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Transcript of ACT427 Auditing
December 23, 2012
Mr. Mahbubur RahmanMr. Mahbubur Rahman
Professor,Professor,
Department of Business Administration,Department of Business Administration,
East West University,
Dhaka-1219
Subject: Honesty, Integrity and Dedicated Professionalism Can Elevate the Position of an Auditor to be
the Best Economic Guard of an Establishment.
Dear Sir:
It gives us a pleasure to submit the project on “Honesty, Integrity and Dedicated
Professionalism Can Elevate the Position of an Auditor to be the Best Economic Guard of
an Establishment” as you authorized us to prepare by August 08,2012.
It was a fantastic opportunity for us to prepare the report under your guidance, which really
was a great experience for us. The data used for preparing the project includes information
available from Different book, Institution as well as internet website.
We have worked hard and tried our best to prepare the project. We believe that it is
encouragement for us to get involved with this process of reporting and a way to enrich our
practical knowledge. We will be very much pleased to provide further clarification on this
project whenever it is necessary.
Sincerely yours,
Sushanta Kumar Roy (2009-1-10-093) ……………………………………….
Mohammad Shaniaz Islam (2009-1-10-102) ……………………………………….
Md. Shakib Chowdhury (2009-2-10-181) ………………………………............
Afia Ferdous Mousumi (2009-2-10-135) ……………………………………….
Page 1 of 28
Executive SummaryExecutive Summary
This Project is prepared as a mandatory requirement for our course requirement for concept of
Auditing (ACT427) at East West University. The project is named “Honesty, Integrity and
Dedicated Professionalism Can Elevate the Position of an Auditor to be the Best Economic
Guard of an Establishment”
In, Auditing is very important and vastly discussed subject. Audits are assessments of the
financial ability of a company. Companies prepare financial statements of their activities, which
signify their overall performance
An Auditor’s to the economic and ethical leadership the bounding standard or in other
conditions provides an auditor in such a way that recognizes him as an effective body.
A successful auditor, his conscience is the biggest assets for his profession. The crucial problem
is the human heart and its insatiable greed. If the rules and regulations of the supervising
institutions could effectively deal with this issue, then society could celebrate the end of
accounting scandals, as well as other callous behaviors presently prevailing in all segments of an
economy.
We have analysis how Honesty, Integrity and Dedicated Professionalism Can Elevate the
Position of an Auditor to be the Best Economic Guard of an Establishment.
Page 2 of 28
Table of Content
Contents Page Numbers
Introduction 4
History of Auditing 5-6
Definition of Auditing 7-8
Purpose of Auditing 9
Diagram of Steps in the Audit Cycle10
Objective of Auditing 11-15
Advantages of Proper Auditing 16
Who is an Auditor 17-18
Responsibilities of Auditor 19-20
Auditor is the most reliable economic guard of an Establishment 21
Honesty, Integrity and Dedicated Professionalism and other
Characteristics of an Auditor
22-24
Example of Audit Failure 25-27
Conclusion 27
References 28
Page 3 of 28
Introduction
In modern present business world, Auditing is an internationally determined and
globally talked of issue. Usually, it is a counter check to accounting details so that any
error, mistake or frauds can be easily recognized through the technique of auditing.
Hence, it is the main resource of advice on efficiency, efficiency and overall economy of
an establishment. Auditing starts its journey where accounting end.
In modern present society the exercise of an auditor’s to the economic and ethical
leadership the bounding standard or in other conditions provides an auditor in such a
way that recognizes him as an effective body. With the enhancing aware recognition of
the value of financial data in the ordering of everyday business and economic life, the
need of primary economic details is providing a consistently enhancing chance of the
accounting profession. The auditors’ reports have an exclusive prospective to satisfy up
with the need for effective and reliable financial material not only because of the
reputation or prestige of the certified statements, but also because of the importance
generally attached by the business man to the functions of the auditor and his reports.
These functions, and the chance of these reports, have in the past been definitely
relevant to the character of and changes in business activity.
Audits and reviews are methods performed on the financial statements of a company,
for the purpose of determining whether the financial statements consist of any material
misstatements. Misstatements are generally incorrect figures due to numerical errors,
frauds, or errors in interpreting the accounting recommendations. Misstatements are
material if they are large enough to make a difference to a user of the financial
statements, such as a financial institution or investor. And the person who involved in
auditing is known as auditor. It also provides the techniques necessary to evaluate the
internal control system of a company and perform operational or compliance audits by
internal or external auditors. The beginning concepts of the functions of the auditor
were such as to confine him to the duties a mere checker and verifier of debits and
credits. As business became more complex in its interrelationships there has been a
compensating broadening demand for the acceptance of new and formerly V
responsibilities by the auditor.
Page 4 of 28
History of Auditing
The origin of auditing goes back to the early times of accounting. Whenever the
advancement of civilization brought about the necessity of one man being entrusted to
some extent with the property of another, some kind of check upon the fidelity of the
former was in place. The ancient Egyptians imposed such a check by arranging that the
fiscal receipts should be recorded separately by two officials. In later times, ancient
Greeks instituted a system of checking public accounts by means of checking-clerks,
every public official having his accounts scrutinized at the expiry of his term of
office. Ancient Romans too, as early as the time of the Republic, recognized the salutary
distinction between the official who authorizes or orders revenue and expenditure and
the official who has the duty of handling cash; and they developed an elaborate system
of checks and counter-checks among the various financial officials. In Italy in the middle
Ages, the transactions of a cashier appear to have been checked by means of a separate
record of them kept by a notary.
Auditing existed primarily as a method to maintain governmental accountancy, and
record-keeping was its mainstay. It wasn’t until the advent of the Industrial Revolution,
from 1750 to 1850, that auditing began its evolution into a field of fraud detection and
financial accountability. Businesses expanded during this period, resulting in increased
job positions between owners to customers. Management was hired to operate
businesses in the owners’ absences, and owners found an increasing need to monitor
their financial activities, both for accuracy and for fraud prevention. In the early 20 th
century, the reporting practice of auditors, which involved submitting reports of their
duties and findings, was standardized as the “Independent Auditor’s Report.” The
increase in demand for auditors leads to the development of the testing process.
Auditors developed a way to strategically select key cases as representative of the
company’s overall performance. This was an affordable alternative to examining every
case in detail, and it required less time than the standard audit.
During the 18th century industrial revolution brought in large scale production, steam
power, improved facilities and better means of communication. This resulted in the
origin of Joint stock form of organizations. Shareholders contribute capital of these
Page 5 of 28
companies but do not have control over the day to day working of the organization. The
shareholders who have invested their money would naturally be interested in knowing
the financial position of the company. This originated the need of an independent
person who would check the accounts and report the shareholders on the accuracy of
the accounts and the safety of their investment.
The Indian Companies Act, 1913 defined the qualification, power, duties and procedure
of appointment of the Auditor. The audit of Joint Stock Company made compulsory by
this Act. Educational qualification certificate were issued by the central and state
governments to those who undergone the prescribed course. In the year 1949,
Chartered Accountants Act was passed. Company act 1956 further elaborated the
provisions related to the auditing and accounts of the companies. Now a person to do
the auditing must be qualified as per the standards of the Institute of Chartered
Accountants of Bangladesh.
Moreover, from the time of ancient Egyptians, Greeks and Romans, the practice of
auditing the accounts of public institutions existed. Checking clerks were appointed in
those days to check the public accounts. To locate frauds as well as to find out whether
the receipts and payments are properly recorded by the person responsible was the
main objective of Auditing of those days.
Page 6 of 28
Definition of Auditing
Auditing is a division of financial management concerned with assessing the internal
financial status of a business. Audits are assessments of the financial ability of a
company. Companies prepare financial statements of their activities, which signify their
overall performance. These financial statements are analyzed by auditors, who assess
them according to the industry’s generally accepted standards. They are analyzed for
accuracy and fairness in their reporting. Companies are expected to complete their
audits, as the results are very important to the business's popularity and success. Audits
are very valuable to external company affiliates, such as shareholders and investors,
because they provide an extra reassurance of their choice in investment strategies when
issues occur.
Audits are conducted to manage and confirm the correctness of a company’s accounting
procedures. It evolved as a business necessity once it became evident that a
standardized form of accountancy must exist to avoid fraud. It has designed into a
standardized yet complicated area that is considered as an important procedure in the
management of business finance.
The word ‘Audit’ is originated from the Latin word ‘audire’ which means ‘to hear’. In
the earlier days, whenever there is suspected fraud in a business organization, the
owner of the business would appoint a person to check the accounts and hear the
explanations given by the person responsible for keeping the accounting funds. In those
days, the audit is done to find out whether the payments and receipt are properly
accounted or not.
Moreover, Auditing is a systematic process of objectively obtaining and evaluating
evidence regarding assertions about economic actions and events to ascertain the
degree of correspondence between those assertions and established criteria and
communicating the results to interested users. In fact, audit is
an examination and verification of a company’s financial and accounting records and
supporting documents by a professional, such as a Certified Accountant. Again, an audit
is an IRS examination of an individual or corporation’s tax return, to verify its accuracy.
Page 7 of 28
There are three types of audits: correspondence audits (the IRS mails a request
for additional information), office audits (an interview is conducted at a local IRS office),
and field audits (an interview is conducted at a taxpayer’s place of business, for
a corporate tax return). Since there is always the chance of an audit, experts
recommend keeping good records to support all the information in a return. The reason
detailed and accurate bookkeeping is so important is that the burden of proof is on the
filer, not the IRS.
As Audit is an international subject, thus a precise definition of the term ‘Auditing’ is
difficult to give. For this reason we have tried to mention some of the definitions given
by some scholars. These are:
According to Montgomery, a well known author, “auditing is a systematic examination of
the books and records of a business or the organization in order to ascertain or verify and
to report upon the facts regarding the financial operation and the result thereof. “
Spicer and Pegler expanded the above definition as follows:
“An audit may be said to be such an examination of the books, accounts and vouchers of a
business as well enable the auditor to satisfy 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 whether
the Profit or Loss for the financial period according to the best of his information and the
explanations given to him and as shown by the books, and if not, in what respect he is not
satisfied.”
R. K. Mautz defines auditing as being “concerned with the verification of accounting data,
with determining the accuracy and reliability accounting statement and reports.”
It is clear from the above definitions that auditing is the systematic and scientific examination of
the books of a accounts and records of a business so as to enable the auditor to satisfy himself that
the Balance Sheet and the Profit and Loss Account are properly drawn up so as to exhibit a true
and fair view of the financial state of affairs of the business and profit or loss for the financial
period.
According to Lawrence R. Dicksee, “an audit is an examination of accounting records undertaken
with a view to establishing whether they correctly and completely reflect the transactions to which
they relate. In some instances, it may be necessary to ascertain whether the transactions
themselves are supported by authority.”
Page 8 of 28
Purpose of Auditing
The main purpose of an audit function is to provide verification of records, procedures
or functions in a sufficiently independent manner from the institution or subject being
audited in order to add its value and improve its operations. Now, let’s have a look over
some specific purpose of auditing, that we have discovered through our research on a
team. These purposes are mentioned below with proper explanation:
Detection of any error, mistake or fraud in the books of accounts and other
relevant records of a business audited.
Identification of information that is essential to develop an overall picture of the
institution/local authority.
Identification of any weaknesses or administrative flaws which otherwise would
not be identified due to the unwillingness or inability by the insiders of the
institutions or organization.
Identification of strengths and weaknesses of the administrative structures in
order to inform prescribed decisions on overall strengthening of the institution
to the authority.
Providing baselines on which reforms can be assessed.
Performing an independent assessment of an action, function, or system, in order
to determine the effectiveness of that action, function, or system’s ability to
control risk.
Page 9 of 28
Figure: Steps in the audit cycle
Page 10 of 28
Objectives of Auditing
As there are several objectives of auditing, thus to have better understand we will
divide its objectives into two wide classification. These categories are: Primary
Objectives and Secondary Objectives.
Primary Objectives: To figure out and judge the reliability of the financial statement
and the supporting accounting records of a particular financial period is the main
purpose of the audit. As per the Indian Companies Act, 1956 it is mandatory for the
organizations to appoint a auditor who, after the examination and verification of the
books of account, disclose his opinion that whether the audited books of accounts, Profit
and Loss Account and Balance Sheet are showing the true and fair view of the state of
affairs of the company's business. To get a true and fair view of the company’s affairs
and express his opinion, he has to thoroughly check all the transactions and relevant
documents of the company made during the audited period. Which will help the auditor
to report the financial condition and working result of the organization. While carrying
out the process of audit, the auditor may come across certain errors and frauds. But
detection of fraud or errors is not the primary objective of the audit. They are come
under the secondary objectives of audit. Audit also disclose whether the Accounting
system adopted in the organization is adequate and appropriate in recording the
various transactions as well as the setbacks of the system.
Secondary Objectives:
In order to report the financial circumstances of the business, auditor has to assess the
books of accounts and the relevant documents. In that process he may come across
some errors and frauds. We may classify these errors and frauds as below:
1. Detection and prevention of Errors
2. Detection and prevention of Frauds.
Detection and prevention of Errors: Following types of errors can be detected in the
process of auditing.
Clerical Errors
Page 11 of 28
Errors of Principle
Clerical Errors: Due to wrong posting such errors may occur. Money received from
Microsoft credited to the Semens's account is an example of clerical error. Even though
the account was posted wrongly, the trial balance will agree. We can classify clerical
errors as below:
i. Errors of Commission
ii. Errors of Omission
iii. Compensating Errors.
Clerical Errors: Due to wrong posting such errors may occur. Money received from
Microsoft credited to the Semens's account is an example of clerical error. Even though
the account was posted wrongly, the trial balance will agree. We can classify clerical
errors as below:
i. Errors of Commission
ii. Errors of Omission
iii. Compensating Errors.
Errors of Commission: These errors are errors caused due to wrong posting either
wholly or partially of in the books of original entry or ledger accounts or wrong totaling,
wrong calculations, wrong balancing and wrong casting of subsidiary books. For
example Rs. 5000 is paid to Microsoft for the supply of windows program and the same
is recorded in the cash book. While posting the ledger the Microsoft's account is debited
by Rs. 500. It may be due to the carelessness of the accountant. Most of these errors of
commission are reflected in the trial balance and can be identified by routine checking
of the books.
Errors of Omission: When there is no record of transactions in the books of original
entry or omission of posting in the ledger could lead to such errors. Sales not recorded
in the sales book or omissions to enter invoices in the purchase book are examples of
Errors of Omission. Errors due to entire omission will not affect the trial balance. Errors
due to partial omission will affect the trial balance and can be detected.
Page 12 of 28
Compensating Errors are errors committed in such a way that the net result of these
errors on the debit side and credit side would be nullifying the net effect of the error.
For example, Ram's account which was to be debited for Rs. 5000 was credited for Rs.
5000 and similarly, Sita's Account which was to be credited for Rs. 5000 was debited for
Rs. 5000. These two mistakes will nullify the effect of each other. Unless detailed
investigation is undertaken such errors are difficult to locate as both the sides of the
trial balance are equally affected.
Errors of Principle: While recording a transaction, the fundamental principles of
accounting is not properly observed, these types of errors could occur. Over valuation of
closing stock or incorrect allocation of expenditure or receipt between capital and
revenue are some of the examples of such errors. Such errors will not affect the trial
balance but will affect the Profit and Loss account. It may occur due to lack of
knowledge of sound principles of accounting or can be committed deliberately to falsify
the accounts. To detect such errors, the auditor has to do a careful examination of the
books of account.
Detection and Prevention of frauds: To get money illegally from the organization or
from the proprietor frauds are committed intentionally and deliberately. If it remains
undetected, it could affect the opinion of the auditor on the financial condition and the
working results of the organization. Therefore, it is necessary for the auditor to exercise
utmost care to detect such frauds. It can be committed by the top management or by the
employees of the organization. Frauds could be of the following types:
1. Misappropriation of cash
2. Misappropriation of goods
3. Falsification or Manipulation of accounts
4. Window dressing
5. Secret Reserves
Misappropriation of Cash: Since the owner has very limited control over the receipt
and payments of cash, misappropriation or defalcation of cash is very common
Page 13 of 28
especially in big business organizations. Cash can be misappropriated by various ways
as mentioned below:
a. Recording fictitious payments
b. Recording more amount than the actual amount of payment
c. Suppressing receipts
d. Recording fewer amounts than the actual amount of payment.
There should be strict control over receipts and payments of cash known as "Internal
check system" to prevent such frauds. The auditor should check the Cash Book with
original records, bills register, invoices, vouchers, counterfoils or receipt books, wage
sheets, salesman's diary, bank statements etc. in order to discover such frauds.
Misappropriation of goods: Companies handling with high value goods are pray to
this kind of misappropriation. Without proper records of stock inward and stock
outward, it is difficult for the auditor to find out such fraud. Periodical and surprise
checking of stock and maintaining the proper record of inward and outward movement
of stock can reduce the possibility of such fraud.
Falsification or manipulation of accounts: In order to achieve certain specific
objectives, accounts may be manipulated by those responsible persons who are in the
top management of the organization. They prepare accounts such a manner that they
disclosed only a fake picture not the true picture. Some of the ways used in
manipulating the accounts are as follows:
1. Inflating or deflating expenses and incomes
2. Writing off of excess or less bad debts.
3. Over-valuation or under-valuation of closing stock.
4. Charging excess or less depreciation
5. Charging capital expenditures to revenue and vice-versa
6. Providing for excess or less doubtful debts.
7. Suppressing sales and purchase or showing fictitious sales and purchases etc.
Page 14 of 28
Window dressing: is the way of presenting the financial data in a much better position
than the original position. It is known as window dressing. Some of the reasons for
doing window dressing are as follows:
1. To win the confidence of share holders
2. To obtain further credit
3. To raise the price of shares in the market by paying higher dividend so that shares
held may be sold
4. To attract prospective partners or shareholders.
5. To win the confidence of shareholders.
Secret Reserves: In secret reserves, accounts are prepared in such a way that they
disclose worse picture than actually what they are. The objectives of preparing
accounts in this way are:
1. To conceal the true position from the competitors.
2. To avoid or reduce the tax liability
3. To reduce the price of shares in the market by not paying dividend or paying lower
dividend so that the shares may be bought at a much lower price.
It is very difficult to detect such frauds since these frauds are committed by those
persons in the organizations who are at the top positions like directors, managers,
financial controllers etc. To detect these kinds of frauds, the auditor must be vigilant
and should make searching inquiries to arrive at the true position.
Page 15 of 28
Advantages of Proper Auditing
It is compulsory for all the organizations registered under the companies act must
be audited. There are advantages in auditing the accounts even when there is no legal
obligation for doing so. Some of the advantages are listed below:
1. Audited accounts are readily accepted in Government authorities like income Tax
Dept., Sales Tax dept., Land Revenue departments, banks etc.
2. By auditing the accounts Errors and frauds can be detected and rectified in time.
3. Audited accounts carry greater authority than the accounts which have not been
audited.
4. For obtaining loan from financial institutions like Banks, LIC, HUDCO, HDFC, IFCI etc.,
previous years audited accounts evaluated for determining the capability of returning
the loan.
5. 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.
6. Audited accounts facilitate settlement of claims on the retirement/death of a partner.
7. 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.
8. In case of joint Stock Company where ownership is separated from
management, 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.
Page 16 of 28
Who is an Auditor?
An official whose job it is to carefully check the accuracy of business records. An auditor
can be either an independent auditor unaffiliated with the company being audited or a
captive auditor, and some are elected public officials. The term is sometimes
synonymous with "comptroller." Auditors are used to ensure that organizations are
maintaining accurate and honest financial records and statements.
In addition to that, an individual qualified (at the state level) to conduct audits. An
auditor may be an internal auditor (an individual whose primary job function is
to audit his or her own company) or an external auditor (an individual from outside the
company, who typically is employed by an auditing firm who handles many
different clients).
An auditor is an individual qualified at the state level to perform financial and
accounting audits. An auditor examines, corrects and verifies the accuracy of financial
accounts related to businesses, non-profit organizations and government agencies. The
auditor is expected to perform an unbiased evaluation. An auditor can be an internal
employee or an external consultant. There is also the IRS auditor, who conducts an
inspection of a taxpayer's return or other related transactions to verify accuracy. An IRS
auditor conducts three major types of audits: correspondence, office and field. Because
there is always the chance of an auditor showing up at the door, it is recommended that
good records are kept to support all data contained within a return. An auditor may also
perform array of additional services such as budget analysis, financial and
investment planning, some legal services and technology consulting. Often an auditor is
required to have at least a bachelor's degree in accounting, business administration or
another related field.
In many cases, Auditors can work for many different entities, such as the IRS or a state
government. Auditors are also found in the private sector at accounting firms. There are
both internal and external auditors; internal auditors are usually employees or
contractors with the company they are auditing, while external auditors generally work
either directly for or in conjunction with governmental agencies.
Page 17 of 28
The work of an auditor is to check the financial accounts or the procedures and policies
of an organization for efficiency and accuracy. There are two types of auditors: external
and internal. An external auditor examines finances and is usually a qualified
accountant, while an internal auditor commonly focuses on efficiency and policy. As an
external auditor, his or her work involves the examination of company accounts,
collection and interpretation of figures, identification of risks and problems of the
business, assessment of the financial reporting systems of the company, establishment
of good working relationships with clients, and making of recommendations for
improvements.
Figure: Types of Auditor
Responsibilities of Auditor
Page 18 of 28
Auditor
Internal Auditor External or independent Auditor
Approved auditors, through the annual audit, perform a critical role in maintaining the
honesty and integrity of the audit system which is the fastest growing segment of the
business industry. In this role, approved auditors identify and report relevant matters
associated with a report and accordingly provide a strong positive influence on trustees.
It is recognized that many auditors adopt best practice and also provide guidance to
their clients on how to get things right. As a professional auditors are required to follow
a range of codes of practice, standards and requirements. Auditors work closely with
the professional accounting bodies in relation to the requirements and in providing
guidance for approved auditors. Together auditors are committed to maintaining and
improving the performance of approved auditors. In addition to helping and supporting
approved auditors, Companies identify those auditors who fail to 'adequately and
properly' perform their duties and work with the professional associations to improve
their performance.
Although all those who perform quality audits may not be members of ICAB, there are
still underlying principles which apply to the ethics of audits. In performing an audit,
the auditor should always strive to be objective in judgment and pronouncements. Only
the facts should enter into the assessment of whether conformance exists between
criteria and established programs. The auditor should express an opinion on a subject
only when it is based on adequate knowledge and honest conviction. In all cases, the
facts should speak for themselves. Opinions, when given, should be solidly grounded in
objective evidence. The leader of an audit team serves as a supervisor and should
always be willing to recognize good work and offer constructive criticism for
improvement in performance. The lead auditor must demonstrate through actions how
the audit team should act. A leader must demonstrate leadership and set good
examples. The team leader should require the team to comply fully with the rules,
regulations and customs of the organization under audit. This entails compliance with
the working hours, dress, lunch hours and other requirements. Team members should
attempt to blend into the environment in which they are auditing. Any action which
makes the team stand out will reduce its effectiveness in dealing with the audited
organization.
In dealing with any problem between the team and the audited organization, the team
leader must demonstrate fairness to both parties. The leader must deal with objectivity
Page 19 of 28
in obtaining the facts and settle any personality conflicts. If there is significant doubt
remaining as to verification of the facts or the correctness of the finding, and additional
evaluation fails to eliminate the doubt, the item should be dropped or offered in
terms which acknowledge the degree of uncertainty at the post-audit (exit) conference.
This type of action demonstrates the objectivity and fairness of the audit. Should
personality conflicts occur between members of the audit team, the team leader has the
responsibility to step in immediately and resolve the conflict? The resolution should
take place in private and be resolved to the benefit of the entire audit team and
organization being audited. It should be the clearly defined policy of any audit team that
there are no surprises involved with the audit at any time. Ethical audits require full
disclosure of any finding (or observation) with responsible members of the audited
organization to test its validity prior to formal exposure at the post-audit (exit)
conference or formal audit report.
The team leader must assure that he (or she) and the team members maintain their
integrity. They should not accept gifts or entertainment of a nature or degree that might
possibly prejudice the audit or affect the relationship between the two organizations
(auditee and audit team). If members of the audited organization offer to take the audit
team to lunch, it is the team leader responsibility to clarify the rules by which the lunch
is accepted, such as limiting the time away from the audited facility. During the conduct
of the audit, auditors often have access to proprietary information of the audited
organization. Auditors have a moral obligation not to divulge this information to
anyone. Divulging proprietary information is a violation of this moral obligation and is
not in the best business or professional interest of either organization (auditee or audit
team). The disclosure betrays a trust and, in so doing, gains a reputation that is not
conducive to building better business relations for his/her company or for himself (or
herself).
Auditor is the most reliable economic guard of an Establishment
Page 20 of 28
In today’s world; auditing has become an incorporated segment of the association. All
association wants auditing not only for avoidance and recognition of fake but in
addition for organizational effectiveness. Auditing plays an essential part to
appropriately finish the accounting records and timely preparation of the consistent
financial information. Internal audit moreover helps organization to defend the
property and maintaining the arranged and effectively accomplish of the business
including adherences to the management policies. The manner of auditing is becoming
easier day by day because of using computer aided audit. The computer aided audit
tools and technique software is simplifying and automating the audit process. The
auditor is now able to find any kind of fraud or material misstatement through the use
of CAATTs software. Government audit also helps the government to find whether the
resources are use effectively and efficiently. They evaluate the data and directly report
to the Comptroller and Audit general of Bangladesh. Also to guard the shareholder,
creditor and supplier from any kind of fraud, every corporation must verify their
financial report by an external auditor. The external auditor must be an independent
man also has to be a member of the ICAB in Bangladesh.
In modern business advancement audit is one of the core factor to be considered.
Because auditing provides support to the whole organization in such a way that it
serves both the external and internal users. For internal users it provides information
to manager to make judgment and for external user it provides guarantee that the
financial report is all right and out of any kind of material misstatement.
An auditor is the most reliable economic guard against fraud. Auditors’ tasks are
performed to ascertain the validity and reliability of information; also to provide an
assessment of a system’s internal control. The goal of an auditor is to express an opinion
on the person or organization or system in question, under evaluation based on work
done on a test basis. Due to practical constraints, an audit seeks to provide only
reasonable assurance that the statements are free from material error. Hence, statistical
sampling is often adopted in audits. In the case of financial audits, a set of financial
statements are said to be true and fair when they are free of material misstatements- a
concept influenced by both quantitative and qualitative factors.
Page 21 of 28
Honesty, Integrity and Dedicated Professionalism and other
Characteristics of an Auditor
There are many features which an auditor should have. Following are the essential
features of an auditor.
Honesty: An internal auditor must not embellish, or leave out, any information
in the final report. An auditor could have an inclination to leave out information
from testimonials which reveal that a certain employee, or department, is
ineffective, which could lead to a dismissal or termination. Yet, the point of the
auditor's report is to advise on how to become more effective, and this might
require termination.
Integrity: The word integrity implies complete honesty together with strength
of mind. Integrity and keeping its flag flying up should be kept by an auditor as a
guiding inflexible rule. He must be tactful and scrupulously honest. He must
possess qualities of withstanding and resisting the influence in the course of
discharge of his duties.
Dedicated Professionalism: The dedicated professionalism refers to
application all the techniques learnt from education, professional degree,
training etc. in related business. Every employs of an entity must apply their
knowledge and experience at their works so that the tasks they do are properly
done. Every employee should undertake works which he or she can expect to
compete with professional competence and with reasonable time. Again,
employees should conduct himself and refrain from any conduct which might
bring discredit to the profession. If this is ensured then productivity of the entity
will increase and fraudulent activity will reduce. Because, if employees use the
professional techniques at their work, every transition will be properly recorded
and transferred to proper books of account. As a result there reduces the
potential to misplace a record, misstate a transition and theft. This dedicated
professionalism is also important for the auditor who provides a reliable report
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on the validity of an entity’s financial statements. Because, without applying
professional techniques frauds and errors cannot be determined.
Qualification: For a professional auditor it is necessary that he should be a
charted accountant. In Bangladesh, he needs to have membership of Institute of
Chartered Accountants of Bangladesh, ICAB.
Know of Taxation Law: It is also a professional quality of an auditor. He must
own a sound working knowledge of taxation laws of the country. This is helpful
in checking the correct return of income etc.
Knowledge of Business/Mercantile Law: He should be quite familiar with the
company and mercantile laws. It is the professional quality of an auditor to be
aware of mercantile law and he should have a complete knowledge of Contract
Act, Sales of Good Act, Agency, Negotiable instruments Act, Partnership Act etc
should have a thorough training in business organization, management and
finance. He should have an understanding of the general principles of economics
and business statistics.
Maintain Secrecy: It is another basis personal quality of an auditor. In the
business world there is a keen competition and if the auditor does not care of the
secrecy of the business, then the client of the auditor has to face a lot of
difficulties. So, the auditor must maintain the entire secrecy among the clients.
He should never compromise his principles without being rigid in his attitude.
Up-to-Date Knowledge: An auditor’s knowledge of auditing must be up to date.
He must know the techniques of auditing. He must have the knowledge of other
subjects relating to auditing.
Bold and Courageous: Auditor should be bold and courageous person so that
none can influence him. He should possess the courage to face the difference of
opinion between him and client on any issue.
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Budget preparation: The auditor has a quality of preparing the budget
according to the facts and figures of previous year, the estimates are established
for the next year. The auditor can check that these budgets are prepared
according to their facts with correct data.
Independence: Independence is the personal quality of an auditor. This quality
is desirable for independent opinion on business activities. He cannot be
influenced directly or indirectly by other people. An auditor must be
independent at time of programming investigation and reporting. He cannot
change his program due to management interference.
Vigilance: This is also the quality of an auditor. By this quality the auditor can
discover the errors and frauds. The auditor can also watch and check that if
according staff has made any fraud or error. Because he has to be alert so that he
cannot avoid errors and frauds in order to exhibit a good performance in audit
work.
Judgment: An auditor must have the qualities of judgment. Judgment is involved
in selecting depreciation, provision for bad debts, inventory valuation. The
auditor can apply professional knowledge, experience and ethics to make
decisions in relevant areas.
Prudence: Prudence is the personal quality of an auditor. He can be asked to
give advice on financial matters. He can be allowed to suggest improvement in
accounting methods and techniques. There is a need to use prudence for guiding
the businessman when he is asked to do so.
Foresightedness: Auditor has not to work for a day or two in auditing
profession, so he should work by keeping eyes on future as well. Audit plan mad
by an auditor for one industry is helpful in future while conducting the audit of
similar industries.
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Goodwill Maker: Auditor helps to make the status of a company where he
conducted audit. On the basis of audited accounts that company can easily take
loans, can deal insurance agents/supplies, creditors etc.
Example of Audit Failure
To do the job of auditing an auditor must possess all the above mentioned
characteristics along with the honesty, integrity and dedication to professionalism. But
in some cases if they fail to maintain all the requirements they should have, then there
can be disastrous situation for the audited as well the auditor. On the other hand, only
because of maintaining all the rules and regulations given by the audit standards, an
auditor can be one best audit firm around the world. In the following section, we will
discuss the consequences of audit failure as an example of ENRON.
Consequence of audit failure can be devastating. It can not only bankrupt the company
but also harm the entire economic system. The best example of audit failure is Enron.
The Enron scandal was a corporate scandal involving the American energy Enron
Corporation and the auditing firm Arthur Andersen that was revealed in October
2001.the scandal eventually led to the bankrupt of Enron, at that point, the largest in
American history. Arthur Anderson, which at the time was one of the five largest
accounting firms in the world, was dissolved.
Enron was formed in 1985 by Kenneth lay. Several years later, when Jeffrey skilling was
hired, he instituted mark-to-market accounting and developed a staff of executives that
would later bring the downfall of the company. Along with chief financial officer Andrew
fastow and other executives, the company used accounting loopholes, special purpose
entities, and poor financial reporting to hide billions in debt from failed deals and
projects. Enron’s audit committee failed to follow up on high-risk accounting issues and
Anderson was pressured by the company to ignore accounting practices.
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Enron’s auditor, Arthur Andersen, was accused of applying reckless standards in their
audits because of a conflict of interest over the significant consulting fees generated by
Enron. In 2000, Arthur Andersen earned $25 million in audit fees and $27 million in
consulting fees (this amount accounted for roughly 27% of the audit fees of public
clients for Arthur Andersen’s Houston office). The auditor’s methods were questioned
as either being completed for conflicted incentives or a lack of expertise to adequately
evaluate the financial complexities Enron employed.
Andersen’s auditors were pressured by Enron’s management to defer recognizing the
charges from the credit risks as the special purpose entities became clear. To pressure
Andersen into meeting Enron’s expectations, Enron would occasionally allow
accounting firms Ernst & young or price water house coopers to complete accounting
tasks to create the illusion of hiring a new firm to replace Anderson.
In the aftermath of the scandal, many executives at Enron were indicated for a variety of
charges and were later sentenced to prison. Andersen was found guilty in a state court,
but by the time the ruling was overturned at the U.S. Supreme Court, the company had
lost the majority of its customers and had shut down. Employees and shareholders
received limited returns in lawsuits, despite losing billions in pensions and stock prices.
In 2002, the Sarbanes-Oxley act was passed as a result of the first admissions of
fraudulent behavior made by Enron. The act expanded criminal penalties for destroying,
altering, or fabricating records in federal investigations or for any attempt to defraud
shareholder.
Enron’s shareholders lost &74 billion in the four years before the company’s bankrupt
(&40 to &54 billion was attributed to fraud). As Enron had nearly &67 billion that it
owed to creditors employees and shareholders received limited, if any, assistance aside
from Enron. To pay its creditors, Enron held auctions to sell its assets. Many executives
at Enron were indicated for a variety of charges and were later sentenced to prison.
Enron’s auditor, Arthur Anderson, was found guilty in a state court, but by the time the ruling was
overturned at the US Supreme Court, the firm had lost the majority of its customers and had
shutdown. Employees and shareholders received limited returns in lawsuits, despite losing billions
in pension and stock prices. As consequences of the scandal, new regulations and
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legislations were enacted to expand the reliability of financial reporting for public
companies. One piece of legislation, the Sarbanes-Oxley Act., expanded repercussions
for destroying, altering or fabricating records in federal investigations or for attempting
to defraud shareholders .The act also increased the accountability of auditing firms to
remain objective and independent of their clients.
From the above discussion it is found that honesty, integrity and dedicated
professionalism are part and parcel for every organization to be sustained and
successful l. Any sort of fraudulent activity will, today or someday in future, cause
failure for the business. In the case of auditors, honesty, integrity and dedicated
professionalism play a crucial role in correctly preparing audit report on the true
financial position of the entity being audited and the entity’s compliance with the
international accounting principles and company policies. If auditors fail in this case,
audit failure may occur resulting in a very devastating situation both for the entity being
audited and the auditor itself. This audit failure may cause the company loose customers and
ultimately be bankrupt.
Conclusion
On the entire, it may be said that to get a successful auditor, their conscience is the
greatest belongings for their career. The crucial problem is the human heart as well as
its insatiable greed. If the rules and regulations on the supervising corporations could
successfully take care of this issue, after that society could observe the conclusion
associated with accounting scandals and various callous behaviors presently prevailing
in all segments of an economy.
Basically, in this particular report we have tried using the levels best to indicate how to
build transparency as well as enhance accountability with crucial administrators and
decision makers inside the business being audited. Positive findings of an independent
audit can go a long way in building public trust in the organization, while negative
findings can serve to catalyze change.. Consequently the auditor is the most reliable
economic guard to check the day today financial transaction of an entity. Although
currently situation it has been seen that there are several auditors which are attempting
to unethical practice which might be only give advantage to them but it provides
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negative influence in the economy. Some recent studies indicate that auditor at times
follow many unlawful activities which may result the dissatisfaction to the external
users of audit report like investors as well as country faces economic destruction only
because of those fraud activities. That’s why now a day honesty, integrity and dedicated
professionalism is cry of the business world which is the only way of ensuring quality
audit and by which an auditor can promote himself/herself from the current position to
the next desired position
References
http://highered.mcgraw-hill.com
http://www.accountanttown.com
http://www.ehow.com
http://iamsam.hubpages.com
http://www.cof.org
http://www.investopedia.com
http://www.investorwords.com
http://www.legal-explanations.com
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