Characteristics of audit of fixed assets in financial audits conducted by pkf auditing company limited

TABLE OF CONTENTS LIST OF TABLES AND FIGURES 3 INTRODUCTION 4 CHAPTER 1 CHARACTERISTICS OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED 5 1 1 Characteristic of f[.]

TABLE OF CONTENTSLIST OF TABLES AND FIGURES 3 INTRODUCTION 4 CHAPTER 1 : CHARACTERISTICS OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED _5 1.1 Characteristic of fixed assets of clients affecting financial audits _5

1.1.1 Features of fixed assets on financial statements 5 1.1.2 Accounting for fixed assets _6 1.1.3 Common misstatements related to fixed assets 6 1.1.4 Internal controls over fixed assets 7 1.2 Audit objectives of auditing fixed assets in financial audits conducted by PKF

AUDITING COMPANY LIMITED 8

1.3 Audit of fixed assets in financial audits process conducted by PKF AUDITING

COMPANY LIMITED 10

1.3.1 Planning the audit _10 1.3.2 Implementing the audit _14 1.3.3 Completing the audit _18

CHAPTER 2: PRACTICE OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED 20 2.1 Planning the audit 20

2.1.1 Accepting a client 20 2.1.2 Audit planning 21 2.1.3 Setting up an audit program 33

2.2 Implementing the audit 34

2.2.1 Performing test of controls _34 2.2.2 Performing analytical procedures _34 2.2.3 Performing test of details 45

2.3 Completing the audit 47

2.3.1 Review the event after the cut-off date 47 2.3.2 Evaluation of results and release of reports _47

CHAPTER 3: ASSESSMENTS AND RECOMMENDATIONS TO IMPROVE AUDIT OF FIXED ASSETS IN THE FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED _ 3.1 Assessments of the audit of fixed assets in financial audits process conducted by PKF Auditing Company _49

3.1.1 Strengths _49 3.1.2 Weaknesses and causes 49

3.2 Recommendations for improving the audit of fixed assets in financial audits process conducted by PKF Auditing Company Limited _50

3.2.1 The legal environment is unstable _50

3.2.2 Regarding the audit work 51

CONCLUSIONS

REFERENCES

LIST OF TABLES AND FIGURES

Table 1.1: Balance-Related Audit Objectives and Test of Details of Balance for Equipment Additions 8 Table 2.1: Extracted from the 2018 audited balance sheet _26 Table 2.2: Extracted from the of 2019 unaudited balance sheet 26 Table 2.3: Compare to column 31/12/2018 after auditing on the table of asset fluctuations, capital sources with the beginning of the year on the balance sheet of 2019 _26 Table 2.4: Fluctuations in assets and capital over the years 2018 and 2019 _28 Table 2.5: Summary of coefficient analysis _30 Table 2.6: Summary of significant risks including fraud risks identified during the

planning stage _31 Figure 2.7: A710 working papers – Determine the materiality

(planning – implementation) _33 Table 2.8: 2019 ABC’s balance sheet 36 Figure 2.9: D710 working paper - Summary data table 38 Table 2.10: Extract of ABC assets details table 39 Figure 2.11: D740 working paper - Accounts adjustments and reclassification _40 Figure 2.12: D750 working paper - Analytical procedures 41 Table 2.13: Extract of the table: ABC depreciation of fixed assets in 2019 _43 Figure 2.14: D761 working paper - Accounting estimate and judgment of time used _44 Figure 2.15: D701 working paper - Summary of the audit’s findings 47

INTRODUCTION

Nowadays, auditing is becoming very important not only for functional agencies but also for business managers and investors The information provided by the audit will be a reliable basis for the state to recognize, evaluate, and properly handle arising economic problems, and at the same time serve as a basis for investors and investors managers when making new business decisions, overcoming errors, and violations in management and observance of state policies andlaws.

Fixed assets and depreciation of fixed assets play a very important role in the production and business process of enterprises Therefore, the accounting of fixed assets, as well as the

deduction of depreciation expenses, need to be properly recorded and calculated accurately Moreover, the fixed assets item on the balance sheet usually accounts for a large proportion, so errors for this item often have a significant impact on the financial statements of the enterprise Recognize the importance of auditing, especially auditing of fixed assets Therefore, I chose the topic with the desire to bring a certain understanding of the process of auditing fixed assets theoretically as well as practically at PKF Auditing Company Limited

Research purposes

Clarify the importance and impact of the fixed assets item on the financial statements of the enterprise, gain a deeper understanding of the audit steps for the item, have a certain

understanding of the differences in applying the theory to the reality of auditing fixed assets

My internship seminar is divided into three chapters as follows:

CHAPTER 1: CHARACTERISTICS OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED

CHAPTER 2: PRACTICE OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED

CHAPTER 3: ASSESSMENTS AND RECOMMENDATIONS TO IMPROVE AUDIT OF FIXED ASSETS IN THE FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED

Due to limited time, the scope of research and knowledge, I hope to receive guidance

to improve my content and presentation Through the introduction, I also want to send my

sincere thanks to Dr Ha Hong Hanh and all staffs in PKF Auditing Company Limited, who helped me to complete this bachelor thesis

CHAPTER 1: CHARACTERISTICS OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED

BY PKF AUDITING COMPANY LIMITED

1.1 Characteristic of fixed assets of clients affecting financial audits

1.1.1 Features of fixed assets on financial statements

1.1.1.1 Definition and Characteristic

Fixed assets refer to long-term tangible assets that are used in the operations of a business This type of asset provides long-term financial gain, has a useful life of more than one year, and is classified as property, plant, and equipment on the balance sheet Their characteristics are:

- Their service period is longer than one year

- Their turnover coefficient is less than one

- They are gradually consumed during their service period

- Only their depreciable value is allocated to a new product

The following items are examples of general categories of fixed assets: Buildings, Computer equipment, Computer software, Land, Machinery, Perennial plants, Vehicles Patents, Means of transport, Licenses, etc

1.1.1.2 Fixed assets classification

Entity reports fixed assets in the balance sheet and normally assets are classified into a different classification based on types of assets and their usages The following are the list of general categories of fixed assets:

- Buildings: These include an office building, warehouse, and another similar kind of Their useful life normally longer compared to other fixed assets

- Computer equipment: These include a laptop, desktop, servers, printers, and other similarkinds of equipment Useful life is around three to five years depending on the type of equipment

- Computer software: These are the software that entity purchases or business processing

or it could be the software that entity builds by their team

- Furniture and fixtures: These are tables, chairs, closets, cabinets, and others similar

- Intangible assets: These are franchise, copyright, trademark, and sometimes software also including here

- Land: Land is classed separately from building and land improvement Land could not bedepreciated

- Leasehold improvements: They are mainly related to the decoration or interior expenses incurred by the entity on the leased office or building

- Machinery: These are the list of machines example cutting machines

- Vehicles: These are cars, trucks, and other related vehicles.

1.1.2 Accounting for fixed assets

1.1.2.1 System of accounts related to fixed assets

Ledger accounts

- Account 211: Tangible fixed assets

- Account 212: Fixed assets under financial leasing

- Account 213: Intangible fixed assets

- Account 214: Depreciation of fixed assets

- Account 217: Investment properties

Other relevant accounts: Account 241: Construction in progress

Documents used in accounting of fixed assets include:

- Contract of buying fixed assets

- Sale invoice, delivery bill of the seller

- Minutes of transfer of fixed assets; the liquidation of fixed assets

- Minutes of acceptance of the completed major repair volume

- Minutes of fixed assets revaluation; inventory of fixed assets

- Minutes of the settlement, liquidation of the contract of property purchase

- Spreadsheet and amortization of fixed assets

1.1.3 Common misstatements related to fixed assets

The audit risks related to fixed assets are vary based on the nature of fixed assets, control that entity has, and auditor limitation The following are the risks that normally attach to an audit of fixed assets:

- Incorrect Depreciation rate and calculation: Depreciation rate is normally decided by management In some cases, management might intend to manipulate the depreciation rate to get the depreciation expenses based on what they want The auditor needs to ensure that the assessment of the depreciation rate is performed The rate should be based

on the expected useful life, as well as the capacity of assets

- The reported fixed assets are not existing: The assets that report in the financial

statements are normally material compare to other assets and the existence of those assets

is normally the concern of auditors To address this, the audit might need to check between book value in the financial statements to fixed assets listing And then check the listing to the fixed assets count sheet

- Overstatement of fixed assets: It is important to assess the recoverable amount of fixed assets For example, the business units of the entity have their revenues down over that last twelve months This indicates that book values of fixed assets that use in these business units are lower than the reported amount.

1.1.4 Internal controls over fixed assets

Internal controls over fixed assets fall into two categories:

Physical Controls

- There must be a register or ledger of fixed assets to identify a particular asset, the date of purchase, model number, serial number, acquisition cost, expected life, and assignment toany debt instrument

- At a minimum, assets must be accounted for annually

- A physical inspection should be carried out for those assets that have a high exposure to damage like vehicles, site development equipment, and tools to identify any possible valuation adjustments

- Good management teams should periodically review their insurance policies related to the particular assets that have exposure to damage and loss

Financial Controls

- A policy should be in a place that sets the requirements for capitalization of an asset, that

is the minimum dollar amount, useful life expectancy, and salvage value

- A policy with a corresponding set of procedures should determine the depreciation formula and the frequency of journal entries related to depreciation

- An inventory of all fixed assets (see physical controls above) should be conducted on an annual basis to ensure that ghost assets are not being accounted for when they are either missing or unusable

- Acquisitions and disposals of assets must be approved by management and then properly recorded to the books of record

- Fixed asset ledgers need to be reviewed regularly to confirm the segregation of non-fixed asset purchases to the fixed assets account The most common error is construction in process expenses being recorded to the fixed assets account

- It is a challenge for companies to keep up with ever-changing tax rules that affect asset depreciation methods based on the classification of the property but this is crucial to the effective control of fixed assets and property tax reports that need to be filed with tax jurisdictions

- Segregation of Duties is the requirement for more than one person to complete a task so that the risk of fraud or theft is eliminated This is essential when carrying out the internalcontrol of fixed assets For example, the person who sells a fixed asset cannot take payment for the asset

-1.2 Audit objectives of auditing fixed assets in financial audits conducted by PKF

AUDITING COMPANY LIMITED

Fixed assets always account for a large proportion of the total asset value of the unit and depend

on each industry, according to each type of business of the unit Therefore, in all cases, the fixed assets item reflects the status of equipment and facilities of the enterprise This makes the fixed asset item an important item when conducting an audit of financial statements On the other hand, because the cost of forming fixed assets is high and the ability to revolve capital slowly, the Audit of fixed assets will help the Auditors to evaluate the economic and efficiency of investing in fixed assets thereby bringing Also, the investment orientation and resources used to invest in fixed assets are most effective

At the same time, auditing of fixed assets will contribute to discovering errors in determining thecosts constituting the historical cost of fixed assets, repairing expenses, depreciation expenses These errors in calculating costs generally lead to material errors in the financial statements For example, depreciation of fixed assets into expenses is often deducted higher (or lower) than reality, thereby affecting the cost and profit targets of the business The failure to distinguish the type of repair costs recorded as an increase in the historical cost of fixed assets from the repair costs included in the cost of production and business in the period also leads to deviations in the fixed assets item, as well as the production cost item

Investments in intangible fixed assets such as land use rights, patent value, scientific research costs often contain many errors as well as frauds and it is difficult to gather costs and assess accurately value Therefore, fixed asset items are often concerned about The audit of fixed assets is the inspection and control of issues related to the actual situation of assets as well as the increase or decrease of the unit With the progress of science and technology, the audit of fixed assets not only detect errors in operations related to fixed assets but also contribute to improving the efficiency of fixed asset management

Audit of fixed assets is also aimed at the general objective of auditing financial statements, defined in Vietnam Auditing Standard No 200 - "Objectives and basic principles governing the audit of financial statements" Accordingly, the audit objectives of fixed assets include:

Table 1.1: Balance-Related Audit Objectives and Test of Details of Balance for Equipment

Additions Balance-Related Audit

Objective Common Tests of Details of Balance Procedures Comments

Current year acquisitions in

the acquisitions schedule

agree with related master file

amounts, and the total agrees

with the general ledger (detail

tie-in)

Foot the acquisition schedule

Trace the individual acquisitions to the master file for amounts and descriptions

Trace the total to the general ledger

Footing the acquisitions schedule and tracing individual acquisitions should

be limited unless control is deficient

All increases in the general ledger balance for the year should reconcile to the schedule

Current year acquisitions are

listed exist (existence) Examine vendor’s invoices and receiving reports

Physically examine assets

This objective is one of the most important for

equipment

It is uncommon to physically examine assets acquired unless controls are deficient

or amounts are material

Existing acquisitions are

recorded (completeness) Examine vendor’s invoices ofclosely related accounts such

as repairs and maintenance to uncover items that should be recorded as equipment

Review lease and rental agreements

This important is important if there are significant repairs that may extend the life of assets, or if there have been trade-ins or disposals of assets

Current year acquisitions as

listed are accurate (accuracy) Examine the vendor’s invoices Extend depends on the inherent risk and

effectiveness of internal controls

Current year acquisitions as

listed are correctly classified

Examine vendors’ invoices ofclosely related accounts such

as repairs to uncover items that should be recorded as equipment

Examine rent and lease expense for capitalizable leases

The objective is closely related to tests for completeness It is done in conjunction with that objective and tests for accuracy

Current year acquisitions are

recorded in the correct period

(cutoff)

Review transactions near the balance sheet date for the correct period

Usually done as part of accounts payable cutoff tests.The client has rights to

current year acquisitions

(rights)

Examine vendors’ invoices Ordinarily, the main concern

is whether the equipment is owned or leased Purchase or lease contracts are examined for equipment; property deeds, abstracts, and tax bills are frequently examined for land or major buildings

1.3 Audit of fixed assets in financial audits process conducted by PKF AUDITING

COMPANY LIMITED

1.3.1 Planning the audit

To perform the audit effectively, it is necessary to build specific audit procedures and following the objectives

Audit procedures are performed at three stages of an audit, namely planning, implementing, and completing.

1.3.1.1 Before planning

 Accepting client

Receive customers as described in paragraph 12 Vietnam Standards on Auditing

(VSA - Vietnamese Standards on Auditing) No 220 - "Quality control of auditing activities" andparagraph F - Customer retention and acceptance and paragraphs 278, 279 of VSA 2005 -

"Professional Ethics"

“In the process of maintaining existing clients and evaluating potential customers, the auditing company must consider the independence, auditing capacity of the auditing company and the integrity” To avoid risks, businesses often assign experienced auditors to receive and research customers, because the risks may be a very high liability and ensure that they do not violate the law and professional ethics

- “The strategic plan is the basic orientation, the central content and the general approach

of the audit outlined by the steering committee based on an understanding of the

operational situation and business environment of the entity being audited.” (Paragraph

04 VSA 300)

- “Strategic plans must be prepared for large-scale, complex, large-scale audits or audits of financial statements of many years” (Paragraph 13 VSA 300) Thus, in this case, the firm has to make a strategic plan, while in other cases it is not required

Planning a general audit plan

“The general audit plan is to concretize the strategic plan and the detailed approach to the

content, schedule, and expected scope of the audit procedures The objective of the overall plan

is to be able to carry out the audit effectively and on time.” (Paragraph 05 VSA 300) The overallaudit plan may also be considered as a preliminary plan for audited items so that the auditors based on which to perform their audit work, including the following contents:

- Auditors must understand about customer activities

- Understand about the internal control system (Internal Control System), learn the

accounting system, accounting cycle, and business cycle

- Preliminary analysis of financial statements - Analytical process that applies when planning the audit

- Preliminary assessment of the internal control system and control risks for fixed assets

- Assessment and estimation of initial materiality and audit risk

Specifically, these contents are as follows:

Auditors must understand about customer activities

- The auditors should collect all information that may affect Customer business activities toconsider their impact on the financial statements The more widely used the financial statements of customers, the more the amount of information they collect, especially for companies listed on the stock market, or companies with a lot of debts.

- Collecting and researching the business situation of customers according to Vietnam Standard on Auditing No 310 - "Understanding of business situation"

- Learn about the internal control system learn the accounting system accounting,

accounting, and business cycles

Auditing Standard No 400 - "Risk assessment and internal control" states: "Auditors must have sufficient knowledge of the customer’s Internal Audit system to prepare the overall audit plan and audit program appropriate, effective Auditors must use professional judgment to assess audit risk and identify audit procedures to reduce these risks to an acceptable level.” The more effective the internal control system, the smaller the control risk and vice versa, the higher the control risk when the internal control system is weak

For fixed assets, auditors need customer’s information about the internal control system for this item When learning about the internal control system for fixed assets, the auditor often has a table with the following questions:

- Is the accounting policy applicable, the depreciation of fixed assets at the company appropriate? Does the company have a plan and budget estimate for the increase or decrease of fixed assets this year?

- Does the company periodically record fixed assets and reconcile them with the

accounting books, are the differences between the estimates and the reality estimated and approved? Does the company have regular reconciliation between ledger and detail book?

- When selling, liquidating fixed assets, does the establishment of liquidation and sale council consist of members as prescribed? Is there a policy to distinguish between the cost of increasing the cost of fixed assets and determining the useful life or the cost of theyear? Are discrepancies between estimated and actual prices regularly reviewed and approved?

Besides, auditors also consider the good management of fixed assets as well as the development

of regulations, principles, and procedures for the maintenance of fixed assets

Auditors survey the internal control system in two main aspects:

- Designing method: Internal control equipment for fixed assets is designed like?

- How to operate: Internal control for fixed assets is done by businesses?

The auditor surveys the internal control system of the customer by the following methods:

- Interview with company employees

- Practical visit to fixed assets

- Check documents and records related to fixed assets

- Observe the internal control procedures for fixed assets

- Repeat control procedures

Auditors should be careful with the "fraud" often occurs in operations on fixed assets such as:

- Making fake invoices, recording an increase in the purchase price of fixed assets,

purchasing expenses, and repairing fixed assets compared to the reality to appropriate the difference

- Deliberately hiding documents, omitting the results of operations such as accounting of fixed assets intentionally not recording the amount collected due to liquidation of fully depreciated fixed assets to embezzle this amount.

- Recording unrealistic transactions: intentionally recording unrealistic transactions related

to the cost of purchasing fixed assets to embezzle capital

- Wrong application of accounting regime and other government documents

Preliminary analytical procedures of financial statements

The auditor performs the analysis process when planning the audit, the analysis process in the substantive test, and the overall review phase of the audit Auditors must apply an analytical process during the audit planning process to understand the business situation of the business andidentify possible risk areas, determine the content, schedule, and scope of the audit Audit

procedures are based on financial and non-financial information After collecting the basic information and information about customers' legal obligations, auditors conducted analytical procedures The analytical procedures used by auditors consists of two basic types: horizontal and vertical analysis

Horizontal analysis (trend analysis): is the analysis based on the comparison of the values of the same criteria on the financial statements For fixed assets, auditors can:

- Compare the figures of the previous year with this year, thereby seeing the abnormal fluctuations and determining the cause

- Compare customer company data with industry data

Vertical analysis (rate analysis): is the analysis based on the comparison of correlation rates of criteria and items on the financial statements For fixed assets, auditors can calculate some rates such as self-financing rate, investment rate,

Preliminary assessment of the internal control system and control risks for fixed assets

The auditor performs the following procedure:

- Accept client and perform initial audit planning

- Understand the client’s business and industry

- Perform preliminary analytical procedures

- Set preliminary judgment of materiality and performance materiality

- Identify significant risks due to fraud or error

- Assess inherent risk

- Understand internal control and assess control risk

- Finalize overall audit strategy and audit plan

Evaluate, estimate initial material significance and audit risk

VSA No 320 - "Materiality in the audit" states: "Materiality refers to the importance of

information (an accounting data) in financial statements" That means that "information is critical

if the omission or omission of such information could affect the economic decisions of users of financial statements " And "Determining The key is the professional judgment of the auditor ”

"The importance of information must consider both quantitative and qualitative aspects."

Determination of material importance includes the initial critical level (or planned critical level) and the performance-critical level

During the stage of auditing preparation, the auditor determines the initial critical level of

acceptability - that is, the maximum permitted amount of deviation, based on which appropriate

audit procedures are designed to detect These deviations may materially affect the financial statements Method of establishment:

Step 1: At the overall level of the financial statements, the auditor makes the initial estimate

procedure for materiality (based on the percentage of profit, turnover, total assets ) for the whole financial statements Usually: Profit before tax: 5% - 10%; Turnover: 0.5% -3%; Total assets and capital: 2% (By VACPA)

Materiality = Criteria (Benchmark) x Percentage

The determination of criteria depends on the information needs of the majority of financial information users (investors, banks, the public, the state )

Step 2: For each item, the auditor allocates the initial estimate of overall materiality for the items

on the financial statements or uses many different techniques to establish the material level for each item

Auditing firms usually build a critical level for each item on the financial statements In the stage

of implementing and completing the audit, the auditor needs to adjust the initial material level, which determines the critical level of performance based on the actual data identified

Risk assessment

Following VSA 400 - "Risk assessment and internal control" stated: "Audit risk is the risk that auditors and auditing companies give inappropriate comments when the financial statements have been completed audited, there are still material errors ”, the audit risk assessment (AR) is conducted by assessing 3 types of risks: inherent risks (IR), control risks (CR) and Detection risk(DR) and the relationship between them is reflected by the following formula:

AR = IR*CR * DR

1.3.1.3 Setting up an audit program

An audit program is a complete set of guidelines for auditors and audit assistants engaged in audit work The audit program provides an audit objective for each part of the operation, the content, schedule, and scope of the specific audit procedures and the estimated time required for each part of the operation.” (Paragraph 06 VSA 300)

Planning for control tests

When designing a control test, the auditor should consider the type of evidence to collect and the cost of performing the tests If the assessed risk level is not considered to be at its maximum and the auditor determines that it is possible to reduce the assessed control risk to a lower level, the auditor will identify the needed control tests Conversely, if the level of control risk is assessed to

be high and it is not practicable to reduce it The auditor does not need to perform control tests, the auditor has to perform substantive tests at a reasonable level

Planning for substantive tests

 The establishment of substantive tests should be following the audit objectives, taking into consideration when determining the content, scope, time, and still need to ensure adequate appropriate audit evidence is collected

- Analytical procedures: A comparison of financial information, indices, ratios, to detect and research on anomalies

- Test of details: A direct inspection of operations or balances

- Check the business: Check the few or the whole of arising transactions to consider the truthfulness of the item This type of check is used for accounts that do not have a

balance, generate little, or in extraordinary circumstances For fixed assets, this type of test is often used because the number of transactions arising in the period is relatively small

- Check balance: Check to assess the honesty of the balance of accounts with many arising transactions

1.3.1.4 Summary of audit planning

The auditor reviews all steps performed at the stage of auditing preparation to summarize the audit plan on the summary of the audit plan

1.3.2 Implementing the audit

1.3.2.1 Performing the control test and Assessing the Internal Control System

Performing control test

- Observe fixed assets in the unit and consider the separation between management

functions, book-keeping, and storage

- Check documents, document rotation and signs of the internal control

- Check for signs of the cancellation

- Check the completeness of documents related to fixed assets

- Combining physical inspection with checking documents and legal documents on

property ownership

- Interview with the people involved and check for signs of approval

- Examine the checkmark of the internal control system

Reviewing and assessing internal control

- Are there ongoing review processes embedded within the organization’s operations, that monitor the effective application of the policies, processes, and activities related to internal control and risk management?

- Do these processes monitor the organization’s ability to re-evaluate risks and adjust controls effectively in response to changes in their objectives, business, external environment, and other changes in risk and control assessments?

- Is there appropriate communication to the board (and committees) on the effectiveness of the ongoing monitoring processes for risk and internal control matters, including reporting on any significant failings or weaknesses on a timely basis?

- Do any internal control findings or weaknesses indicate a need for more extensive

monitoring of the internal control system?

- Is inconsistent risk or internal control information received from many competing

functions and, if so, are steps needed to ensure management gives a single view of risk and internal control?

1.3.2.2 Reassess control risks and change substantive tests

After completing the control tests, the auditor reassesses the control risk The order of

performing a control risk assessment is as follows:

- The auditor reviews the evidence used as a basis for a reassessment of control risk, takinginto consideration both the quantity and quality of the evidence may be omitted

(typically 2% to 20%) in the implementation of control procedures If the deviation rate islower or equal to the level that can be ignored, the control procedure is considered to be effective and vice versa

- Examine the cause of the error and conclude

The results of the control help the auditor to reassess and compare with the preliminary

assessment level, adjust the time and scope of the substantive tests expected in the audit

program If it is true to the level of the initial assessment, the substantive tests remain the originalplan, if the level of control risk is higher, the auditor needs to increase the substantive tests, expanding the scope of their implementation The auditor should keep an audit record of the assessment of control risks through a summary of control risk assessment and substantive test changes

1.3.2.3 Performing substantive tests

Analytical procedures for tangible and intangible assets

The analytical procedure is the audit procedure that we use in all stages of the audit by looking atthe trend, ratio, and the relationship between data, etc Similarly, we usually use substantive analytical procedures for fixed assets to gather audit evidence before performing the test of details

Reasonableness test is the common substantive analytical procedure that we use to in the audit offixed assets The fixed assets balances and depreciation expenses have a close relationship Hence, any change up to or down in both of them should be within our expectations

We also usually compare fixed assets that the client purchased during the year to the budgeted plan for the year to check the reasonableness of the spending Either actual spending on fixed assets is much bigger or much smaller than the budgeted plan, we may need to inquiry the management for the reasons behind

Test of Details for Fixed Assets

There is a variety of tests of details on fixed assets as they have many areas related to them, including fixed assets addition, disposal, existence and ownership, depreciation, repair and maintenance, impairment, and cutoff

Fixed Assets addition

In the audit of fixed assets, the test of addition will help to ensure the occurrence, valuation, completeness, and classification assertions on fixed assets

An example of the test of fixed assets addition:

- Select a sample of fixed assets additions

- Vouch the selected sample to the supporting documents, such as vendor invoices,

purchase agreements, and titles

- Check and verify to ensure that the additions have been properly recorded in fixed assets register and general ledger

- Check and verify to ensure that they meet the condition to be capitalized

Fixed Assets Disposal

The test of fixed assets disposal will ensure the rights and obligations, completeness, occurrence,and accuracy audit assertion.

An example of the test of fixed assets disposal:

- Select a sample of fixed assets disposal

- Vouch for the selected sample of disposal to the supporting document, such as title transfer, fixed assets bill of sale, and sale receipt

- Recalculate gain or loss on disposal

- Check and verify to ensure that the gain or loss on disposal reflects in the income

Fixed Assets Existence and Ownership

An example below is the test to ensure the existence assertion as well as the ownership of the assets:

- Select a sample of items in fixed assets to register or listing

- Perform physical inspection on the selected items to ensure their existence

- Examine the title documents or title deeds of the items to ensure they belong to the client.This ensures audit assertion of rights and obligations

- Review lease agreement to ensure that all and only financial leases are included in the balance sheet

Fixed Assets Depreciation

In the audit of fixed assets, we perform the test on depreciation to ensure the valuation assertion.Below is an example of the test of fixed assets depreciation:

- Review the client’s depreciation method to make sure it conforms with applicable

accounting standards

- Examine the useful life and salvage value of fixed assets to ensure that the client’s estimate is appropriate This may involve a lot of professional judgment; one way to do is

to compare the client’s estimate with the industry standard

- Perform recalculation on depreciation to see if our result is the same as the client’s figures This will ensure audit assertion of accuracy

It is useful to note that the depreciation method and the estimate of fixed assets’ useful life that the client use will directly impact on both the balance and the income statement In this case, an understatement of depreciation will result in an overstatement of both fixed assets and net profit, and vice versa

Repair and Maintenance

Though the repair and maintenance account is an expense account, we usually examine this account in the audit of fixed assets to test the completeness and classification of audit assertions

An example of the test include:

- Select a sample of large expenses in repair and maintenance account

- Vouch those selected expenses to the invoices to ensure that they are not needed to be capitalized.

Impairment Test

Review for the indicator of impairment on the fixed assets In this case, the asset is impaired when it no longer produces the benefits for the client as it did in the past The assets that are likely to be impaired are those that are obsolete or those that are likely to be exposed before theirestimated useful life

If there are some cases like this, you might need to discuss it with management to reduce their carrying value to an appropriate amount

Cut-off Test

The cutoff test is performed to ensure that all fixed assets transactions have been recorded in a correct accounting period This test can be performed by selecting purchases and sales of the items for the few days before and after the end of the accounting period to ensure that

transactions related to items are recorded in the correct accounting period

Auditing of financial lease fixed assets

The audit of fixed assets of the finance lease is similar to that of tangible fixed assets However, the auditor needs to pay attention to the following:

- Classification of financial lease assets and operating leases

- Study in detail the lease contracts, the degree of transfer of benefits and the risks

associated with the property rights, limits on the right to cancel the contract with the lessee, agreement on compensation due to contract cancellation, commitment to the right

to transfer property at the end of the lease or a discount

- Determining the cost of financial lease assets

- According to VAS 06 - Leased property: "The cost is recognized in the lower amount between the fair value and the present value of the minimum rent payment" Therefore, it

is necessary to consider the data and methods used by the entity to determine the present value of the minimum payment

- Check the financial costs and depreciation costs of the financial lease assets to see if it complies with the requirements of current accounting standards and regimes

- Financial leasing will incur a depreciation expense and a financial expense for each accounting period, considering the consistent financial lease depreciation policy with fixed assets of the same type owned by the enterprise, if unsure Certainly, the lessee whohas the ownership of the property at the end of the lease term will be amortized over the shorter period between the lease term or its useful life

- Review issues that need to be presented and disclosed in respect of financial leases on thefinancial statements

Audit of investment properties

Audit of investment property is similar to that of tangible fixed assets, besides, the auditor shouldpay attention to the classification of investment properties with real estate of fixed assets and realestate goods For real-estate purposes, interview managers about their use purposes, and examinethe evidence after the balance sheet date

1.3.3 Completing the audit

1.3.3.1 Consider the event after the year-end closing

Audits are usually conducted after the balance sheet date Therefore, during this period, events that affect the financial statements are the responsibility of the auditor to review abnormal eventsthat occur after the balance sheet date Paragraph 04 VSA 560 defines “events occurring after thebalance sheet date to prepare the financial statements as events affecting the financial statements that arise in the period from after the balance sheet date prepare financial statements for auditing

up to the date of signing the auditing reports, and events discovered after signing the auditing report” There are two types of events:

- Events requiring adjustment of financial statements: Confirmation after the end of the annual accounting period on the original price of purchased assets or the proceeds from the sale of assets in the annual accounting period Or the frauds and errors about fixed assets indicate that the financial statements are not accurate

- Events do not need to adjust the financial statements: these events need to be published inthe notes to the financial statements Announcement of the plan of shutdown and

liquidation of fixed assets related to the shutdown; or enter into a binding contract to sell the property; procuring or liquidating large value assets; factories, fixed assets went bankrupt due to fire or flood; lawsuits related to fixed assets;

Audit procedures that can be applied to review events occurring after the balance sheet date,

including two procedures: normal balance checking and specialized procedures for detecting

events after the date ending the year as an interrogation of the Management Board; review internal reports, books made after the financial statement date; Check the release records after the balance sheet date

1.3.3.2 Evaluate the results

At the end of the audit, it is most important to consolidate all results into a conclusion Overall assessment of the results to review the entire audit process, the results obtained, and consider the basis for giving opinions on the financial statements Auditors need to conduct the following procedures:

- Reapply the final analysis procedures to review and evaluate the completeness and authenticity of the financial information, helping the auditor determine which parts need

to gather additional evidence to strengthen the opinion

- Assessing the adequacy of evidence ensures that every important aspect of the audit has been tested and assessed for effectiveness Auditing organizations often use the Audit Completion Checklist, which consists of questions for the auditor to remind themselves

of frequently overlooked aspects

- The general assessment of unadjusted errors, these errors include errors discovered but not corrected due to non-materiality but need to be re-evaluated as they may not be significant when considered separately overall, these errors become significant; or errors that the auditor has proposed adjustments but the unit has not agreed to adjust Predictive errors are estimated from the sample test result, these errors cannot be corrected because they are only estimated from the sample Errors are estimated from analytical procedures

or other audit procedures

- The expected errors in fixed assets need to be summarized and then compared with the acceptable errors of fixed asset items or not After that, the auditor sums up the errors of the fixed assets item to see whether they exceed the materiality of the financial statements

or the type of fixed assets

1.3.3.3 Expressing opinions on fixed assets and publishing audited reports

After evaluating the audit results and reviewing events arising after the date of closing the accounting book, the auditor prepares a general report on the operating part

Categories of Audit Reports :

- Standard Unmodified Opinion: The conditions stated above have been met

- Unmodified Opinion with Emphasis-of-matter, Explariatory Paragraph or Nonstandard Wording: A complete audit took place with satisfactory results and financial statements are fairly presented, but the auditor believes that is important or is required to provide additional information

- Adverse: The auditor concludes that the financial statements are not fairly presented

- Disclaimer: He or she is unable to form an opinion as to whether the financial statements are fairly presented, or he or she is not independent

Besides, the auditor may prepare and issue a management letter (VSA 700, article 52) to advise the customer of the entity's weaknesses

In summary, there are two ways to classify audits:

- By type of purpose: Operational audit, compliance audit, and financial statement audit

- Classification by auditing subjects: Internal audit, State audit, independent audit

In particular, financial statement audits are the most common type of audit, due to the increasing demand for audited financial statements even within enterprises and for external departments Besides, in the process of auditing the financial statements, the auditing organization can flexiblycombine with other types of audits The auditing of financial statements, including the balance sheet, and the fixed assets is a basic item presented on the balance sheet, usually of great value and accounting for the significant ratio of total assets on the balance sheet That is the basis for forming the topic of auditing fixed assets in the audit of financial statements

Through this chapter, I give an overview of fixed assets, fixed assets, audits of financial

statements, and it is important to provide an audit process for auditing fixed assets in the

financial statements audits based on reasoning To create a premise for easy monitoring of the audit process, it is also a basis for identifying and comparing the differences between theory and practice, which will be mentioned in Chapter 2 “Practice”: PRACTICE OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY

LIMITED

CHAPTER 2: PRACTICE OF AUDIT OF FIXED ASSETS

IN FINANCIAL AUDITS CONDUCTED BY PKF

AUDITING COMPANY LIMITED

2.1 Planning the audit

Because ABC Company is a former customer of PKF, the audit preparation stage is quick and mainly based on the experience of auditors performed last year The auditor has inherited the information contained in the 2019 auditing file of ABC

2.1.1 Accepting a client

Accept a client and contract risk assessment

For new customers (the first year), the customer acquisition job is done by the deputy general director of the company, or by the general director by the customer directly contacting the company to request an auditor based on the relationship of the Board of Management to find customers, through audit invitations and service offers

For current customers who have been audited by the company for one or more years, PKF can actively contact customers, or customers can contact the company if they need to continue auditing This acquisition is made by a senior auditor with extensive experience in the company

or by a Deputy General Director of the financial statements auditing department through

“invitation letter of audit”

Through the invitation of the auditor, the PKF Board of Management will discuss the necessary information related to the activities of the customer unit and related to the audit work in the future such as business lines, the field of operations, management work, development ability, After that, the two sides agreed and signed an "audit contract", accompanied by the contract is an

"audit plantable" which fully presents the tasks and responsibilities of the auditor Arrange the number of performers and charge rates accordingly

Agreeing, establishing an audit contract.

After considering the low contract risks and continuing to receive and maintain ABC customers, the two sides reached an agreement and signed an "audit contract" The main contents of the audit contract include the content of the contract, the law and standards, the responsibilities of the parties, audit reports, service fees and payment methods, commitment to perform, validity , language, contract term

Create an audit team

The PKF management team based on the experience of the auditors then divided them into audit teams for ABC The PKF then sent to ABC an "audit appointment letter" prepared by the Board

of Management to outline some conditions and situations of the PKF regarding the audit The content of the audit appointment letter includes the auditor's responsibility; management's

responsibilities and determining applicable financial statements of the company; audit fees; expected implementation; audit team and other issues

Send customers the audit plan

PKF will send ABC a "Letter to the customer about the audit plan" prepared by the main auditor,the content of the letter includes the audit team, the scope of the work, the estimated time to perform the audit, request ABC coordinate to work and request documentation Enclosed with the letter is the "List of documents to be provided by the customer" prepared by the main auditor

to request the client to prepare documents for the auditor before the requested date is January 31, 2020; This list of documents is required to be backed up to add to the ABC's audit records in

2019 so that the auditor can keep track of the number of documents requested by ABC to be provided fully and promptly

According to the letter sent to customers about the audit plan, PKF is expected to participate in witnessing the inventory of assets on 25 - 27 December 2019 and start conducting the audit from

January 22, 2020, at the office ABC Corporation and is expected to close within 6 working days.The expected time to issue the draft audit report is March 10, 2030.

Assign tasks to audit teams

After being assigned by the Board of Management an audit team to perform the audit for ABC, the main auditor will depend on the competence of each auditor, assign a specific part of the audit assistant to each audit assistant on the date of the audit The payment is January 22, 2020, through the “Task Board Assignment Audit Board”

Subsequently, the PKF Board of Management conducted discussions with the ABC Board of Directors on the audit plan, committing the independence of the audit team, the influencing factors, and measures to ensure independence

Because ABC Company is an old customer, the audit preparation stage is quick and mainly based on the experience of the auditor who performed last year and inherited the information already available in the previous audit records

2.1.2 Audit planning

The audit planning and audit program for ABC is prepared by the PKF Board of Management and assigned to the main auditor to implement the audit plan and with audit assistants

Overall audit plan

The overall audit plan conducted by PKF for ABC includes the following tasks:

- Understanding customers and operating environment

- Find out about internal control system, learn accounting policies and business cycles

- Carry out preliminary analysis procedures

- Assess the internal control system and fraud risk

- Determination of material importance

- Determine the method of sampling

These contents are expressed in detail as follows:

- Learn customers and operating environment

- Understanding customers and operating environment aim to: Gather customer knowledgeand operating environment to identify and understand events, transactions, and business information of customers that have a significant influence on financial statements,

thereby helping to identify risks of material misstatement due to fraud or mistake

Understanding the operating environment of ABC is the main responsibility of the Board of Management, but for the effectiveness of the audit, it is required that all auditing members must

be familiar with the operating environment, the business situation of the ABC Therefore, after finding out the Board of Management re-deployed to the auditing team members, at the same time, the members actively learn about ABC through all different sources of information on the internet, the press, the partners partner, opponent,

Because ABC is an annual customer of PKF, the step of understanding ABC's business activities was done by its predecessors Current auditors only inherit and update new information in the year via new documents provided by customers and documents of external departments

The contents that the auditor learns to include:

ABC's general business environment

In 2019, the exchange rate remains little changed, inflation is curbed, interest rates are on a downward trend, the economy receives the necessary support from monetary policies of the government but the number of businesses goes bankrupt Still increasing, businesses still face difficulties in accessing government loans.

Due to the peculiarity of the business line of products serving educational activities, equipment, stationery, the demand for these items is relatively stable over the years even though Vietnam's economy is still encountering many difficulties

Issues about the industries that businesses conduct and industry trends

Despite being affected by the general difficulties of the economy, the company's total revenue in the year still increased compared to 2018 (up nearly 19%) Due to the characteristics of the business product of the enterprise is the food processing industry in Vietnam, consistent with the diverse culinary needs of consumers, a variety of items serving the daily needs of the people

The legal environment in which ABC operates

The Company's activities are affected by the following laws:

- Current tax laws; Relevant laws and regulations

- External factors affecting the business

And there are no other external factors that significantly affect the business

Main activities and business situation

ABC Company's main business activities during the year:

- The company processes food, food, shrimp chips, and beverages

- Trading and importing and exporting foods and other goods that are not prohibited by law

- Production and processing of animal feed, aquatic products, space lease

Ownership, stakeholders and ABC's organizational structure

Information about founding shareholders under the latest business registration license, list of organizations and individuals related to ABC, description of ABC's organizational structure by departments

Understanding of applied accounting system

The Company applies Vietnam Accounting Standards and Vietnam Business Accounting

System

Business results and taxes

The Company's profit in 2019 increased sharply compared to 2018 (more than 37%) despite being affected by the general difficulties of the economy

Important taxes and payments to the State Budget:

- VAT: Following the Law on VAT

- CIT: Following the Law on VAT

- Personal Income Tax: According to the Law on VAT

- Other taxes: According to current regulations of the State

Other issues such as key personnel, administrative information

Conclusion: Through the overview and operating environment of ABC in 2019, there is no

significant change compared to 2018, the auditor has determined the preliminary risks associatedwith the whole financial statements and risks risks related to specific accounts

Risks associated with the whole financial statements

The situation of liabilities incurred more than the previous year led to the unit can account the lack of liabilities

Risks related to specific accounts

- Inventory: Inventory recording does not have sufficient valid invoices and documents: nowarehousing notes, no delivery or receipt record, no inventory quality assessment record Determining and recording the cost of inventories Record of warehousing without valid invoices: buying goods in bulk but without contracts, invoices not following regulations

- Accounts receivable and payables to customers: the risk of accounting unit lacks

liabilities due to high arising and thin accounting force

- Administrative Cost: the risk that the accounting unit does not have enough expenses in the period, the purpose for the Company to reduce tax obligations (may aim to meet the conditions for bank loans) Relevant accounts: Management expenses; Corporate income tax

After preliminary identification of risks, the auditor identifies basic audit procedures for specific risks:

- Check the arising and the inventory balance, consider whether or not it is appropriate

- Review debts, check comparisons and confirm large arisen subjects

- Check the cost accounting unit Are the management expenses invalid, and the salary andamortization expenses fully accounted?

Particularly with the item of fixed assets, the auditor found that ABC's business activities have not changed significantly compared to 2018 and nothing significantly affected the item of fixed assets being audited in 2019

Find out about internal control systems, understand accounting policies and business cycles

It is very important from the auditor’s point of view to study and evaluate the system of internal control To obtain an adequate understanding of the internal control system, that must be tested The auditor has to determine whether the audit is possible, if yes, then he should determine the scope of the audit

The objectives of understanding the internal control system, understanding accounting policies and business cycle are:

- Identify and understand transactions and events related to important business cycles

- Evaluate in terms of design and implementation of key business process control

procedures

- Decide whether to perform an internal control system inspection;

The auditor should ensure that certain rules and procedures are followed by the business unit he

is working on, although a sound system of internal control is the sole responsibility of the

management The auditor can simply guide or help the management if he is asked to do so because he has no authority to prescribe such rules and procedures The degree of reliance on thesystem depends upon the effectiveness of internal control system; therefore, the Auditor should

review and evaluate the internal control system of an organization to prepare his audit Progr The auditor has found the following information about auditing of fixed assets:

The main types of fixed assets of ABC

Tangible fixed assets include houses, architectural objects; machines and equipment; means of transport and transmission; equipment, management tools; Intangible fixed assets are the

company's long-term land-use rights; There is no real estate owned by financial institutions and investment property

Accounting policies applicable to unfinished fixed assets and capital construction

Tangible and intangible fixed assets are amortized on a straight-line basis over their estimated useful lives following the Minister of Finance's Circular No.203/2009 The number of years of depreciation of the fixed assets is as follows:

- Buildings and structures: 06–30 years

- Machinery and equipment: 04–7 years

- Means of transport, transmission: 08-09 years

- Management equipment and tools: 03 - 08 years

- Intangible assets: Indefinite land use right, no depreciation

Reviewing the design and implementation of the main control procedures of the internal control system for the fixed asset and capital construction cycle.

The auditor scans the details of fixed assets and depreciation tables to see if ABC has many fixedassets or not, including the types of fixed assets? depreciation period? Determine the size, and source of investment in fixed assets from? Does ABC have a plan and budget estimate for the increase or decrease of fixed assets this year?

After taking steps to understand, the auditor summarizes the material risks, which risks affect which assertion, which accounts, and the audit procedures to be performed

Conclusion: When reviewing the detailed book of fixed assets and the depreciation worksheet

provided by the ABC, the auditor discovered some assets suspected to be misclassified so the auditor focused on the types of assets By marking the notes, the auditor will focus on checking documents for these types of assets and interviewing chief accountants to review their use purposes If it is a mistake, the auditor will discuss it with the main auditor and the chief

accountant to readjust the correct classification Specifically, the types of assets classified

incorrectly will be presented in the detailed inspection section

Performing the procedures for preliminary analysis of financial statements

When the auditor received the initial documents on the financial statements provided by ABC, the auditor performed a general analysis procedure to check the reasonableness and analysis of the data fluctuation trend Audit documents should include:

- Financial statements 2019

- Audited report 2018

- Working papers of the auditor in 2019

The auditor performed the preliminary analysis procedure to understand ABC's general financial situation Because this is only a general analysis procedure, the auditor only focuses on the balance sheet and the business results table to calculate some important ratios to have an overall view and from that relationship to detect suspicious points when there is a big difference All

fluctuations that are greater than the material importance level need to be explored in causes or noted to find explanations when going into each part of the operation or item at the stage of performing the audit.

The auditor conducts the preliminary analysis of the financial statements, including the followingsteps:

- Analysis of changes in assets and capital over the years 2018 and 2019 through the Balance Sheet

- Analysis of fluctuations of indicators on the Report of business results in 2019 compared

to 2018

- Coefficient analysis

The above steps are performed by the auditor specifically as follows: Analyze asset fluctuations and capital over the years 2018 and 2019 through the Balance Sheet To analyze changes in assets and capital sources over the years of 2018 and 2019, the auditor has aggregated data into the table of assets and capital changes over the past two years through the balance sheet (Table 2.4), including columns the following metrics:

31/12/2018 after the audit: the figures in this column are taken by the auditor from the year-end column on the 2018 Balance Sheet, audited in the 2018 Audit Report, or from the working papers of the auditors in 2018 After that, the figures on the column 31/12/2018 after the audit were compared with the auditors' balance at the beginning of the year on the arising balance sheet and the balance sheet of 2019 which were approved by ABC The requirement is that the beginning of 2019 must match the audited end of 2018 which corresponds to the column of December 31, 2018, after the audit The auditor collated and found a match Therefore, the beginning of the year on ABC's 2019 balance sheet has been guaranteed Specifically:

Table 2.1: Extracted from the 2018 audited balance sheet

Table 2.2: Extracted from the of 2019 unaudited balance sheet

Table 2.3: Compare to column 31/12/2018 after auditing on the table of asset fluctuations,

capital sources with the beginning of the year on the balance sheet of 2019

ASSET Year-end balance

In particular, for the fixed assets item, the auditor commented that:

The value of tangible fixed assets increased sharply compared to 2018, so when auditing, the auditor needs to check the records related to the increased assets as well as the deduction

provision for these increases The auditor should focus on this feature to examine in depth what assets have been increased, how they have increased, where they have been raised, whether they have been purchased or transferred from capital construction, and gathered all relevant evidence Regarding this increase, at the same time, consider if there is a new fixed asset, whether or not the old fixed assets will be liquidated, whether this increase is effective and accurately

recorded,

The value of tangible fixed assets increased sharply during the year: