A Report On Audit Planning of ACI LIMITED
A Report On Audit Planning of ACI LIMITED
A Report On Audit Planning of ACI LIMITED
Submitted To:
Mohammad Salahuddin Chowdhury
Assistant Professor
Department of Finance
Faculty of Business Studies
University of Dhaka
SUBMITTED BY:
Group Number: 01
Section: B
BBA 19th Batch
Department of Finance
Faculty of Business Studies
University of Dhaka
Group Profile
Name
1
3
4
5
ID No
Acknowledgement
First of all we express our gratitude from heart to the Beneficent, the Merciful & Almighty Allah
for giving us the strength and patience to prepare this term paper within the programmed time.
We are deeply indebted to our course teacher, Mohammad Salahuddin Chowdhury, Assistant
Professor, Department of Finance, Faculty of Business Studies, University of Dhaka, for his cooperation and precious contribution in preparing the report.
We have relied mostly on the annual report (2013-2014) of ACI Ltd. We have taken help from
internet & various books. We are thankful to those authors for the help we have gathered from
their resourceful work.
Letter of Transmittal
Mohammad Salahuddin Chowdhury
Assistant Professor
Department of Finance
Faculty of Business Studies
University of Dhaka
Subject: Submission of Term Paper
Dear Sir:
It is an immense pleasure for us to submit the Term Paper on Audit planning on ACI limited"
which is prepared as a partial requirement of the course named "Auditing (F-310)" of BBA
program under Department of Finance of the Faculty of Business Studies, University of Dhaka.
The study is mainly focused on Bangladesh Accounting Standards provided in our text book and
its analysis with the financial statement of a Bangladeshi company. The experience that we
gathered through this study will help us in our career indeed. It was an opportunity of
rediscovering our potentials. It was of excitements too.
We would like to convey our special thanks and gratitude to you for patronizing our effort & for
giving us proper guidance and valuable advice. We have tried our best to cover all the relevant
fields.
We thank you and look forward to receive your cordial approval of our submission.
Executive Summary
Advance Chemical Industries (ACI) Limited is one of the leading conglomerates in Bangladesh,
with a multinational image. ACI is a Public Limited Company with a total number of 19,653
shareholders. The company has diversified into four major businesses. The Risk Management
and Internal Audit is one of the support department established in ACI Ltd in order to maintain
an effective and smooth functioning in the organization .And also to monitor all the activities
like from planning to revenue generation each steps of ACI and its subsidiaries.
Corporate governance practice in Bangladesh is very less in our country because most of the
companies are family oriented. To secure the operations of governance of a strong company,
there must be cooperation between the various components of the system of governance, internal
auditors, executive management, financial management, board of directors, shareholders and
external auditors. To achieve the quality of governance, the company must focus on all
cornerstones of corporate governance and in particular the audit function. It assesses the
commitment to the ethics of the organization and its goals, programs and activities.
Abstract
The first step of an audit is planning. In this report we tried to find out the meaning, importance
and others aspects of audit. We mentioned the standards that an auditor has to follow in case of
planning an audit. After the theoretical explanations we did the audit planning of ACI
Pharmaceuticals Limited on a sample basis which helped us to understand the concept more
precisely. We also provided an opinion based on findings up to the planning level of our audit.
Audit Planning
The first generally accepted auditing standard of fieldwork requires adequate planning. For audit
purpose Planning means to develop a general strategy and a detailed approach for the expected
nature, timing and extent of the audit. Auditor plans to perform the audit in an efficient and
timely manner. Adequate planning for audit work helps to ensure that appropriate attention is
devoted to important areas of the audit, those potential problems are identified and that the work
is completed expeditiously. The extent of planning will vary according to the size of the entity,
the complexity of the audit and the auditor`s experience with the entity and knowledge of the
business.
Auditor should review the prior year`s working paper to understand the entity`s activities
in a better way.
Auditor should review industry and business data which is very much related to
information about the industry collected from various industry publications.
Auditor should visit client operations.
Auditor should make inquiries of audit committee for better understanding.
The effective use of analytical procedures in the planning phase involves the systematic
completion of following steps:
There are some factors which are considered in making preliminary judgments at the planning
stage, are discussed in below:
Auditor should assess materiality at financial statement level. Here, the financial
statement materiality is the minimum aggregate misstatement in a financial statement that
is important enough to prevent the financial statements from being presented fairly in
conformity with the generally accepted accounting principle (GAAP).
Auditor should assess materiality at account balance level. Account balance materiality is
the minimum misstatement in an account balance that can exist in an account balance for
it to be considered materially misstated.
Auditor should allocate financial statement materiality to accounts
Risk assessment:
The risk that auditor expresses an inappropriate audit opinion when the financial statements are
materially misstated is known as audit risk. The audit risks are manly two types (1) Risk of
material misstatement of the financial statements, (2) Detection risk.
(1)Risk of material misstatement of the financial statement: The risk that the financial
statements are materially misstated prior to audit is referred as audit risk. The category of audit
risk is also known as the risk of material misstatement at the assertion level. The risk of
material misstatement at the assertion level consists of two components mainly: Inherent risk and
Control risk.
Inherent risk: Inherent risk is the suspect ability of an assertion to a misstatement that
could be material, either individually or when aggregated with other misstatements,
assuming that there are no related controls. The risk of such misstatement is greater for
some assertions and related class of transactions, account balances and disclosures than
for others.
Control risk: Control risk is the risk that a misstatement that could occur in an assertion
and that could be material, either individually or when aggregated with other
misstatements, will not be prevented or detected and corrected, on a timely basis by the
entity`s internal control.
(2)Detection risk: Detection risk is the risk that the auditor will not detect a misstatement that
exists in an assertion that could be material, either individually or when aggregated with other
misstatements. Detection risk is a function of the effectiveness of an audit procedure and of its
application by the auditor. There is an inverse relationship between detection risk and combined
level of inherent and control risk.
The auditor should understand the design of policies and procedures pertaining to each
ICS components.
The auditor should demine whether the policies and procedures have been placed in
operations.
Auditor should document the understanding of the Ices component.
Bangladesh
Auditing
Standards
on
There are three BSAs which are related with audit planning. So an auditor working in
Bangladesh must have complete understanding of them in order to follow them properly. We
have studied all 3 BSAs. Some important points mentioned in these BSAs are described below:
BSA 300: Planning an audit for Financial Statements
The auditor should plan the audit so that the engagement will be performed in an
effective manner.
The auditor should perform procedures regarding the continuance of the client
relationship and the specific audit engagement.
The auditor should establish the overall audit strategy for the audit.
The auditor should develop an audit plan for the audit in order to reduce audit risk to an
acceptably low level.
The overall audit strategy and the audit plan should be updated and changed as necessary
during the course of the audit.
The auditor should document the overall audit strategy and the audit plan, including any
significant changes made during the audit engagement.
BSA 315: Identifying and assessing the risks of the material misstatement through
understanding the entity and its environment
The auditor should understand the entity, environment & its internal control to identify &
assess the risk of material misstatement of the financial statement.
The auditor should perform the inquiries of management, analytical procedures &
observation & inspection.
The auditor should determine whether the changes have occurred that may affect the
relevance of the information in that current audit.
The auditor should obtain information about relevant industry & regulatory & other
external factors.
The auditor should obtain the understanding about nature of the entity.
The auditor should obtain the understanding of companys objective, strategies &
measurement & review of entitys financial performance.
The auditor shall include in the audit documentation the following amounts and the
factors considered in their determination:
The materiality levels for particular class of transactions, account balances or disclosures.
Performance materiality.
Understanding
industry
of
the
With over US$250 million investments in the pharmaceutical industry of Bangladesh, the sector
has emerged as the countrys most developed hi-tech one that contributes significantly to the
national economy.
Meeting over 97 percent of the domestic requirements, pharmaceutical products from
Bangladesh have reached the international market spreading over 72 countries around the world
including Pakistan, Nepal, Sri Lanka, India, Thailand, and China. Pharma companies are now
trying to penetrate into the medicine market of European and African continents.
Expressing optimism, the BAPI (Bangladesh Association of Pharmaceutical Industries) president
also said that export value of the countrys pharmaceutical sector is growing significantly.
With favorable government policy, BAPIs president expects a vibrant growth in domestic and
overseas business in the coming years.
According to Export promotion Bureau (EPB), pharmaceutical export witnessed 6.21 per cent
growth in the fiscal 2008-2009, earning US$45.67 million, which was recorded US$ 43 million
in fiscal 2007-2008.
PEST-L analysis
It is a part of the external analysis when conducting a strategic analysis or doing market research
and gives an overview of the different macro environmental factors that the company has to take
into consideration. It is a useful strategic tool for understanding market growth or decline,
business position, potential and direction for operations.
Politically, Bangladesh appears stable after decades of instability and corruption; Economically,
Bangladeshs economy continued to grow throughout the global downturn. However, the export
value of pharmaceuticals, through small, is growing at 50 percent per year. The industry
produces quality medicines for millions of people in Bangladesh. Almost self-reliant in
Pharmaceutical products, the industry meets 97% of national demand for medicines. Remarkably
this sector consistently creates job opportunities for highly qualified people. Demographically,
the projected population of Bangladesh in 2015 will be nearly twice of Vietnam and nearly three
times that of the UK and France. Official reporting of Bangladeshs health spending is scarce, but
it does appear that expenditure is increasing. Bangladesh has the lowest physician rate in the
world.
Bangladesh is an extremely poor country, and many of the population cannot afford to see health
professionals when they fall ill, therefore been a long tradition of self-medication in the country.
The pharmaceutical distribution network tends to be more retail oriented and bulk of distribution
is done by the companies. An anarchic situation is prevailing in the marketing and sales of
medicines in Bangladesh. Thousands of illegal and unlicensed drug stores exists in cities, towns
and rural hats and bazaars, which leads to the unnecessary sale of often poorly- manufactured
pharmaceuticals.
Despite the country possessing huge manufacturing capabilities, the complete lack of R&D in
domestic companies could cause the market to stagnate.
Legally, Bangladesh does not have to abide by the WTOs TRIPS agreement until 2016, an
aspect which is being exploited by the domestic generic industry. Most companies follow the
good manufacturing practice (GMP) standards, set by the UN World Health Organization
(WHO). In addition to, a good number of Bangladeshi companies have won accreditation for
export in some developed countries. So, Bangladesh drug policy requires all its pharmaceuticals
manufacturers to strictly comply with the standards.
Analytical procedure
In this part we compared Beximco Pharmaceuticals with two other leading pharmaceuticals in
Bangladesh, Square and Renata. We compared some leading indicators, like Gross Turnover,
Profit after Tax and Total Asset with indicates a companys growth and stability.
The given bar chart provides information on gross turnover of Beximco pharmaceutical and
other pharmaceutical companies. According to the bar chart, there was a rapid increase in the
gross turnover of Square pharmaceutical ltd than Beximco and Renate Pharmaceutical ltd. More
specifically, in 2010 gross turnover of Beximco , Square and Renata were 486,82,54,915,
1136,65,97,928 and 390,07,32,314 respectively.
The given bar chart shows the total assets of Beximco and other pharmaceutical companies.
According to this bar chart, there was high increase of total assets for Beximco pharmaceutical.
More specifically, total assets of Beximco , Square and Renata were 1989,19,33,422 ,
1325,12,42,856 and 385,13,69,286 respectively.
The given bar chart provides information on profit after tax of Beximco and other
pharmaceutical companies. According to this bar chart, there was high increase of profit after tax
for Square pharmaceutical. More specifically, profit after tax of Beximco , Square and Renata
were 62,47,40,307, 189,00,52,929 and 60,35,24,452 respectively.
Advance Chemical Industries (ACI) Limited is one of the leading conglomerates in Bangladesh,
with a multinational image. ACI is a Public Limited Company with a total number of 19,653
shareholders. Among these, there are three foreign and fifty local institutional shareholders. The
company has diversified into four major businesses. Besides these, the company has a large list
of international associates and partners with various trade and business agreements.ACI was
established as the subsidiary of Imperial Chemical Industries (ICI) in the then East Pakistan in
1968. After independence the company has been incorporated in Bangladesh on the 24th of
January 1973 as ICI Bangladesh Manufacturers
Limited and also as Public Limited Company. This Company also obtained listing with Dhaka
Stock Exchange on 28 December, 1976 and its first trading of shares took place on 9 March,
1994. Later on 5 May, 1992, ICI plc divested 70% of its shareholding to local management.
Subsequently the company was registered in the name of Advanced Chemical Industries Limited.
Listing with Chittagong Stock Exchange was made on 22 October 1995.
Organizational Profile
In the below table the Organization profile is being given in short:
Core Objectives:
The management of ACI, a competent team of professionals, operates with a progressive attitude
to provide effective solutions to satisfy the customers needs, through its products and services of
uncompromising quality.
Company Strategies:
ACI follows International Standards on Quality Management System to ensure consistent quality
of products and services to achieve customer satisfaction. ACI also meets all national regulatory
requirements relating to its current businesses and ensures that Current Good Manufacturing
Practices (CGMP) as recommended by World Health Organization is followed for its all
operations.
Mission of ACI:
ACIs mission is to enrich the quality of life of people through responsible application of
knowledge, skills and technology. ACI is committed to the pursuit of excellence through world
class products, innovative processes and empowered employees to provide the highest level of
satisfaction to its customers.
Vision of ACI:
To realize the mission ACI will:
Attain a high level of productivity in all its operations through effective and efficient use
of resources, adoption of appropriate technology and alignment with our core competencies.
Provide products and services of high and consistent quality, ensuring value for money
to its customers.
Major Competitors:
Pharmaceuticals
The major competitors of ACI in the pharmaceutical market in the year 2009 are as follows:
depends on the size and nature of the item, judged in the particular circumstances of its
misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary
qualitative characteristic which the information must have if it is to be useful. There are no
specific rules or prescriptions that can be followed in all circumstances to assess materiality. It is
the matter for the auditor to decide whether a particular misstatement or an item has material
impact on the financial statements or not. Thus it is considered as the thresh hold.
In case of applying materiality, there are five closely related steps .The steps are illustrated in
below:
The steps start with setting preliminary judgment about materiality and allocating this estimate to
the segments of the audit. The first two steps are done as part of planning. Estimation of the
amount of misstatements in each segment takes place throughout the audit. The final two steps
are done near the end of the audit during the engagement completion phase. Now explain the
steps in follow:
that the statements could be misstated and still not affect the decisions of reasonable users. The
auditor will often change the preliminary judgment about materiality during the audit. When that
is done, the new judgment is called a revised judgment about materiality.
Several factors affect setting a preliminary judgment about for a given set of financial
statements .The most important of these are discussed in below Materiality is a relative rather than an absolute concept
Bases are needed for evaluating materiality like net sales, gross sale
,net income
Qualitative factors also affect materiality
The FASB and AICPA are currently unwilling to provide specific materiality guidelines to
practitioners .The concern is that such guidelines might be applied without considering all the
complexities that should affect the auditors final decision.
Net misstatement in the sample /Total sampled total recorded population total recorded
population value=Direct projection estimate of misstatement.
Risk:
There is a close relationship between materiality and risk. An effective auditor recognizes that
risks exist and deals with that risk in an appropriate manner. Most risks auditors encounter are
difficult to measure and require careful thought to respond to appropriately .For analyzing risk,
an auditor primarily use audit risk model. Now we explain the audit risk model-
The primary way that auditors deal with risk in planning audit evidence is through the
application of the risk audit risk model. It is a formal model reflecting the relationships between
acceptable audit risk, inherent risk, control risk and planned detection risk. We can illustrate it by
following way-
Inherent Risk:
was likely based on discussions with management, knowledge of the company and results
in audits of previous years.
Control Risk:
In case of risk, there are some factors which affect the risk in many ways. Now we
illustrate the relationship of factors influencing risks to risks and risks to planned
evidence:
In case of above figure, there exist relationship different types of risks and evidence; here we
illustrate the relationship of risk to evidence by following table:
Situation
AAR
IR
CR
PDR
Amount of
evidence
required
There is an inverse relationship between materiality and the degree of audit risk. When
conducting an audit, the auditor should consider materiality and its relationship with audit risk.
The level of detection risk can be considered only after considering the level of inherent and
control risks. While planning an audit, the auditor should keep in mind that the audit risk is to be
kept at an acceptably low level. The range, efficiency, efficacy, nature and timing of the
procedures performed by the auditor will determine the level (i.e. high or low) of detection risk.
The nature of evidence is also an important factor that may determine the level of detection risk.
For instance, the external evidence like confirmations or certificates from third parties like bank
may reduce the level of detection risk than internal evidence.
The consideration of the materiality of an item is the matter of professional judgment and
experience of the auditor. The financial statements must contain all the material information to
show true and fair picture. AAS-2, Objective and Scope of the Audit of Financial Statements,
states that the auditors opinion helps determination of the true and fair view of the financial
position and operating results of an enterprise. The user, however, should not assume that the
auditors opinion is an assurance as to the future viability of the enterprise or the efficiency or
effectiveness with which management has conducted the affairs of the enterprise.
We use earning from operation as a base because it is more reliable to users and regarded as a
critical item of information for users. The minimum level is 5% of earnings from operations and
maximum level is 10% and the amount is 43373371 to 86746743.
In above case, zero or small tolerable misstatement because account can be audited at low cost
and no misstated are expected. We used large tolerable misstatement because account is large and
requires extensive sampling to audit the account and moderately large tolerable misstatement
because a relatively large number of misstatements are expected.
the application of the audit risk model is the difficulty of measuring the components of the
model.
For assessing the risk of Beximco Pharmaceutical LTD, we use audit risk model. As we know, in
audit risk model, there are three types of risk like planned detection risk, control risk and
inherent risk. First of all we have to identify these risks and then assess the risk.
Due to our limitation, we cannot examine the company physically and thats why we do not
assess the risk of the company and we do not show the risk as numerical figure .But according to
our observation and previous years audit report, we consider significant audit risk for Beximco
Pharmaceutical Limited.
Beximco Pharmaceutical Limited is one of the leading pharmaceutical companies in Bangladesh.
The company continues to adhere to the global standards and take initiatives to remain more
competitive in order to maintain its strong track record.
Recommendation
The audit risk model is primarily a planning model and is therefore of limited use in evaluating
results. As there are no hard rules over materiality and items can be material by nature as well as by
value, so great care must be used in revising the risk factors when the actual results are not as
favorable as planned.
As we did the PEST-L analysis, we found that there is relationship between change the of govt.
and companys profitability. So, great care has to be taken regarding this fact.
However, as we were limited to audit only up the planning stage and used previous years data as
the only source of information, we can express that up to this point company looks sound and
therefore we are ready to accept a significant amount acceptable audit risk.
Conclusion:
Planning is the very first and important stage of audit. A successful audit and ensure a successful
audit. In our report we developed an understanding about audit planning, and audited our client,
ACI Pharmaceuticals limited on a test basis. It helped us understand the concept of audit
planning by making bridge between a theoretical and practical knowledge. However, due to our
limitations, we couldnt gather information from internal sources which is a must for auditing.
Instead we used previous years annual report as the source of information. We tried to find the
condition of the company in political, economic, social, technological and legal aspects. We also
stated an opinion based on our audit planning