University of Jahangir Nagar

Institute of Business Administration

BBA Programme 21
st
Batch
Auditing and Taxation
Lecture 1 & 2
ourse Teacher!
"hish #aider ho$dhury
shishcho$dhury%yahoo&co&u'
(1 A)ri* 2(1+
0
1& Audit, Auditing
The word audit has been defned by many distinguished authors and every one of
them has attempted to highlight one aspect or the other. Defnitions of the word
audit given by authorities on the subject are as follows:
n audit is the independent e!amination of fnancial statements or related
information of an entity" whether proft oriented or not" and irrespective of its si#e"
or legal form" when such an e!amination is connected with a view to e!pressing an
opinion thereon.$
Internationa* "tandard of Auditing 1
n audit is such an e!amination of the boo%s" accounts and vouchers of business"
as will enable the auditor to satisfy himself that the &alance 'heet is properly drawn
up" so as to give a true and fair view of the state of the a(airs of the business and
whether the )roft and *oss ccount gives a true and fair view of the proft or loss
for fnancial period" according to the best of his information and e!planations given
to him and as shown by the boo%s+ and if not" in what respects he is not satisfed$
")icer and Peg*er
n audit is an e!amination of accounting records underta%en with a view to
establishing whether they correctly and completely re,ect the transactions to which
they purport to relate. -n some instance it may be necessary to ascertain whether
the transactions themselves are supported by proper authority.
L& -& .ic'see
n audit is an e!amination of such records to establish their reliability and
reliability of statements drawn from them. A&/&
#anson
uditing is connected with the verifcation of accounting data with determining the
accuracy and reliability of accounting statements and reports.$ -& 0& 1aut2
uditing is a systematic e!amination of the boo%s and records of business or other
organi#ations in order to ascertain or verify and to report upon" the facts regarding
the fnancial operations and the results thereof.$
1ontgomery
-t can be concluded that" the audit means critical and intelligent e!amination of
facts. fnancial or otherwise to give in the form of certifcate or report an attestation"
an e!pert opinion or e!pert advice.
2& 3rigin of Audit
The word audit is derived from the *atin word audire$ which means to hear. -n the
good old days whenever the proprietors of a concern suspected a fraud" certain
people were appointed to hear verbal evidence of transactions of barter etc." and to
1
judge the facts. They heard the points of view of those who maintained the
accounts. *ucas )acilio who is commonly considered as the father of double entry
boo%.%eeping wrote his treatise on the double entry boo%.%eeping and described the
duties and responsibilities of an auditor in it. The roots of modern audit lie deep in
the birth of -ndustrial /evolution" which brought large.scale production in its wa%e.
The rapid growth of ban%ing" transport 0 insurance development" use of mechanical
appliances and computers in business concerns and gigantic growth of joint stoc%
companies have resulted in the growing importance of audit. The need of audit
became imminent when the management and ownership of business was divided
among di(erent groups of people. The investor would naturally li%e to see that his
investment is safe. 1or this purpose" the accountants must be chec%ed and audited"
especially in case of joint stoc% companies. s it is not possible for shareholders to
chec% the accounts of the company they appoint a person who would audit the
accounts on their behalf. 1ormerly such a person used to be one of the shareholders
who might not technical %nowledge of accountancy. To have an e(ective chec%" the
custom to appoint professional accountant began to develop.
4& Advantages of audit
2. 5rrors and frauds are *ocated at an early date and in future no attempt is
made to commit such frauds or one is rather careful not to commit an error
or fraud as accounts are subject to regular audit.
3. The auditing of accounts %eeps the accounts department regu*ar and
vigi*ant as they %now that the auditors would complain against them if the
account is not prepared up.to date or there is any irregularity.
4. 1und can be 6orro$ed easily on the basis of previous audited &alance
'heet.
5. -f the accounts have been prepared on a uniform basis" accounts of one year
can be com)ared with other years and if there is any discrepancy" the cause
may be en6uired into.
7. -n case of any accident8mishap8untoward event" the insurance company
may settle the claim on the basis of audited accounts of the previous years.
+& /hat is accounting
ccounting means the compilation of accounts in such a way that one is in a
position to %now the state of a(airs of the business. -t is a comprehensive
information system begins with recogni#ing the event of transaction" ends with
analysis and interpretation. The man who performs this wor% is called an
accountant. 9is wor% is to interpret and review the accounts and draw conclusions
with a view to guide the management in chal%ing out the future policy of business.
+&1 Necessity, im)ortance & ro*e of accounting
2. To determine )ro7t or *oss! the most principle aim of a business
organi#ation is to achieve proft. -f the transactions of a business organi#ation
are written and maintained in the boo%s of accounts properly" it can be easy
to determine the amount proft achieved within a certain period.
2
3. To determine the 7nancia* condition! The fnancial condition of a
business organi#ation can be %nown by preparing the balance sheet at the
end of the year only through preserving the accounts.
4. om)arative ana*ysis! -f the accounts are preserved in right way" the
improvement or other condition of business can be recogni#ed by doing
comparative analysis of one years income.e!pense with that of another year.
5. To ta'e care of the assets and re)ayment of de6t! To %now the amount
of debt and to repay it in time etc." it is necessary to %eep any %inds of
accounts of related to debt.
7. To determine the income tax! The income ta! of a business organi#ation is
determined on the basis of its income. 'o it is important to prepare a reliable
-ncome statement after preserving the accounts in a scientifc way.
:. To ta'e *oan! The fnancial institutions" want to watch the fnancial
statements of a business to assess the power of loan repayment before
issuing loan.
;. To manage 6usiness! -t helps the management to run the business in right
way by supplying di(erent information.
8& -e*ationshi) 6et$een Accountancy and Auditing
ccountancy and auditing is specially related the wor% of auditing begins after that
of accounting.
ccountant e!amines whether transactions are written accurately following the
accounting theory or rules and prepares fnancial statements with the help of boo%s
of accounts and other fnancial information. nd he presents and describes these to
the owner or director in such a way" so that they can be well informed about the
fnancial condition of the business and can decide what to do in future.
lthough an auditor does not prepare the accounts" he e!amines whether
accounting rules are properly followed to prepare these. 9owever" it is not his
principal duty. 9is main duty is to give his e!pert opinion after judging
independently and neutrally" the accounts and descriptions of business prepared
earlier" whether the fnancial condition of the business is presented logically.
1rom the above discussion it is clear that" there is a close relation between
uditing and ccounting. &ecause it is the job of an accountant to assess the reality
and dependability of fnancial statements prepared and described by accountants
on the basis of fnancial transactions written in accounting boo%s. The spade wor% is
done by the accountant to enable the auditor to give a fnishing touch. -t has been
said that " where the wor% of an accountant ends" the wor% of an auditor begins.
9& .i:erence 6et$een Accounting and Auditing
Accounting Auditing
-t is the act of maintaining boo%s of
accounts of an organisation
-t goes for the e!amination of the
accounts and reporting on their
accuracy to the sta%eholders
The wor% is a preparatory wor% by the
accountant for a fnishing touch by
The wor% of an auditor begins where
the wor% of an accountant ends.
3
the auditor.
The accountant of an organisation
prepares the fnancial statements and
fund ,ow statements along with
some analytical statements.
uditor prepares the end product i.e.
audit report based on the wor%
already done by the accountant upon
chec%ing and e!amination
The law does not ma%e compulsory
about the 6ualifcation of an
accountant. -t is the management
who stresses on the competence of
an accountant.
-t is legally mandatory that an
e!ternal auditor i.e. the auditor of a
public company must be a <hartered
ccountant =<>.
The accountant is appointed by the
management on its re6uirement.
The auditor is appointed by the
shareholders at the ?@ of the
<ompany.
;& Audit P*anning
n audit plan is a detailed outline of the auditorAs plans and procedures used in
conducting an audit. The importance of good detailed documentation in the audit
plan cannot be stressed enough. n audit plan will include the following items:
description of the business activities+
schedule of planned audit procedures+
summary of the evaluation of the records+
description of special problems to be resolved in the audit.+
Deviations from the plan if any" and why the deviations were made+
The results of the audit+
*isting of events8activities occurring during the audit.
-ecord of Audit P*anning, Activities, and -esu*ts
The /ecord of udit )lanning" ctivities" and /esults are the form which documents
the audit plan for every audit performed. This form" which can be completed
manually or on the computer" should be completed as the audit progresses. The
computeri#ed audit plan can be accessed through the @' Bord program in
Bindows.
<& Audit Programme
-t refers to the detailed listing of the steps to be ta%en by an uditor" such as a <
when analy#ing transactions to determine the acceptability of fnancial statements.
@ajor accounting frms may prepare an audit program for each client and re6uire
the person who does the wor% to sign or initial each step performed.
2. -dentifcation of the audit procedures followed in an audit.
3. Cutline and description of the steps and wor% to be conducted in an audit
engagement.
Typically" it specifes the name of the auditor responsible for a given job including
the estimated time to conduct the audit tas%. The audit program guides and
4
controls the wor% of sta( assistants. Bhen a tas% is conducted" identifcation is
made of who performed it and the date.
=& Audit $or'ing )a)ers
udit wor%ing papers are the documents which %eeping all audit evidences obtained
during fnancial statements auditing. udit wor%ing paper is to be able to support
the audit wor%s done in order" suDcient and assurance audit evidences have been
obtained and reasonable assurance audit conclusion can be made in due course.
udit wor%ing papers are the property of the auditor. -n order to %eep professional
ethic" it cannot discover to third party without consent of the client unless limited
specifed situations mentioned in -' 34E Documentation and re6uired by law" the
e!amples are court order" for public interest and so one.
=&1 ontents of auditor $or'ing )a)ers
Permanent
@emorandum and rticles of ssociation+
&usiness registration certifcate+
&usiness *icense+
1ranchising certifcate and agreements+
&usiness agreements with ban%" suppliers and customers+
*ist of professional advisers =eg. lawyer> and outsourcing contractors+
uditor engagement letter+
@anagement representation
Current
1inancial statements including balance sheet" income statement" cash ,ow
statement" budget" business forecast statement of the client and so on+
udit planning document including time sheet and human resource
arrangement records of audit sta(+
/is% assessment documentation+
udit evidence of the audit job+
udit sampling method and the sample si#e calculation+
'chedule of unadjusted di(erence+
udit review points and highlight+
<lientAs system Bea%ness letter and management letter.
=&2 Pro)er features of $or'ing )a)ers
/eviewed by auditors with supervisory+
'igned" dated and approved by relevant level of audit sta( with suDcient
cross reference+
Bith e(ective audit planning" wor% done" suDcient and 6uality evidence+
5
Cutstanding matters cleared in due course.
1(& Interna* ontro* once)t
-nternal control refers to the whole system of control in conducting a business and
includes internal chec%" internal audit and any other form of control.
ontro* in 3rgani2ations
<ontrols are restraining and directive in,uences over the activities of a
system
?eneral principles of control are applied in business organi#ations
ccounting systems assist management in controlling operations
ccounting internal controls assure that all transactions are authori#ed" all
transactions are recorded" access to assets is allowed only for authori#ed
purposes and accounting records describe only real assets.
FAdministrative contro* includes but is not limited to" the plan of
organi#ation and the procedures and records that are concerned with the
decision processes leading to managementAs authori#ation of transactions.
'uch authori#ation is a management function directly associated with the
responsibility for achieving the objectives of the organi#ation and is the
starting point for establishing accounting control of transactions.F =G43E.3;>
FAccounting contro* comprises the plan of organi#ation and the procedures
and records that are concerned with the safeguarding of assets and reliability
of fnancial records and conse6uently are designed to provide reasonable
assurance that:
Threats, 5x)osure, -is' and 36>ectives of interna* contro*
Threat! 9a#ard" potential loss
-is'! li%elihood of potential loss
/ea'ness! ris% not reduced to a low level by internal controls
5x)osure! 'i#e of potential loss associated with a control problem
5x)ected *oss H e!posure I ris%
36>ective of ontro*s! @inimi#e losses to organi#ation resulting from
threats
5xam)*es of threats ?incom)etence@
wasteful and ineDcient use of resources
poor management decisions
unintentional errors recording or processing data
accidental loss or destruction of records
loss of assets through employee carelessness
lac% of compliance by employees with management policies
5xam)*es of threats ?i**ega*@
lac% of compliance with government regulations
pilferage
6
em6e22*ement! theft or misappropriation of assets by employees"
accompanied by the falsifcation of records designed to conceal the theft
other illegal acts by employees" such as the ta%ing of a bribe
ontro* ris'
Fontro* ris' is the ris% that error that could occur in an account balance or class of
transactions and could be material" when aggregated with error in other balances or
classes" will not 6e )revented or detected on a time*y 6asis 6y the system
of interna* accounting contro*s&F
ontro* /ea'ness
F materia* $ea'ness in internal control is a condition in which the specifc control
procedures or the degree of compliance with them do not reduce to a relatively low
level the ris% that errors or irregularities in amounts that would be material in
relation to the fnancial statements being audited may occur and not be detected
within a timely period by employees in the normal course of performing their
assigned tas%s.F
Aour o6>ectives for contro*s
authori2ation =all transactions are authori#ed>
recording =all transactions are recorded>
access =allow access to assets only for authori#ed purposes>
asset accounta6i*ity =ensure that accounting records describe only real
assets>
-n addition" accounting and data processing must be operationally eDcient.
ost and Bene7ts of Interna* ontro* BThe 6ene7t of an interna*
contro* must exceed its cost
)rimary cost is personnel
&enefts stem from reductions in e!pected loss
onsider 6oth e:ectiveness and timing
a control that prevents a loss is superior to a control that detects a loss after
it has occurred
early detection is essential if prevention fails
when a failures occurs" correction reduces future losses
-e*ia6i*ity ana*ysis
assess e(ectiveness of specifc control procedure in detecting and correcting
a specifc type of error
system reliability is probability that process will be completed with no errors
ris% is complement of system reliability
11& Interna* and 5xterna* Audit
The 1ain .i:erences
7
There are many %ey di(erences between internal and e!ternal audit and these are
matters of basic principle that should be fully recogni#ed:
The e!ternal auditor is an e!ternal entity and not an employee of the
organi#ation as is the internal auditor&
The e!ternal auditor see%s to provide an opinion on whether the accounts
show a true and fair view" whereas internal audit forms an opinion on the
ade6uacy and e(ectiveness of systems of ris% management and internal
control" many of which fall outside the main accounting systems&
The 1ain "imi*arities
The main similarities between internal and e!ternal audit are as follows:
2. &oth the e!ternal and internal auditor carry out testing routines and this may
involve e!amining and analy#ing many transactions.
3. &oth the internal auditor and the e!ternal auditor will be worried if
procedures were very poor and8or there was a basic ignorance of the
importance of adhering to them.
4. &oth tend to be deeply involved in information systems since this is a major
element of managerial control as well as being fundamental to the fnancial
reporting process.
5. &oth are based in a professional discipline and operate to professional
standards.
7. &oth see% active co.operation between the two functions.
:. &oth are intimately tied up with the organi#ations systems of internal control.
;. &oth are concerned with the occurrence and e(ect of errors and
misstatement that a(ect the fnal accounts.
J. &oth produce reports on their activities.
8