ACC3AUD Auditing
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Executive Summary
Auditing is a systematic examination of the books and records of a business or the organization in order to ascertain or verify and to report upon the facts regarding the financial operation and the result thereof. Audit is performed to obtain reasonable assurance about whether the financial statement is free from the material misstatement. As Popular Life Insurance Company Ltd. is now one of the largest life insurance companies in Bangladesh with the motto is to reach to the doors of every insurable person of the country; they have done their auditing reports by the reputed auditors (like- 2009-10; M.N.Islam & co.) to verify the financial statements. The company engages in a large volume and variety of transactions both in terms of number and value. This necessarily requires complex internal control and in particular, the entity’s information system and related business processes relevant to financial reporting, and widespread use of electronic data processing. This is another reason for maintaining the auditing report every year. Here, the self-assessment exercise, complemented by due diligence by the company staff, specifically focused on the auditing systems is seen.
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IntroductionThe word ’Audit' is originated from the Latin word 'audire' which means 'to hear'. In the earlier days, whenever there is suspected fraud in a business organization, the owner of the business would appoint a person to check the accounts and hear the explanations given by the person responsible for keeping the account and funds. In those days, the audit is done to find out whether the payments and receipt are properly accounted or not. The objective of modern day accounting is not only for the verification of cash but to report the financial position of the undertaking as disclosed by its Balance sheet and Profit and Loss account. Auditor technique in gathering auditing evidence to substantiate the reliability of the accounting records. The auditor evaluates whether the information presented is logical and reasonable. Examples of auditing procedures are observing assets to verify existence and amount (e.g., fixed assets), collecting independent confirmations from external parties (e.g., bank confirmation), evaluating internal control, appraising management's activities, and obtaining management representations. The audit procedures to be followed on an engagement are indicated in the audit program . The work papers indicate what has been done on the audit. The audit process is generally a ten-step procedure as outlined below- Notification, Planning, Opening Meeting, Fieldwork, Communication, Report Drafting, Management Response, Closing Meeting, Report Distribution, Follow-up.
Methodology
The following methodology has followed for the study based on observation and interpretation.
Primary data sources are-
Scheduled survey,
Formal discussion with professionals
Observation while working in different desks.
Employee’s opinion collected through Questions.
The secondary data sources are-
Annual reports of Popular Life Insurance Company Ltd.
Website of Popular Life Insurance Company Ltd.
Manual & brochures of Popular Life Insurance Company Ltd. and Different publications of Bangladesh Bank.
We had interviewed with the employee and extensive study of the existing file as well as practical case observations to know the auditing system.
Company Profile
Popular Life Insurance Company Ltd. with the influencing Slogan “A great name in life insurance” started is journey on September 26, 2000. Today, with premium of 393.24 crore, life fund of 608.09 crore, it is now on the largest life insurance companies in Bangladesh. Their motto is to reach to the doors of every insurable person of the country. Popular Life Insurance Company Ltd. has been able to maintain its performance in the recent pasts with almost 17.75% gross premium income. In 2009 their assets stood at tk. 947.96 crore from tk. 630.08 crore of the previous year. They are not only contributing to the economy through the business operations, but also contribute to the socio- economic development of the nation. Their works towards corporate social responsibility includes campaigns against drug abuse and human trafficking, tree plantation, ‘Vitamin A’ campaign etc. They have also extended their help and stood besides the victims of floods, cyclones and landsides.
Corporate Information
Company Name
Popular Life Insurance Company Limited
Year of Establishment
2000
Date of Incorporation
26th September, 2000
Registered Office
Peoples Insurance Bhaban,
36 Dilkusha C/A (3rd Floor), Dhaka – 1000.
Authorized Capital
Tk. 500 Crores
Paid up Capital
Tk. 20.9733 crores
Nature of Business
Life Insurance Business
Auditors
M.N Islam & Co.
Chartered Accountants
123/4 Tejkunipara, Tejgaon , Dhaka-1215
Popular Life Insurance Co. Limited: At a Glance
26.09.2000
Incorporation of the company
26.09.2000
Commencement of Business
01.11.2000
Signing of first insurance policy
01.11.2000
Launching of Janapriyo Bima (Micro Insurance)
25.10.2000
Launching of Islami Bima (Takaful)
2002
First declaration of bonus to the shareholder
23.05.2002
Launching of Al-Amin Bima
16.07.2003
Launching of Islami DPS
25.01.2004
Launching of Al Baraka Islami Ekok Bima
29.03.2005
Publication of IPO prospectus
02.06.2005
Lottery for allotment for share
10.07.2005
Listing with Dhaka Stock Exchange
10.07.2005
Listing with Chittagong Stock Exchange
12.07.2005
First trading at Dhaka Stock Exchange
12.07.2005
First trading at Chittagong Stock Exchange
07.05.2007
Purchase of DSE membership
19.09.2007
First credit rating
2007
Payment of 1st maturity claim
06.08.2008
Purchase of CSE membership
28.08.2008
Issuance of first bonus shares
01.10.2008
Launching of Al- Amin Ekok Bima
25.06.2009
Receipt of registration certificate as stock dealer and stock broker of DSE 12.07.2009
Receipt of registration certificate as stock dealer and stock broker of CSE 24.06.2010
Launching of Popular Life brokerage House
Auditing Procedure of Popular Life Insurance Company Limited In carrying out the work required to form an opinion on the Popular Life Insurance Company Limited’s financial statements, the auditor’s work is divided into several distinct phases, as contemplated in the ISAs. A schematic representation of these phases is as follows-
Defining the Terms of the Engagement- Popular Life Insurance Company Limited
According to the company laws and ISA 2010-
Popular Life Insurance Company Limited confirms the auditor’s acceptance of the appointment, the objective and scope of the audit, the extent of the auditor’s responsibilities to the client and the form of any reports. In making such an assessment, the auditor will consider the following factors- the availability of sufficient expertise in the aspects of banking relevant to the audit of the business activities of the bank; the adequacy of expertise in the context of the computer information systems (CIS) and electronic funds transfer (EFT) systems used by the bank; and the adequacy of resources and/or inter-firm arrangements to carry out the work necessary at the number of domestic and international locations of the bank at which audit procedures are likely to be required.
Planning the Audit
The auditor should plan the audit work so that the audit will be performed in an effective manner. In developing an overall plan for the audit, the auditor of Popular Life Insurance Company needs to give particular attention to-
The determination of materiality;
The assessment of the risk of material misstatement;
The expected degree of reliance on internal control;
The existence of significant areas of audit concern not readily apparent from the bank’s financial statements; The existence of related party transactions;
The involvement of other auditors;
Management’s representations; and
The work of supervisors.
Establishing the Degree of Reliance on Internal Control
The auditor is required to obtain a sufficient understanding of the internal control to plan the audit and develop an effective audit approach. After obtaining the understanding, the auditor should consider the assessment of control risk to determine the appropriate detection risk to accept for the financial statement assertions and to determine the nature, timing and extent of substantive procedures for such assertions. Identifying, documenting and testing the operating effectiveness of control procedures Popular Life Insurance Company’s Internal Control system” sets out Three (3) objectives of internal controls-
Recorded assets are compared with the existing assets at reasonable intervals and appropriate action is taken regarding any differences;
All transactions and other events are promptly recorded in the correct amount, in the appropriate accounts and in the proper accounting period so as to permit preparation of financial statements in accordance with an identified financial reporting framework.
Access to assets is permitted only in accordance with management’s authorization.
Performing Substantive Procedures carried out by auditor
The nature, timing and extent of the specific substantive procedures to be performed on the financial statement balances will be based on the auditor’s assessment of inherent and control risk. Substantive procedures means tests performed to obtain audit evidence to detect material misstatements in the financial statements and are of two types-
Tests of details of transactions and balances; and
Analytical procedures.
Reporting on the Financial Statements
This review and assessment involves forming an overall conclusion as to whether-
The financial statements have been prepared using acceptable accounting policies, which have been consistently applied. It complies with regulations and statutory requirements relating to the preparation of financial statements; the view presented by the financial statements as a whole is consistent with the auditor’s knowledge of the business of the entity.
The Six Sigma Audit Process by Popular Life Insurance Company
Recently Popular Life Insurance Company adopted the Six Sigma techniques for their recent audit.
The Six Sigma audit process is similar to the assessment process employed during the deployment stage because only qualitative checks are conducted during the audit. The audit process involves the use of questionnaires and checklists that allow auditors to assess the existing status of business processes, which is then compared with predetermined standards or desired results. The standards are very specific and are clearly defined at the commencement of the deployment phase.
The Six Sigma audit process is also similar to the quality audit conducted by an ISO 9000 certified company. In the past, many companies have successfully developed and implemented Six Sigma audit procedures based on the audit platform provided by ISO 9000. Many companies have even gone beyond and included VOC factors (voice of customer) while carrying out the audit. It is now become quite commonplace to find Six Sigma companies employing ISO 9000 audit procedures developed by Malcolm Baldrige.
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Checklists and Charts for Six Sigma Audits
By using descriptive charts prepared in the form of checklists, the auditors are able to ensure that proper checks are conducted on every aspect of the project. These checklists are prepared at the initial stages of the project deployment process. Each individual checklist is specifically prepared for assessing the status of a particular business process or activity. For example, a production checklist will cater to production processes whereas an inventory checklist will cater to inventory related processes.
The process checklists are based on SOP's (standard operating procedures), which is determined at the beginning of the project implementations. These checklists contain questions that help auditors in determining whether a particular process is being followed or not. The actual answers are also summarized and recorded on the sheet itself. For example, while auditing business processes related to the dispatch system, the process variations that are recorded in the operator's log are revealed during the audit. The variations are then compared to standard deviation for determining the full extent of the problem. The data representing the deviations can be utilized for finding out the exact causes that lead to the deviation.
Limitations
Although the Six Sigma audit is very effective in checking the progress of Six Sigma implementation projects, its scope is limited to existing business goals and objectives. This means that the audits cannot be utilized for improving upon the level of quality that has already been achieved by the organization. All it can do is to gauge customer reactions and analyze them in the context of changes that have been effected during the implementations. If the customer reactions and the effected changes show a positive correlation, the existing processes are maintained whereas if there is negative correlation, the process is scraped or referred for further improvements.
The scope of Six Sigma audits may be limited but they do help in ensuring the success of implementation projects. Implementing Six Sigma projects without utilizing standard audit procedures could be a risky venture and should be avoided.
Reasons why Popular Life Insurance Company maintains audit system
Audited accounts carry greater authority than the accounts which have not been audited. Audited accounts are readily accepted in Government authorities like income Tax Dept, Sales Tax dept., Land Revenue departments, banks etc. Regular audit of account create fear among the employees in the accounts department and exercise a great moral influence on clients staff thereby restraining them from commit frauds and errors. As ownership is separated from management, audit of accounts ensure the shareholders that accounts have been properly maintained, funds are utilized for the right purpose. To determine the value of the business in the event of purchase or sales of the business, audited account will be the treated as the base for the evaluation. The audit of accounts by a qualified auditor also help the management to understand the financial position of the business and also it will help the management to take decision on various matters.
Findings
The expenditure incurred was for the purpose of the company’s business, Proper books of account as required by the relevant laws were maintained by the company so far as appeared from the examination and that proper returns adequate for the purpose of audit have been received from the branches, According to the information and explanations, all the expenses of management whatever incurred directly or indirectly have been fully charged to the revenue account as expenses, According to the information and explanations, the company has not paid any commission outside Bangladesh in respect of insurance business transacted in Bangladesh and that the company has not received from any person outside Bangladesh any commission in any form in respect of any business re-insured abroad.
Recommendations
Auditors of banks should have a background that is taken from one of the following areas of expertise;
Experience in audit work or in banking gained from line responsibilities in a financial institution; IT experience gained either in an audit or technical environment Internal and external audit maintain a regular, constructive dialogue on all aspects of audit planning, coverage and areas of concern, whilst seeking to avoid duplication of effort. Internal audit departments can employ staff with mathematical backgrounds to examine the models used to price and risk manage complex financial products.
Conclusion
An unbiased examination and evaluation of the financial statements of an organization. It can be done internally (by employees of the organization) or externally (by an outside firm). An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the presentation of the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of the material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments; the auditor considers internal control relevant to the entity's preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.
In the Popular Life Insurance Co. Limited, the auditor’s responsibility is to express an opinion on the financial statements based on audit. They conduct their audit in accordance with Bangladesh Standards on Auditing (BSA). Those standards require that they comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
At last, from our survey as well as interviews, we can say that Popular Life Insurance Co. Limited, has kept almost perfect audit report as their shareholders are very much happy with their effort.
References
A Handbook of Practical Auditing; B. N. Tandon, S. Sudharsanam, S Sundharabahu
Auditing and Integrated Approach; Arens. Loebbecke
http://www.popularlifeins.com/ ( official website of Popular Life Insurance Co. Limited)
Md. Momen Sarkar; Assistant director( Development);
Head office: 49-51 Dilkusha, Dhaka-1000.
Appendix
a. Questionnaire
1. What is the objective of maintaining audit system?
2. Who is the auditor of your company?
3. How the audit committee is formed?
4. Responsibility of the audit committee?
5. What types of audit system is being followed by your company?
6. Which auditing standards are being followed by your auditor?
7. Is your audit report published in any newspaper?
8. By whom the external auditor is appointed?
9. External auditor’s opinion about the effectiveness of internal audit system?
10. What is the opinion of external auditor about the company’s financial statements of 2011?
11. Do they make any plan to conduct the auditing of your company?
12. Is there any involvement of other auditor in your company?
13. Is the audit report influenced by others?
Signature
b. List of Data and Tables
Business Position
Premium & Claim position
Asset Position for last 5 Years
Claim payment for last 5 years
c. Balance Sheet
By using descriptive charts prepared in the form of checklists, the auditors are able to ensure that proper checks are conducted on every aspect of the project. These checklists are prepared at the initial stages of the project deployment process. Each individual checklist is specifically prepared for assessing the status of a particular business process or activity. For example, a production checklist will cater to production processes whereas an inventory checklist will cater to inventory related processes.
The process checklists are based on SOP's (standard operating procedures), which is determined at the beginning of the project implementations. These checklists contain questions that help auditors in determining whether a particular process is being followed or not. The actual answers are also summarized and recorded on the sheet itself. For example, while auditing business processes related to the dispatch system, the process variations that are recorded in the operator's log are revealed during the audit. The variations are then compared to standard deviation for determining the full extent of the problem. The data representing the deviations can be utilized for finding out the exact causes that lead to the deviation.
Limitations
Although the Six Sigma audit is very effective in checking the progress of Six Sigma implementation projects, its scope is limited to existing business goals and objectives. This means that the audits cannot be utilized for improving upon the level of quality that has already been achieved by the organization. All it can do is to gauge customer reactions and analyze them in the context of changes that have been effected during the implementations. If the customer reactions and the effected changes show a positive correlation, the existing processes are maintained whereas if there is negative correlation, the process is scraped or referred for further improvements.
The scope of Six Sigma audits may be limited but they do help in ensuring the success of implementation projects. Implementing Six Sigma projects without utilizing standard audit procedures could be a risky venture and should be avoided.
Reasons why Popular Life Insurance Company maintains audit system
Audited accounts carry greater authority than the accounts which have not been audited. Audited accounts are readily accepted in Government authorities like income Tax Dept, Sales Tax dept., Land Revenue departments, banks etc. Regular audit of account create fear among the employees in the accounts department and exercise a great moral influence on clients staff thereby restraining them from commit frauds and errors. As ownership is separated from management, audit of accounts ensure the shareholders that accounts have been properly maintained, funds are utilized for the right purpose. To determine the value of the business in the event of purchase or sales of the business, audited account will be the treated as the base for the evaluation. The audit of accounts by a qualified auditor also help the management to understand the financial position of the business and also it will help the management to take decision on various matters.
Findings
The expenditure incurred was for the purpose of the company’s business, Proper books of account as required by the relevant laws were maintained by the company so far as appeared from the examination and that proper returns adequate for the purpose of audit have been received from the branches, According to the information and explanations, all the expenses of management whatever incurred directly or indirectly have been fully charged to the revenue account as expenses, According to the information and explanations, the company has not paid any commission outside Bangladesh in respect of insurance business transacted in Bangladesh and that the company has not received from any person outside Bangladesh any commission in any form in respect of any business re-insured abroad.
Recommendations
Auditors of banks should have a background that is taken from one of the following areas of expertise;
Experience in audit work or in banking gained from line responsibilities in a financial institution; IT experience gained either in an audit or technical environment Internal and external audit maintain a regular, constructive dialogue on all aspects of audit planning, coverage and areas of concern, whilst seeking to avoid duplication of effort. Internal audit departments can employ staff with mathematical backgrounds to examine the models used to price and risk manage complex financial products.
Conclusion
An unbiased examination and evaluation of the financial statements of an organization. It can be done internally (by employees of the organization) or externally (by an outside firm). An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the presentation of the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of the material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments; the auditor considers internal control relevant to the entity's preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.
In the Popular Life Insurance Co. Limited, the auditor’s responsibility is to express an opinion on the financial statements based on audit. They conduct their audit in accordance with Bangladesh Standards on Auditing (BSA). Those standards require that they comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
At last, from our survey as well as interviews, we can say that Popular Life Insurance Co. Limited, has kept almost perfect audit report as their shareholders are very much happy with their effort.
References
A Handbook of Practical Auditing; B. N. Tandon, S. Sudharsanam, S Sundharabahu
Auditing and Integrated Approach; Arens. Loebbecke
http://www.popularlifeins.com/ ( official website of Popular Life Insurance Co. Limited)
Md. Momen Sarkar; Assistant director( Development);
Head office: 49-51 Dilkusha, Dhaka-1000.
Appendix
a. Questionnaire
1. What is the objective of maintaining audit system?
2. Who is the auditor of your company?
3. How the audit committee is formed?
4. Responsibility of the audit committee?
5. What types of audit system is being followed by your company?
6. Which auditing standards are being followed by your auditor?
7. Is your audit report published in any newspaper?
8. By whom the external auditor is appointed?
9. External auditor’s opinion about the effectiveness of internal audit system?
10. What is the opinion of external auditor about the company’s financial statements of 2011?
11. Do they make any plan to conduct the auditing of your company?
12. Is there any involvement of other auditor in your company?
13. Is the audit report influenced by others?
Signature
b. List of Data and Tables
Business Position
Premium & Claim position
Asset Position for last 5 Years
Claim payment for last 5 years
c. Balance Sheet
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