Introduction of Auditing

Compiled By:
Md. Mahedi Hasan FCA CPFA
Adjunct Faculty
Department of Accounting and Information Systems
Bangladesh University of Professionals (BUP)
Course Outline/Reference books/Materials
Lecture Sheets

Study Manual of ICAB: Assurance

Study Text of ACCA: F8 (Audit & Assurance)

A. Arens and J. K. Loebbecke. Auditing: An Integrated Approach (Prentice Hall)

Assessment

Assignments and the term paper

After every four classes, the fifth
will be individual tasks, assigned
class will be a class test, consisting
after the 13th class or Midterm,
of a combination of MCQs and
Whichever is earlier, and must be
short questions.
submitted before the 21st class.

Presentations will be taken

Midterm and final exam will be
individually, with a maximum of 5
conducted as per the departmental
minutes for the presentation and 2
guidelines.
minutes for Q&A.
 Other Tasks

Case Study Articles & Research Study Tour/Practical

paper reading Expedition
 The Case of the Missing Millions
Once upon a time, in the bustling city of Metropolis, there was a company called Titan Technologies. Titan was a tech giant, known
for its innovation and rapid growth. The company had a reputation for being incredibly profitable and was admired by many in the
industry.
One day, the CEO, Sarah Blake, received an anonymous tip about potential irregularities in the company's financial statements.
Although Titan had always had clean audits in the past, Sarah decided it was time for a fresh perspective. She hired a new auditing
firm, Green & Co., to perform a thorough audit.
As Green & Co. delved into Titan's financial records, they uncovered a series of discrepancies. Hidden within the complex web of
transactions were several unauthorized transactions that had siphoned off millions of dollars. These transactions had been cleverly
disguised through fake invoices and doctored financial reports.
The auditors meticulously traced the discrepancies, revealing that the company's former CFO, who had left for another lucrative
position, had been embezzling funds over several years. The discovery led to an internal investigation, recovery of the stolen funds,
and significant changes in the company's financial controls.
Thanks to the diligent work of the auditors, Titan Technologies not only saved its reputation but also implemented stronger financial
oversight measures. The company's leadership realized that a thorough audit was not just a routine check but a vital safeguard
against potential fraud and mismanagement.
The story of Titan Technologies serves as a powerful reminder of the crucial role auditors play in maintaining the integrity of financial
reporting. It highlights how a keen eye and rigorous auditing can prevent significant financial losses and protect the interests of
shareholders and stakeholders alike.
The Historical Perspective
Ancient Civilizations
Mesopotamia (Around 4,000 BCE): One of the earliest known auditing practices can be traced back
to Mesopotamia, where scribes were responsible for checking the accuracy of transactions recorded
in cuneiform on clay tablets. These early audits were primarily for verifying the correct collection of
taxes and payments.

Egypt (Around 2,000 BCE): In ancient Egypt, audits were conducted to ensure the pharaoh’s wealth
was accurately accounted for. Auditors would verify the contents of treasuries and storerooms.

Greece and Rome (5th Century BCE – 5th Century CE): The Greeks introduced public accountability
by requiring magistrates to submit accounts for public audit. The Romans had "quaestors," officials
responsible for financial administration and auditing of public funds.
 Medieval Period

• Europe (9th – 15th Century): The medieval period saw the rise of more formalized auditing
systems, particularly within religious institutions and royal treasuries. Monasteries and churches
kept meticulous records of donations and expenditures, often audited by clerics.

• The Domesday Book (1086 CE): Commissioned by William the Conqueror, this book was essentially
a detailed audit of land and resources in England, used to assess taxes and feudal duties.
Renaissance and Early Modern Period

Italy (14th – 17th Century): The rise of commerce and banking

during the Renaissance, particularly in Italy, led to more
sophisticated bookkeeping and the need for auditing. The Medici
family, for example, employed auditors to review the books of
their banking empire.

The Birth of Double-Entry Bookkeeping (1494): Luca Pacioli, an

Italian mathematician, published "Summa de Arithmetica," which
included a section on double-entry bookkeeping, laying the
groundwork for modern accounting and auditing.
 Growth of Corporations: The Industrial Revolution led
to the growth of large corporations, which in turn
increased the need for formal audits to protect
investors and ensure accuracy in financial reporting.
Auditors were hired to verify the accuracy of financial
statements.
Industrial Revolution
(18th – 19th Century)
Legislation: In the 19th century, legislation began to
require audits for certain companies, particularly in
Britain, where the Joint Stock Companies Act of 1844
made audits mandatory for large companies.
 20th Century and Beyond
• Professionalization: The 20th century saw the
formalization of auditing as a profession, with the
establishment of professional bodies such as the
American Institute of Certified Public Accountants (AICPA)
in 1887 and the Institute of Chartered Accountants in
England and Wales (ICAEW) in 1880.
• International Standards: Post-World War II, the
globalization of business led to the development of
international auditing standards to ensure consistency
and reliability in audits worldwide. The International
Auditing and Assurance Standards Board (IAASB) was
established in 1977 to set global standards.
• Technological Advances: In recent decades, the advent of
computers and software has revolutionized auditing, with
the development of automated auditing tools, data
analytics, and blockchain technology, which promise to
further transform the field.
Contemporary Auditing

Regulatory Frameworks: Scandals such as Enron and WorldCom in the early 2000s led
to significant changes in auditing regulations, most notably the Sarbanes-Oxley Act of
2002 in the United States, which introduced stricter auditing standards and corporate
governance requirements.

Modern Challenges: Today, auditors face challenges from rapidly evolving technology,
complex global financial systems, and the increasing demand for transparency and
accountability in both the public and private sectors.
 The Companies Act 1994

The Banking Companies Act (Amended)

Securities and Exchange Commission (SEC) Rules and Regulations

Income Tax Act 2023

Governance in International Standard on Auditing (ISA) and other Pronouncements

Auditing Profession
International Ethical Standard Board for Accountants (IESBA) Code of Ethics
in Bangladesh (Key)
Bye Laws of Institute of Chartered Accountants of Bangladesh (ICAB)

Financial Reporting Act, 2015 and Financial Reporting Council (FRC)

NGO Affairs Bureau, foreign Donations (Voluntary Activities) Regulation Act 2016

Microcredit Regulatory Authority Act 2006

Insurance Act 2010

 Assurance

An assurance engagement is one in which a practitioner (auditor or other professionals)

expresses a conclusion designed to enhance the degree of confidence of the intended users
other than the responsible party about the outcome of the evaluation or measurement of a
subject matter against criteria.

Three people or groups of people involved (Practitioner, Users,

Responsible party)
The key elements of an assurance engagement A subject matter
Suitable criteria
are as follows:
Sufficient appropriate evidence to support the assurance opinion
A written report in appropriate form
Types of Assurance

Reasonable Assurance: A high Limited Assurance: A Other Assurance

level of assurance where the moderate level of assurance, Engagements: These could
auditor expresses a positive typically associated with include environmental audits,
opinion, as in an audit. reviews, where the auditor social responsibility audits, or
expresses a conclusion in the other specific subject matters
form of negative assurance. where stakeholders require
confidence in the information
presented.
Audit

An audit is a systematic examination and evaluation of financial

statements, records, operations, or performances of an entity,
typically by an independent and qualified professional (auditor).

The goal is to ensure that the financial statements present a true and
fair view of the financial position and performance of the entity,
adhering to accounting standards and regulations.
Types of Audit

Operational Audit: Evaluates the

Financial Audit: Focuses on the
efficiency and effectiveness of any
financial statements and related
part of an organization's
disclosures.
operations.

Internal Audit: Conducted by an

Compliance Audit: Assesses entity’s own staff to provide
adherence to laws, regulations, and management with ongoing
internal policies. evaluations of risk management
and control processes.
 Key Differences (Audit Vs Assurance)

Criteria Audit Assurance

Scope Audit is a specific type of assurance Assurance can cover a broader range of
engagement focused on financial subject matters.
statements

Level of Assurance Audits generally provide a higher level of Assurance provide lower level of assurance
assurance than audit

Regulation Audits are often mandated by law or assurance engagements may be voluntary
regulations or driven by specific stakeholder needs
Relationship Between
Audit and Assurance

All audits are assurance engagements, but not all

assurance engagements are audits.

Audits fall under the umbrella of assurance services,

but assurance can extend to other areas beyond
financial statements, such as sustainability reports
or internal controls.
Key Distinctions (Accounting Vs Audit)
Objective: Accounting aims to present an accurate financial picture, while auditing
aims to verify the accuracy of that picture.

Timing: Accounting is a continuous process, while auditing is periodic (e.g., annually).

Independence: Accounting is performed by the company's own staff, whereas auditing

is usually conducted by external, independent auditors.

Focus: Accounting focuses on the preparation of financial data; auditing focuses on the
verification and validation of that data.
What about Absolute Assurance!!
• Human Error: Humans are involved in the preparation of financial statements, conducting audits, and other
processes. Errors, whether accidental or due to misjudgment, are always a possibility.
• Sampling Limitations: In auditing, it's impractical to test every transaction or document. Auditors typically rely
on sampling, which means they only review a subset of the total transactions. There's always a risk that
something important might be missed.
• Inherent Uncertainty: Certain aspects of financial reporting and risk management involve estimates and
judgments about future events (like bad debt provisions, depreciation methods, or valuations). These estimates
are inherently uncertain.
• Complexity and Fraud: Fraudulent activities are often designed to be concealed, making them difficult to detect.
Additionally, the complexity of some financial transactions can make it challenging to identify issues.
• Time and Cost Constraints: Providing absolute assurance would require exhaustive testing, which is often not
feasible due to time and cost limitations.
• Changing Environments: Regulatory, economic, and technological changes can affect the accuracy of assurances
provided at any given time.
 What about Absolute Assurance!!

1 2 3 4 5 6

Human Error: Humans Sampling Limitations: In Inherent Uncertainty: Complexity and Fraud: Time and Cost Changing Environments:
are involved in the auditing, it's impractical to Certain aspects of Fraudulent activities are Constraints: Providing Regulatory, economic,
preparation of financial test every transaction or financial reporting and often designed to be absolute assurance and technological
statements, conducting document. Auditors risk management involve concealed, making them would require exhaustive changes can affect the
audits, and other typically rely on sampling, estimates and judgments difficult to detect. testing, which is often accuracy of assurances
processes. Errors, which means they only about future events (like Additionally, the not feasible due to time provided at any given
whether accidental or review a subset of the bad debt provisions, complexity of some and cost limitations. time.
due to misjudgment, are total transactions. There's depreciation methods, or financial transactions can
always a possibility. always a risk that valuations). These make it challenging to
something important estimates are inherently identify issues.
might be missed. uncertain.
Social and Economic roles of Auditing
Social Roles Economic Roles

Accountability and Transparency: Auditing ensures that organizations are Financial Accuracy: Auditing ensures the accuracy and reliability of financial
accountable to their stakeholders by verifying that financial statements and statements, which is crucial for making informed economic decisions. Investors
operations are accurate and transparent. This builds trust with the public, and creditors rely on audited financial statements to assess the financial health
investors, and other stakeholders. and performance of organizations.

Fraud Prevention and Detection: By identifying irregularities and discrepancies, Efficient Resource Allocation: By providing insights into financial management
audits help prevent and detect fraud and misconduct, thereby protecting the and control, audits help organizations improve their resource allocation and
interests of employees, customers, and the community. operational efficiency, leading to better economic performance.

Regulatory Compliance: Audits help organizations comply with legal and Risk Management: Audits identify potential financial and operational risks,
regulatory requirements, promoting ethical behavior and adherence to laws and enabling organizations to address these risks proactively and minimize potential
standards. losses.

Public Confidence: Regular audits reinforce public confidence in the financial Market Confidence: Reliable auditing practices contribute to a stable and
systems and institutions, as they demonstrate that organizations are operating trustworthy financial market, which can attract investment and support
with integrity and fairness. economic growth.

Corporate Governance: Effective auditing supports strong corporate governance

by ensuring that management practices are sound and that financial reporting is
accurate, which helps maintain a balanced and fair economic environment.