the client’s personnel. The overall
audit plan and the audit programme; however, remain the auditor’s responsibility.
DEVELOPING OF AN OVERALL PLAN
The auditor should consider the following matters in developing his overall plan for the
expected scope and conduct of the audit:
(1) The terms of his engagement and any statutory responsibilities.
(2) The nature and timing of reports or other communication with the client that are
expected under the engagement
(3) The accounting policies adopted by the client and changes in those policies.
(4) The accounting policies adopted by the client and changes in those policies.
(5) The effect of new accounting or auditing pronouncements on the audit
(6) The identification of significant audit areas
(7) The setting of materiality levels for audit purposes.
(8) Conditions requiring special attention, such as the possibility of material error or
fraud or the involvement of related parties
(9) The degree of reliance he expects to be able to place on accounting system and
internal control
(10) The nature and extent of audit evidence to be obtained
(11) The work of internal auditors and the extent of their involvement, if any, in the
audit
(12) The involvement of other auditors in the audit of subsidiaries or branches of the
client
(13) The involvement of experts.
The auditor should document his overall plan. The form and extent of the
documentation will vary depending on the size and complexity of the audit. A time
budget, in which hours are budgeted for the various audit areas or procedures, can be an
effective planning tool.
DEVELOPING THE AUDIT PROGRAMME
The auditor should prepare a written audit programme setting forth the procedures that
are needed to implement the audit plan. The programme may also contain the audit
objectives for each area and should have sufficient detail to serves as a set of
instructions to the assistants involved in the audit and as means to control the proper
execution of the work.
In preparing the audit programme, the auditor, havi9ng an understanding of the
accounting system and related internal control, may wish to rely on certain internal
controls in determining the nature, timing and extent of required auditing procedures.
The auditor may conclude that relying on certain internal controls is an effective and
efficient way to conduct his audit. However, the auditor may decide not to rely on
internal controls when there are other more efficient ways of obtaining sufficient
appropriate audit evidence. The auditor should also consider the timing of the
procedures, the coordination of any assistance expected from the client, the availability
of assistants, and the involvement of other auditors or experts.
The audit plan and related programme should be reconsidered as the audit progresses.
Such consideration is based on the auditor’s review of internal control, his preliminary
evaluation thereof, and the results of his compliance and substantive procedures.

AUDIT EVIDENCE
ISA 8 deals with audit evidence. Its salient features are reproduced below:
Sufficient appropriate evidence- Sufficiency and appropriateness are interrelated and
apply to evidence obtained from both compliance and substantive procedures.
Sufficiency is the measure of the quantity of audit evidence obtained; appropriateness
of audit evidence relates to its relevance and reliability. Normally, the auditor should
finds it necessary to rely on evidence that is persuasive rather than conclusive. He may
often seek evidence from different sources or of a different nature to support the same
assertion.
The audit evidence should, in total, enable the auditor to form an opinion on the
financial information. In forming such an opinion, the auditor does not normally
examine all of the information that is available to him because he can reach a
conclusion about an account balance, class of transactions or a control by way of
judgmental or statistical sampling procedures.
The auditor’s judgment as to what is sufficient appropriate audit evidence is influenced
by such factors as:
(a) the degree of risk of misstatement:- This risk may be affected by-
• the nature of the item;
• the adequacy of the internal control;
• the nature of the business carried on by the entity;
• situations which may exert an unusual influence on management; and
• the financial position of the entity;
(b) the materiality of the item in relation to the financial information taken as
a whole;
(c) the experience gained during previous audits;
(d) the results of auditing procedures, including fraud or error which may
have been found; and
(e) the type of information available.
In obtaining audit evidence from compliance procedures, the auditor is concerned
with the following assertions:
Existence- the control exists
Effectiveness – the control is operating effectively
Continuity – the control has so operated throughout the period of intended reliance.
In obtaining audit evidence from substance procedures, the auditor is concerned with
the following assertions:
Existence – an asset or a liability exists at a given date
Rights and Obligations – an asset is right of the entity and a liability is an obligation
of the entity, at a given date
Occurrence – a transaction or event took place which pertains to the entity
Completeness – there are no unrecorded assets, liabilities or transactions
Valuation – a n asset or liability is recorded at an appropriate carrying value
Measurement – a transaction is recorded in the proper amount and revenue or expense
is allocated to the proper period
Presentation and disclosure – an item is disclosed, classified, and described in
accordance with acceptable accounting policies and when applicable legal
requirements

The reliability of audit evidence is influenced by its source – internal or external, and
by its nature – visual, documentary or oral. While the reliability of audit evidence is
dependent on the circumstances under which it is obtained, the following
generalisations may be useful in assessing the reliability of audit evidence:
(3) External evidence is more reliable than internal
evidence
(4) Internal evidence is more reliable when related
internal control is satisfactory
(5) Evidence obtained by the auditor himself is more
reliable than that obtained from the entity
(6) Evidence in the form of documents and written
representations is more reliable than oral representations.
The Auditor may gain increased assurance when audit evidence obtained from
different sources or of a different nature is consistent. When audit obtained from
one source is inconsistent with that obtained from another, and then further
procedures may have to be performed to resolve the inconsistency.
The Auditor should be thorough in his effort to obtain evidence and be objective in
its evaluation. In selecting procedures to obtain evidence, he should recognise the
possibility that the financial information may be materially misstated.
There should be a rational relationship between the cost of obtaining evidence and
the usefulness of the information obtained. However, the matter of difficulty and
expense involved in testing a particular item is not itself a valid basis for omitting a
procedure.
When the auditor is in reasonable doubt as to any assertion of material significance,
he should attempt to obtain sufficient appropriate evidence to remove such doubt. If
he is unable to obtain sufficient appropriate evidence, he should not express an
unqualified opinion.
Methods of obtaining Audit Evidence:
The auditor obtains evidence in performing compliance and substantive procedures by
one or more of the following methods:
(1) inspection
(2) observation
(3) inquiry and confirmation
(4) computation; and
(5) analytical review
The timing of such procedures will be dependent in part upon the periods of time during
which the audit evidence sought is available.
These points are briefly explained now:
1. Inspection- Inspection consists of examining records, documents or tangible
assets. Inspection of records and documents provides evidence of varying degress
of reliability depending on their nature and source and the effectiveness of
internal controls over their processing. Three major categories of documentary
evidence, which provide different degrees of reliability to the auditor are:
(a) documentary evidence created and held by third parties
(b) documentary evidence created by third parties and held by the entity; and
(c) documentary evidence created and held by the entity.
Inspection of tangible assets provides reliable evidence with respect to the
existence but not necessarily as to their ownership or value.
2. Observation- Observation consists of looking at a process or procedure being
performed by others. For example the auditor may observe the counting of
inventories by client personnel or the performance of internal control procedures
that leave no audit trial.
3. Inquiry and confirmation – Inquiry consists of seeking appropriate information of
knowledgeable persons inside or outside the entity. Inquiry may be formal or
informal. Confirmation consists of the response to an inquiry to corroborate
information contained in the accounting records.
4. Computation – Computation consists of checking the arithmetical accuracy of
source documents and accounting records or of performing independent
calculations.
5. Analytical Review- Analytical review consists of studying significant ratios and
trends and investigating unusual fluctuations and items.