Research Project on Audit

“An analysis on the costs and benefits of the internal

audit or internal review activities in,

Aramit Limited...”

Prepared for:Mr. rezvee rahmanTeacherBangladesh Institute of management studies

Curse name: BTEC Higher national certificateSubject: research project

Student name: sarker asif iqbalStudent id: 1312

Letter of Transmittal

August 22, 2007

To

Rezvee Rahman

Teacher

Bangladesh Institute of Management Studies

2/6, Block – B, Lalmatia, Mohammadpur, Dhaka- 1207.

Dear Sir,

With due respect and humble submission, I would like to state that I have completed my Research

Project on Auditing in a company of my choice.

In auditing in a company is a sophisticated area. I discussed the methodologies, questionnaires,

time schedule etc in this report. I also made recommendation to the company.

I expect your kind, concern and wise judgment on this report.

If you have any further enquiry concerning any additional information I would be very pleased to

clarify. Thank you.

Sincerely yours,

Sarker Asif Iqbal

ID: 1312

Date:

Acknowledgement

I begin by thanking the Almighty for the successful completion of the Higher National Certificate

by completing the Research Project on Auditing.

Secondly I would like to thank my parents who motivated me and gave me mental throughout the

course especially in the time of making reports.

I, then extend my heart-felt thank to our respected and cooperative Program Director Mr. Samiur

Rashid. His kind support and providing information and suggestion helped me to finish the course

in time.

I would like to thank my teacher Mr. Rezvee Rahman for allowing me to do such an interesting

and knowledgeable Project Report on Auditing in a company of my choice. I have done the

whole report based on the information that I got from primary and secondary data. His enormous

and continual effort and guidance made me successful in completion of the Report.

I would also like to thank each and every person of Bangladesh Institute of Management

Studies.

Executive Summary

Aramit Limited. Aramit Limited is a company which produces various kinds of products. These are foot wear, clothes, tin, pipes, and cement. They purchase raw materials for their production and supply the goods to market.

Aim of the audit

Proper accounting records have been kept and proper returns adequate for the audit received from branches not visited.

The accounts agree with the accounting records and returns. All information and explanations have been received as I think necessary and Ihave had

access at all times to the company’s book of accounts and vouchers. Details of directors’ emoluments and other benefits have been correctly disclosed in the

financial statements.

Particulars of loans and other transactions in favor of directors and others have been correctly disclosed in the financial statements.

The information given in the directors’ report is consistent with accounts. I will report to the share holders of the company if anyone of the following is not true. I will

give a true and fair view of the company to shareholders of the company.

Learning activity-01

TASK-1

Research question What are the purposes of auditing in Aramit Limited? What are the impacts of the report in Aramit Limited? What are the weaknesses within the systems of internal control in the company?

JustificationThe audit report is usually done by external auditors, to know the truth and fairness of a company’s financial statements. This will not only make the shareholders benefited but also will help other users or stakeholders of the company. An audit report is usually kept on for public records, with the filed financial statements. The purpose of external audit is to verify that the annual accounts provide a true and fair picture of the organization’s finances; and that the use of funds is in accordance with the aims and objects as outlined in the constitution.

It is not the prime role of the audit to detect fraud, although this may of course come to light during the checks that take place. Auditors have thus been described as ‘watchdogs not bloodhounds’.

Audit report describes the weakness and threats to the organization. It also gives explanation and recommendation of these weaknesses and threats. Therefore, the stakeholders of the company will be able to know different impacts of management decisions. Thus they can improve the performance of management and as well as remove the threats of the company.

TASK-2

I will do the audit in such a way so that it will reach the main purposes of auditing. I will make the audit report understandable to each and every stakeholders of the company. I will make a questionnaire which will be asked to directors, managers and employees of the company. I will make a time schedule for different tasks and will go through it.

We will collect the data through,Qualitative research:

I will ask questions face - to – face questions to different level of staffs and then will relate those with the documents we have to judge the character of staffs.

I will do telephone interviews in the case where can not reach the required stakeholder.

I will try to show the behavior and decision making of different level of staffs and will try to show the reasons behind

Quantitative research: Quantitative research is a systematic research procedure to know the

actual situation of the management’s working quantitatively. To do this I will go through the sales day book, purchase day book, sales

returns day book, cash book, petty cash book, journals and will do random sampling of the documents.

I can go to in-depth of interview, my observation will be clear and the document review will look handsome.

I will assume a time dimension to perform or complete all the tasks properly and then will segregate the total time for particular tasks according to tasks.

TASK-3

Date Topic Done with Remarks14 – 08 – 07 to16 – 08 – 07

Start and introduction with the company and planning.

Employees, managers and directors.

A formal introduction with the employees, managers, department directors and board of directors.

17 – 08 – 07 to20 – 08 – 07

Receiving previous audit reports.

Previous auditors.

Previous two audit reports will be collected and checked.

21 – 08 – 07 to28 – 09 – 07

Meeting with previous auditors.

Previous auditors.

Discussion to view the companies environment in sight of them.

29 – 08 – 07 to03 – 08 – 07

Collecting recent and previous financial statements and go through the

Accounts director and manager.

Previous two financial reports will be collected and matched with auditor’s reports.

statements.04 – 08 – 07 to12 – 08 – 07

Visiting different units.

Managers.

13 – 08 – 07 to16 – 08 – 07

Meeting with different level of staffs.

Employees, Department directors, Managers, Board of directors.

Meeting will be done with them separately. Question will be asked critically.

17 – 08 – 07 to18 – 08 – 07

Adding all the data and information.

19 – 08 – 07 Preparing a report for the stakeholders.

20 – 08 - 07 Presentation on our findings.

To board of directors.

TASK-4

Code of Ethics During and After the Research

A Code of Ethics is a comprehensive statement of the values and principles that shall guide the conduct of members of staff in an organization.

During and after the research I will ask questions directly to different level of staffs. In that case I will add the answers in my report but I will not disclose any name to anybody.

Data handling and reporting will be appropriate to the task. I will try my best to make trust, confidence and credibility. I will not violate confidentiality of anyone related to report. I will try my best to make the report using integrity. Integrity includes honesty, honesty,

truthfulness and candidness in the course of the work and in the relationships with the staff of audited entities.

I will make the report independently with fulfilling the objectives and maintaining impartiality.

Data presentations or interpretations will not be violated. I will be politically neutral throughout the research. I will provide advice and services other than audits to the audit clients by taking care so

that my advice does not lead to any conflict of interest. I will perform my duty in a professional manner at all times and by applying high

professional standards in carrying out the work to enable affectivity, efficiency and impartiality.

I will try to give recommendation to the company. The report will not be disclosed in front of competitors and I will handover the copyright to

the company. The report will be based on the actual situation of the company. No parts will be copied

from any source.

Learning activity-02

TASK-1

QuestionnaireWe want to check the control system of Aramit Limited. We want to check that how efficiently or perfectly their control system is working. We will check it through Internal Control Evaluation Questionnaires (ICEQs).Control Questions are as follows,

Sales are properly authorized? Sales are made to reliable payers? All goods dispatched are invoiced? All invoices are properly prepared? All invoices are recorded? Invoices are properly supported? All credits to customers’ accounts are valid? Cash and cheque received are properly recorded and deposited? Slow payers will be chased and that bad and doubtful debts will be provided against? All transactions are properly accounted for? Cash sales are properly dealt with? Sundry sales are controlled? At the period end the system will neither overstate nor understate debtors?

Resources used for secondary research Reports of 2004-2005 and 2005-2006. Internet. Journals. Media.

TASK-2

Research methodology

The methodology chosen by me will provide me enough information to carry out the research and to prepare a report.

I will ask the research questions to related stuffs from lower level to upper level. It will help me to get every one’s view and comments. So, I can include those in the recommendation. It will help me to find out fraudstars of the company. By adding all comments I can take neutral decision.

Previous reports will give me the views given by the previous auditors. So, it will help me to guess the limitations of the company.

I will get the historical views of the company from newspapers. Internet, journals will help me to carry out the research in-depth.

Learning outcome -03

TASK-1

Date Topic Monitoring Date Date of Update Agree/ Not agree

14 – 08 – 07 to16 – 08 – 07


17 – 08 – 07 to20 – 08 – 07


21 – 08 – 07 to28 – 09 – 07


29 – 08 – 07 to03 – 08 – 07

Collecting recent and previous financial statements and go through the statements.

04 – 08 – 07 to12 – 08 – 07


13 – 08 – 07 to16 – 08 – 07


17 – 08 – 07 to18 – 08 – 07



20 – 08 - 07 Presentation on our findings.

Supervisor’s name: _____________________

_________________________Supervisor’s signature and date

TASK-2

Date Topic Done with Changes

14 – 08 – 07 to16 – 08 – 07


Employees, managers and directors.

17 – 08 – 07 to20 – 08 – 07


Previous auditors.

Previous audit reports collected, checked and meeting done with the previous auditor.

21 – 08 – 07 to28 – 09 – 07


Previous auditors.


29 – 08 – 07 to03 – 08 – 07


Accounts director and manager.

Meeting with suppliers.

04 – 08 – 07 to12 – 08 – 07


Managers.

13 – 08 – 07 to16 – 08 – 07


Employees, Department directors, Managers, Board of directors.

Meeting will be done with them separately. Question will be asked critically.

17 – 08 – 07 to18 – 08 – 07



Presentation on the findings.

20 – 08 – 07 Presentation on my findings.

To board of directors.

Report handover.

I made a time schedule before. I was going through that schedule and finished some of my required task early. That’s why I revised my scheduled work.

TASK-3 & 4

Scope of Audit

As an Auditor I will focus on various concerns, such as:

Whether there is any discrepancy between the amount and quantity of raw materials purchased and the bill placed against them.

Whether the materials purchased according to the specification. Whether there is any discrepancy between the payment and bill submitted. Whether posting is given in all relevant books of prime entry properly. Whether financial statement is done properly e.g. any dissimilarity in expenditure, closing

balance in bank and cash in hand.

Materiality

I will consider small accounts very carefully so that they can not be repeated. I will also check in quantitative aspect and qualitative aspect.

Changes to the level of materiality:

The level of materiality must be reviewed constantly as the audit progresses. Changes to audit procedures may be required for various reasons.

I will alter the draft accounts that contain material error and therefore overall materiality changes.

External factors cause changes in the control or inherent risk estimates. Changes are caused by errors found during testing.

Effect of planning materiality on audit process

PLANNINGMATERIALITY based on draft financial statements.

Apply planning materiality to individual audit objectives/balances.

Test all itemsPLANNING MATERIALITY

Sample from remaining

Final materiality

Compare and consider need for additional testing.

Actual errors detected

Actual errors detected

Actual errors projected

Audit Risk:

Risk-centered approach will gave me an overall measure of risk, but at the same time it provided a quantification of each stage of the audit. A diagrammatic view of the risk-based approach is given below,

DETERMINE ACCEPTABLE AUDIT RISK. WE TOOK IT AS 5%

CONSIDER INDUSTRY AND OTHER BACKGROUND INFORMATION.

ASSESS INHERENT RISK

CALCULATE DETECTION RISK.

INVESTIGATE AND DOCUMENT INTERNAL CONTROLS.

ASSESS THE COTROL RISK

TEST CONTROLS

RE ASSESS CONTROL RISK.

DESIGN SUBSTANTIVE TESTS BASED ON DETECTION RISK.

Audit Risk

Audit risk has three components; Inherent risk. Control risk. Detection risk.

Audit risk is the risk that the auditors give an unqualified opinion on the accounts when they should have given a qualified opinion (or vice versa) or give an opinion qualified for a particular reason where that reason was not justified. Audit risk can never be completely eliminated.

During my work I have to deal with following risks,

Inherent Risk

This type of risk is by born. I can not cure it fully but it can be minimized. I pointed some inherent risks here, for example,

Faulty raw materials, Transposition error, Control of credit Sales.

Control Risk

This is the risk of misstatement. It can occur in an account balance or class of transactions. It can be material. It can not be prevented, or detected but it can be corrected on a timely basis.

Fraudulent activities by fraudster.

Detection Risk

Detection risk is the risk that audit procedures will fail to detect material errors. Detection risk is the risk that relates to the inability of the auditors to examine all evidence.

Audit Test

I carried out the following tests to examine the operational aspect of the company:

I checked that the references are being obtained for all new customers. I checked that all new accounts on the sales ledger have been authorized by senior staff. I checked that orders are only accepted from customers who are within their credit terms

and credit limits. I checked that customer orders are being matured with production orders and dispatch

notes. I checked the petty cash book. I checked the payment slips to find out ghost employee. I checked that the payment to debtor is properly recorded or not. I checked that the loans taken by the manager is recorded correctly or not. I checked the stock.

I checked that whether the control system made by the company is following by the employees properly or not.

I checked that whether the financial statement is maintained properly or not. I checked whether income statement and balance sheet are prepared by proper

accounting system. I checked the previous audit reports.

Some typical contents of sample working paper

The name of client. The balance sheet date. The file reference of the working paper. The name of the person preparing the working paper. The date the working paper was prepared. The subject of the working paper. The name of the person reviewing the working paper. The date of the review. The objective of the work done. The source of information. The work done. A key to any audit ticks or symbols. The results obtained. Analysis of errors or other significant observations. The conclusions drawn.

Working papers

Client name: Aramit Limited.Subject: DebtorsYear ended: 31st December 2006

Prepared byAS

Date: 18.08.2007

Reviewed byMS

Date: 20.08.2007SL-

8332

Objective To ensure sales ledger balance fairly stated.Work done Selected a sample of trade debtors as at 31 December and reconciled the

customer’s statement to the year and sales ledger balance. Results See SL-8332.

One debit note relating to Bishwash Builders Ltd. has not been accounted for. An adjustment is required.Debit: Bishwash Builders Ltd. 600000 Tk.Credit: Sales account 600000 Tk.Another error is found, which was immaterial, and which the fault of the my client was.The client management system should check statement reconciliation as supplier at least on the ledger account.

Conclusion After making the adjustment note above sales ledger balances are fairly stated as at 31st December 20X6

Client Name: Aramit LimitedSubject: CreditorYear ended: 31st December, 2006.

Objective To ensure purchase ledger balance fairly stated.Work done Selected a sample of trade creditors as at 31 December and recorded the

supplier’s statement to the year and purchase ledger balance. Vouched any reconciliation items to source documentation.

Results See 3442One credit note related to EURASIA LEATHER has not been accounted for. Adjustment is required. Debit: Trade creditors 20, 00000 TK.Credit: Purchases 20, 00000 TK.Another error was found. Which was immaterial and which was the fault of the supplier. In view of the error found, however, I should recommend that the client management checks supplier statement reconciliations at least on the large accounts.

Conclusion After making the adjustment noted above, purchase ledger balances are fairly stated as at 31st December, 2006.

SL-8332

Client name: Aramit Limited.Subject: DebtorsYear ended: 31 st December 20X6

Client Sales Customer’s Difference Agreed Reconciling

Prepared byAS

Date: 18.08.2007SL-

3442

Prepared byAS

Date: 18.08.2007

Reviewed byMS

Date: 20.08.2007

Reviewed byMS

Date: 20.08.2007

ledger Statement item

Bishwash Builders

Ltd.

600,000 600,000 ……. OK …….

Sheltech Ltd.

500,000 475,000 25,000 NO 25,000 Debit not yet

received1,100,000

SL-3442

Client Name: Aramit LimitedSubject: CreditorYear ended: 31st December, 2006.

Client Purchase ledger

Supplier statement

Difference Agreed Reconciling item

EURASIA LEATHER

2,000,000 20, 00000 ……. OK ……. …….

IQBAL BROTHERS TANNERY

1,470,000 14, 55000 15, 000 NO 15, 000 Credit note not yet

received.3,470,000

Flow chart for Bishwash Builders Ltd.

B.B. Limited Sales Dept. Credit Control Dispatch AccountsSales

Ledger clerk

Prepared byAS

Date: 18.08.2007SL-

3442

Reviewed byMS

Date: 20.08.2007

1. Order received from B.B. Ltd.

2. 5-part order acknowledgement created

3. Checked for credit worthiness

4. 3-part dispatch note created and 1 part is sent with goods to B.B. Ltd. (DN)

5. 2-Part invoice created (INV)

6.(Monthly) statement sent to B.B.Ltd.

Flow chart for Eurasia Leather

Purchase system – Chart 1 – Ordering and receiving of goods.

Eurasia Leather Op. No.

Warehouse Buyer Goods Inwards

2

3

OrderFrom B.B. Ltd.

X

x

2 3

B.B. Ltd.

Credit ratings

21

DN

To B.B. Ltd.With goods

2

21 X

Statement

1INV

Customer

B. B. Ltd.

x

X

Sales ledger

N

A

D

B

T

54

31

2

X X

Requisition of goods is signed by warehouse and given to Eurasia Leather. Order quantity is predetermined.Aramit Limited checked the authorization of requisition.Purchase order prepared using supplier’s latest price list. Mailed to Eurasia Leather.

File of outstanding purchase orders scanned weekly for overdue deliveries. When goods arrive, quantity is checked against the purchase order. Goods are in sealed condition. If obviously damaged, the quantity of delivery is refused. If goods are short delivered a shortage memo is raised at the same time and cross referenced to the GRN.

Filed in GRN numerical order.Filed in shortage memo in numerical order.

1

2

3

4

5

6

7

8

9

10

Eurasia Leather Purchase system – Chart 2 – Ordering and receiving of goods.Op No.

Goods Inwards Buyer Purchase ledger Clark

X

X

X

X

X

Req’nSupplier’s price

list

PO

X

P2

PO

GRN

To warehouse with goods as next requisition

P2

P2

Shortage memo

Matches and checks signature on GRN, quantity and description of goods.Invoice given sequential numbers and stamped with a grid for approval.Invoices filed until goods arrive.Invoices matched with GRN and purchase order. If unmatched buyer retains until goods received. Checks quantity, price and discount terms.Enters accounting code and signs approval grid. If price and quantity incorrect notes this on invoice and raises debit note. Debit notes are referenced to supplier invoice.

Check all costs and extensions on invoices over 20,000 TK and 10% of all invoices under 20,000TK.

Reviews invoices to see that package is complete and approval grid fully signed.

11

12

13

14

15

16

17

Direct from supplier (via mail room only)

Learning Activity – 04

Shortagememo

P1

P1

GRN

Shortage memo

P1

PO

X

Invoice

X

Debit Note

PO GRN

Invoice

P3

XTo supplier

Debit note

P3

TASK- 1, 2, 3 & 4

AS & CoCertified Accountants

52 Borobagh,Mirpur, Section-2,

Dhaka-1216.

The Board of Directors,Aramit Limited.53 Kallurghat Heavy Industrial Estates,P.O. Mohara,Chittagong - 4208.

Financial statement for the year ended 31st December 20X6

In accordance with normal practice, I set out in this letter certain matters which arose as a result of my review of accounting system and procedures operated by your company during my recent interim audit.

I would point out that the matters dealt with in this letter came to my notice during the conduct of my normal audit procedures which are designed primarily for the purpose of expressing my opinion on the financial statements of your company. In consequence my work did not encompass a detailed review of all aspects of the system and can not be relied on necessarily to disclose defalcations or other irregularities or to include all possible improvements in internal control.

Purchase: Ordering Procedures

Present systemDuring the course of my work I discovered that it was the practice of the stores to order certain goods from IQBAL BROTHERS TANNERY orally without preparing either a purchase requisition or purchase order.

ImplicationsThere is therefore the possibility of liabilities being set up for unauthorized items and at a non-competitive price. An d I found there a liability of 15,000 TK.

RecommendationsWe recommend that the buying department should be responsible for such orders and, if they are placed orally, an official order should be raised as confirmation.

Purchase Ledger Reconciliation

Present system

Although your procedures require that the purchase ledger is reconciled against the control account on the nominal ledger at the end of every month, this was not done in December or January.

ImplicationsThe balance on the purchase ledger was short by some 25,000 TK of the nominal ledger control account at 31st January20X6 for which no explanation could be offered. This implies a serious breakdown in the purchase invoice and or cash payment batching and posting procedures.

RecommendationsIt is important in future that this reconciliation is performed regularly by a responsible official independent of the day to day purchase ledger, cashier and nominal ledger functions.

Preparation of payroll and maintenance of personnel records

Present SystemUnder your present system, just four members of staff are entirely and equally responsible for the maintenance of personnel records and preparation of the payroll. Furthermore, the only independent check of any nature on the payroll is that the chief accountant confirms that the amount of the wages cheque presented to him for signature agrees with the total of the net wages column in the payroll. This letter check does not involve any consideration of the reasonableness of the amount of the total net wages cheque or the monies being shown as due to individual employees.

ImplicationsIt is a serious weakness of your present system, that so much responsibility is vested in the hands of just four people. This situation is made worse by the fact that there is no clearly defined division of duties as between the four of them. In my opinion, it would be far too easy for fraud to take place in this area and or for clerical errors to go undetected.

Recommendations Some person other than four wages clerks be made responsible for maintaining the

personnel records and for periodically checking them against the details on the payroll; The four wages clerks are allocated specific duties in relation to the preparation of the

payroll, with each clerk independently reviewing the work of other. When the payroll is presented in support of the cheque for signature to the chief

accountant, that he should be responsible for assessing the reasonableness of the overall charge for wages that week.

My comments have been discussed with our finance director and the chief accountant and these matters will be considered by me again during future audits. I will look forward to receiving your comments. If you need further more information please don’t hesitate to contact me.

This letter has been prepared for the sole use of your company and it will not disclose to third party with out written consent. No responsibility is assumed by me to any other person.

I should like to take this opportunity of thanking your staffs for their co-ordination and co-operation during the course of the audit.

Cordially yours,

----------------------Sarker Asif IqbalOn behalf of,AS & Co.

Research Project on Audit

Documents