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Audit Management and Audit

Observation Settlement Procedure

Shish Haider Chowdhury

Finance Controller (Army), Pay-1

Dhaka Cantonment, Dhaka

(2)

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.

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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

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INTERNAL AUDIT AND EXTERNAL AUDIT

COMPANY PERSPECTIVE

Basic point Internal Audit External Audit

Appointment Internal auditor is appointed by the company management

External auditor is appointed by the 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

for the internal auditor

The external auditor must be a Chartered Accountant

Responsibility Internal auditor serves the needs of the management

His duty is compliance of statutory requirements

Basic job Review of operations and internal control for developing improvements and ensuring compliance of policies and procedures

Expression of an independent opinion on financial statements

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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

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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.

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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

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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.

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Types of Audit

• Attest or Financial auditing

• Regularity or Compliance auditing, and

• Performance or Value for Money

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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.

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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.

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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.

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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

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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).

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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;

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Process of Government Audit

Audit Program

Provide training & briefing to audit team

Supervision & Inspection

Auditing

Audit Plan

Audit Inspection Report

Send to Ministry for their comments.

Prepare Audit Reports with two volumes:

– audit observations. – annexure

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Audit Management Process

Legal framework. Concerned Offices & authorities. Existing laws, rules, regulation and orders. Reporting & Monitoring frame work. President Audit Report O C A G

Information Analysis Audit observation Revenue Earning Agencies (NBR, Ministries, Sector Corporation). Spending Agencies (Ministries, Departments, Sector Corporation etc). Ministry of Finance P A R L I A M E N T Legislative function Monitoring function

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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).

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End Product of Audit

• Report

Audit Inspection Report (AIR) by audit

teams to Executives

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Audit Inspection Report

Auditor’s report (Certified Financial Statement)

Management letter

Section 1: General information about project

 Audit scope

Financial operation and controlEquipment management

Monitoring Evaluation & ReportingAdequacy of management structure

Section 2: Audit observations

Part-A: Advance Para including SFIPart-B: Ordinary/Normal ParaOverall Audit Results

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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

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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

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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

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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

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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;

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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

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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

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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

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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

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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

(42)

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

(43)

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.

(44)

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