Audit Management and Audit

Observation Settlement Procedure

Shish Haider Chowdhury
Finance Controller (Army), Pay-1
Dhaka Cantonment, Dhaka
Cell: 01819225594
 Definition of Audit

The word 'audit' comes from the Latin audire

meaning to hear.

An auditor is defined in Chamber dictionary as: a

hearer: one who audits accounts.

The auditors were deputed to hear suspected cases

of irregularities, corruption, fraud and other serious
offences in medieval times.
 Definition of Audit
Audit is an independent examination of books of accounts,
other documents, stores, assets etc relating to receipts and
expenditure of the Government, statutory public authorities
and public enterprises with a view to ensure

 that rules and orders framed by competent authority in regard

to financial matters have been followed;
 that expenditure has been incurred with due regularity and
propriety;
 that assets have been properly utilized and safeguarded;
 that public resources have been used economically, efficiently
and effectively; and
 that the accounts truly represent the fact/ true and fair view.
Auditor
Auditor- Financial Watchdog
Who audits audit?
 INTERNAL AUDIT AND EXTERNAL AUDIT
COMPANY PERSPECTIVE
Basic point Internal Audit External Audit
Appointment Internal auditor is appointed by the External auditor is appointed by the
company management shareholders of the company at
the AGM

Status He is a paid employee of the company He is an independent individual

Qualification No compulsory qualification is required The external auditor must be a

for the internal auditor
Responsibility Internal auditor serves the needs of the
management
Basic job Review of operations and internal
control for developing improvements
and ensuring compliance of policies and
procedures
Chartered Accountant
His duty is compliance of statutory
requirements
Expression of an independent
opinion on financial statements

Scope of work Determined by the management Determined the companies act 1994
 Internal Audit
Internal audit is an
unit of the
government entity
does the auditing job
of the expenditure. It
is concurrent in
nature. The internal
audit reports directly
to head of the
office/department.
External Audit
 External Audit
External audit is an independent act by
the Comptroller and Auditor General on
the accounts of the Government bodies.
The C&AG is empowered by the
constitution and answerable to the people
through parliament.
 Principles of Auditing
Seven principles as extracted from INTOSAI
• All institutions financed with or supported by public money
should be subject to audit by supreme audit institutions, to
promote better governance, transparency and accountability;
• The external auditor is fully independent in the conduct of the
audit;
• The external auditor has sufficient authority to carry out the
audit in a manner that meets best practice in the audit of
public money
 Principles of Auditing (Contd.)

• The external auditor has adequate resources to carry out the

audit;
• The external auditor has the right and obligation to report on
the results of the audit;
• The external auditor meets relevant professional and ethical
standards; and
• The external auditor is appointed in an open, fair and
transparent manner.
 Types of Audit

• Attest or Financial auditing

• Regularity or Compliance auditing, and
• Performance or Value for Money
auditing.
 Financial Audit

• Verifies the accuracy

and fairness of
financial statements
presented;
• An independent
examination and
evaluation to
provide reliable and
objective
information to the
parliament.
 Compliance Audit

A regularity or compliance
audit is an examination of
the management of
expenditures and receipts,
and financial systems and
transactions of the audited
entity to determine whether
the entity has complied with
specific applicable laws,
rules, regulations,
procedures, etc.
Performance Audit
 Performance Audit
Performance audit is an objective and
systematic examination of an entity’s
programme, activity, function, or
management systems and procedures to
provide an assessment of whether the entity
in pursuit of predetermined goals has
achieved economy, efficiency, and
effectiveness in the utilization of its
resources.
 Audit Work and Mandate
• The Audit work of the government
expenditure is conducted by the Comptroller
and Auditor General of Bangladesh;
• Article 127-132 of the Constitution of
Bangladesh gives the mandate to the C&AG
 Comptrollership and Auditing
• The Comptrollership function is undertaken by
– Controller General of Accounts and its subordinate
bodies like CAO, DCA, DAO and UAO;
– Controller General of Defense Finance and its
down streamed organs e.g. SFCs, FCs, AFCs and
FPOs and UAs;
– ADG (F) of Bangladesh Railway and its bottom
streams say FA&CAOs, DFAs, Mangers (Pay and
Cash).
 Comptrollership and Auditing (Contd.)
Audit Agents of C&AG for auditing functions:
• Directorate of Civil Audit;
• Directorate of Commercial Audit;
• Directorate of Defense Audit;
• Directorate Foreign Aided Projects Audit;
• Directorate Local and Revenue Audit;
• Directorate of Mission Audit;
• Directorate of Railway Audit;
• Directoarte of Performance Audit;
• Directorate of PT&T Audit;
• Directorate of Works Audit.
 Process of Government Audit
Audit Plan
Prepare Audit Reports with two
volumes:
– audit observations.
– annexure
Audit Program

Provide training &

briefing to audit team
Send to Ministry for
their comments.
Auditing

Supervision &
Inspection Audit Inspection Report
 Audit Management Process
P A R L I A M E N T
Legislative function
Monitoring function
(Finance Act, Appropriation Act).(Public Accounts Committee)

Legal
framework.
Concerned Reporting &
Offices & Ministry Revenue Earning Monitoring
authorities. of Agencies (NBR, frame work.
Existing laws, Finance Ministries, Sector President Audit
rules, Corporation). Report
regulation and Spending Agencies
orders. (Ministries,
Departments, Sector
Corporation etc).

O C A G
Information Analysis Audit observation
 Basics of Audit

• Compliance with Public Procurement Act and

Rules;
• Compliance with GFR, TR, Delegation of Financial
Power, Fund Release Procedure etc.
• Special Regulations applicable for the Entity;
• Ensure Parliamentary requirements;
• Various circulars of NBR;
• Audit Code and Audit Standards; and
• Adherence to DPP/TPP in terms of project
management (for projects).
 End Product of Audit
• Report
Audit Inspection Report (AIR) by audit
teams to Executives
Auditor General’s Report to Parliament
 Audit Inspection Report

 Auditor’s report (Certified Financial Statement)‫‏‬

 Management letter

Section 1: General information about project

 Audit scope
 Financial operation and control
 Equipment management
 Monitoring Evaluation & Reporting
 Adequacy of management structure

Section 2: Audit observations

 Part-A: Advance Para including SFI

 Part-B: Ordinary/Normal Para
 Overall Audit Results

Section 3: Follow up action

Audit Observations
 Developing Audit Observation

Significant deficiencies,
weakness and problems caused
by non- compliance with
standards, regulations, authority
and non-adherence to norms of
economy and efficiency
impairing the purpose of the
project raises issues that are
addressed in audit observations.
 Why Audit Observation Arises
 Misstatement in FS:
 Understated, Overstated, Accounting Standards
 Lack of project documentation in transactions.
 Non compliance of:
 Rules, regulations, agreements and other orders issued
by GoB and DPs.
 Non-compliance with loan covenants.
 Lack of transparency in procurement.
 Lack of Internal control:
 Cash management
 Asset management
 Continued ……
 Poor Monitoring
 Delay in preparation & submission of records
 Incomplete information from field offices
 Non reconciliation of accounting records
 Long outstanding advances
 Progress monitoring.
 Lack of skills
 Lack of adequate and skill manpower
 Common Audit Observations
 Non maintenance and submission of auditable documents
 Observation related to GOB fund
 Non adjustment and irregular advance
 Discrepancy between FS of PHQ & FO
 Unauthorized expenditure
 Misuse of money
 Non realization of Tax/VAT
 Poor maintenance of assets
 Excess payment
 Absence of reconciliation
 How to minimize audit observations?

 Personal involvement of Head/PD on

financial management;
 Consultation of previous audit observation;
 Steps for non-repetition of previous audit
queries;
 Introduction of Internal Control;
 Maintenance of the updated rules and
regulations;
 Reconciliation and co-ordination between
the transaction of field offices & PHQ;
How to minimize audit observations?
 Proper and updated record keeping;
 Maintenance of proper accounting books;
 Avoidance of expenditure in the non project
areas;
 Proper monitoring of physical and financial
activities and transactions;
 Immediate response to the audit query; and
 Arrangement of bi and tripartite audit
meeting
 Procedure of Settlement
There are several ways to settle audit observations:
 Spot reply
 Exit meeting
 Broadsheet reply
 Bi-lateral meeting
 Tri-partite meeting
 PAC meeting‫‏‬
 Spot Reply
Audit observations
are raised during
audit. The Auditee
can furnish reply
and evidence at
that time. If the
reply is satisfactory
the audit
observation is
settled in the spot
Audit Exit Meeting
It is a tri-partite meeting
usually held at FAPAD
immediately after
completion of audit.
Discussion held on Draft
AIR among DP
representatives,
concerned ministry,
project personnel and
FAPAD representatives.
After discussion and
presentation of evidence
observations may be
dropped
Broadsheet Reply
Bi-lateral/Tri-partite meeting
 Continued……..
 Broadsheet (BS) reply:
 After issuance of the AIR, the auditee sends written
reply on audit observation to FAPAD. The reply of part-
A observation comes through concerned ministry and
the reply of Part-B comes directly to FAPAD. Audit
observations are dropped after analyzing the BS reply.
 Bi-lateral/Tri-partite meeting:
 This type of meeting is usually held by the request of
the auditee to discuss and settle audit observations.
 PAC meeting
Audit observations
included in the
C&AG’s audit report
are discussed in the
PAC of the
Parliament. The
C&AG’s Audit Report
is prepared with the
unsettled SFI
observations
 Preparation of C&AG’s Report

 SFIs are issued to the concerned Secretary giving

30 days time for reply;
 Reminder issued giving additional 2 weeks time;
 D.O letter issued to the Secretary by the Director
General giving 4 weeks time; and
 2 weeks time for preparation of draft audit
report.