The audit process conducted by EY Vietnam in ABC company and the necessity of audit payroll and payroll deductions in financial statement audit...32 3.1.1.. Audit planning for audit of p
INTRODUCTION
Rationale of the research
The audit industry is increasingly asserting its role in the world economy in general and Vietnam's economy in particular The development is expressed in both quality and quantity, increasing in quantity is proportional to the substance Besides, the number of people who know about auditing profession, know about auditor's work is getting more and more and their trust in audit reports is also increasing. Moreover, the Vietnamese stock market is in the early stages of development and needs more and more honest and objective opinions of the auditors about the financial statements of listed companies in order to be able to operate smoothly. With the process of formation and development almost parallel to the process of formation and development of Vietnam auditing industry, Ernst & Young Vietnam Co., Ltd (hereinafter referred to as EY Vietnam) still has, is and will confirm the important role and solid position as the leading person leading the rise of Vietnam's audit industry.
In an audit of financial statements, the salary cycle and personnel are an indispensable part On the one hand, the salary is economically significant for every business, is included in the cost and accounts for a large part of the total cost of auditing customers Moreover, labor is an important factor in the value of inventories in manufacturing and construction enterprises, if the classification and division of unreasonable labor can have a significant impact on net profit Another reason for the important wage cycle is that the use of inefficient or fraudulent labor will cause waste in the use of enterprise resources On the other hand, salary not only brings economic meaning but also social meaning Whether the size of a large or small customer, a state-owned enterprise, a private enterprise or a foreign- invested enterprise, requires a workforce to conduct business and production activities Whether or not the staff is highly productive depends mainly on how much they are paid for the effort and time they spend That is the salary If they do not achieve this income expectation, they will not devote their energy to the work that stagnates in productivity Even strikes are possible.
Being aware of the importance of the salary cycle and personnel through the internship at Ernst and Young Vietnam Co., Ltd., I would like to select the topic: “The auditing process of payroll and personnel cycle in manufacturing companies implemented by Ernst and Young company.”
Objectives of study
The ultimate goal of the thesis is to
1 Clarify the process of auditing payroll and personnel cycle in ABC company
2 Illustrate the viewpoints on the auditing payroll process
Scope of the study
The thesis will focus purely on the the process of auditing payroll in manufacturing company.
The data and documents of the ABC company in the study are provided by Ernst& Young company Besides, reliable information sources sush as published books, internal Ernst& Young documents, reports and articles via Vietnam Goverment website or written by professional experts have contributed to the thesis accomplishment.
Structure of the thesis
The thesis consists of three parts:
Chapter 1: The introduction of the thesis.
Chapter 2: Theoretical Framework on Audit of Payroll and Personnel cycle in Financial Audits.
Chapter 3: The current situation of audit of payroll and personnel cycle in financial statements audit of ABC Company conducted by Deloitte Vietnam Co., Ltd.
Chapter 4: Reviews on audit of payroll and personnel cycle in financial statements audit conducted by Ernst and Young Vietnam Vietnam Co., Ltd.
Methodologies and Data
A literature review is necessary to build of a system of theoratical framework which aims at providing background audit of payroll and personnel cycle, then with given a typical manufacturing company in this case of ABC, the thesis will show how to Ernst and Young company implements the audit process of payroll and personnel cycle in ABC company Besides, there would be a system of payroll questionnaire set up to summerize opinions from sources of qualified audit people
The thesis is going to use Data Collection, Qualitative Analysis.
Accoring to information provided via website of University of Minnestora (Minnesota), the data collection technique is “Information are collected to have background; literature review to support analysis” This unniversity also recommends some types the Data Collection Techniques, in which employed to server this thesis; they interviews, observation, questionnaires, focus groups.
Quanlitative method which is a type of scientific research to obtain culturally specific information about the values,opinions, behaviors, and social contexts of particular population (Quanlitative Research Methods: A Data collection' Field Guide, 2005).This method used to collected opinions about the effectiveness of the process of auditing payroll and personnel cycles conducted by Ernst& Young company given by the focus groups’ view.
The opinions obtained by interview a targeted group including 10 qualified people, they are seven managers and three partners working for Ernsr & Young company During the talk, they gave the opinion about what Ernst & Young achieves or does well in the terms of conducting audit process for auditting payroll and personnel cycle as well as their concerned about the barriers or challeging As a result, their views will be revealed in the Chapter 4: “Reviews about current situation of auditing payroll and payroll deductions in financial statements audit conducted by EY Vietnam Co., Ltd” Basing on the “AQR” which is Annual Quality Review, questionnaire system obtainning previous year, the following questions are designed in the terms of similar manner.
1 How comprehensively have Ernst & Young auditor implemented works in preparation step?
2 How to reduce substantive tests, enhance performance of the audit in the process of auditting payroll and personnel cycle?
3 Is there any difficulty in implementing the payroll audit program when applied to a variety of business categories?
4 What are the difficulties and limitations for auditors when conducting salary audits?
Besides, This thesis also carries out a typical interview question relating to the process of setting PM & TE conducted by senior auditor which use to provide sufficient information for any audit program The question is “Was the engagement team's determination of planning materiality (PM), tolerable error (TE), and the nominal amount to use in posting audit differences appropriate and correctly documented? Which could be presented in the “2.3.1.5 Mateiality and audit risk section”
3 steps is answering the question raised in the “1.6.1 research method” (Trường, 2019)
Step 1: At the level of overall financial statement – the planning and materiality determination
The determination of performance material (PM) relies on subjective judgment of the chairman or senior (audit team leader) and depends on each customer characteristics as well as the possibility of errors Usually, Pre- tax profit, total asset, equity or net revenue is considered as a bench mark to calculate EY Canvas of Ernst & Young Vietnam company has detailed guideline on how to identify PM.
Table 1-1: Guideline on how to identify PM of Ernst and Young
Profit before tax 3 – 10 Clients who have stable profits every year
Revenue 0,5 – 1 Business customers that suffer losses or have low profit or high risk
Gross profit 1 – 2 Business customers who lose money or have low profit
Equity 1 – 5 New customers come into operation or audited first year Total asset 0,25 – 0,5
Step 2: At the level of general and administrative expense item – The tolerable errors identification.
The tolerable level of error (TE), in other words, is also the critical level distributed to each account For each the level of risk and the quality of information requirements, Ernst & Young will set up TE levels on a variety of grounds, including listed and unlisted companies Under the instruction of Ernst & Young, the mandatory condition is that TE is less than or equal to PM.
Step 3: At the level of transactions recorded – Determining the difference that needs to be adjusted SAD (Summary of Audit Differences)
After determining PM and TE, auditor will conclude about the difference of the amount that must be adjusted (SAD), that violate SAD or its violation is greater the SAD, auditor should have appropriate adjustment entries All differences greater than level of SAD will be included in the Audit Gap and aggregated with entries that customers do not agree that they will affect the audit opinion on honesty, reasonable information on the financial statements.
SAD nominal amount = 3% TE SAD nominal amount = 5% TE
Total SAD ≥ PM Total SAD