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Master’s Thesis
HASNATUL NOOR E RABBI
Brno 2022
FACULTY OF ECONOMICS AND ADMINISTRATION
Statutory audit versus
forensic audit: impact on
financial performance and
position of the company.
Evidence from Bangladesh
Supervisor: Ing. Oleksandra Lemeshko
Department: Finance
MUNI ECON
MASARYKOVA U N I V E R Z I T A
Faculty of Economics and Administration
Lipová 41a, 602 00 Brno
IČ: 00216224
DIČ: CZ00216224
Master's thesis description
Academic year: 2021/2022
Student: Hasnatul Noor E Rabbi
Programme: Finance
Title of the thesis/dissertation: Statutory audit versus forensic audit: impact on financial performance and position of the company. Evidence from Bangladesh
Title of the thesis in English: Statutory audit versus forensic audit: impact on financial
performance and position of the company. Evidence from
Bangladesh
Thesis objective, procedure and methods used: Aim:
On the basis of investigation of impact of statutory audit and
forensic audit on the financial position and performance of the
chosen company from Bangladesh to identify major advantages
and disadvantages, similarities and differences between both types
of audit and to make a set of related recommendations for
companies from Bangladesh.
Plan:
Introduction
1. Role of external audit in determining whether company’s
financial statements present fairly in all material aspects.
2. Comparison of financial impact of statutory audit and
forensic audit on the chosen company from Bangladesh.
3. A list of key advantages and disadvantages, major similari ties
and differences between both types of audits and a set of related
recommendations for companies from Bangladesh. Conclusion
Extent of graphics-related work: According to thesis supervisor’s instructions
Extent of thesis without supplements: 60 – 80 pages
Literature: BEASLEY, Mark S., Frank A. BUCKLESS, Steven M. GLO- VER and
Douglas F. PRAWITT. Auditing Cases: An Interactive Learning
Approach. 6/E. Pearson, 2015. 448 s. ISBN 0-13-
385210-5.
ARENS, Alvin A., Randal J. ELDER and Mark S. BEASLEY. Auditing and
Assurance Services. Person Global Edition, 2014. 864 s. 15/E. ISBN
978-0-273-79000-6.
Current issues in external and internal auditing. Edited by Gerald
Vinten. [Bradford, England]: Emerald Group Pub., 2004. p. 576-692.
ISBN 0861769686.
HAYES, Rick, Philip WALLAGE and Hans GORTEMAKER. Principles of
Auditing: An Introduction to International Standards on Auditing.
3/E. Person, 2014. 736 s. ISBN 0-273- 76817-4.
Thesis supervisor: Ing. Oleksandra Lemeshko
Thesis supervisor’s department: Faculty of Economics and Administration
Thesis assignment date: 2021/02/09
The deadline for the submission of Master’s thesis and uploading it into IS can be found in the academic year calendar.
In Brno, date: 2022/05/11
Bibliographic record
Author: Hasnatul Noor E Rabbi Faculty of Economics and Administration Masaryk University Department of Finance
Title of Thesis: Statutory audit versus forensic audit: impact on financial performance and position of the company. Evidence from Bangladesh
Degree Programme: Finance
Field of Study: Accounting
Supervisor: Ing. Oleksandra Lemeshko
Year: 2022
Number of Pages: 86
Keywords: Internal Control, Statutory Audit, ISAB, External Audit, Corporate Governance, Forensic Audit, Fraud, GAAP
Abstract
This thesis contains the audit procedures and the difference between statutory and
forensic audits. It implies the importance of the internal control of a company. The theoretical
part also explains the major accounting cycle. Based on the fraudulent activities some audit tests
were carried out and later the impacted accounts were identified. To check the financial impact
for the frauds various ratio analysis were conducted and compared with the statutory and forensic
audit outcomes. To check the bankruptcy risk Z-score analysis was performed at the end. This
study culminates with providing a set of recommendations for the companies in Bangladesh to
prevent similar fraud cases identified in this study in future.
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Declaration
I certify that I have written the Master’s Thesis Hasnatul Noor E Rabbi by myself under the
supervision of Ing. Oleksandra Lemeshko, and I have listed all the literature and other sources
in accordance with legal regulations, Masaryk University internal regulations, and the internal
procedural deeds of Masaryk University and the Faculty of Economics and Administration.
Brno, 12.05.2022 .......................................
Hasnatul Noor E Rabbi
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Acknowledgement
Thanks to the Almighty for the good health which enabled me to research on this topic.
This thesis is the result of months of research at Masaryk University to obtain Master’s degree.
It has enriched my experience.
At first, I would like to express my sincere gratitude to my supervisor Ing. Oleksandra
Lemeshko for her collaborative support, related research, patience, and motivations. Her
guidance helped me immensely all the time during research and writing of this thesis. I am
really indebted to her for sharing expertise and their valuable guidance.
Last but not the least, I would like to express gratitude to my parents and other family
members for the unceasing encouragement, support, and attention throughout my whole life.
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Table of Content List of Charts........................................................................................................................................... 9
List of Tables ........................................................................................................................................ 10
List of Terms and Abbreviations .......................................................................................................... 11
List of Formulas .................................................................................................................................... 12
INTRODUCTION ................................................................................................................................ 13
CHAPTER 1. THEORETICAL FUNDAMENTALS OF STATUTORY AND FORENSIC AUDIT 14
1.1 Definition of Audit and Its Importance ....................................................................................... 15
1.2 Types of External Audit .............................................................................................................. 17
1.3 The Role and Responsibilities of External Auditors ................................................................... 20
1.4 Forensic Audit as Special Type of External Audit...................................................................... 22
1.4.1 Steps of Forensic Audit ........................................................................................................ 22
1.4.2. Sources and Techniques of Forensic Audit ......................................................................... 23
1.4.3. Tools of Forensic Audit ...................................................................................................... 25
CHAPTER 2. STATUTORY AND FORENSIC AUDIT THROUGH CHOSEN REPORTING
CYCLES AND STATUS OF AUDITS IN BANGLADESH ............................................................... 27
2.1. Reporting Cycles ........................................................................................................................ 27
2.1.1. Order-to-Collect (OtC) ........................................................................................................ 29
2.1.2 Purchase to Pay (PtP) ........................................................................................................... 31
2.1.3 Record-to-Report (RtR) ....................................................................................................... 33
2.2. External Audit Procedures Conducted at Chosen Reporting Cycles – Classical Statutory Audit
Procedures and Forensic Audit Procedures ...................................................................................... 35
2.2.1 Statutory Audit and Forensic Audit Techniques for OtC and PtP Cycles............................ 35
2.2.2 Statutory Audit and Forensic Audit Technique for RtR Cycle ............................................ 40
2.3. State of the Audit in Bangladesh: Internal and External ............................................................ 42
2.3.1 Frequency and Common Types of Fraud among in the Local Companies .......................... 46
2.3.2 Popularity of Forensic Audit in Bangladesh ........................................................................ 47
CHAPTER 3. APPLICATION OF STATUTORY AND FORENSIC AUDIT TECHNIQUES TO
CHOSEN REPORTING CYCLES IN ACME FROM BANGLADESH ............................................. 49
3.1 ACME – Brief Introduction, History and Organizational Chart ................................................. 49
3.2 Methodology and Data ................................................................................................................ 52
3.3 Fraud – Nature, Circumstances and Types ................................................................................. 52
3.4 Description of Fraud Case in ACME .......................................................................................... 54
3.4 Description of Statutory and Forensic Audit Procedures to Detect Chosen Frauds in ACME ... 58
3.5 Evaluation of impact of chosen fraud cases and related audit procedures on financial health of
ACME ............................................................................................................................................... 61
CHAPTER 4: LIST OF KEY ADVANTAGES AND DISADVANTAGES, MAJOR SIMILARITIES
AND DIFFERENCES BETWEEN BOTH TYPES OF AUDITS AND A SET OF RELATED
RECOMMENDATIONS FOR COMPANIES FROM BANGLADESH ............................................. 71
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4.1 Advantages and Disadvantages of Statutory and Forensic Audits .............................................. 71
4.2 The Difference between Both Types of Audits........................................................................... 73
4.3 Related Recommendations for Companies from Bangladesh ..................................................... 74
CONCLUSION ..................................................................................................................................... 76
REFERENCES ..................................................................................................................................... 78
APENDIX ............................................................................................................................................. 81
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List of Charts
Chart 1: ACME’s Organizational Chart
Chart 2: Revenue impact on the Profit and Loss statement
Chart 3: Cash flow impact due to the inventory mismatch
Chart 4: Impacts on the activity performance due to the inventory mismanagement
Chart 5: Impacts on the liquidity performance due to the cash leakage
Chart 6: Impacts on the liquidity performance due to the cash leakage
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List of Tables
Table 1: Statutory audit technique for RtR cycle
Table 2: Forensic audit technique for RtR cycle
Table 3: Description of the required internal control and failed internal control and the test
conducted for fraud 1
Table 4: Description of the required internal control and failed internal control and the test
conducted for fraud 2
Table 5: Description of the required internal control and failed internal control and the test
conducted for fraud 3
Table 6: Audit Procedures Conducted Under Statutory and Forensic Audit in ACME for
Chosen Fraud Cases - Qualitative Description
Table 7: Audit Procedures Conducted Under Statutory and Forensic Audit in ACME for
Chosen Fraud Cases - Quantitative Description
Table 8: Audit procedures conducted under statutory and forensic audit in ACME for chosen
fraud cases - Financial Impact on the Financial Statements
Table 9: Impact on sales due to the failed sales interface issue
Table 10: Impacts on Cash flow due to the inventory mismatch
Table 11: Impacts on the activity performance due to the inventory mismanagement
Table 12: Impacts on the liquidity due to the cash leakage
Table 13: Z score evaluation
Table 14: Difference between Statutory and Forensic Audit
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List of Terms and Abbreviations
AP - Accountant Payable
APC - Auditing Practices Committee
AR - Accountant Receivable
BDT - Bangladeshi Taka
BS - Balance Sheet
BSA - Bangladesh Standard on Auditing
CPA - Certified Public Account
CAATs - Computer Assisted Auditing Techniques
CST - Common Software Tool
C&AG - Comptroller and Auditor General
DGDA - Directorate General of Drug Administration
ERP - Enterprise Resource Planning
FRF - Financial Reporting Framework
GAPP - Generally Accepted Accounting Principles
GAS - Generalized Audit Technique
GRN - Goods Received Note
GDN - Goods Delivery Note
IT - Information Technology
IFRS - International Financial Standard Reporting
IASB - International Accounting Standards Board
ICAB - Institute of Chartered Accounts of Bangladesh
ISA - International Standards of Auditing
NGO - Non-Governmental Organization
MNC - Multinational Corporations
OtC - Order to Cash
PtP - Purchase to Payment
P&P - Profit and Loss
RtR - Record to Report
SEC - Securities and Exchange Commission
VAT - Value Added Tax
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List of Formulas
1. Return on Sale = Earning Before Income Tax (EBIT)/ Revenues
2. Profit Margin on Sale = Earning After Tax (EAT)/Revenues
3. Cost on Sale = (Revenues − EBIT)/ Revenues
4. Cash Flow (CF) Return on Sale = Net Cash from Operating Activites/Revenues
5. CF I: Profit Before Tax + Depreciation and Amortization
6. CF II: = CF I + Inventories Previous year – Inventories Current year
7. Inventory Turnover = Net Sales/Average Inventory
8. Days Sales in Inventories = Average Inventory/(Sales/360)
9. Cash Ratio = Cash and Cash Equivalents/Current Liabilities
10. Current Ratio = Current Assets/Current Liabilities
11. X1 = Net working capital / Total Assets
12. X2 = Retained Earnings / Total Assets
13. X3 = EBIT / Total Assets
14. X4 = Market Value of Equity / Book Value of Total Liabilites
15. X5 = Sales / Total Assets
16. Net Working Capital = Current Assets − Current Liabilities
17. Market Value of Equit = Stock Value ∗ Total number of share outstanding
18. Altman′s Z Scoore = 1.2 ∗ X1 + 1.4 ∗ X2 + 3.3 ∗ X3 + 0.6 ∗ X4 + 0.999 ∗
X5
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INTRODUCTION
It is undeniable fact that a fraud case can ground a company financial health and its
reputation at the same time. Even though companies are trying to develop internal control,
restricting access to accounts and records but the fraudsters are always looking for an
opportunity. There are many more stakeholders in the global economy today than there was
before including regulators, creditors, business partners, suppliers, and customers are keen to
know the financial performance of the corporation. As a result of this increased interest from
the public and from non-profits as well as governmental organizations a company must
examine their financial statements. Boards of directors and audit committees are among the
groups that want to know more about how management is addressing the risk of fraud in an
organization's internal controls, as well as how that risk is being addressed in the organization's
overall strategy and goals.
The aim of this study is to find out the financial impacts of a company from the view
of statutory and forensic audit when there is certain fraud. The data and related information
will be taken from ACME’s annual reports between the years 2018 to 2020. The samples will
run after the auditors discover the fraud cases, a ratio analysis will be performed to determine
the impact of the frauds and the results will be analyzed to determine the financial impact on
the Balance Sheet (BS) and Profit and Loss (P&L) Statement for both statutory and forensic
audits. At the end Z-score will be calculated to see if the company falls in bankruptcy zone or
not which will help investors to make decision.
In the theoretical part this study will describe the importance of external audit and the
types of audits can be done to check the company financial position. In addition, the steps,
methods, and techniques will be discussed for both audit procedures. The approaches for both
audits will be specified and described the procedures for the chosen reporting cycle. The
importance of reporting cycle and the impact on these reporting cycle due to fraud will be
describe also.
After pointing out the fraud, in the practical part this study determined which accounts
were affected and how the fraud may have affected them. The ratio analysis will show that
even if the fraud has a small impact, it can have a huge influence on the financial position of
the company. Acme's financial statements were negatively affected because of the frauds,
which led to a set of recommendations for the Bangladeshi companies involved. Internal
control is the most important step in preventing fraud, and this includes the resources and
training provided by the company to its employees.
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CHAPTER 1. THEORETICAL FUNDAMENTALS OF
STATUTORY AND FORENSIC AUDIT
A statutory audit is one that is performed to ensure that a statute or an Act is being
followed, for example, the Companies Act requires that all corporations be audited. When it
comes to financial auditing, the goal is for financial statements users to have confidence that
the business is maintaining its records in accordance with generally accepted accounting
principles and thus providing a true and fair picture. Fundamentally statutory audit is the review
of the truth and fairness of a company's financial statements by an external auditor who is
independent of the company, as required by a reporting system such as the International
Financial Reporting Standards (IFRS). Most governments mandate that organizations with
revenues greater than a particular threshold undergo an external audit on an annual basis. A
financial audit has only one goal: to provide confidence that a company's financial record
keeping is in accordance with generally accepted accounting rules, known as Generally
Accepted Accounting Principles (GAAP). To accomplish this, the auditor must conduct an
objective examination of the company's financial records and apply his or her best judgment in
reaching the proper decision.
Intentional fraud or misrepresentation of facts may or may not be discovered during a
statutory audit. The goal of an auditor's work is to gather as much objective, verifiable evidence
as possible to support their conclusions. A statutory auditor investigates of records and traces
documentation in order to gather the information he requires. There are many aspects of a
company's financial status that can be probed during a financial audit; they include accounting
records, internal controls rules and cash holdings. An external financial audit is a routine
occurrence for publicly traded organizations and even for private enterprises that aren't publicly
traded, such as a sole proprietorship.
Forensic auditing is more like an investigation than it is like an auditing process. The
most important goal in this case is to establish a fact, such as whether or not a fraud has
occurred. In contrast, statutory auditing is carried out with the goal of determining whether the
accounts have been prepared in accordance with the applicable Financial Reporting Framework
(FRF) and whether they present a true and fair view. Forensic auditing covers a wide range of
activities, and the terms used by regulators are not always limited. The work of a forensic audit
looks a lot like the work of a financial audit. Both types of audits require a lot of attention to
financial records. The main difference is what the search is for and why it is being done. In
forensic audits, financial transactions are analyzed, and the information is put together for use
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in court cases. The forensic auditor may also look at a company's financial systems to see if
they are reliable, accurate, and strong.
The detection of fraud or error during a statutory audit may occur in the normal course
of events, but the primary goal of the audit is not to look for fraud or error. Forensic auditing
is not a regular occurrence, unlike financial audits. It's a never-ending journey. Digital forensic
investigators independently and continually examine digital communications and
documentation as part of a forensic audit to detect any suspicious behavior. The primary goal
of an investigation is to discover instances of fraud or error.
1.1 Definition of Audit and Its Importance
As defined by the International Accounting Standards Board (IASB), an audit is an
independent examination of financial information against previously stated criteria conducted
on any entity, whether profit-oriented or not, regardless of its size or legal form, with a view to
expressing an opinion thereon. A secondary goal of auditing is to guarantee that the
organization whose financial statements are being scrutinized and follows all applicable legal
requirements, that it is operationally efficient, and that it will be able to continue as a going
concern for the foreseeable future. Depending on the sort of service providers, audits can be
conducted both externally and internally.
Adding value to a company's operations and making them more efficient are the
primary goals of internal auditing, which is a non-biased, unbiased kind of assurance and
consultation. It does this by putting in place a methodical, disciplined approach to analyzing
and enhancing the effectiveness of risk management, control, and governance systems. This
helps a firm get closer to accomplishing the objectives it has set for itself. By providing insight
and suggestions based on data and business process analyses and assessments, internal auditing
acts as a catalyst for organizational change in governance, risk management, and management
controls. This is accomplished via the provision of information. The basic goals of an internal
audit are to reduce risk, put in place internal controls, strengthen the robustness of the
information technology system, and improve corporate governance. Internal auditors work in
tandem with management to carry out exhaustive investigations into the operation of various
systems and procedures. Internal auditors investigate each and every facet of an organization.
External auditing is a term that refers to audit firms that provide specific auditing
services, such as assurance, consulting, tax consulting, legal services, financial advisory, and
risk management advisory. External auditors are frequently used to refer to audit staff
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employed by accounting firms. Audit associates, senior auditors, audit partners, and managing
partners are the various positions. External audit firms provide a variety of services, including
financial statement auditing, tax consulting, and advice services. The firms operate
independently of the auditing clients they audit. If a conflict of interest exists, appropriate
processes must be followed to mitigate the conflict.
The term "external audit" refers to the audits that are done for people outside of the
entity being audited, by experts who are not part of the entity being audited or its staff or
officers, called an external auditor, qualified and independent auditors are hired by these
companies. An outside audit is done by a qualified and independent auditor who follows the
international auditing standards (Lotfii, 2005).
External auditing is regarded as a critical process for achieving reliable accounting
information, as it generates accurate and reliable data by implementing controls tools across
the organization's various activities (Youssef, 2013).
External auditing is the examination of an organization's financial statements by
independent, legally authorized auditors. The external audit's primary objective is to express
an opinion on the financial statements. The term audit derives from the Latin word Audire,
which means to listen. The auditor is defined as a listener: an individual who examines the
statements. (Jovanova & Josheski, 2011, p. 2). If the impairment cannot be reduced to an
acceptable level, the firm should consider terminating the audit assignment. Certain external
auditing firms also provide internal auditing services.
The value of auditing is demonstrated by the number of stakeholders who have relied
on the audited financial statements to help them make business choices, such as the following:
An audit report shows the need of good management, especially when it comes to
implementing development plans and keeping track of and evaluating the team's progress.
When it comes to making decisions regarding their savings and investments, investors may
rely on an auditor's report because it serves as a safety net. If a project applies for credit or a
loan from a bank, lenders will typically look at audited financial accounts as a basis for their
evaluation. Plan, control, and taxes, as well as the reporting of subsidies to specific industries
are all based on audited financial records (Budur, 2008, p. 97). Several studies have shown that
the credibility and fairness of the company's financial statements is directly related to the
existence of audit committees that originate from the boards of directors, which increase the
effectiveness of financial statement preparation and reduce disputes between management and
external auditors (Ahmed, 2011).
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1.2 Types of External Audit
External auditors also play a role in establishing procedures to guarantee that the
organization is accountable. External auditors, for example, may suggest punishments for
officers who falsify financial records by inflating or falsifying accounting statistics. External
auditors examine a company's anti-fraud and anti-corruption safeguards. Along with examining
prospective hazards, auditors also consider factors such as the company's general risk tolerance
and all the steps it has taken to reduce risk. As a further benefit to corporate governance,
external auditors do period risk assessments.
External auditors can help to keep good corporate governance by making sure that there
are good crisis management plans in place in case there are allegations of corruption or fraud.
A plan of this kind assigns jobs to every administrative official. So, if the company has a
problem, officials have a plan for how to keep investors' faith. There may also be control
indicators in crisis management plans, which are meant to be used by the media and law-
enforcement. In addition, an outside auditor should always have a good relationship with the
government. There are a lot of regulators who have a good relationship with businesses that
seem to be running smoothly External auditors look at how a company is run to make sure it
meets rules. As soon as an auditor says that the information is true, most people believe that
the company is telling the truth.
Due to the external auditor's independence and impartiality of view, external auditing
greatly helps to financial data control. Auditing an organization's compliance with management
rules, processes, and regulations is the primary goal of external auditing. An independent or
external auditor is not employed by an organization. This person performs an audit in order to
provide a report that includes an opinion on a client's financial accounts. When it comes to
financial reporting, external auditing's attest function is the auditor's opinion. The basic
independent audit confirms the fairness and integrity of the financial accounts. An
accompanying written report is delivered to the audited entity's management to explain the
results of the audit (an oral presentation of findings may sometimes be requested as well).
During the audit, the external auditor learns a great deal about the client's accounting methods
as well. A final audit report to management often includes suggestions for improving the
efficacy of current internal controls.
The income statement, balance sheet, and cash flow statement are virtually usually
subject to an annual audit. The results of an external audit are typically requested by lenders as
part of their financial covenants. Audits are a legal requirement for certain organizations
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because of the strong incentives to deliberately misstate financial facts in order to commit
fraud. The following is a list of some of the audit types and their goals:
1. Forensic Audit: Typically, a forensic audit is conducted by a forensic accountant
who possesses both accounting and investigative skills. Forensic Accounting is a sort of
engagement that entails conducting financial investigations in response to a specific subject.
Typically, the investigation's findings are utilized as evidence in court or to resolve shareholder
disputes. The investigation encompasses numerous areas, including fraud, criminal activity,
insurance claims, and shareholder issues. As with other audit engagements, a forensic audit
requires an appropriate plan, technique, and report. Forensic auditing, like financial statement
auditing, must adhere to ethical standards. This type of engagement is not as common as
financial statement audits or statutory auditing.
2. Statutory Audit: Statutory audit refers to an examination of financial accounts for
a certain type of entity as mandated by law or local government. For example, all banking
sectors require certified audit companies approved by their central bank to audit their financial
statements. Statutory auditing may be distinct from financial statement auditing, as financial
auditing encompasses the examination of all types of entities' financial statements, including
those that comply with or do not comply with government requirements. Statutory audit, on
the other hand, refers to the auditing of an entity's financial accounts as required by local
legislation.
External audit firms typically conduct the statutory audit, and the auditor issues the
audit report, which the entity submits to the government body. Not according to the auditor.
The common criteria established by legislation that require entities to have their financial
statements audited by competent audit companies are yearly revenue, asset value, and number
of employees. Certain governments may compel corporations in specified industries, such as
banking, mines, and others, to have their financial accounts audited. Companies listed on a
stock exchange are generally required and enforced by the stock exchange authorities to have
their financial statements audited by a recognized audit firm.
3. Financial Audit: Financial auditing is the process through which an independent
auditor audits an entity's financial statements and issues an audit opinion on those financial
statements following the auditing work. A financial audit is often performed annually and at
the conclusion of the accounting period by an external audit firm led by a CPA. This is also
referred to as financial statement auditing. However, on occasion, when required by
management, the bank, the securities exchange, or regulation, the financial audit is also
conducted quarterly.
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The majority of organizations create their financial statements in accordance with IFRS,
but some prepare their financial statements in accordance with local GAAP. For instance, if
an entity is registered in the United States, its financial statements are prepared in accordance
with GAAP. If financial statements are prepared in accordance with IFRS, the financial audit
must be conducted in accordance with IFRS. However, if financial statements are prepared in
accordance with local GAAP, the audit must be conducted in accordance with those local
GAAP. The audit standards that the auditor uses to conduct financial audits must comply with
both worldwide standards and local legal obligations. Certain countries compel audit firms to
adhere to their audit standards, while others have embraced worldwide standards and adapted
them to be more local.
4. Tax Audit: The government's tax department or tax authority conducts a tax audit.
For example, a government agency may detect noncompliance and order an audit, or the
government tax department may set a deadline for such an audit. It is not mandatory for a
business to request an audit from the tax authorities. They will show up on their own. Only the
appropriate and timely filing of tax returns in compliance with the country's tax regulations is
required of the organization. Because of the tax audit, the organization should comply to all
tax law obligations and, for those areas in which they are not sure, consult with an experienced
tax advisor. The big four firms, as previously indicated, all offer this service.
5. Information System Audit: The term "IT audit" is sometimes used to refer to an
information system audit. Audits such as this one is designed to ensure that the system's
security system, information security structure, and integrity are reliable enough to deliver a
trustworthy output. There are instances when IT auditing is necessary for financial auditors
due to the ever-increasing use of complex accounting software by many clients. When
management's financial reporting and accounting practices changed, so did the auditing
process.
Information systems (software) used to produce financial statements are typically tested
and reviewed by IT and audit teams before they can be relied upon by auditors. Especially if
an organization employs an ERP system with integrated operational and financial reporting.
For instance, the accounting system of a bank is typically linked to operational reporting. In
addition to the financial audit, IT audits are also available and can be requested on their own.
This service is offered by most of the major corporations. They not only do IT audits, but they
also supply IT consultants.
6. Compliance Audit: A compliance audit examines a company's internal policies and
procedures, as well as the laws and regulations of the jurisdiction in which the company
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conducts business. The term "law and regulation" here refers to the laws and regulations of the
country in which the firm operates. The banking industry, for example, has a wide range of
regulations that bankers must adhere to. Most central banks mandated commercial banks to
set up a complaint review (assessment) or compliance audit in order to ensure that they are
adhering to the laws and regulations set out by those institutions in power. Internal audits can
also be used to ensure that the company's internal policies and processes are being properly
implemented and adhered to. To ensure that the government's laws and regulations and internal
policies and procedures are properly implemented, a compliance audit is employed by the
entity's management.
7. Operational Audit: Auditing important processes, procedures, systems, and internal
controls is the emphasis of operational auditing. Operational productivity and efficiency and
effectiveness are the major goals. Operational audits have also discovered resource-wasting
leaks in essential controls and processes and advised fixes. Providing value to the company is
the major goal of internal auditing, a subset of operational auditing. It is also important to have
a systematic and disciplined approach to ensure that the operational audit provides value to the
company.
8. Integrated Audit: When there are two distinct audit needs, an integrated audit
occurs. For instance, there may be a financial audit and a social audit, or certain areas may
require confirmation during the financial audit. For instance, an NGO's financial statements
must be audited, and the technical areas in which those NGOs invest their funds must be audited
by a qualified auditor. For instance, NGOs work on public health, and the majority of money
spent is on public health. Apart from expense reports, which detail the costs incurred by NGOs
and must be reviewed by the financial auditor, there are numerous technical reports, such as
health reports, that must be validated by technical auditors with experience reviewing health
reports. This is referred to as integrated auditing. Additionally, an integrated audit occurs when
a business operates in multiple jurisdictions and the financial statements are audited by multiple
audit firms.
1.3 The Role and Responsibilities of External Auditors
External and internal auditors have specific roles, but many professional bodies now
say that coordinating the work of both external and internal auditors can be more efficient and
effective (Brink and Witt, 1982; Engle, 1999; Felix et al., 1998; Moore and Hodgson,1993;
Institute of Internal Auditors, 1995).
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Robertson and Louwers (1999) also said that the external auditors are in charge of
looking at existing internal controls and figuring out how safe they are. External and internal
auditors usually start by looking at the control systems of the businesses they audit. This way,
they can make sure that the information in the books is correct.
External auditors have a job in the area of corporate governance to make sure that the
company is following the law and regulations that apply to it, that it is running its business
fairly, and that it has effective controls in place to prevent employees from having conflicts of
interest and fraud. An audit committee made up of independent directors can be in charge of
management, giving shareholders a sense of security that they will get the right information.
Most people agree that in good corporate governance, the external auditor should recommend
people to serve as independent directors, who will be able to run the company in the right
direction, protect investors and lenders, and make sure shareholders are safeguarded.
Throughout the fraud detection process, auditors have played a key role. One of the
primary goals of the review process was to catch fraud, and auditors were tasked with doing
just that. When it comes to auditing financial accounts, the auditor's role is limited to ensuring
that the financial statements are free of fraud and that they accurately reflect the financial status
of the organization (Alarbeed, Alothman, & Assee, 2014).
People who own shares in a company usually have a lot of faith in the auditor's report,
which they think shows the company's accounts in a way that is true and fair. Another person
says that outside auditors should be very careful and watchful to make sure that there are no
illegal or improper transactions. If the audit committee was made up of a majority of
independent and non-executive directors, the auditor's independence would be protected. This
might mean that their independent status would help the auditor's independence by connecting
communication networks.
Information technology has a big impact on the external audit process because
traditional methods and procedures don't work in the modern world of electronic data
processing and informatics, where electronic accounting systems provide information in a big
and fast way, and with a lot more accuracy and efficiency than before. Therefore, information
technology has a big impact on the process (Zghoot, 2016). According to Kasswna (2012),
today, information technology is a fact that should be taken into account because of all the
changes and developments that are taking place all over the world at the moment.
Kassem and Higson (2016) Auditors are supposed to find and report misstatements
caused by illegal acts that have a direct and significant impact on the financial statement
amounts, just like they are supposed to find and report misstatements caused by error or fraud.
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While Ojo (2006) stated external auditors need to meet norms of independence, objectivity,
and integrity in order to play a role in the supervisory process.
If we look at both the regulator and the external auditor's performance, we can see that
both have the same responsibility: to make sure that financial stability and the interests of
investors are protected. The regulator, on the other hand, works to protect the private interests
of the shareholders of a company.
1.4 Forensic Audit as Special Type of External Audit
Forensic auditing goes a step further than the typical financial audit. Investigative
techniques are used to investigate how the transaction was made and if any assets were stolen.
When an employee wants to steal money from the company, he or she might set up a fake
account and give the money to someone else. The financial reporting may not be aware of such
a transaction if it is properly tracked and accounted for financial audit. In this case, the affected
company will get a negative report from the audit.
Forensic auditing is a term used to describe the techniques used to gather evidence.
Examples of evidence that can be gathered include how long the fraud has been going on, and
what methods were employed by the offenders to hide it. In the event of a court case, evidence
can be gathered to support other problems as well. A forensic audit includes additional steps
and special techniques that need to be performed in addition to regular audit techniques.
1.4.1 Steps of Forensic Audit
1. Planning for Investigation - It is important for the auditor to know what the audit
is about when the client hires him or her. Because raw materials might not be of the best quality,
customer might be skeptical about possible scam. The forensic auditor will think about how
their investigation will help them meet their goals. The below common steps are drawn by the
forensic auditors while doing a forensic audit:
o At the beginning as a first step, they identify the fraud
o They figure out the time frame. How long the fraud has occurred.
o Find out the reason why the fraud was not identified
o Search for the fraudsters behind the fraud
o Measure the loss of the company
o Collect appropriate testimony
o Suggest procedures to avoid similar frauds in future
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2. Collection of evidence related to investigated area - An auditor's job is not done
until he or she has determined what kind of fraud, if any, has been committed, and how it was
accomplished. Gathering adequate evidence is essential for proving that a person or individuals
were involved in a fraudulent scheme and identifying those who were affected as a
consequence of that scheme in court.
The court will be better able to comprehend the fraud and the evidence offered if the
evidence is presented in a rational manner. In order to ensure that the papers and other evidence
obtained are not damaged or altered by anyone, forensic auditors are expected to take
reasonable safeguards. These are some of the most common techniques used in forensic audits
for gathering evidence, and they are described in greater detail later in this subchapter: forensic
accounting, forensic data analytics, operative analysis, buyer and supplier relationships
analysis, revealing potential conflicts of interest, identifying the offender, and calculating
damages.
3. Reporting – A customer must be informed of the deception by filing a complaint.
As a result of an investigation, a summary of the evidence, an explanation for how the fraud
was committed, and proposals for how internal controls may be strengthened to avoid such
incidents in the future should be included in the report. To proceed with a legal matter, the
client must first review the report.
4. Court proceedings – It is important that a report be made so that the client can learn
about the fraud. As a part of the report, it should include findings from the investigation, a
summation of evidence, an explanation of how the fraud was done, and ideas for how internal
controls can be better to prevent similar frauds in the future. There must be a report first before
the client can start a case in court.
1.4.2. Sources and Techniques of Forensic Audit
Forensic Accounting it entails the examination and evaluation of existing accounting
records, as well as the potential for their reconstruction. Forensic accountants and auditors are
also relying on the following three sources of evidence:
1. Reviewing of public documents and conducting background checks – Since the
public can access these documents, they are subjected to scrutiny. A thorough investigation
of a company's historical activities is also carried out as part of a background check. The
term "public documents" refers to any material that can be found in the public database, in
the company records, or on the internet.
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2. Detailed interviews including those with unwilling persons – After accurately
assessing the gravity of the situation, the interviewer should prepare questions that are
appropriate for the situation. Discussions should take into account every detail while also
considering the big picture in order to determine the scope of illegal activity and the identity
of the perpetrator responsible.
3. Information provided by a confidential and trustworthy source – After receiving
information from a confidential source or confidential informant, all necessary precautions
should be taken to keep the identity of the so-called source or informant hidden from the general
public. As many confidential sources as possible should be sought by a forensic accountant in
order to virtually guarantee the accuracy of the results obtained through the investigation.
And techniques used for processing such collected evidence are the following:
1. Forensic Data Analysis – Identification of abnormal transactions, patterns, and the
content of written descriptions are all part of this process, as is other related information. It can
include both structured and unstructured data, including both financial and non-financial
information (emails, messaging, audio, and video). Even behavioral metric data has been
included in modern fraud data analysis tools. To distinguish between false positives, errors,
and misappropriations, sophisticated graphical elements and dashboards are employed. Such
factors are considering while fraud data discovery:
o Familiarity
o Location
o Volume
o Data type of discovery
o Preservation requirements
2. Operative Activities – collection of information and evidence right from the
environment of interest (multiple on-site checks).
3. Analysis of Buyer and Supplier Relationships – identification of all mutual
connections between stakeholders in the buyer and supplier relationships of entities of interest
if there is no risk of bribery or extortion.
4. Revealing Potential Conflicts of Interests – identification of possible hidden
connections of an employee or his close persons to business partners or company’s suppliers.
5. Identification of Offender and Calculating Damages – revealing of offender,
gathering evidence and calculating damages and presentation of findings in a detailed report
which can be used solid evidence for further criminal proceedings and/or commercial law
disputes.
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6. General Audit Techniques: A good initial forensic audit technique is to attempt to
circumvent these defenses yourself. The weaknesses you find within the organizations control
will most probably guide you down the sea path taken by suspected perpetrators. This technique
requires you to attempt to put yourself in the shoes and think like your suspect
7. Statistical & Mathematical Techniques: There are two common types of statistical
and mathematical techniques are followed by the forensic auditors:
Trend Analysis: Similar to the natural world, the business world goes through cycles
and seasons. Investigating a cost incurred by a company or an incident that would be
comparable to having snow fall in the middle of summer is something that should be done.
In order for you to be able to recognize an unusual occurrence if it occurs during your
research, it is vital for you to do a thorough analysis of the historical norms of the
organization that is the focus of your inquiry.
Ratio Analysis: Calculating data analysis ratios for key numeric fields is another
method that can be utilized for the purpose of detecting fraudulent activity. Data analysis
ratios are similar to financial ratios in that they provide signs of the health of a firm's
finances. These ratios report on the fraud health of a company by recognizing potential
symptoms of fraud.
8. Technology Based or Digital Forensics Techniques: Because we live in a
technologically driven society, everything we do has an electronic trail. Detailed examination
of relevant emails, accounting records, phone logs, and the hard drives of the target company
are essential components of any modern forensic audit. To avoid being accused of violating
someone's privacy, a forensic auditor should consult with an attorney before taking steps such
as obtaining data from email or other sources. In-depth digital investigations necessitate the
assistance of professionals with digital investigation experience. It's also possible to get help
with this phase of the investigation from open-source digital forensics tools.
1.4.3. Tools of Forensic Audit
1. Computer Assisted Auditing Techniques (CAATs): Audit is becoming
increasingly difficult due to the ever-increasing wealth of information and the ever-changing
business practices, regulatory framework, and lack of resources available to auditors. As a
result, auditors and forensic auditors need to use CAATs. Using computer programs, auditors
can process audit-relevant data stored in a client's information systems using computer-assisted
audit techniques (CAATs), which are independent of the client.
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2. Generalized Audit Software (GAS): Auditors can do data extraction, querying,
manipulation, summarization, and analysis using CAATs of the Generalized class. In order to
achieve audit goals, GAS focuses on making full use of the data accessible in the entity's
application systems. Using GAS, auditors are able to quickly, easily, flexibly, independently,
and interactively review a company's data in data-based auditing. When an auditor uses GAS,
they have the ability to create a wide range of hypotheses about a potential falsification in the
subject matter and rapidly test those assumptions. With the results, auditors can create "what
if" scenarios and quickly evaluate the created report.
3. Common Software Tool (CST): CSTs have gained in popularity over time as a
result of the drawbacks associated with GAS. A few examples of CSTs include report writers
and spreadsheets like Microsoft Excel and Lotus. Other examples include Crystal Reports and
other similar programs. The immediate availability of these services at competitive prices is
largely responsible for their widespread acceptance. Spreadsheets, due to their inherent
simplicity and adaptability, might be the CSTs that are the easiest to use, whereas other CSTs
might require more practice. Regardless of whether one uses GAS or CST, it is crucially
important that the auditor be aware of the circumstance and processes that have led to the
generation of the data, the control environment that revolves around the data, and the source
from which the data samples are imported into the GAS. This is because the manner and
mechanisms that have led to the generation of the data have led to the generation of the data.
4. Data Mining Techniques: Automated techniques are used to mine enormous
datasets for new, hidden, or unexpected information or patterns that have not previously been
uncovered by humans. Discovery, Predictive modeling, and Deviation and Link analysis are
all examples of data mining approaches. Without any preconceived notions or hypotheses about
what the pattern might be—in other words, without any prior knowledge of fraud—it identifies
the normal knowledge or patterns in the data. Conditional logic is used to explain numerous
affinities, associations, trends, and variations.
To recap, a forensic audit is a deep engagement that requires the skill of not only
accounting and auditing methods, but also specialist knowledge of the legal environment. This
is because a forensic audit seeks to determine whether or not criminal activity has taken place.
It is necessary for a forensic auditor to have knowledge of the numerous types of frauds that
can be committed as well as the procedures that should be followed when gathering evidence.
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CHAPTER 2. STATUTORY AND FORENSIC AUDIT
THROUGH CHOSEN REPORTING CYCLES AND STATUS
OF AUDITS IN BANGLADESH
The reporting cycle is the formal process of data collection, assimilation, analysis, and
dissemination. Throughout the closing and consolidation cycle of a leading practice,
management receives information on key indicators and statistics. Formal reporting, both
internal and external, might include a large number of personnel, which can result in areas of
inaccuracy or miscalculation. The flow of information necessary to ensure accuracy in a timely
manner is critical to this process. This would incorporate data from all source systems and may
require the assistance of a support process. There are numerous tools available for resolving
reporting concerns.
Reporting cycle is also important for the auditors as they run sample from the selected
procedures based on the reporting cycles. On the other hand, they are the big elements of
verifying the financial health of a publicly listed company and meeting the requirement for info
concerning the financials of the company that investors have is being able to produce financial
statements that have been audited. By examining the organization's internal control system,
auditors help identify important areas that pose a high risk.
Each country in the world follows different sets of rules and regulations based on its
internal systems and Bangladesh is also following its own legislations. During the years it has
updated and changed the legislations. At the end of the chapter the status of the audit and the
recent financial frauds has been highlighted
2.1. Reporting Cycles
The reporting cycle is concerned with the operation, management, updating, and
reporting of a business's financial statements. Typically, the cycle occurs concurrently with the
planning and budgeting processes. It ensures that the business is prepared to begin the
subsequent period. While the planning and budgeting and reporting cycles of a business are
typically distinct, they may involve the same people in their preparation.
The planning cycle involves forecasting future cash flows for spending and income,
whereas the reporting cycle summarizes the company's current financial position in terms of
assets, revenue, and expenses after a specified period of business time. Thus, the planning cycle
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is forward-looking in time, whereas the reporting cycle is backward-looking in terms of
business activity and recent standings.
Globally, reporting on business performance particularly for public companies is
mandatory. The reporting cycle should be no longer than a year. This type of regulation
promotes transparency in the management of public companies. Investors acquire shares in
publicly traded companies and gain insight into their operations by reading the companies'
financial reports. As a result, financial reports enable investors to easily monitor the company's
performance. Companies are required to report on financial statements such as their income
statement, cash flow statement, statement of retained earnings, and statement of financial
position. They are the fundamental financial statements that enable the public to comprehend
the company's financial performance over a specified time. Two cycles in the reporting process
described below:
An Account: Each time a company does something, it makes a record of it in an
account. This is a basic building block of a reporting cycle. A transaction, on the other hand, is
a job done by a business to help a customer. It can either be a profit for the company or an
expense where it has to the company will spend money in future. Accounts are separated into
different types for instance, revenue, liability, equity, assets, and expenses. This means that
each account in a company must be different from the rest. Therefore, each account has a
unique account number and name. Whether it's a debit or credit balance, the account always
has a balance of either.
A transaction: People can make a transaction that is both financial and non-financial
at the same time. There are two ways to record transactions: they can be accrual or cash
transactions. The number and state of transactions don't usually depend on the size of the
company or how many people work there. Transactions include things like paying dividends,
buying assets, writing off bad debt, making a sale, and making money. Transactions are put
into the journal in order. The order in which things happen determines their order. It makes it
easy to follow up if someone needs more information about the financial report.
The reporting cycle is over when financial statements are made and made public. The
reported statements should be checked for mistakes through auditing before they are released
to the public. This will help make sure they are correct. Before the financial statements are
made public, they are talked about with the directors. The final report should be checked by an
auditor before it is released to the public. An auditor should read in between the lines of the
report to find any inconsistencies and mistakes that need to be fixed. The auditor checks to see
if the report is in line with the accounting rules that have been set up and if it shows the true
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financial state of the company. As long as the auditor is satisfied with the report and gives it a
"unqualified" opinion, it's released to investors, shareholders, and other people who care about
the company.
In the following three subchapters there are presented the major types of reporting
cycles – Salles and collection cycle also knows as “Order to cash” (OtC), Purchase and payment
cycle also known as “Purchase to payment” (PtP) and financial statements preparation cycle or
“Record to report” (RtR).
2.1.1. Order-to-Collect (OtC)
The Order to Collect (OtC) process can be summarized as the sequence of events that
occur between the receiving of an order and its acceptance, the delivery of a product or service,
the transmission of an invoice, the buyer's approval of the invoice, and the final payment.
Suppliers who streamline their OtC process receive cash more quickly, resulting in a stronger
liquidity position. Additionally, suppliers can save money on transaction expenses by reducing
the time spent on order and invoice processing.
To put it more succinctly, order-to-collect is an acronym for a company's business
process for the order-processing system. This is a set of business operations that manages
everything from the sales order through the customer's payment. It helps to define your
company's success and customer interactions. Streamlining this procedure might have a
positive impact on the company as a whole.
According to industry reports, logistics is one of the businesses with the lengthiest
payment periods (Graydon, 2019). While the buyer is ultimately responsible for invoice
approval and payment, the supplier is ultimately responsible for most of the other steps in the
process. It is consequently critical for suppliers to streamline these stages in order to avoid
liquidity issues and expensive transaction costs. Given that Logistics Service Providers (LSPs)
frequently operate at a loss, a lengthy and inefficient OtCprocess has a disproportionately
negative influence on profitability (Hausmann et al., 2015; Eliott et al., 2020). A typical OtC-
process consists of the following phases:
1) Acceptance and approval of orders. After suppliers receive and approve a buyer's
purchase, the order must be processed through internal systems.
2) Goods/services delivery.
3) Billing. Generally, invoices are provided when goods/services are delivered;
however, there are instances when providers can send invoices prior to delivery.
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4) Invoices (according to contractually agreement payment term). Payment is made
following the buyer's approval of the invoice. If an invoice has errors, this can result in disputes,
which can result in extended invoice approval time and late payment.
5) Payment (after contractually agreed payment term). Buyers frequently fail to adhere
to negotiated payment conditions, for example, due to liquidity constraints or payment process
inefficiencies.
In these instances, suppliers' follow-up communication is typically required. While
practically all OtC processes consist of these five steps, there are several deviations,
particularly in the order of the phases. For example, it is customary for large building projects
to require repeated payments over a specified period, with the first payment frequently
occurring prior to the commencement of construction. OtC-process steps:
Source: Inefficiencies to cash processes in the logistics industry, empirical evidence from the
Netherlands, 2022.
Inefficiencies in the OtC process: numerous inefficiencies have been documented in
the literature at all stages of the OtC-process. Manual order and invoice processing can have a
negative cashflow effect due to the lengthier processing time and increased transaction
expenses, such as staff time spent on orders and invoices and printing costs (Fairchild, 2004).
Lack of digitalization in the OtC-process is likely the most studied inefficiency in the literature,
as it can affect a wide variety of OtC-process phases. Suppliers can gain more visibility into
the processing of orders and invoicing through automation, resulting in increased flexibility in
managing accounts receivables (Fairchild, 2005; Caniato et al., 2016). De Goeij et al. (2016)
argue that a lack of client segmentation and the proliferation of invoice kinds may contribute
to the lengthening of OtC procedures.
Segmenting consumers based on their payment history and/or invoice volume per
customer may result in improved liquidity management (Zeng et al., 2008; Hu et al., 2015).
When businesses issue a variety of various sorts of invoices to different clients, such as invoices
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per order, weekly invoices, monthly invoices, and partial payment invoices, the complexity
grows, perhaps necessitating additional time for efficient invoicing. Late payment is frequently
the result of disagreements between suppliers and buyers (Silvestro & Lustrato, 2014; De Goeij
et al., 2016). Substantially if disputes already result in inefficiencies, De Goeij et al. (2016)
demonstrate how the absence of a standardized method for resolving such disputes can result
in even lengthier O2C processes. Finally, an inefficiency that is commonly highlighted is
attributed to internal objective conflicts, particularly between the sales and finance
departments. According to Dekkers et al. (2020, p. 7), financial managers frequently have a
"transactional view," meaning they are focused on getting paid, but sales managers have a
"relational view," meaning they value customer satisfaction as well. For instance, this could
result in sales managers offering extended payment terms to keep clients happy, while finance
is upset about the effect on liquidity.
2.1.2 Purchase to Pay (PtP)
An organization's purchase to pay process, known as PtP, is made up of a number of
steps that explain the entire process from an organization's request for a product or service from
suppliers, through the subsequent payment for those items or services. These are the essential
steps: product ordering, supplier requisition payment, budget authorization, delivery reception
and invoice processing.
All businesses make purchases, and suppliers expect to be paid for those purchases. As
a result, the procurement-to-payment cycle should be viewed as a single business process,
independent of who is in charge of procurement and accounts payable. Procurement can be
better controlled by implementing a software-based system, which ensures that all expenditures
are authorized and recorded before a contract is signed with the supplier. A company's
procurement of the commodities and services it need to operate is handled through the procure
to pay procedure. When products and services are requisitioned and procured, procure-to-pay
or P2P is the term used to describe the complete process from order to payment, also known as
purchase-to-pay.
Accounts payable (AP) automation software cuts costs by removing paper and
decreasing manual effort, while also enhancing relationships with suppliers by facilitating fast
payments. Even whether purchasing and AP are handled by distinct departments or one
department, a single system that connects both operations is likely to be easier to adopt and
more beneficial in both areas.
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Any authorized user in the organization can easily and efficiently create online purchase
requests with the help of a good PtP solution. Provider preferences, budget monitoring, and
contract enforcement are all pre-existing features of the system. Orders are also issued
electronically to vendors after approval has been given online or via a smartphone. With built-
in features for effective exception management, bills received and processed without paper are
automatically matched and issued for payment. Receipt of goods and services is documented.
Monitoring and analyzing supplier performance is made possible through the use of reports
and inquiries.
As mentioned above the goal of purchase-to-pay is to improve the organization's
financial management and efficiency by streamlining the purchasing process. Besides, a
simplified, integrated system saves money and decreases the chance of errors. A typical
purchase-to-pay system consists of five steps, each of which has certain prerequisites for
completion:
1. In a purchase-to-pay system, catalogs from selected vendors are the initial step.
2. The buyer submits a purchase request to the appropriate management after selecting a
product from a catalog.
3. Purchase order workflow - Once the purchase requisition is accepted by management,
a purchase order is generated.
4. When it comes to the purchase-to-pay system, invoice processing is a time-consuming
and labor-intensive task that must be automated to save time and money. A
reconciliation tool that matches purchase orders to invoices is included in automated
invoice processing, saving both time and money.
5. If a payment is authorized, a file in the company's accounts payable system is created
for the invoice in question. The supplier is paid by the end of the credit period that the
provider has given the buyer. It is not the purpose of purchase-to-pay systems to speed
up the payment procedure.
Despite the fact that this is an admirable goal, the reality is that most organizations
would not prioritize this because it would harm their own financial flow. Because finance
departments have timely purchasing data at their fingertips, a purchase-to-pay system's purpose
is to improve efficiency and financial management.
The advantages of a P2P solution are numerous. Since submitting purchase requests
and receiving receipts is made simple, but also because controls are built throughout the entire
purchase to pay process, user adoption is high. Take charge of purchasing and even more cost
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savings and profits in accounts payable. Invoice processing can be automated to a large extent
because purchases are pre-approved, but exceptions still need to be handled manually.
A lack of visibility into the account payable process makes it difficult for managers to
respond supplier inquiries quickly, and it also prevents them from knowing their current
financial circumstances or accessing the BI and data they need in order to move the business
ahead. A business' profit margins and relationships with suppliers suffer when manual
processes lead to late payment penalties, duplicate payment, and the inability to take advantage
of an early payment discount.
2.1.3 Record-to-Report (RtR)
For modern companies, data management is a significant instrument for increasing
earnings and performance as well as gaining a competitive advantage. Financial and other data
provided by companies can be used to obtain new insights and better strategic planning, as
well. Using the RtR method, for example, companies can compile accurate financial reports
and gain meaningful, strategic insights by gathering, organizing, and analyzing company's
financial data.
The record-to-report (RtR) process includes accurate financial data collection,
processing, and reporting. It provides management and other stakeholders with information on
the organization's strategy, finances and operations. It is a Finance and Accounting process that
collects, processes, analyzes, and distributes timely, accurate information utilized for
delivering strategic and operational feedback, which helps determine if the organization is
working like a well-oiled machine or is in the final stages of its demise.
In addition, the RtR Process encompasses the stages involved in establishing and
reporting the overall accounts, which are typically kept in either a general or nominal ledger
and are supervised by a Comptroller. These steps are commonly included in the R2R Process.
The following activities are included in the Record to Report Process Cycle:
➢ Extraction of Data
➢ Data Collection
➢ Validation of Data
➢ Transformation of Data (generation of voucher)
➢ Posting of Vouchers (to the general ledger)
➢ Voucher Storage in a Non-Normalized and Compressed Format
➢ Producing Analyses Trial Balance of the Account
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➢ Financial And Management Reporting
Instead of processing transactions, Record to Report aggregates data from existing
computer systems to provide management-ready performance reports. RtR may be part of a
larger accounting department. As far as the field of accounting is concerned, an IT platform
provides the data management required with the press of a single key. Typically, this means
that a team is needed all year round to ensure that the reports are given in the correct format.
The record-to-report process, as previously said, can be time consuming and complex.
The modern business world relies on automated systems that streamline operations and boost
accuracy. Below are the five key steps in the record to report cycle:
Transactions Record: The name says it all. The transaction needs to be recorded.
However, adherence to a standard structure for each transaction is mandated by a set of rigid
criteria.
Transactions Process: In order to ensure that totals are accurate and full, all
transactions must be compiled and indexed.
Closing Cycle: The general ledger is locked, and the books are closed for this length
of time according to generally accepted accounting rules.
Consolidation: To ensure the accuracy of the data, all recorded transactions are
compared side by side in the appropriate category, called "apples to apples."
Reporting: The culmination of the process, the final report. Management can use this
information to make operational improvements and plan for the future.
Internal controls, procedures, and data management strategies all have a role in how
quickly finance and accounting departments can complete the R2R process. As a result, firms
may enhance their business operations, fulfill growth and innovation targets, and improve their
bottom line by learning how the record to report process works, why it's important, and the best
practices needed to optimize it.
Businesses face their own unique challenges when implementing complicated
procedures such as RtR. When processing their data into financial reports and insights,
however, any organization could run into a number of challenges. This is especially true for
large international corporations that have complex intercompany accounting operations;
however, the truth is that any organization could face a number of these challenges. If an
organization has inefficient workflows and struggles with data management, there is a chance
that the master data that is required for decision-support, reporting, and planning will be
compromised. If the methods for the gathering of data, organization of the data, and analysis
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are not clearly defined and implemented, this could result in costly delays or increased risk
exposure.
General ledger data, from the final stages of closing through to reconciliation and
validation, are all dependent on their accuracy and completeness to function properly. Until the
general ledger is balanced and checked, errors resulting from inefficiencies in the supply chain
may go undetected. Additional costs, stress and frustration may result while journal entries are
reviewed, and analysis is put on wait.
Getting more and more complicated reporting and compliance rules. In the modern
world, it can be hard to meet the needs of both internal and external stakeholders, as well as
the regulatory bodies that keep track of financial compliance. Companies who want to be
competitive and have a healthier balance sheet through lower risk and better performance are
likely to be the main reason why they want to use fast, accurate, and complete data management
solutions.
2.2. External Audit Procedures Conducted at Chosen Reporting Cycles –
Classical Statutory Audit Procedures and Forensic Audit Procedures
The thorough audit plan documents risk assessment and assertion-level audit methods
in response to evaluated risks. The audit plan specifies the types of transactions, account
balances, and disclosures that will be audited by the team. In a small-entity audit, the audit plan
is usually incorporated in conventional audit programs and schedules for transactions and
account balances. In any case, standard programs must be adapted such that the approach to an
item, in terms of substantive procedures, control tests, or both, is proportional to the risk
identified for that item and is focused at generating audit evidence capable of validating the
underlying assertions.
2.2.1 Statutory Audit and Forensic Audit Techniques for OtC and PtP Cycles
Normal way how occurrence and existence assumptions are tested under statutory
audit for chosen items from Profit and Loss (P/L) and Balance Sheet (B/S) is as follows:
1. For Sales and Cost of Sales (tests of transactions) - Obtaining of breakdown of
sales transactions and related costs of sales recorded in the ledger during some peak period
(with peak sales) and the sales and margin reports from the same periods. Check if they
reconcile with max of 10% variance. Then prepare audit samples with 5-10 transactions using
simple random sampling and/or systematic sampling methods. Trace items from created
samples to review against quotation, sales orders, invoices, contracts, and goods delivery noted.
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Make sure that all variances higher than materiality threshold are investigated (commentaries
and explanations from accountants and management of the client are obtained).
2. For Purchases - Select a sample of 5-10 expenses from either all accounts the
purchase ledger or accounts with highest materiality for some peak period and trace those to
the invoices and other supporting documents such as goods received notes (GRNs).
3. For Account Receivables and Account Payable (test of balances) - Obtaining of
breakdown (listing) of debtors (for AR testing) and vendors (for AP testing) recorded in the
financial statements (ledger) as per Period 06 and Period12, then answer some peak period
during the year. Then select a sample of 5-10 items from each part (i.e., AR and AP) and trace
them to related sales orders and purchase orders, sales and purchase invoices, contracts, and
goods dispatch notes and goods delivery notes. It is important to ensure that the sampling items
represent the total population. Otherwise, the conclusion might go wrong.
4. For Inventory (test of balance) - Conducting of year-end stock count. Get
breakdown of stock from the ledger (stock listing) from Period 6 and Period12 and some peak
periods, make a sample of 15-20 stock items and trace them to goods delivery notes, purchase
invoices and purchase orders.
Particularities (i.e., differences from procedures used under statutory audit) of forensic
Audit procedures used for testing of occurrence and existence assumptions for the same items
from Financial Statements (FS) are the following:
1. For Sales and Cost of Sales (tests of transactions) - Obtaining of breakdown of
sales transactions and related costs of sales recorded in the ledger and the supporting sales and
margin reports for all 12 periods of the given fin year. If required, get the same breakdowns
from previous year (up to 5 years into the past). Check if they reconcile with max of 5%
variance. Then prepare audit samples for each period from current fin year with 20-30
transactions and, if required, prepare audit samples for each period from past fin year with 5-
10 transactions. If still required, prepare samples with 5-10 transactions for Period 6 and, Period
12 and peak periods from fin years prior the past year. Make sure that all variances higher than
materiality threshold are investigated through obtained commentaries and explanations from
accountants and management. Finish testing with reasonableness analysis and discuss the
obtained results in interviews with senior management.
2. For Purchases - Select a sample of 10-20 expenses from target expense accounts
(where fraud is suspected) from each period during fin year under audit (if needed, get similar
breakdowns from past years, up to 5 years into the past) and trace those to the invoices and
other supporting documents such as GRNs.
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3. For Account Receivable and Payable - Obtaining of breakdown (listing) of debtors
(for AR testing) and vendors (for AP testing) recorded in the financial statements (ledger) for
each period during the year (if needed, get similar breakdowns from past years, up to 5 years
into the past). Then select a sample of 10-20 items from each part (i.e., AR and AP) and trace
them to related sales orders and purchase orders, sales and purchase invoices, contracts, and
goods dispatch notes and goods delivery notes.
4. For Inventory - Participate in year-end stock count and see how stock listing is
prepared. For manufacturing companies: trace individual cost components which enter into
total capitalized value of stock to their expense records in P/L and supporting documents (note:
common fraud is overstatement of value of stock by capitalizing items which should not be
capitalized. Items which most often get capitalized under fraud scheme are selling expenses
and general and administrative overheads). Get breakdown of stock from the ledger (stock
listing) from each period during fin year under audit (if needed, get similar breakdowns from
past years, up to 5 years into the past), make a sample of 20-30 items, trace them to related
GRN, purchase invoices, purchase orders. Check the selected samples from previous step
against report of aged stock, if the sampled items haven't been included into the provision for
aged items.
As for testing of Assumption of Completeness - under Statutory Audit it is tested as follows:
1. For Sales and Cost of Sales (tests of transactions) - Select samples of 5-10
customer orders from P6, P12 and some peak periods and trace to dispatch notes and sales
invoices and the posting to the sales account in the general ledger.
2. For Purchases - Select a sample of 5-10 matched GRNs from P6 and P12 and some
peak period, trace them to breakdown from purchase ledger.
Select a sample of 5-10 unmatched items, check their timing and trace them to year-end
accruals.
3. For Account Receivable and Payable - Select a sample of 5-10 closed customer
orders (for AR testing) and closed purchase orders (for AP testing) from P6, P12 and some
peak period and trace to related dispatch notes and sales invoices for AR testing and to related
delivery notes and purchase invoices for AP testing. Then trace selected items to related
records/balances in debtor and vendor ledgers (listing).
4. For Inventory - Select inventory receiving reports (delivery notes listing) from P6,
P12 and some peak periods and trace them to inventory records in the ledger to make sure the
two reports match.
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When it comes Forensic Audit then the Completeness are tested below way:
1. For Sales and Cost of Sales (tests of transactions) - Select samples of 10-30
customer orders from all 12 periods of the given fin year. If required, make samples with 5-10
customer orders from previous year (up to 5 years into the past, takes them from P6 and P12
periods). Trace items from created samples to review against quotation, sales orders, invoices,
contracts, goods delivery notes and, finally, the postings to the sales account in the general
ledger. Check if there have been any collections allocated to the items from the sample.
2. For Purchases - Select a sample of 10-20 unmatched GRNs from each period during
fin year under audit (if needed, get similar breakdowns from past years, up to 5 years into the
past), trace them to breakdown from purchase ledger. Select a sample of 10-30 unmatched
items, check their timing and trace them to year-end accruals.
3. For Account Receivable and Payable - Select a sample of 10-20 closed customer
orders (for AR testing) and closed purchase orders (for AP testing) from each period during
the year (if needed, get similar breakdowns from past years, up to 5 years into the past) and
trace to related dispatch notes and sales invoices for AR testing and to related delivery notes
and purchase invoices for AP testing. Then trace selected items to related records/balances in
debtor and vendor ledgers (listing). Make similar samples but for open items (i.e., open
customer orders and open purchase orders) and trace them to debtor and vendor balances as
per ledger to make sure that they are not found there.
4. For Inventory - Make a sample of 10 items from inventory receiving reports
(delivery notes listing) from each period during fin year under audit (if needed, get similar
breakdowns from past years, up to 5 years into the past) and trace them to inventory records in
the ledger (stock listing).
Under Statutory Audit Cut – Off assumption is tested in this way:
1. For Sales and Cost of Sales (tests of transactions) - Select a sample of 5-10 last
goods dispatch notes from P6, P12 and some peak period and trace them to sales invoices to
ensure that goods dispatched are recorded in sales and cost of sales in the correct period and in
case of P12 samples - in correct year. One more test can be done through obtaining of GDN
from P12 by direct participation of external auditors in year-end stock count.
2. For Purchases - Select a sample of 5-10 GRNs dated shortly before and after year-
end, agree that the amounts on the invoices are posted in the correct financial year. One more
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test is to Obtain a schedule of accruals and inspect the date on the GRNs to make sure that they
have been correctly accrued and that goods received after year end are not included.
3. For Account Receivable and Payable - For AR testing select a sample of 5-10 items
from a list of last goods dispatch notes as per P6 and P12 and trace to sales invoices and to
debtor balances (listing) to ensure that debtor balances originated in the same period when
related GDN was raised. Similar procedure is done for AP ledger: tracing selected goods
delivery notes to purchase invoices and vendor balances as per chosen periods to ensure that
vendor balances originated in the same period when related goods delivery notes were raised.
4. For Inventory - Recording last goods dispatch notes at the inventory count and
tracing to year-end stock listing to ensure that goods dispatched are excluded from it. Similar
test is done for goods delivery notes: recording last goods delivery notes at the inventory count
and tracing to year-end stock listing to ensure that goods dispatched are included into it.
Under forensic audit Cut off tested in the below way:
1. For Sales and Cost of Sales (tests of transactions) - Select a sample of 10-30 goods
dispatch notes from all 12 periods of the given fin year. If required, make samples with 5-10
GDN from previous year (up to 5 years into the past, take them from P6 and P12 periods).
Trace them to sales invoices to ensure that goods dispatched are recorded in sales and cost of
sales in the correct period and in case of P12 samples - in correct year. Data from P12 needs to
be collected by direct participation in client's year-end stock count done in all warehouses of
the client.
2. For Purchases - For a sample of GRNs dated shortly before and after year-end, agree
that the amounts on the invoices are posted in the correct financial year. One more test is to
Obtain a schedule of accruals and inspect the date on the GRNs to make sure that they have
been correctly accrued and that goods received after year end are not included.
3. For Account Receivable and Payable - For AR testing select a sample of 5-10 items
from a list of period goods dispatch notes (GDN) as per each period during the year (if needed,
get similar breakdowns from past years, up to 5 years into the past) and trace to related sales
invoices and to debtor balances (listing) to ensure that debtor balances originated in the same
period when related GDN were raised. Similar procedure is done for AP ledger: tracing selected
goods delivery notes to purchase invoices and vendor balances as per chosen periods to ensure
that vendor balances originated in the same period when related goods delivery notes were
raised.
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4. For Inventory - Cash disbursements after the end of the period. If the auditor finds
payments made directly to vendors that were not recorded in the purchase journal, he or she
should investigate further.
2.2.2 Statutory Audit and Forensic Audit Technique for RtR Cycle
The below two tables - Table 1 and Table 2 contain classical and forensic techniques
used by the auditors during the statutory and forensic audit of RtR cycle such as tracing of
postings to source records, individual journals, B/S reconciliations and variance analysis
commentaries.
Table 1: Statutory audit technique for RtR cycle
Interfaces Posted
(Recording
Component)
Journals Posted
(Recording
Component)
Reconciliations
Prepared
(Reporting
Component)
Budgetary Control
Occ
urr
ence
& C
om
ple
ten
ess
Get a breakdown of
either all items or
items with highest
materiality posted
into the ledger via
interface (i.e.,
system driven
postings to the
ledger) in P6 and
P12 and trace them
to items recorded in
the source system to
make sure that
interface worked
successfully.
Get a list of either
all items or items
with highest
materiality posted
into the ledger via
manual journals
(i.e., manual
entries posted to
the ledger via
automated
accounting
platform e.g.,
Blackline) in P6
and P12 and trace
them to individual
journals uploaded
into system to
make sure that
automated
platform worked
successfully.
Get a list of either
all of B/S accounts
or accounts with
highest materiality
or unusual year-
on-year trend as
per P6 and P12
and trace them to
individual
reconciliations
uploaded into
system to make
sure that each
accounts has a
proper
reconciliation.
Get a list either all of
B/S accounts or
accounts with
highest materiality
or unusual year-on-
year trend as per P6
and P12 and trace
them to individual
variance
commentaries
uploaded into system
to make sure that
each accounts has a
proper attention
from its owner and
those charged with
governance.
Source: (https://www.accaglobal.com, 2022)
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Table 2 describes the main difference of testing of RtR cycle under forensic audit
compared to statutory audit:
Table 2: Forensic audit technique for RtR cycle
Interfaces Posted
(Recording
Component)
Journals Posted
(Recording
Component)
Reconciliations
Prepared
(Reporting
Component)
Budgetary
Control
Occ
urr
ence
& C
om
ple
ten
ess
Get a breakdown of
all items posted into
target accounts
(where fraud is
suspected) of the
ledger via interface
(i.e., system driven
postings to the
ledger) during all
periods of the
current fin year (if
needed, get similar
breakdowns from
past years, up to 5
years into the past)
and trace them to
items recorded in
the source system to
make sure that
interface worked
successfully.
Check interface
reports including
exception reports
(about failed items)
and trace them to
related interface
reconciliations.
Get a list of either
all items posted
into target
accounts (where
fraud is suspected)
of the ledger via
manual journals
(i.e. manual entries
posted to the
ledger via
automated
accounting
platform e.g.
Blackline) during
all periods of the
current fin year (if
needed, get similar
breakdowns from
past years, up to 5
years into the past)
and trace them to
individual journals
uploaded into
system to make
sure that
automated
platform worked
successfully.
Get a list of all
target B/S accounts
(where fraud is
suspected) during
all periods of the
current fin year (if
needed, get similar
breakdowns from
past years, up to 5
years into the past)
and trace them to
individual
reconciliations
uploaded into
system to make
sure that each
accounts has a
proper
reconciliation with
subsequent review
from the business.
Get a list all target
B/S accounts
(where fraud is
suspected) during
all periods of the
current fin year (if
needed, get similar
breakdowns from
past years, up to 5
years into the past)
and trace them to
individual variance
commentaries
uploaded into
system to make
sure that each
accounts has a
proper attention
from its owner and
those charged with
governance.
Source: (https://www.accaglobal.com, 2022)
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2.3. State of the Audit in Bangladesh: Internal and External
Auditing is a methodical strategy to look for and evaluate information that backs up
statements about economic acts and events to see how well they match up with specified
criteria. The purpose of this evaluation is to determine whether or not the claims can be
supported by the evidence. It is a review of the financial statements or other financial
information of a firm or organization that has been conducted by an independent party. The
findings of the inquiry are presented, in the form of a particular opinion, to the individuals who
are in a position to benefit from having this information. Companies in Bangladesh that have
been registered in accordance with the Companies Act of 1994 are required to have their
financial accounts reviewed and verified by an independent party. According to Section 213(3),
the auditor is required to prepare a report for the annual meeting of the firm that discusses the
accounts that he has examined over the previous year. At the meeting, attendees will be shown
this report.
Before ICAB approved ISA, auditing had two basic goals: detect and avoid errors and
frauds, and make sure they did not happen again. Currently, Bangladesh adopts ISA auditing
regulations. Companies Act 1994, Insurance Act 1938, Banking Companies Act 1991,
Securities and Exchange Commission Act 1993, and Securities and Exchange Rules 1987
include auditing rules.
Company accounts must be checked by certified accountants who follow the rules of
the Bangladesh Chartered Accountants Order 1973, which was passed in 1973. According to
the same Order, any non-government organization that receives foreign donations must have
its books of account checked by a chartered accountant. Audits must be done at least once a
year on the accounts of every co-op society. In this case, the audit will be done by the Registrar,
or by an audit officer who has been given permission by him. It will be done by the date that is
set. Sector corporations have internal audit departments, independent professional audit firms,
and the Bangladesh Comptroller and Auditor General (C&AG) to check the accounts of
businesses that work for them. Internal audits, which are sometimes called management audits,
are done by employees of a company to look into specific problems. The goal of this audit is
to make sure that the rules and regulations of the company are being followed when a policy is
put into place. An independent professional audit is done by chartered accountants every year
to give their opinion on the financial statements. If the government owns, invests in, or gives
money to a business, the C&AG has to do a government commercial audit. According to the
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guidelines of Bangladesh Standards on Auditing, the Auditor's Report on Financial Statements
outlined the following standards that the auditor must adhere to.
The purpose of this Bangladesh Standard on Auditing (BSA) is to develop guidelines
and provide direction on the structure and substance of the auditor's report released following
an audit of an entity's financial statements conducted by an independent auditor. Much of the
ideas offered here can be applied to audits of financial information other than financial
statements. It is the responsibility of the auditor to thoroughly review and assess the
conclusions drawn from the audit evidence used to support the assertion of an opinion in the
financial statements. This evaluation and assessment consider whether the financial statements
have been prepared in compliance with an adequate framework for financial reporting, which
may include Bangladesh Accounting Norms (BASs) or other applicable national standards or
practices. It's also a good idea to check to see if the financial statements are in accordance with
any applicable legislation.
The auditor's report must incorporate a clear and succinct written statement that
conveys the auditor's overall impression of the financial statements as a whole. Because of the
special position of trust that the Constitution of the People's Republic of Bangladesh grants to
the Office of the Comptroller and Auditor General, it is imperative that all operations associated
with the office adhere to the highest possible professional standards. This places the burden on
us to keep our quality standards high, to adopt the best practices, and to develop benchmarks
for measuring the quality of our work and its output. In light of this, it is compulsory to define
and codify internationally acceptable and contemporary professional standards to control all of
the audit work so that the tasks outlined in the Constitution can be carried out in an efficient
and effective manner.
The Companies Act of 1994 mandates that all businesses have their financial statements
audited by experienced accountants. This clause is desirable because shareholders who
contribute capital to a corporation give management and control to directors. Auditors are
chosen in order to safeguard shareholder interests. Chartered accountants from the Institute of
Chartered Accountants of Bangladesh (ICAB) are eligible to undertake auditing after having
adequate expertise in this sector through an ICAB-approved business.
The history of firm auditing issues (ICAB, 1999) illustrates the following instances that
have affected auditing standards and practice in Bangladesh throughout the years:
1850 - Indian Joint Stock Companies Act (enacted in UK as the 1844 Act): All
incorporated businesses are required to have their financial statements audited annually. The
Act made no requirement for the auditor to be independent or a certified public accountant.
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The audit report was to state whether the balance sheet presented a complete and accurate
picture of the company's financial position.
1859 - Nichol's Case: The judgment stated that it was part of the auditors' responsibility
to detect fraudulent misrepresentation. This marked the beginning of fraud and error detection
as the primary audit objective for the next approximately 80 years.
1896 - the court said that the auditor was a watchdog, not a bloodhound, and that what
was expected of him at the time was the exercise of reasonable skill and care.
1913 - Companies Act (India): requires that all companies have their accounting books
and records audited. A report on the balance sheet and profit and loss account was required.
Auditors were required to have a professional background.
There are basic rules and practices that members are supposed to follow when they do
an audit. Members who appear to not follow these standards may be investigated by the
appropriate committees of the accounting bodies. This could lead to disciplinary action.
Auditing standards have been set by the world's top accounting bodies for their members to
follow. A group called the Consultative Committee of Accountancy Bodies was set up by the
major accounting bodies in the United Kingdom and Ireland to help each other out. This body,
through a subcommittee called the Auditing Practices Committee (APC), is setting up rules
and guidelines for auditing. Standards from the APC covered a lot of different things, and they
are given below:
a) The auditor’s operational standard
b) The audit reports
c) Quality of that audit report.
The annual report and accounts of limited companies are a typical example of how
directors account to shareholders for their stewardship. Before the owners can accept these
financial statements, they must be audited (ICAB, 1999). Thus, the audit function is
inextricably linked to the function of accounting information, and can be summarized as
follows (ICAB, 1999):
a) The people who own resources (investors) have to make decisions about how these
resources are used.
b) These decisions are made based on how much money they think they will make from
investing.
c) When there are not any forecasts available, investors look at past data as a guide to
the future.
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d) This information comes from the people who manage the resources like the
Management of a company.
Because their interests may be at odds with the investors, the audit serves to give the
financial statements more credibility. We have seen that when the ownership and management
of a business are not the same, an external audit is needed. There are, however, some benefits
to having financial statements audited even if there is no law that requires it.
a) Disputes between management may be easier to deal with this way. For example, if
a partnership has complicated profit-sharing rules, an outside accountant may need
to look over the company's accounts to make sure that the profits are being split as
evenly as possible.
b) In this case, big changes in ownership could be made easier if the past accounts
have an unqualified audit report from the past. It can happen for example, when two
people who work alone start a business together and then merge it into one.
c) Audited financial statements may help get money from other people. However, keep
in mind that a bank, for example, is more likely to care about the future of the
business and the security it has available than the past cost accounts, whether they
have been audited or not.
d) If an auditor finds major mistakes and fraud during his audit, even though this is
not the main goal of the audit, he might still find out about it.
e) It is possible that the auditor will spend a lot of time looking into the business and
giving management advice on how to make it more efficient (ICAB, 1999).
There is further information that delves deeper into the specifics of how the auditing
standards can be applied in the actual world. It is not possible to devise a system of rules that
is both specific enough and comprehensive enough to handle every possible circumstance.
These recommendations are not obligatory in any way. Nevertheless, they do represent the best
way to carry things out at the present time, and an auditor will not ignore them unless there had
been a compelling reason to do so. It is possible that a court will utilize auditing standards and
guidelines as a guide to determine what constitutes best practice, and it is also likely that the
court will rate the auditor's performance based on how closely they adhere to the standards or
guidelines.
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2.3.1 Frequency and Common Types of Fraud among in the Local Companies
Bangladesh, like many other developing countries, has a plethora of corporate entities
that legitimately contribute to local economic success. As an economic zone in Asia, the
country has also been a victim of a slew of corporate crimes. The manipulation of the stock
market and the syndicate's looting of small investors were the most often discussed corporate
issues in the country. They transferred enormous sums of money into foreign countries by
utilizing their extensive and empirical network. Regrettably, these market manipulators have
not yet been prosecuted.
Until now, the investigating authority lacked the necessary expertise to examine
incidents of corporate corruption, and the country's legal framework was not sufficiently
updated to account for the intricacies inherent in financial crimes. Sonali Bank and Hallmark
scam is well-known corporate fraud in Bangladesh. The Bangladesh Bank disclosed in 2012
that between 2010 and 2012, the Ruposhi Bangla Hotel Branch of the state-owned Sonali Bank
illegally dispersed 460 million US Dollars in loans, with the Hallmark Group obtaining the
largest portion of 340 million US Dollars. This swindle, it is alleged, is the country's largest
financial scandal in history and arose from collusion between Sonali Bank and Hallmark
shareholders.
Some of Bangladesh's foreign exchange reserves were stolen from its account at the
Federal Reserve in New York in February. Until now, only about $20 million of the money has
been found. It's not clear who took the money or where it went. The bank heist is being called
one of the biggest in history. This is not the first time that Bangladesh's banks have lost a lot
of money. The high-flying cyberscam at the Federal Reserve isn't even close to the regular theft
of Bangladesh's money.
There is a lot of corruption in Bangladesh because there is not a lot of transparency in
politics and there isn't a lot of good governance. The second reason is that there was a lot of
informal work and a lot of informal transactions in the economy that left a lot of unknown
sources. Finally, the rich are worried about political instability or "false stability," which makes
them want to go somewhere else.
Most people in Bangladesh are talking about how some e-commerce platforms have
been cheating a lot lately. Everyone from policymakers to the media is now working on it.
Even the courts are now taking it in. The people who were scammed by a group of e-commerce
platforms, like e-valley, e-orange, and e-dhamaka. Discounts were offered on a variety of
products at an abnormally high rate, and it was not difficult to notice the ridiculousness of the
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offers. The e-valley took the lead. Accepting advances against purchase orders has been another
hoax. Certain well-known e-commerce platforms provide buyers with a variety of payment
choices for their orders. They typically accept payment upon delivery of items. For quite some
time, a significant South-Asian internet marketplace has operated in Bangladesh, with over 4.0
million daily users. Certain local platforms have also acquired the public's trust by their timely
and faultless service.
Only recently have a large number of people been duped by various so-called
multilayer-marketing (MLM) companies. The market leaders were Destiny and Jubok. Bank
regulators have been watching Destiny Group for several months now, since they were initially
tipped off to their alleged fraudulent and illegal deposit stealing from customers. Thousands of
young people became involved in these businesses, which scammed millions of people across
the country. In the majority of cases, victims deposited cash with fraudsters who promised large
profits. They had bribed certain individuals with huge returns in order to entice others and
decamp with cash at the correct time.
2.3.2 Popularity of Forensic Audit in Bangladesh
Nowadays numerous corporations retain the services of forensic accountants.
Corporations retain forensic accountants to examine claims of employee, supplier, or customer
fraud. Attorneys consult forensic accountants to get estimates of losses, damages, and assets in
connection with specific legal cases in a variety of practice areas, including product liability,
shareholder disputes, and contract violations. Forensic accountants are primarily involved in
two types of work: investigative accounting and litigation support. Investigative accounting
involves not only the financial statements and records of an organization, but also the business
environment (Moncliff, 2005).
Bangladesh has a well-structured Securities and Exchange Commission (SEC) and
stock exchanges. Despite these safeguards, financial scams and losses continue to occur as a
result of companies employing inventive accounting practices and exploiting loopholes in
International Accounting Standards (IAS's) and Generally Accepted Accounting Principles
(GAAP's). Therefore, it is preferable if the Institute of Chartered Accountants in Bangladesh
establishes a forensic cell and, as external audit is mandatory, makes forensic audit mandatory
for publicly traded companies, in order to minimize financial scams and maintain a healthy
financial and sound environment for investment and accounting practices.
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Forensic accounting is not widely used in Bangladesh's corporate sector. Additionally,
there is not a specialized training program for forensic accountants. Despite having an external
audit, the frequency of corporate scandals has raised awareness among the various
stakeholders.
Imran, Rahman, and Hossan (2011), did a study of professional accountants,
Multinational corporations (MNCs), and local organizations to find out what they thought
about forensic accounting. The study found that professional accountants and MNCs know a
lot about forensic accounting, but small businesses and nonprofits don't know much about it.
According to study conducted by Karim, Rashid, and Islam (2017), when it comes to
forensic account, Bangladesh is still very new at it, and there are not any professional bodies
yet that do it. It is still going on today that the people who belong to the Institute of Chartered
Accountants of Bangladesh (ICAB) are taking care of things that they were hired to do. People
in Bangladesh have a long way to go when it comes to making their financial statements more
open. To make sure that this sector gets the money and resources it needs, things like setting
up a forensic cell and making people more aware of it are still very important.
Research conducted by Islam (2011) revealed that, as developing country, Bangladesh
has a significantly lower level of forensic accounting practice and development than
industrialized countries like the United States and Europe. Formally forensic accounting has
only been used in Bangladesh by a few multinational businesses, according to the findings of
an analysis of expert opinions. Forensic accounting as a method for detecting fraud and
corruption in Bangladesh was also shown to be useful in the study. In Bangladesh, there are no
efficient accurate means to measure, detect, or prevent fraud or corruption. A strategic and
dynamic tool for the management of all forms of corruption, forensic accounting could be the
best framework for the accounting firms.
Forensic accounting is a new field, and it is important for Bangladesh to have forensic
accounting in its businesses. Forensic accounting is already well-known around the world as a
separate field of study. There was a lot of financial crime in Bangladesh, which everyone agrees
on, so forensic accountants should be hired by businesses that want to stop both overt and
covert frauds.
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CHAPTER 3. APPLICATION OF STATUTORY AND
FORENSIC AUDIT TECHNIQUES TO CHOSEN REPORTING
CYCLES IN ACME FROM BANGLADESH
This chapter will cover the brief history of ACME and its organizational chart and its
business sectors in Bangladesh. It covers the fraud types and why the fraudsters intend to do
the fraud and described briefly the fraud triangle. This chapter will also cover the ratio analysis
to check the financial conditions after the fraudulent incident happened within the company.
Besides, Altman’s Z score analysis conducted to check the overall financial health of the
company.
3.1 ACME – Brief Introduction, History and Organizational Chart
ACME was formed in the year 1954 and it became a renowned pharmaceutical
company in Bangladesh overnight. The corporation operates a massive production facility in
Dhamrai, which is around 40 kilometers from the heart of the city of Dhaka. There are many
different types of dosage forms produced by the company, including tablets, capsules, oral
liquids, ampoules, dry powder vials, powder for suspension, nasal drops, eye drops, infusions,
and injections, among other things. Since its establishment, ACME has been developing and
introducing new products to meet the needs of the healthcare industry that have gone
unfulfilled. The emphasis must be on bringing in more novel molecules that are technologically
advanced to this country.
In Bangladesh, one of the most successful parts of the economy is the pharmaceuticals
industry. In 2000, there were 210 licensed units in the country that made allopathic drugs, but
only 173 of them were making drugs. Others were shut down for their own reasons or because
they did not follow good manufacturing practices or drug laws and were panelized by the
licensing authority for drugs. This industry made about 5,600 different brands. In Bangladesh,
about 37,700 people had licenses to sell drugs to the public and 1,495 people had licenses to
sell drugs to wholesalers. Due to recent changes in this industry, medicines are now being sent
to Europe and other places around the world. This sector also meets 97 percent of the home
market's total medicine needs. Several of the companies make insulin, hormones, and drugs
that fight cancer, which were not made in Bangladesh before. Leading drug companies are
growing their businesses so that they can sell more drugs abroad.
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Increasing production capacity, hiring more staff, and ramping up the company's sales
and marketing operations are all priorities for ACME. As a result, it has worked hard to expand
its foreign marketing operations. ACME currently has three product categories. Animal health
is a subcategory of allopathic treatment. Various goods can be found in each category. Contract
production, sales, and distribution are the primary functions of ACME. Dhaka's Kallyanpur
neighborhood serves as the organization's headquarters. In Dhamrai, around 40 kilometers
north of Dhaka, the company has a facility. It is now exporting medicines to 16 nations,
including Sri Lanka, Nepal, Myanmar, the Philippines, Afghanistan, and Hong Kong. Human,
herbal, and animal health medicines items are all exported by Bangladesh's ACME Laborites
Ltd. While the country's pharmaceutical sector grew at a rate of about 13%, ACME Laborites
Ltd grew at a far higher rate of 25%.
Since its founding as a sole enterprise in 1954, ACME Laboratories has been engaged
in the production of pharmaceuticals. As of 1976, ACME Laboratories is a privately held
limited liability corporation. Commercial operations began in 1983 at Dhamrai, a 32-kilometer
drive from Dhaka, where a six-acre factory was built. In 1987 the manufacture of cream and
ointment was expanded. The 1990s had an average growth rate of 25 percent, compared to just
13 percent for the pharmaceutical industry. Product injections were introduced in 1992. In
1997, the Agrovet Division was established to manufacture veterinary and animal health care
drugs.
Specialties from ACME are widely promoted around the country thanks to an efficient
sales force. Almost every part of Bangladesh, both rural and urban, is serviced by this firm.
One of the company's 19 depots can be found in every corner of the country. It is a leading
pharmaceutical company with significant societal and regulatory impact. A significant portion
of the Bangladesh pharmaceutical market is controlled by ACME laboratories, a company with
significant market share in the country.
Company’s organization structure has two tiers – chairmen on first, top tier, and
managing director with two managing directors on the second tier. There are also several
directors leading individual corporate departments. For more details, please see Chart 1.
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Chart 1: ACME’s Organizational Chart
Source: ACME annual statement (2019)
Chairman
Managing
Director
Deputy Managing
Director (JRS)
Deputy Managing
Director (ARS)
Directors
Corporate
Office
Plant
Marketing Division - Human
Marketing Division - Veterinary
PPIC Division
Accounts & Finance Division
HR Division
Internal Audit Division
IT Division
QMS Division
International Business Division
Production Division - Human
Production Division -
Veterinary
Production Division
(Herbal and Ayurvedic)
Quality Operation Division
Engineering Division
Factory Admin Division
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Because of specificity of its business operations (i.e. paratheatrical industry) it is
regulated by many laws and regulatory pronouncements, particularly by the Drugs Ordinance
1982, Companies Act 1994, Directorate General of Drug Administration (DGDA) Regulations,
Income Tax Ordinance 1984, Income Tax Rules 1984, Customs Act 1969, Value Added Tax
(VAT) Act 1991, and Value Added Tax (VAT) Rules 1991, Bangladesh Securities and
Exchange Rules 1987 and other rules and regulations of the country. Any abrupt changes of
the policies made by the regulatory authorities may adversely affect the business of the
Company.
3.2 Methodology and Data
The data collection methodology was systematic review of the existing financial
statements in the company website. There was no interview, experiment or the survey
conducted for this study. However, the fraudulent cases were hypothetical, and they were
developed in way where they showed the failing internal control and corruption of an employee
push a corporation into a deep financial crisis.
After discovering the fraud cases all the measurement were taken to run the samples so
that the cases identified on the point and the financial impacts on the Balance sheet and Profit
and Loss statement are measured. To check the impacts of those frauds the ratio analysis was
conducted to the related accounts for both statutory and forensic audit. Finally, Z score was
conducted on the ACMEs related account to check if the company fall into the bankruptcy zone
or not.
3.3 Fraud – Nature, Circumstances and Types
Before going into details of model fraud cases of chosen company it is necessary to
briefly explain the nature, circumstance and types of the frauds. There are several ways to
commit fraud, but the most common is to deceive or mislead people to get an advantage, either
for oneself or for the institution, by employing deception, misleading recommendations, or
suppression of the truth. Using any of the methods described above to deprive another person
or institution of a benefit to which they are entitled constitutes fraud. In order to commit fraud,
a person must trick another into doing or not doing something that causes a financial loss.
Online, in person, or by letter, the fraud can be perpetrated in any of these ways.
Among those who study why people commit fraud, the Fraud Triangle is the most
widely accepted model to explain their behavior. Dr. Donald Cressey, a criminologist who
studied embezzlers and coined the term "trust violators," came up with the Fraud Triangle.
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The fraud triangle is a diagram that depicts the circumstances that make it more likely
that fraud will be committed. Deception for financial gain is a form of fraud. Pressure,
opportunity, and rationalization all play roles in the fraud triangle's construction. They're
outlined in detail in the following paragraphs.
1. Pressure - A person may owe money for family care, education loans, auto loans,
etc. Or they may have a pricey habit that requires support. When stuck, people may resort to
fraud. There may be perceived pressure, such earning less than peers. This can lead to wanting
a sports car, overseas vacation, or a larger home. When achieving these standards honestly
seems impossible, a person may resort to dishonesty.
2. Opportunity - A person must also see an opportunity to commit fraud when the
previous pressures are there. A maintenance worker may discover, for instance, that there are
no restrictions over the checkout and return of tools; this presents a chance for theft. When a
company's internal controls are inadequate, fraud is typically more likely to occur.
3. Rationalization - For fraud to go on for a long time, the person doing it must also
be able to explain why what they are doing is acceptable. For example, someone who steals
from a company's petty cash box might tell themselves that they are just borrowing the money
and will pay it back later. As another example, a management team might change the reported
earnings for a few months in the middle of the year because they expect sales to go up at the
end of the year, which would let them get rid of the changes by the end of the year.
There are two types of Fraud usually occurred in the organizations:
1. On Book – Related to manipulated accounting records. Just to hide the financial
performance or hide any mistakes employees tend to change amounts in ledgers by inputting
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journals which means they manipulate the company books so that the fraud is not easily visible
to the bare eyes.
2. Off Book – Off book frauds are Bribes, Kickbacks, Conflict of Interest. This could
happen by both management and the employees since they both can identify the opportunity.
Types of Fraud Perpetrators:
1. Active – The active perpetrators are usually driven by motivation or greed.
2. Passive – Driven by temptation (weakness in internal controls; honest but gave in to
temptation) They do not need any money or benefits from the fraud, yet they commit the fraud
just because they see an internal opportunity to commit the fraud.
Both types of fraudulent activities are crime and the company's financial standing,
competitiveness, and reputation are all harmed when it commits such frauds, which are almost
always met with legal action. Below Fraud 1 is the example of “on book” and the perpetrators
were active as their motive was to show the revenue high to the investors. However, fraud 2 is
an example of “on book” and passive type fraud as with the help of managers the management
wanted to hide the true inventory and fraud 3 is “on book” and passive example where the
manager saw an opportunity to take the cash away from the company.
3.4 Description of Fraud Case in ACME
To show how circumstances for fraud work in real world as well as how such frauds
get detected by forensic auditors, I have simulated the following model fraud cases in chosen
company: case No. 1 Fictious Sales, case No. 2 Fictious Sales and No.3 Cash Leakage.
Fraud 1 - Fictious sales: The Company is recording of its peak sales to legitimate
customers without proper sales orders around year-end with subsequent cancelation of some
part of such sales after year-end. As in Bangladesh before winter and before summer the
seasonal sickness for example flu, fever, and cough etc. illnesses rate is high, the perpetrators
choose to pick that time so that they can hide the fraud with the high sales at that period. Such
sales helped to increase total revenues for the year and management became entitled for annual
bonuses.
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Table 3: Description of the required internal control and failed internal control and the
test conducted for fraud 1
Type
of
Fraud
Internal Control
Required
Status of Such
Internal Control
Audit Test to Identify this
Fraud
Fictious
Sales
Record of the
purchase order.
Missing purchase
order.
To verify the genuine customer by
collecting and reviewing sample
for customer invoices/purchase
orders. If there is no purchase
order, confirm with the customer
directly and verify the purchase
i.e., ask for the supporting
documents. If there is missing
documentation or the customer
denies the purchase, then it
obviously a fake sale which
increased the revenue.
Approval for the
manual journal and
backup data for the
journal.
The journal was
approved by the line
manager, but it was
adjustment journal
for the sales interface
control account.
Check for the manual revenue
journals in the revenue ledger.
Finding the reasons for the manual
journals. Why the revenue journal
was posted instead of having to
post through the sales function the
accounting software.
Sales Manager
approval was
missing
No approval from the
manger
Scan through the GL to find out
the low-price revenue for a
specific product category to find
out if the business is selling to a
genuine customer.
Source: Author’s own evaluation based on the ACME’s annual report and financial reports
Fraud 2 - Fictitious Inventory: The inventory manager could not show the purchase
documents for the inventory (i.e., capsule, mask and hand sanitizer). The management took the
advantage of Corona Virus as the auditors could not go the warehouse and inspect the
inventories physically. This could happen because of management intends to declare
exceptionally high profits, maybe to meet investor expectations, meet a bonus objective, or
surpass a loan requirement, ending income purposely inflated.
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Table 4: Description of the required internal control and failed internal control and the
test conducted for fraud 2
Source: Author’s own evaluation based on the ACME’s annual report and financial reports.
Fraud 3 – Cash Leakage: A manager in the company having authority to sign cheques
up to 50,000 Bangladeshi Taka (BDT), while performing the Audit there were many cheques
49,999 BDT which has been signed by the manager. Further he had split large payments
(amounting more than 50,000) into two or more cheques less than 50,000 BDT so that he can
Type of
Fraud
Internal Control
Required
Status of Such
Internal Control
Audit Test to Identify this Fraud
Fictitious
Inventory
Maintain the
internal inventory
system to make sure
the proper
inventory
management
maintained
There was high
YtY ratios for the
gross margins.
Analyze gross margins, days of
inventory hand, inventory turnover
ratio, and cost of inventory.
Periodic
Reconciliation
based on the report
from the internal
system
Reconciliations
were not compared
between two
reports i.e., source
report and
inventory manager
report
To avoid mistakes run a cut-off
analysis while conducting a
physical count to hold processes
such as receiving and shipment of
merchandise.
Documentation of
the purchases
Missing data in the
internal inventory
system
In order to determine how many
items and how much it costs to send
an item, perform a matching test.
Test charging dates and amounts by
using a matching program.
Costs control by the
managers (expense
department)
The costs were
identified correctly
and allocated in the
relevant accounts
Check the indirect expenses of the
business and the overhead costs that
may be included in the cost of
inventory by performing an
overhead analysis. The inventory
cost can include costs like rent,
utilities, and other expenses.
Parodic
Reconciliation
Issue identified in
the reconciliation
Check the reconciliations to find out
if the discrepancies are solved that
are found from the above test.
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authorized the payments. Later it was found that the cheques were deposited in the manager
personal account i.e., the manager had misappropriated the amount.
Table 5: Description of the required internal control and failed internal control and the
test conducted for fraud 3
Source: Author’s own evaluation based on the ACME’s annual report and financial reports.
Type of
Fraud
Internal Control
Required
Status of Such
Internal Control
Audit Test to Identify this Fraud
Cash
Leakage
Proper
documentation in
the AR Team
Missing
documentation
Run the test for collection on
account Receivables, check if there
are any suspicious balances.
Payment
recognition
among the teams
i.e., AR and
banking team
No recognition of
such payments
from the AR team
Check to see if any payments have
been made twice. Get the complete
check register by downloading it.
Sort by quantity and seller name.
Then, if there is more than a
particular number of identical-dollar
payments to the same vendor,
investigate it.
Proper lists of
vendors and their
merchant ID’s
There was no such
list
New vendors and their addresses can
be retrieved through a periodical
report (e.g., month or quarter). Use
Google to verify the legitimacy of
the business addresses. If it is
needed to contact the seller, do so.
Ask a vendor expert to go through
the list or enlist their help
(preferably someone without vendor
set-up capabilities).
AR to team to be
able to match the
signature or
identify the
appropriate
signatures
Unmatched bank
statements as AR
team and banking
team could not
identify the
incoming payments
Pick a period (e.g., two months),
obtain the related bank statements,
and scan the checks for appropriate
signatures and payees.
Also, consider scanning
endorsements (if available).
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The mentioned above fraud cases were identified by the forensic auditors and in the
above tables described which internal control was failed and the tested audit sample to detect
the fraud by the forensic auditor’s team. It was noticed that most of the fraud cases occurred
due to the lack of internal control and when the employees noticed a gap in that internal control
they committed to the fraud. Due to the Fictious sales and Inventory fraud it will impact both
Cash flow and the Operating activities of the ACME’s financial performance and for the cash
leakage fraud which will impact the cash flow in the company.
3.4 Description of Statutory and Forensic Audit Procedures to Detect Chosen
Frauds in ACME
The below two tables (No.6) describes the conducted audits methods and figured out
the failed controls such as unrecorded point of sale, interface issues for sales control for both
of the audit. It is also pointed out how many samples and transactions were run for the audit
procedures. As forensic audit conducted in wide rage of area it is natural that the auditor picked
a ton of samples and requested for the related documents to conduct the audit and figure out
the actual problem.
On the other hand, table 7 illustrates the number of people involved and their time
invested to conducted both audits. Again, as the forensic audit covered the numerous areas of
the business and required different documents, it took almost five times higher hours. In terms
of the manpower forensic audit required or involvement of Information Technology team and
the internal account as the auditors requested for the proper documents for that audit.
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Table 6: Audit Procedures Conducted Under Statutory and Forensic Audit in ACME for
Chosen Fraud Cases - Qualitative Description
Panel A. Fraud No 1 - Failed Controls Statutory Audit Forensic Audit
Record Purchase Orders
From 10 purchase
sample, 20 transactions
were tested for each
financial year
From 10 purchase
samples, 35
transactions were
tested for each period.
Failed Sales Interface control account
Could not recognize the
issue during the
financial year
Forensic audit
conducted on the sale
interface and for each
financial year for each
period
Missing Sales Manager approval
It was flagged during
the year end audit
During the forensic
audit it was found that
the sale manger is also
involved with this
fraud
Panel B. Fraud No 2 - Failed Controls
Unmatched Reconciliations (no
balancing report between source data
and report)
From 10 samples, 10
transactions were
tested just to match the
purchases with
invoices
From 10 purchase
samples, 30
transactions picked up
from each period and
tested.
Broken inventory system
No test on this Forensic auditors
tested 45 samples to
match with the source
system
Panel C. Fraud No 3 - Failed Controls
No payment recognition by the AR team
No test on this Auditors checked all
the documents
approved by AR to
find out if the
payments were
approved by the team
or not.
Unmatched bank statements
Reconciliation checked
by the auditors for 2
periods
Checked all the
periods reconciliation
and conducted deep
search into peak
periods reconciliations
Source: Author’s own evaluation based on the ACME’s annual report and financial reports.
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Table 7: Audit Procedures Conducted Under Statutory and Forensic Audit in ACME for
Chosen Fraud Cases - Quantitative Description
Panel A. Fraud No 1 - Failed Controls Statutory Audit Forensic Audit
Record Purchase Orders
Reconciliation check
took 10 hours for 2
auditors
Reconciliation and
Sample check took 150
hours for 4 forensic
auditors.
Failed Sales Interface control account -
IT Professionals needed
10 hours to pull the data
from mainframe. Then
forensic auditors spent
another 50 hours to
check the samples.
Missing Sales Manager approval
Reconciliation check
took 18 hours
Interview conducted by
the forensic auditors took
12 hours and then
reconciliation check took
another 50 hours.
Panel B. Fraud No 2 - Failed Controls
Unmatched Reconciliations (no balancing
report between source data and report)
10 hours spent on the
reconciliation testing for
2 auditors
120 hours spent to match
the source data with the
manager-maintained
report.
Broken inventory system -
IT Professionals needed
25 hours to pull the data
from internal inventory
system.
Panel C. Fraud No 3 - Failed Controls
No payment recognition by the AR team
35 hours was spent to
check the payments and
documentation
80 hours spent to run
wider samples from the
AR team.
Unmatched bank statements
40 hours spent by the
auditors to run the
samples and check the
items in bank statement
Internal accounts spent
20 hours for the bank
statements and the
forensic auditors spent
60 hours to run and
match the samples
provided by the bank and
internal accountant.
Total Time spent - Audit Team 113 hours 522 hours
Total Time spent - Internal Accountants - 20 hours
Total Time spent - Internal IT Team - 10 hours
Source: Author’s own evaluation based on the ACME’s annual report and financial reports.
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The below table explains the impact of the fraud cases on the related accounts in balance
sheet. As the fraud case 1 was related to sales, therefore, it impacted on the revenue account
most. Fraud 2 impacted both balance sheet and profit and loss statements, but it could not
impact anything when statutory audit was conducted because the auditors were unable to figure
out the issue in the beginning. The last fraud impacted most the liquidity accounts since it was
related to the cash. Based on the assumptions the impacted percentage are given below and in
the next steps these percentages will be applied to get the real amounts for the BS and P&L
accounts.
Table 8: Audit procedures conducted under statutory and forensic audit in ACME for
chosen fraud cases - Financial Impact on the Financial Statements
Panel A. Fraud No 1 - Accounts Affected Statutory Audit Forensic Audit
Revenue (Profit and Loss) 0.88% 0.94%
Panel B. Fraud No 2- Accounts Affected
Inventories (Balance Sheet)
0% 2% Cost of Goods Sold (Profit and Loss)
Cash Flows (Profit and Loss)
Panel C. Fraud No 3- Accounts Affected
Liquidity (Balance Sheet) 0.34% 0.78%
Total impact on financial impact 1.22% 3.72%
Source: Author’s own assumptions based on the ACME’s fraud.
3.5 Evaluation of impact of chosen fraud cases and related audit procedures
on financial health of ACME
Based on the audit tests and after running reports from various sources regarding the
fraud cases mentioned above it is calculated above table 8 that the financial impact on the
ACME’s financial statements. It was noticed that after running wider tests and forensic
investigations on the fraudulent cases the financial impact was more than twice on the ACME’s
financial statements.
Due to the failed sales interface issue ACME’s revenue recognition amounts were not
accurate. After running various report by the auditors from internal information technology
team, it was revealed that the failing issues was occurring since the year 2108 and because of
management unwillingness to fix the issue it triggered massive difference in sales and profit.
The below ratios have been applied to differentiate the financial impact due to statutory audit
and forensic audit.
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𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑺𝒂𝒍𝒆 = 𝑬𝒂𝒓𝒏𝒊𝒏𝒈 𝑩𝒆𝒇𝒐𝒓𝒆 𝑰𝒏𝒄𝒐𝒎𝒆 𝑻𝒂𝒙 (𝑬𝑩𝑰𝑻)/ 𝑹𝒆𝒗𝒆𝒏𝒖𝒆𝒔 (1)
The most appropriate indicator to evaluate corporation’s operating efficiency is return
on sale (ROS). Also, this indicator represents operation profit margin, and it shows profitability
of sales. The higher the ratio is better for the company. If the ratio is lower that indicates there
is financial trouble in the company.
𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝒐𝒏 𝑺𝒂𝒍𝒆 = 𝑬𝒂𝒓𝒏𝒊𝒏𝒈 𝑨𝒇𝒕𝒆𝒓 𝑻𝒂𝒙 (𝑬𝑨𝑻)/𝑹𝒆𝒗𝒆𝒏𝒖𝒆𝒔 (2)
A company's profit margin is one of the most often used profitability measures for
evaluating how much money is made by a company or a business. It is a measure of how much
money was made from each sale. A higher profit margin indicates the company is performing
well.
𝑪𝒐𝒔𝒕 𝒐𝒏 𝑺𝒂𝒍𝒆 = (𝑹𝒆𝒗𝒆𝒏𝒖𝒆𝒔 − 𝑬𝑩𝑰𝑻)/ 𝑹𝒆𝒗𝒆𝒏𝒖𝒆𝒔 (3)
The cost-to-revenue ratio is a measure of a company's efficiency that compares its
expenses to its income. It analyzes both the revenue cost and the revenue total. The cost of
revenue comprises all manufacturing charges, including marketing and shipping costs. The
total revenue reflects the overall sales earnings for a certain period. The lower ratio means the
company earning higher profit.
𝐂𝒂𝒔𝒉 𝑭𝒍𝒐𝒘 (𝑪𝑭) 𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑺𝒂𝒍𝒆 = 𝑵𝒆𝒕 𝑪𝒂𝒔𝒉 𝒇𝒓𝒐𝒎 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑨𝒄𝒕𝒊𝒗𝒊𝒕𝒆𝒔/
𝑹𝒆𝒗𝒆𝒏𝒖𝒆𝒔 (4)
The cash flow to sales ratio indicates a company's ability to create cash flow relative to
its sales volume.
Table 9: Impact on sales due to the failed sales interface issue
Statutory Audit Impact Forensic Audit Impact
2018 2019 2020 2018 2019 2020
Return on Sale 1.36% -0.03% -1.80% 7.66% 6.36% 4.70%
Profit Margin on Sale -2.69% -3.60% -4.96% 3.86% 3.01% 1.74%
Cost of Sales 98.64% 100.03% 101.80% 92.34% 93.64% 95.30%
Cash flow Return on Sale 0.2374 0.2498 0.1983 22.22% 23.39% 18.57% Source: Author’s own calculation based on the assumption in table 8. *Note: all the numbers
are in BDT
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It is noticeable from both chart and table above that the impact on the ACME’s financial
balance sheet was remarkable. During the year 2019 and 2020 the company had negative return
on sale which is threatening indicators to the stakeholders. The cost of sale and the profit
margin ratios also indicate the same issue, the company doing poor performance in terms of
their sale and revenue recognition since the beginning. The cash flow returns on sale declined
during the year. Other than the sales interface issue it could happen the company is generating
a smaller amount of cash from pursing an incremental sale or the company is offering longer
payment term to its customer which tied up with account receivable and impacting its cash
flow for sale (chart 2). Because of this fraud management entitled to the high annual bonus
which was totally illegal. After this fraud the shareholders lost their trust on this company and
decided to sell their portion of shares as soon as possible.
Chart 2: Revenue impact on the Profit and Loss statement
Source: Author’s own calculations in table 9
Inventory mismatch issue hampered ACME’s cash flows and its activity ratios. Due to
not maintain the inventory the company faces tremendous cash impacts on its cash flow
statement. Below ratio analysis was conducted to find out ACMEs financial performance after
both types of audits being completed. The below two cash flow ratios used to check the
financial impact due to the inventory fraud.
-20.00% 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00%
Statutory Audit Impact
Forensic Audit Impact
Impact on ACME's Financial Statements for Fraud 1
Cash flow Return on Sale Cost on Sales
Profit Margin on Sale Return on Sale
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𝑪𝑭 𝑰: 𝑷𝒓𝒐𝒇𝒊𝒕 𝑩𝒆𝒇𝒐𝒓𝒆 𝑻𝒂𝒙 + 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝒂𝒏𝒅 𝑨𝒎𝒐𝒓𝒕𝒊𝒛𝒂𝒕𝒊𝒐𝒏 (5)
𝑪𝑭 𝑰𝑰: = 𝑪𝑭 𝑰 + 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒊𝒆𝒔 𝑷𝒓𝒆𝒗𝒊𝒐𝒖𝒔 𝒚𝒆𝒂𝒓 – 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒊𝒆𝒔 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒚𝒆𝒂𝒓 (6)
A company's financial analysis would be incomplete without including cash flow ratios.
Each ratio reflects a different facet of a company's financial health. With cash flow ratios,
businesses learn how much money they have, where their money goes and what they must do
to keep their budget balanced. Businesses can use cash flow ratios to identify and correct a
variety of financial difficulties. When determining how much money a business owner must
invest or pay off debts, they consider the interest rate as well as other important factors.
Table 10: Impacts on Cash flow due to the inventory mismatch
Statutory Audit Forensic Audit
Cash
Flows
2018 2019 2020 2018 2019 2020
CF I
1,954,844,0
67
1,953,341,
460
1,979,432,
202
1,954,844,
067
1,953,341,
460
1,979,432,
202
CF II
1,525,594,6
81
1,607,757,
850
5,897,400,
028
1,096,345,
295
1,262,174,
240
9,815,367,
854
Source: Author’s own calculations based on the assumption made for the financial impact in
table 8. *Note: all the numbers are in BDT
The cash flow I ratio is same over the whole years because it was the base for cash flow
II calculation. It also means that it has nothing to do with the fraudulent activities regarding the
inventory. However, the cash flow II ratio indicates that over the first two years the impact was
same for both audit procedures, while for the last year it impacted in huge on ACMEs balance
sheet. This is because the previous year inventory impact was comparatively low compared to
the year 2020. Also, to check the inventory impact in wider range the below two ratios were
analyzed to find the impact in deeper level.
65 | P a g e
Chart 3: Cash flow impact due to the inventory mismatch
Source: Based on author’s own calculation made on table 10
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 = 𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔/𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 (7)
The rate at which inventory stock is sold, or used, and replaced is known as inventory
turnover. This ratio is derived by dividing the cost of products by average inventory over a
specific time period. In general, a greater sales-to-cost ratio indicates better sales; on the other
hand, a lower ratio indicates poorer sales.
𝑫𝒂𝒚𝒔 𝑺𝒂𝒍𝒆𝒔 𝒊𝒏 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒊𝒆𝒔 = 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚/(𝑺𝒂𝒍𝒆𝒔/𝟑𝟔𝟎) (8)
The average number of days it takes a company to sell off its inventory is called the
days sales of inventory (DSI). An analyst's tool for measuring sales efficiency is the DSI metric.
Insufficient inventory management or merchandise that is difficult to sell might both be
reflected in a high DSI score. The lower the ratio is, the better performing the company is.
Table 11: Impacts on the activity performance due to the inventory mismanagement
Statutory Audit Forensic Audit
Activity Ratios 2018 2019 202
0
2018 2019 202
0
Inventory Turnover 441.18% 435.46% - 220.59% 217.73% -
Days Sales in
Inventories
8159.85
%
8267.18
% -
16319.70
%
16534.36
% -
-
2,000,000,000
4,000,000,000
6,000,000,000
8,000,000,000
10,000,000,000
12,000,000,000
2018 2019 2020 2018 2019 2020
Statutory Audit Forensic Audit
Impact on ACME's Cash flows for Fraud 2
CF I CF II
66 | P a g e
Source: Author’s own calculations based on the assumption made for the financial impact in
table 8. *Note: author could not do the calculation for year 2020, due to ACME’s 2021
financial statements are not available yet.
It is clear from the above depicted table and the chart that after discovered the fraudulent
activities, it become worst. The inventory management is the key to the operation fluidity and
overall fiscal health but looking at the ACME’s inventory turnover it was increasing year to
year for both audits results. Besides, the days sales in inventories were also increased year to
year which put the company in the trouble. Due to the high inventory turnover ACME could
not sell their manufactured product and that leads overall loss to the company.
Chart 4: Impacts on the activity performance due to the inventory mismanagement
Source: Based on author’s own calculation made on table 11
After the cash leakage fraud found in ACMEs, it was necessary to check the cash impact
on its financial statement. It was discovered after statutory audit that the liquidity of ACME
was hampered by 0.34% and 0.78% after the forensic audit. Below two ratios are analyzed to
check the overall cash impact.
𝑪𝒂𝒔𝒉 𝑹𝒂𝒕𝒊𝒐 = 𝑪𝒂𝒔𝒉 𝒂𝒏𝒅 𝑪𝒂𝒔𝒉 𝑬𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔/𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 (9)
0.00%
2000.00%
4000.00%
6000.00%
8000.00%
10000.00%
12000.00%
14000.00%
16000.00%
18000.00%
2018 2019 2020 2018 2019 2020
Statutory Audit Forensic Audit
Impact on ACME's Activity Ratios for Fraud 2
Inventory Turnover Days Sales in Inventories
67 | P a g e
It is a measure of a company's capacity to pay down its current liabilities using solely
cash and cash equivalents, known as the cash ratio or the cash coverage ratio. Because only
cash can be used to pay off current debt, the cash ratio is more limited than the current ratio or
quick ratio. A ratio of not lower than 0.5 to 1 is usually preferred.
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔/𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 (10)
Short-term commitments due within one year are measured using the current ratio,
which is also known as the working capital ratio. Assets and liabilities are considered while
calculating the ratio. An organization's financial health and the extent to which its existing
assets can be used to pay off debts and other obligations are both reflected in this metric. Using
the current ratio calculation (shown below), we can quickly determine how liquid a company
is. In general, a current ratio of 1 or higher is considered good, and anything lower than 1 is a
cause for concern.
Table 12: Impacts on the liquidity due to the cash leakage
Statutory Audit Forensic Audit
Liquidity Ratios 2018 2019 2020 2018 2019 2020
Cash Ratio 0.0416 0.0403 0.0496 0.0854 0.0827 0.1017
Current Ratio 1.0381 0.8678 0.9709 1.0819 0.9102 1.0231
Source: Author’s own calculations based on the assumption made for the financial impact in
table 8. *Note: all the numbers are in BDT
From the creditor perspective this liquidity ratios are more important to see if the
company maintaining enough or adequate cash balance to pay off all their current debts when
it will come to due. The higher the ratio the firm has the better condition to pay off short term
debts. Regarding both current and cash ratios, in comparison of both audits, year 2020 liquidity
ratio is good, stable through 3 years performance. When the frauds were discovered many of
the investment banks in Bangladesh hold their investment in ACME as their liquidity ratio and
overall solvency drastically fall.
68 | P a g e
Chart 5: Impacts on the liquidity performance due to the cash leakage
Source: Based on author’s own calculation made on table 12
Finally, to check the ACME’s overall financial condition, I have applied Altman’s Z
score. Based on the overall impact on the financial position the overall percentage (for the
statutory audit 1.22% and 3.72% for forensic audit) was applied to the related accounts.
The Z score is an important measure in determining the financial strength of a company
since it relies on several different metrics. Many investors use it to gauge the solvency of a
company and decide whether to buy or sell an investment. The lower Z score indicates that a
firm is gradually approaching insolvency or bankruptcy. Thus, firms with lower scores are
higher risk investments. Z > 2.99 indicates that it is a safe zone, healthy debt zone. 1.81 < Z <
2.99 means that moderate but need to be cautious. Z < 1.81 points out that critical and prone to
bankruptcy. To detect any signs of looming bankruptcy, investors calculate and analyze all
kinds of financial ratios:
𝑿𝟏 = 𝑵𝒆𝒕 𝒘𝒐𝒓𝒌𝒊𝒏𝒈 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 / 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 (11)
𝑿𝟐 = 𝑹𝒆𝒕𝒂𝒊𝒏𝒆𝒅 𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 / 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 (12)
𝑿𝟑 = 𝑬𝑩𝑰𝑻 / 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 (13)
𝑿𝟒 = 𝑴𝒂𝒓𝒌𝒆𝒕 𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑬𝒒𝒖𝒊𝒕𝒚 / 𝑩𝒐𝒐𝒌 𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑻𝒐𝒕𝒂𝒍 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒆𝒔 (14)
𝑿𝟓 = 𝑺𝒂𝒍𝒆𝒔 / 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 (15)
𝑵𝒆𝒕 𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔 − 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 (16)
𝑴𝒂𝒓𝒌𝒆𝒕 𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑬𝒒𝒖𝒊𝒕𝒚 = 𝑺𝒕𝒐𝒄𝒌 𝑽𝒂𝒍𝒖𝒆 ∗
𝑻𝒐𝒕𝒂𝒍 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 (17)
0.0000
0.2000
0.4000
0.6000
0.8000
1.0000
1.2000
2018 2019 2020 2018 2019 2020
Statutory Audit Forensic Audit
Impact on ACME's Liquidity Ratios for Fraud 3
Cash Ratio Current Ratio
69 | P a g e
𝑨𝒍𝒕𝒎𝒂𝒏′𝒔 𝒁 𝑺𝒄𝒐𝒓𝒆 = 𝟏. 𝟐 ∗ 𝑿𝟏 + 𝟏. 𝟒 ∗ 𝑿𝟐 + 𝟑. 𝟑 ∗ 𝑿𝟑 + 𝟎. 𝟔 ∗ 𝑿𝟒 + 𝟎. 𝟗𝟗𝟗 ∗
𝑿𝟓 (18)
Where,
X1 = working capital which determines short term financial health
X2 = profitability to check financing if the company expenditure using borrowed fund or not
X3 = debt levels and liquidity
X4 = market capitalization to check the value of the equity
X5 = to check the management efficiency how efficiently they are using their asset to generate
revenue.
Table 13: Z score evaluation
Statutory Audit Forensic Audit
2018 2019 2020 2018 2019 2020
Stock Price
10
10
10
10
10
10
Number of
Share
211,601,7
00
211,601,70
0
211,601,7
00
211,601,
700
211,601,7
00
211,601,
700
X1 0.010708
796
-
0.0506545
55
-
0.012560
476
0.122360
896
0.061368
061
0.098764
53
X2 0.147452
279
0.1597649
4
0.167070
137
0.147452
279
0.142730
524
0.148701
768
X3 0.005430
757
-
0.0001055
-
0.007876
764
0.032675
367
0.024873
745
0.019546
123
X4 0.141263
578
0.1203772
91
0.103858
269
0.141263
578
0.120377
291
0.103858
269
X5 0.399587
609
0.4099017
02
0.437614
024
0.426832
219
0.391165
265
0.416057
847
Net Working
Capital
349,366,3
88
(1,773,531
,309)
(479,992,
855)
3,991,93
1,999
2,405,068
,064
4,240,45
4,238
Market Value
of Equity
2,116,017
,000
2,116,017,
000
2,116,017
,000
2,116,01
7,000
2,116,017
,000
2,116,01
7,000
Altman's Z
Score
0.721151
412
0.6442554
76
0.692323
67
0.972258
509
0.818548
238
0.869158
868
Source: Author’s own calculations based on the assumption made for the financial impact in
table 8. *Note: all the numbers are in BDT
70 | P a g e
Investors calculate and investigate a wide range of financial proportions: working
capital, profitability, debt levels and liquidity. The inconvenience is every proportion is
remarkable and recounts an alternate story about a company's budgetary wellbeing. Relying on
a bundle of individual proportions, the financial specialist may think that it is confusing and
hard to know when a stock is setting off to the wall. The lower the score, the higher the odds
are that a company is headed for bankruptcy.
Chart 6: Impacts on the liquidity performance due to the cash leakage
Source: Based on author’s own calculation made on table 13
Now look back at the ACME’s Z score which clearly said that last 3 years their financial
strength was too bad. Their Z scores number define that their condition is critical and prone to
bankruptcy. Why this happen to ACME because their liquidity, profitability and productivity
ratios were too low for the financial year. Which means that the net liquidate assets of firm
relative to the total capitalization was not good enough for them. After the whole fraud issue
when the investors came to know the new z-score they have withdrawn their investment from
ACME and the share price of ACME drops in the security exchange commission.
0
0.2
0.4
0.6
0.8
1
1.2
2018 2019 2020 2018 2019 2020
Statutory Audit Forensic Audit
Altman's Z Score
71 | P a g e
CHAPTER 4: LIST OF KEY ADVANTAGES AND
DISADVANTAGES, MAJOR SIMILARITIES AND
DIFFERENCES BETWEEN BOTH TYPES OF AUDITS AND A
SET OF RELATED RECOMMENDATIONS FOR
COMPANIES FROM BANGLADESH
Fraud is perceived as easy money until the offender is detected, which is why
companies and individuals engage in it. The implications can be dire at this point. A company
can lose massive amount of money if they have been the victim of fraud. Beside reviewing
company security, it is also possible to prevent it by maintaining strong internal control.
Internal control may include the internal audit and if the management think that internal
audit is not enough then they can hire external auditors and if the suspense the bigger issue
they can hire forensic auditors before it is too late to face the bigger financial crisis. Both
statutory and forensic audits have difference as one take longer time and another take much
less time and less audit sample. After differentiating the characteristics, a set of
recommendation will be provided for the companies in Bangladesh to prevent fraud and
financial loss.
4.1 Advantages and Disadvantages of Statutory and Forensic Audits
Financial statements must be audited in accordance with local rules and regulations in
order for a statutory audit to be performed. There are several reasons why statutory audits are
vital, including the fact that they serve to maintain the trust of shareholders and improve the
company's internal controls. Investigations into corporate and financial records to establish if
fraud, money laundering, or other criminal activity has taken place are the subject of forensic
accounting. It is in the nature of forensic accountants to create evidence that can be utilized in
a court of law that the term "forensic" was coined. The advantages of both audits given below:
72 | P a g e
Statutory Audit Forensic Audit
It enhances the credibility of the financial
statements because the auditor verifies them
thoroughly
When it comes to resolving financial crimes,
forensic accounting can be an invaluable
tool. Bribery in government agencies and
fraud and money laundering in corporations
are examples of this
Due to a lack of fraud, misrepresentation and
mistakes, financial records are more
trustworthy when they have been audited
To solve financial crimes, forensic
accounting can be quite useful
It aids management in doing their jobs more
effectively
When an employee purchases something for
personal use, a corporation can hire a
forensic accountant to analyze the purchase
records to discover if all the purchases were
for work use or if some were diverted
By conducting in-depth research, auditing,
and interpretation of business operations
considering company policy, auditors help to
strengthen the internal system
Reduce the likelihood of fraud in a business
The disadvantages of both audits given below:
Statutory Audit Forensic Audit
Undoubtedly, audit reports are expensive,
and in the case of statutory audits,
outsourcing raises the price
Considering the fraud, it may take longer
time than statutory audit as it aims to run
huge test
The audit report's quality is impacted by the
competing interests of audit committee
members
Since it takes more time, it is more expensive
Audit sampling can impact the precision of
an Audit report
Employees can become distracted by the
forensic audit, especially when external
accounts are bought in. The long process
may decrease productivity and efficiency of
the company internal accountant
The time limit may impact the audit report's
accuracy
Forensic auditing can make employees feel
as if their integrity is being questioned,
resulting in a decrease in staff morale.
There is a chance of inaccuracy when
evidence is limited
73 | P a g e
4.2 The Difference between Both Types of Audits
The audit's goal distinguishes financial from forensic audits. A financial audit checks a
company's financial records, reassuring investors and creditors. Forensic audits target a specific
audit issue. This may involve staff fraud or a supplier or client conflict. Forensic auditing is an
important solution to this problem. According to Singleton and his colleagues (2006), there is
no clear demarcation in the literature between the concepts of fraud audit, accounting
investigations, forensic accounting, forensic auditors, etc., with particular emphasis on the
conceptual differences between forensic accounting and forensic audit.
Table 14: Difference between Statutory and Forensic Audit
Items Statutory Audit Forensic Audit
Number of
accounts under
testing
As much as it is possible - purpose is to
cover whole P/L and BS
Only particular accounts are tested
purpose is to confirm existence of
fraud in given area
Number of
samples
Sample for each account with material
balance or unusual trend
Few samples
Sample size Small samples (5-10 transactions) Large samples, covering 60-70% of
population
Sampling
approach
Simple random sampling and
systematic sampling (they both are
statistical)
Judgmental sampling (non-statistical)
Materiality
threshold
Based on net income
(earnings/profits): 5 – 10 percent (for
example an amount <5% = immaterial,
> 10% material and 5-10% requires
judgment).
Based on net income (earnings/
profits): 2 – 5 percent (for example an
amount <2% = immaterial, >5%
material and 2-5% requires judgment).
When fraud is suspected in PtP cycle,
other benchmarks such as total
revenues (sales) may be more
appropriate to use (e.g., 0.1 – 1 percent
of total revenue). Also, where fraud is
suspected in OtC cycle, then all sales
can be a real concern, basing overall
materiality on financial position (e.g.,
equity) may be more appropriate to use
(e.g., 0.1 – 0.5 percent of owners’
equity).
Analytical
procedures
Are used only at planning stage and
chosen accounts only
Are mandatory for all accounts under
investigation.
Source: (https://www.accaglobal.com, 2022)
74 | P a g e
4.3 Related Recommendations for Companies from Bangladesh
Internal controls are used by organizations to protect themselves from financial hazards
and to meet industry norms and laws. Having effective controls in place helps guarantee that
financial reporting is accurate and effectively addresses investment, capital, and credit needs.
Many of the most popular financial laws can be used to implement internal controls.
1. Control of a financial transaction should be distributed among several parties, not just
one.
• A designated person must sign off on all purchases, payroll, and other
expenditures. Distinguishing between the functions of receiving and depositing
and those of maintaining records (recording transactions and reconciling
accounts).
• Separate purchasing functions from payables functions. The same person
should not be able to both write and sign a check at the same time.
2. Rectify agency bank accounts on a monthly basis
• A person without bookkeeping or check signing responsibilities should
complete the reconciliation, and it should not be subject to supervisory review.
• The canceled checks should be examined to ensure that the vendors are
recognized, the expenditures are related to agency business, the signatures are
by authorized signers, and the endorsements are appropriate.
• If a check is issued out of order, check bank statements and cancelled checks.
• Record that a review and reconciliation was performed by putting your initials
and the date on the bank statements or reconciliation reports, then saving them
in a safe place until needed.
3. Pay special attention to cash and check deposits.
• It is important to keep track of all cash and checks that are received and deposit
them immediately.
• Use a pre-numbered receipt book for cash receipts.
• Unannounced cash audits should be performed.
• Every day, you should reconcile your cash receipts and keep track of your
transactions (cash reports, receipt books, mail tabulations, etc.) Whenever
possible, try to consolidate cash receipts.
75 | P a g e
4. Maintain internal audit
• In an internal audit, the data on accounts payable, such as stocks, assets, and
cash reconciliation, are looked at. Cash reconciliation is the process of making
sure that your organization can fully account for all of its cash, taking into
account all of its income and expenses.
5. If the broken system issue raise, immediately take action to solve the issue, because not
fixing the issue may drive the company sale or revenue performance alternatively which
will be big issue for late.
6. Inquire about the department's annual reports.
• Verify that important business indicators are trending in the right direction.
Internal control failures may be to blame for negative trends in measures such
as revenue, profitability, or customer grinding down. To acquire a complete
picture of the company, combine reports from all departments.
• Reporting controls and control deficiencies should be encouraged by
departments or business units. Examine each department's ability to
appropriately assess the current condition of its controls and verify its results,
rather than taking these reports at face value.
7. Inquiry Inventory, Journal Entries, and E-Transfer. It is also critical to conduct regular
inventory and asset audits. A random inventory count should be done throughout the
year by a person who has no reason to misreport. At least once a month, evaluate general
journal entries. Large or unexpected sums should be flagged as suspicious and
examined. So, because wire transfers are a favorite means of fraud, these transactions
should be examined frequently to ensure that all transactions are valid, approved, and
accompanied by adequate paperwork.
8. Establish an Anti-Fraud Hotline. Having a hotline where staff may safely report any
suspected financial statement manipulation encourages them to do so. Whistleblowers
are more likely to stay in an organization if they feel safe raising a red flag. A company's
best hope for detecting and avoiding fraud is to rely on its own employees.
Above mentioned preventive masseurs and recommendations were made
considering the fraudulent cases occurred in ACME. If a company fears such fraudulent
activities happening inside the corporation, they should ask for forensic audit as the fraud
can demolish the company and its reputation.
76 | P a g e
CONCLUSION
This study distinguished internal and external audit is at the beginning and their
characteristics and role in terms of performing and audit. The external auditors’ responsibilities
are different than the internal auditors, especially when it comes to the forensic auditors their
way of working and collecting the audit samples was slightly different than the statutory
auditors. External auditors' primary responsibility in corporate governance should be to
safeguard the interests of stockholders and the public. There is no influence from the
organization on external audits. External auditors report on a firm's financial position and
certify the integrity of financial reports that the company may have provided. All the data must
be correct and trustworthy. The firm's accounting practices should be in line with industry
standards and if the firm is from particular sector it has to follow the specific regulation for
instance Drugs Ordinance 1982 for ACME.
The importance of maintaining a solid and easy reporting cycle is concerned with the
operation, management, updating, and reporting of a business's financial statements. Typically,
the rotation occurs concurrently with the planning and budgeting processes. It ensures that the
industry is prepared to begin the subsequent period. The budgeting and reporting cycles of a
business are typically distinct; they may involve the same people in their preparation. In most
cases, a fair and robust report cycle help the company to indicate the gap in the internal system.
Also, the internal audit report helps the organization to find out the major issues before the
external auditors appears in the company.
This study indicates that the importance of strong internal control in the company and
if it is missing how badly it can be affected in the company financial performance. The role of
internal control and internal audit plays the same importance in the company performance. The
risk of the fraud cases, and analysis was discovered later but it was too late for the company
itself. It is clear that if there was strong internal control the corporate governance could have
mitigate the risk. Their essential role within the company reflects the overall performance of
the company.
All the frauds indicated that because of management and their greed push ACME in the
edge of the corner. If they could take all the necessary steps to fix the sales interface issue and
not to hide the issue, they would have ended up with much better situation. The inventory fraud
issue helped them to hide the real inventory amounts, hence the falsifying the financial
statements. Cash leakage issue clearly indicated that the fragile internal control would create
opportunity to the fraudsters.
77 | P a g e
Besides, this study covers the methods and tools used by both statutory and forensic
auditors. The sample testing and run those tests in the perspective or the angle from the fraud
was different from each other. It is clear that the bigger the sample size is the longer the time
takes to run the test and justify them. For each of the fraud’s auditors took different types of
methods to get into the main point and find out the root cause of the fraud. The forensic auditors
collected the line level breakdown from the internal sources and they even went through the
interview process to make sure they get the right information.
After pointing out the fraud, this study figured out the impacted accounts and their
possible impact due to the fraud. Then the ratio analysis was conducted to find out the overall
financial impact on ACME’s financial performance. Ratio analysis is the way toward inquiring
and comparing financial data by computing significant financial statement figure percentages
instead of looking at line components from each financial statement. It is clear from the ratio
analysis that even if the impact of the fraud is small, it can impact the company’s financial
position is enormous. After the z-score analysis especially when the investor withdrawn their
all investment, additionally because of the cash leakage and the fictious revenue fraud the
investments bank denied borrowing money to ACME. They have showed their concern as
ACME will not be able to repay their debt.
Finally, after observing the characteristics of the frauds and the impacts on ACME’s
financial statements, a set of recommendations was provided for the companies from
Bangladesh. The principal action to prevent a fraud is a good internal control and then it comes
with the tools and technique place by the corporation for the employees.
78 | P a g e
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81 | P a g e
APENDIX
ACME Pharmaceuticals Financial Statements
Statement of Financial Position / Year
2018 2019 2020
Assets
Non-Current Assets
21,162,036,812
23,785,620,542
24,712,740,493
PPE
21,105,678,957
23,751,657,485
24,602,564,373
Intangible Assets 120,375
78,750
86,369,645
Investment in Shares 34,892,667
33,884,307
23,769,350
Investment Property 21,344,813
-
-
Right of use assets -
-
37,125
Current Assets
11,462,209,428
12,135,978,847
14,705,522,689
Inventories 3,143,134,830
3,572,384,216
3,917,967,826
Trade Receivable 1,506,585,427
1,600,062,384
1,910,829,633
Other Receivable 14,003,447
20,296,828
19,729,469
Advance, Deposits & Pre-payments 1,728,861,666
1,917,113,434
2,683,622,048
Advance Income Tax 2,234,845,243
2,365,624,805
2,762,563,924
Material in Transit 595,929,689
762,231,856
1,312,625,960
Term Deposit 1,103,779,169
520,503,605
274,367,312
Cash and Cash Equivalents 1,135,069,957
1,377,761,719
1,823,816,517
Total
32,624,246,240
35,921,599,389
39,418,263,182
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Equity and Liabilities
Shareholders’ Equity
17,645,034,827
18,343,391,846
19,044,180,165
Share Capital 2,116,017,000
2,116,017,000
2,166,017,000
Share Premium 5,127,599,728
5,127,599,728
5,127,599,728
Revaluation Surplus 5,402,713,591
5,319,635,386
5,238,752,312
Gain/(Loss) on Marketable Securities (Unrealized)
8,720,809
6,941,204
(216,257)
Tax Holiday Reserve 179,464,241
179,464,241
179,464,241
Retained Earnings 4,810,519,458
5,593,734,287
6,384,509,141
Non-current Liabilities 4,615,514,545
4,578,020,122
6,392,286,374
Long Term Loan-net off Current Maturity 3,780,826,927
3,556,975,950
5,106,567,547
Provision for Gratuity 330,362,700
336,558,221
361,679,351
Deferred Tax Liability 504,324,918
684,485,951
857,259,010
Long Term Lease Liability -
-
66,780,466
Current Liabilities
10,363,696,868
13,000,187,421
13,981,796,643
Loans & Overdrafts 5,826,848,423
8,287,743,650
8,315,320,639
Current Maturity of Long-Term Loans 2,109,615,101
2,122,725,287
2,459,340,207
Trade Payable 208,815,093
321,405,105
398,967,527
Provision for Income Tax 1,992,201,935
2,011,594,657
2,366,744,574
Current Lease Liability -
-
11,643,390
Liability for Expenses and Others 222,407,023
239,394,833
423,044,663
Dividend Payable 3,809,293
17,323,889
6,735,643
Total Liabilities
14,979,211,413
17,578,207,543
20,374,083,017
Total
32,624,246,240
35,921,599,389
39,418,263,182
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Statement of P/L / Year
2018 2019 2020
Revenue
14,813,914,266
16,308,627,037
19,003,659,657
Cost of Goods Sold
(8,942,398,576)
(9,882,879,199)
(11,728,937,307)
Gross Profit/Loss 5,871,515,690
6,425,747,838
7,274,722,350
Other Income 106,611,149
96,382,118
74,986,576
5,978,126,839
6,522,129,956
7,349,708,926
Selling Marketing and Distribution Expenses
(2,232,988,549)
(2,389,580,093)
(2,679,085,139)
3,745,138,290
4,132,549,863
4,670,623,787
Administrative Expenses (589,467,718)
(591,955,304)
(807,968,326)
3,155,670,572
3,540,594,559
3,862,655,461
Financial Expenses
(1,103,084,302)
(1,489,586,026)
(1,784,251,649)
Fire Incident
Profit Before Contribution to WPPF and Welfare Fund
2,052,586,270
2,051,008,533
2,078,403,812
Contribution to WPPF and Welfare Fund (97,742,203)
(97,667,073)
(98,971,610)
Net Profit Before Tax 1,954,844,067
1,953,341,460
1,979,432,202
Current Tax Expenses (405,613,809)
(333,572,829)
(355,149,917)
Deferred Tax (Income)/Expenses (122,659,262)
(179,389,788)
(173,784,555)
Net Profit After Tax 1,426,570,996
1,440,378,843
1,450,497,730
Other Comprehensive Income
Gain/Loss on Marketable Securities (Unrealized)
2,487,277
(1,008,360)
(10,114,957)
Total Comprehensive Income for the Year 1,429,058,273
1,439,370,483
1,440,382,773
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Statement of Cash Flows/Year
2018 2019 2020
Cash Flows from Operating Activities
Collection from Sales and Others
14,772,685,829
16,311,726,800
18,764,510,739
Payment to Suppliers & Others
(11,586,491,496)
(12,638,634,365)
(15,360,249,230)
Workers Profit Participation Fund (91,599,771)
(87,967,983)
(87,900,366)
Cash Generated from Operation 3,094,594,562
3,585,124,452
3,316,361,143
Financial Expenses
(1,101,287,317)
(1,487,057,301)
(1,773,085,133)
Income Tax Paid (415,018,428)
(444,959,669)
(396,939,119)
Net Cash Generated from Operating Activities
1,578,288,817
1,653,107,482
1,146,336,891
Cash Flows from Investing Activities
Acquisition of PPE
(3,622,541,357)
(3,520,175,068)
(2,104,536,549)
Sales Proceeds of PPE 1,270,000
1,090,000
4,237,000
Encashment of Term Deposit 950,220,831
583,275,564
246,136,293
Term Deposit
-
-
Dividend Received 498,555
1,024,420
682,261
Investment in Share -
-
-
Advance to ACMUNIO int. Ltd -
-
-
Net Cash Used in Investing Activities
(2,670,551,971)
(2,934,785,084)
(1,853,480,995)
Cash Flows from Financing Activities
85 | P a g e
Share Capital -
-
-
Share Premium -
-
-
Dividend Paid (739,403,477)
(727,091,354)
(751,194,196)
Principal Portion Payment of Lease Liability -
-
(9,390,408)
Next Increase/Decrease in Loans and Overdrafts
522,809,088
2,462,201,509
27,576,989
Net Increase/ Decrease in Long Term Borrowings
1,061,018,910
(210,740,791)
1,886,206,517
Net cash generated/used from financing activities
844,424,521
1,524,369,364
1,153,198,902
Increase/Decrease in Cash and Cash Equivalents
(247,808,633)
242,691,762
446,054,798
Cash and Cash Equivalents at the Opening 1,382,878,590
1,135,069,957
1,377,761,719
Cash and Cash Equivalents at the Closing 1,135,069,957
1,377,761,719
1,823,816,517
Net Operating Cash Flow Per Equity Share 7.46 7.81 5.42
iMentioned Statements figures are in BDT
i All the figures are in BDT