An analysis on the costs and

benefits of the internal audit or

internal review activities in,
Aramit Limited...

Prepared for:
Mr. rezvee rahman
Teacher
Bangladesh Institute of management studies

Curse name: BTEC Higher national certificate

Subject: research project
Student name: sarker asif iqbal
Student 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 companys 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?
Justification

The audit report is usually done by external auditors, to know the truth and fairness of a
companys 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 organizations 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 managements 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
14 08 07 to
16 08 07

17 08 07 to
20 08 07
21 08 07 to
28 09 07
29 08 07 to
03 08 07

04 08 07 to
12 08 07
13 08 07 to
16 08 07

17 08 07 to
18 08 07
19 08 07
20 08 - 07

Topic
Start and
introduction
with the
company and
planning.
Receiving
previous audit
reports.
Meeting with
previous
auditors.
Collecting
recent and
previous
financial
statements and
go through the
statements.
Visiting
different units.
Meeting with
different level
of staffs.

Adding all the

data and
information.
Preparing a
report for the
stakeholders.
Presentation on
our findings.

Done with
Employees,
managers and
directors.

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

Previous
auditors.

Previous two audit reports will be

collected and checked.

Previous
auditors.

Discussion to view the companies

environment in sight of them.

Accounts
director and
manager.

Previous two financial reports will

be collected and matched with
auditors reports.

Managers.
Employees,
Department
directors,
Managers,
Board of
directors.

To board of
directors.

TASK-4
Code of Ethics During and After the Research

Meeting will be done with them

separately. Question will be asked
critically.

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

Questionnaire
We 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 ones 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

14 08 07 to
16 08 07

Start and
introduction
with the
company and
planning.
Receiving
previous audit
reports.
Meeting with
previous
auditors.
Collecting
recent and
previous
financial
statements and
go through the
statements.
Visiting
different units.
Meeting with
different level
of staffs.
Adding all the
data and
information.
Preparing a
report for the
stakeholders.
Presentation on
our findings.

17 08 07 to
20 08 07
21 08 07 to
28 09 07
29 08 07 to
03 08 07

04 08 07 to
12 08 07
13 08 07 to
16 08 07
17 08 07 to
18 08 07
19 08 07
20 08 - 07

Monitoring
Date

Date of Update

Agree/ Not
agree

Supervisors name: _____________________

_________________________
Supervisors signature and date

TASK-2
Date
14 08 07 to
16 08 07

17 08 07 to
20 08 07
21 08 07 to
28 09 07
29 08 07 to
03 08 07

04 08 07 to
12 08 07
13 08 07 to
16 08 07

17 08 07 to
18 08 07
19 08 07
20 08 07

Topic
Start and
introduction
with the
company and
planning.
Receiving
previous audit
reports.
Meeting with
previous
auditors.
Collecting
recent and
previous
financial
statements and
go through the
statements.
Visiting
different units.
Meeting with
different level
of staffs.

Adding all the

data and
information.
Preparing a
report for the
stakeholders.
Presentation on
my findings.

Done with
Employees,
managers and
directors.
Previous
auditors.
Previous
auditors.
Accounts
director and
manager.

Changes

Previous audit reports collected,

checked and meeting done with the
previous auditor.
Collecting recent and previous
financial statements and go through
the statements.
Meeting with suppliers.

Managers.
Employees,
Department
directors,
Managers,
Board of
directors.

Meeting will be done with them

separately. Question will be asked
critically.

Presentation on the 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. Thats 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

PLANNING
MATERIALITY based on draft
financial statements.
Compare and consider need for additional testing.

Apply planning materiality to

individual audit
objectives/balances.

Test all items

PLANNING MATERIALITY

Actual errors detected

Sample from remaining

Actual errors detected

Final materiality

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 riskbased approach is given below,
DETERMINE ACCEPTABLE AUDIT
RISK. WE TOOK IT AS 5%

INVESTIGATE AND DOCUMENT

INTERNAL CONTROLS.
CONSIDER INDUSTRY
AND OTHER
BACKGROUND
INFORMATION.

ASSESS THE COTROL RISK

TEST CONTROLS

ASSESS
INHERENT RISK

RE ASSESS CONTROL RISK.

CALCULATE DETECTION 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
Prepared by
Client name: Aramit Limited.
AS
Subject: Debtors
Date:
18.08.2007
st
Year ended: 31 December 2006

Objective
Work done
Results

Conclusion

SL8332

To ensure sales ledger balance fairly stated.

Selected a sample of trade debtors as at 31 December and
reconciled the customers statement to the year and sales ledger
balance.
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.
After making the adjustment note above sales ledger balances are
fairly stated as at 31st December 20X6

Client Name: Aramit Limited

Subject: Creditor
Year ended: 31st December, 2006.

Objective
Work done

Reviewed by
MS
Date: 20.08.2007

Prepared by
AS
Date: 18.08.2007

Reviewed by
MS
Date: 20.08.2007

SL3442

To ensure purchase ledger balance fairly stated.

Selected a sample of trade creditors as at 31 December and
recorded the suppliers statement to the year and purchase ledger
balance. Vouched any reconciliation items to source documentation.

Results

See 3442
One 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.
After making the adjustment noted above, purchase ledger balances
are fairly stated as at 31st December, 2006.
SL-8332

Conclusion

Client name: Aramit Limited.

Subject: Debtors
Year ended: 31st December 20X6
Client

Sales
ledger

Bishwash
Builders
Ltd.
Sheltech
Ltd.

600,000

600,000

500,000

475,000

Prepared by
AS
Date: 18.08.2007

Customers Difference
Statement

Reviewed by
MS
Date: 20.08.2007
Agreed

Reconciling
item

OK

25,000

NO

25,000

Debit not
yet
received

1,100,000

SL-3442
Client Name: Aramit Limited
Subject: Creditor
Year ended: 31st December, 2006.

Client
EURASIA
LEATHER

Purchase
ledger
2,000,000

Prepared by
AS
Date: 18.08.2007

Supplier Difference
statement
20, 00000
.

Reviewed by
MS
Date: 20.08.2007

Agreed
OK

Reconciling
item
.

SL3442

IQBAL
1,470,000
BROTHERS
TANNERY

14, 55000

15, 000

NO

15, 000

Credit
note not
yet
received.

3,470,000

Flow chart for Bishwash Builders Ltd.

B.B. Limited

1. Order received
from B.B. Ltd.
2. 5-part order
acknowledgement
created

Sales Dept.

Order
From
B.B.
Ltd.

5. 2-Part invoice
created (INV)

Dispatch

Accounts

Sales
Ledger
clerk

Credit
ratings

2 3

3. Checked for credit

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

Credit Control

A
2

1
DN

B.B. Ltd.
B
2

2
1

To B.B. Ltd.
With goods

1
INV

Sales
ledger

N
Customer

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

Statement

B. B. Ltd.

x
T

Flow chart for Eurasia Leather

Purchase system Chart 1 Ordering and receiving of goods.
Eurasia Leather

Op.
No.

Warehouse

Buyer

Goods Inwards

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
suppliers latest price
list.

Reqn

Suppliers price
list

X X

Mailed to Eurasia
Leather.

5
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.

PO

GRN

Shortage
memo

PO

7
P
2
8

X
To warehouse with
goods as next
requisition

P
2

P
2

9
10

Filed in GRN
numerical order.
Filed in shortage
memo in numerical
order.
Eurasia Leather Purchase system Chart 2 Ordering and receiving of goods.
Op
No.

Goods Inwards

Buyer

Purchase ledger Clark

P
1

P
1
Shortage
memo

Direct from supplier

(via mail room only)

P
1
PO

Invoice

GRN

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.

12
13

14

15

Reviews invoices to see

that package is complete
and approval grid fully
signed.

Debit
note

X
To supplier

16
Check all costs and
extensions on invoices
over 20,000 TK and
10% of all invoices
under 20,000TK.

11

Invoi
ce

GRN
PO
Debit
Note

Shorta
ge
memo

17
P
3

P
3

Learning Activity 04
TASK- 1, 2, 3 & 4

AS & Co
Certified 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 system
During 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.
Implications
There 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.
Recommendations
We 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.
Implications
The 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.
Recommendations
It 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 System
Under 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.
Implications
It 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 dont 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 Iqbal
On behalf of,
AS & Co.