Audit of selling expenses in auditing financial statements conducted by ey vietnam co ltd

Completing the audit...54 CHAPTER 3: ASSESSMENTS AND RECOMMENDATION TO COMPLETE THE APPLICATION OF THE SELLING EXPENSES AUDIT PROCESS IN AUDITING FINANCIAL STATEMENTS BY EY VIETNAM CO.,

NATIONAL ECONOMICS UNIVERSITY

EXCELLENT EDUCATIONAL PROGRAMS



BACHELOR THESIS

OF SPECIALIZED INTERNSHIP

Topic:

Audit of selling expenses in auditing financial statements

conducted by EY Vietnam Co., Ltd.

Name : NGUYEN THI PHUONG LINHClass : Audit 57A

Student ID : 11152559Instructor : Assoc Prof, PhD PHAN TRUNG KIEN

Hanoi, 2019

Table of Contents

LIST OF TABLES 1

INTRODUCTION 2

CHAPTER 1: THE PROCESS OF AUDITING SELLING EXPENSE IN AUDITING FINANCIAL STATEMENTS 5

1.1 General overview of the selling expense recognition 5

1.1.1 Classification of selling expense recognition 5

1.1.2 Method of accounting for several major transactions 7

1.2 Common misstatement and control relating to selling expenses 9

1.2.1 Audit objectives of auditing selling expense 9

1.2.2 Common errors in auditing selling expenses 11

1.3 Auditing selling expenses in auditing financial statement 15

1.3.1 Designing audit program 15

1.3.2 Implementing audit program 26

1.3.3 Completing audit program 30

CHAPTER 2: AUDITING SELLING EXPENSES IN AUDIT OF LPN LIMITED COMPANY’S FINANCIAL STATEMENTS CONDUCTED BY EY VIETNAM LIMITED COMPANY 33

2.1 Designing the audit program of selling expense in the audit of LPN Co., Ltd.’s financial statement 33

2.1.1 Understand client business and obtain information 33

2.1.2 Identify and assess risks 34

2.1.3 Audit plan 38

2.2 Conducting audit program for auditing selling expense in audting LPN’s financial statement 41

2.2.1 Test of control 41

2.2.2 Primary substantive procedures 42

2.3 Completing the audit 54

CHAPTER 3: ASSESSMENTS AND RECOMMENDATION TO COMPLETE THE APPLICATION OF THE SELLING EXPENSES AUDIT PROCESS IN AUDITING FINANCIAL STATEMENTS BY EY VIETNAM CO., LTD 58 3.1 Comment and assessment on current situation of the selling expense audit process at EY

3.1.1 Strengths 58

3.1.2 Weaknesses 62

3.2 Recommendation to complete the application of the selling expense audit process at EY Co., Ltd 64

3.2.1 Designing audit process 64

3.2.2 Conduct an audit 64

3.2.3 Completing an audit 65

3.2.4 Other recommendations 66

CONCLUSION 68

REFERRENCES 70

LIST OF TABLES

Table 1.1 Accounting system of selling expense

Table 1.2 Combine risk assessments of inherent and control risks into one CRA.

Table 1.3 The extent of work to be performed at -scope components by category

Table 1.4 Audit sampling tools

Table 2.1 LPN’s information

Table 2.2 Determination of significant

Table 2.3 PM-TE setting

Table 2.4 Time phases and related due dates

Table 2.5 Lead sheet of selling expense section – VC.101

Table 2.6 OARP of selling expense

Table 2.7 Reconciliation of books for VCA01 working papers

Table 2.8 Determine the approach for each item

Table 2.9 Test of unusual selling expense account

Table 2.10 Adjusted entries

Table 2.11 Effects of uncorrected misstatement to financial statement

Table 2.12 LPN’ s Income Statement

Diagram 1.1 Overall accounting diagram of selling expense

Diagram 1.2 The combination of tests of controls and substantive procedures

Diagram 1.3 Group audit strategy

Diagram 1.4 Identify risks of material misstatement due to fraud

Diagram 1.5 The hierarchy of substantive audit evidence

Diagram 2.1 The hierarchy of substantive audit evidence

1 The urgency of the topic

On the path of integrating national economic, the competition become increasinglyfierce in finding markets, seeking clients and providing products and services

Facing the current economic situation with many risks, auditing was born anddeveloped as an indispensable objective This is a service activity that creates trust forthose interested in the financial information of businesses, making economic decisions,contributing to guiding the accounting profession, improving the quality ofmanagement through the process of consulting and completing the internal controlsystem Nowadays, as audit services grow increasingly strong, auditing companies areconstantly expanding in scale and diversifying the services provided One of theleading services that auditing companies provide to clients must include financialstatement audit services

Although selling expenses are only indirect costs for the production process, they arethe components that constitute the cost of products, goods and services, which aredirectly and often generated The risk of determining a taxable income on the incomestatement of the business Therefore, selling expenses plays a very important role andhas certain influence on the audit of financial statements, requiring attention whenconducting this item

During the internship at EY Vietnam Co., Ltd, I had a chance to learn about the auditprocess in enterprises, from which I was aware of the importance of selling expenseaudit in an auditing financial statement After a period of researching, I have completed

the graduation thesis with the topic: "Audit of selling expenses in auditing financial

statements conducted by EY Vietnam Co., Ltd.".

2 Research purpose of the essay

The purpose of the research is:

• Learn about the status of the applying selling expense audit process in auditingfinancial statement at EY Vietnam Co., Ltd

• Approving the theory and status of the process to provide some solutions toimprove and complete quality and efficiency of auditing selling expense in auditingfinancial statements at EY Vietnam Co., Ltd

3 Subject and scope of the research

• Research subjects: Auditing process of selling expense in auditing financialstatements

• Scope of research: Auditing process of selling expenses in auditingfinancial

statements at EY Vietnam Co., Ltd

4 Structure of the essay

In addition to the Introduction, Conclusion, List of abbreviations, List of diagrams,Tables, Appendices and Table of Contents, the content of the thesis consists of threechapters:

Chapter 1: The process of auditing selling expense in auditing financial statements at EY Vietnam Co., Ltd.

Chapter 2: Auditing selling expenses in audit of LPN Co., Ltd.’s financial statements conducted by EY Vietnam Co., Ltd

Chapter 3: Assessments and recommendation to complete the audit process of selling expenses in auditing financial statements at EY Vietnam Co., Ltd.

In the process of researching this topic, I have received the guidance and enthusiasticguidance of the instructor - Associate Professor, Doctor Phan Trung Kien I would like

to thank the teacher and would also like to thank the Board of Directors and staff of

EY Viet Nam Co., Ltd for facilitating me in the process of practicing and completingthis thesis But with limited knowledge, my essay will inevitably be inadequate I lookforward to receiving comments from respected teachers to make the essay morecomplete

Thank you sincerely!

Student

Nguyen Thi Phuong Linh

CHAPTER 1: THE PROCESS OF AUDITING SELLING EXPENSE IN

AUDITING FINANCIAL STATEMENTS

1.1 General overview of the selling expense recognition

1.1.1 Classification of selling expense recognition

According to Cir.200/2014/TT-BTC: “Selling expenses are expenses that actuallyincurred in process of selling products, goods, providing services, including publicityexpenses, demonstration expenses, advertising expenses, sale commission, warrantycharges of goods and products (excluding construction activity), maintenance charges,cost of packing, transportation

Costs that are not considered as business income tax expense under the provisions ofthe tax Law but have full invoices and have accounted in accordance with accountingpolicy shall not be recorded a decrease in accounting costs but only adjusted in finalbusiness income tax declaration to increase the business income tax payable

Account 641 is opened in detail suitable to contents of expenses, such as pay rollexpenses, costs of materials, package, tools, supplies, fixed assets depreciation,characteristic, management demand of every industry, every business that account 641can have additional items of expenses At end of period, transferring selling expenses

to Dr 911 - Income Summary”i

Selling expenses have 7 types:

“- Payroll expenses: recording accounts payables to sales personnel, package

personnel, transportation and maintenance personnel of products, goods, includingsalaries, intershift meal expenses, wages and appropriation of social insurance, medicalinsurance and labor union fees, unemployment insurance

- Costs of materials, package: recording costs of materials and package delivered for

protection, consumption of products, goods, services, such as costs of packagematerials of products, goods, costs of materials, fuels used for protecting, loading,transporting products, goods used for repairing, maintenance of fixed assets, used forsales department

- Costs of tools, supplies: recording instruments, tools served for consumption process

of products, goods, such as measurement tools, computing devices, working facilities

- Depreciation cost of Fixed assets: recording depreciation expenses of fixed assets in

maintenance department, sales department, such as warehouse, stores, quays, loadingand transportation facilities, computing and measurement tools, quality verification,

- Costs of warranty: used to record cost of product and goods warranty Especially,

repairing and warranty expenses of construction work are recorded at account 627 Factory Overhead Expenses, and not recorded at this account

Costs of outsourcing services: recording costs of outsourcing services for selling

products, such as outsourcing costs for repairing fixed assets used directly for sellingdepartment, warehouse rent, quay rent, loading and transportation expenses for sales,commission for sales agency, for exporting consignee

- Other cash expenses: recording other cash expenses incurred is sales operation in

addition to above mentioned expenses, such as expenses of entertainment in salesdepartment, demonstration expenses of products and goods, offering expenses,expenses of client conference.”ii

1.1.2 Method of accounting for several major transactions

6412 Costs of material, package

6413 Costs of tools, supplies

6414 Depreciation costs of Fixed assets

6415 Costs of warranty

6417 Costs of outsourcing services

6418 Other cast expenses

- Vouchers related to inventory: Import-export bills, purchase lists

- Documents related to fixed assets: Documents and procurement decisionsrelated to the formation of fixed assets, spreadsheet of depreciation allocation,handover minutes, records of liquidation of fixed assets

- Documents related to employee salaries: timesheets, payroll tables and salarydeductions,

❖ Accouting Diagram

Diagram 1.1 Overall accounting diagram of selling expenses

1.2 Common misstatement and control relating to selling expenses

1.2.1 Audit objectives of auditing selling expense

According to Vietnam Standards on Auditing (VSA) no 200: “The objective ofauditing financial statement is to help auditors and auditing companies to comment onwhether the financial statement is prepared on the standard and does the currentaccounting system comply with the relevant laws and reflect honestly and reasonablythe financial situation of the business on material aspects?”iiifor each specific audit, thisgoal is categorized into general audit objectives and specific audit objectives

The general audit objective is to review and evaluate the total amount stated on theitems on the basis of a general commitment with the responsibility to present truthfullyand reasonably information on the financial statement and with all informationobtained through actual surveys in the client workplace With the selling expensesaudit and the overall goal is whether all selling expenses and in the financial statementsbeing honest and reasonable in all respects

 Selling expense audit objective:

“Occurrence – the transactions and events that have been recorded or disclosed, have

occurred, and such transactions and events pertain to the entity

Accuracy, valuation and allocation – included in the financial statements at appropriate

amounts and any resulting valuation or allocation adjustments have been appropriatelyrecorded and related disclosures have been appropriately measured and described

Completeness – expenses that should have been recorded have been recorded and all

related disclosures that should have been included in the financial statements have beenincluded

Accuracy – amounts and other data relating to recorded transactions and events have

been recorded appropriately, and related disclosures have been appropriately measuredand described

Cut–off – transactions and events have been recorded in the correct accounting period Presentation –appropriately aggregated or disaggregated and clearly described, and

related disclosures are relevant and understandable in the context of the requirements

of the applicable financial reporting framework.”iv

In addition, during the audit of selling expenses, auditors are also very interested incompliance in accounting these expenses For this purpose, auditors must gathersufficient evidence to prove that the accounting of operating expenses at enterprises istrue or not in compliance with the state's regulations as well as the regulations set byenterprises

1.2.2 Common errors in auditing selling expenses

❖ The costs reflected on books are lower than the actual costs

When businesses want to beautify financial statements by raising profits to attractinvestment or companies that are being considered to become public companies listed

on stock, it may lead to risks Cost reflected in the report; accounting books lower thanactual costs It is possible to generalize some situations leading to this risk as follows:

- Some actual expenses have been paid, but because of lost documents, if theenterprise does not have necessary measures to have valid documents, such expensesmust not be accounted into expenses during the period

- Some actual amounts have been spent as advances for officials to perform theirtasks, they have completed immediately in the period but at the end of the period, thepayment procedures have not yet been made, so these expenses have not been recordedinto expenses in the period

- Enterprises have tracked and accounted for expenditures according to unfinishedjobs in the accounting period (unfinished expenses) higher than the actual costs ofthese jobs

- Enterprises do not record expenses incurred from the previous period but areallocated in many periods

- Enterprises have not accounted for the insurance cost, management cost of theitems that have been consumed during the period, but in the next period, they have topay for this period such as the cost of electricity, water, telephone of December, nextmonth, next year, there is a notice of the supplier

❖ The costs reflected on books are higher than the actual costs

For various reasons such as professional qualifications of inferior accountants orindividuals with the aim of cheating, embezzling personal interests; companies with thepurpose of tax evasion may lead to the risk that auditors will not detect when the costsreflected in accounting books are greater than the actual costs when:

- Enterprises account into insured shares, management costs, includinginadequate expenses, no vouchers or vouchers but invalid original vouchers

- The enterprise has accounted into insurance expense, enterprise managementfee, but the expenses which according to the State's regulations must not be accountedinto production and business costs such as fines for law violations, business expenses,foreign work costs exceed the norms, expenditures on capital construction investment,procurement of fixed assets, expenses covered by other funding sources, expenses forsupport of agencies and social organizations

- Accounting has confusion in the calculation and recording, thus making the costrecorded in the books, accounting reports increased compared to reflected onaccounting documents

- Enterprises have recorded into insurance expenses, management expenses ofactual expenses that have not incurred in the accounting period, or recorded in thisperiod, which have not been spent before, such as deducting expenses for overhaul offixed assets, product warranty fees, interest expenses

- The enterprise has accounted into the insurance policy, enterprise managementdepartment in the period of actual expenditures but due to the content, nature ormagnitude of the expenditures, it is required that these expenditures should be allocated

to many production periods

❖ The cost of all kinds and the objects reflected in the accounting books also have confusion

Due to the limited professional capacity of accountants, the risk may be a mistakebetween selling expenses and production costs, financial operating costs or otheroperating expenses Therefore, the risks that auditors encounter when auditing salescosts may be risks in accounting the above costs related to selling expenses

For sales expenses related to cash payments (such as buying materials for sales andbusiness management activities, service costs, warranty costs, etc.), possible riskscause incorrect recognition of expenses such as: the same invoice but has been paidtwice, the spending content is not correct for business activities (may be spent on salesbut recorded mistakenly spend on management activities)

For the export of raw materials, tools and packaging used for sales and businessmanagement, the possible risks are: loss management, poor preservation; distribution

of tools and tools according to inconsistent, inconsistent criteria, without a spreadsheet

of tools for use in the period

For fixed asset depreciation expenses used for sales activities and enterprisemanagement activities, risks may be taken improper calculation and depreciationmethods; determine unreasonable useful time, depreciation level not in compliancewith regulations; still depreciating for assets which have been fully depreciated but arestill in use Bringing selling expenses into expenses for waiting for transfer withoutallocating to expenses to determine production and business results, Acc 142 hasbalance; classification of short-term and long-term prepaid expenses are notappropriate, costs related to many periods but not allocated or allocated according toinappropriate criteria

For the possible risk tax: do not account the land rent but do not have the officialdocument of the competent authority on exemption from land rent reduction, has notsigned the land lease contract with the Department of Finance or local environment.

For the costs of salaries, allowances and deductions for social insurance, healthinsurance and labor insurance of sales staff, business managers and the board ofdirectors, there may be risks of foreign abnormalities appear, salary regulations ofbusiness leaders, salaries of salespeople spike and pay salaries Accounting for allsocial insurance, health insurance and labor insurance in Acc 622 without separateallocations for selling expenses and enterprise management costs

Above are the common risks when auditing the cost of sales in general, for eachcomponent has its own risks Risks often have many causes, but may be mainlybecause many businesses are not properly aware of the complexity of the item, so theyoften arrange accounting with high or part-time jobs so the processing and recordinghave many errors

1.3 Auditing selling expenses in auditing financial statement

1.3.1 Designing audit program

Audit planning will ensure that the audit is carried out effectively, auditors and auditing companies are active on the work during the audit process, helping auditors gather an audit evidence in a full and quality way The audit planning is defined in the auditing standard 300, requiring that "the audit work must be fully planned, and the assistants should be properly supervised." Thus, the audit preparation stage is very important because it influences the quality and efficiency of the audit.

1.3.1.1 Initial planning

At the beginning of the audit, EY plan and resource the audit for effective delivery by performing procedures to:

• Understand the service requirements and the terms of the audit contract

• Comply with EY’s policies for client, engagement acceptance and continuance

• Evaluate agreement with relevant ethical requirements, including independence

• Identify issues arising from these procedures that have implications for the audit

❖ Identify those charged with governance of the entity

EY determine those charged with governance and the appropriate persons within the entity to communicate Also, in an audit team, the Primary Team determines those charged with governance of the group, and the appropriate persons at the

group level with whom to communicate For example, Partner will communicate with General Director, Senior and Manager will communicate with Chief Accountant or CFO and staffs will communicate with accountants, etc.

❖ Understand service requirements

At this stage, the audit manager will meet with those charged with governance and management early in the audit to agree the scope of services, the timing of the work, the expected outputs and delivery dates, and any expectations of management (e.g., schedules and documents) In addition, EY and client will review the results of the prior audits and Annual Service Quality surveys (when applicable).

The result of this meeting provides information for planning the audit, such as deadlines and the extent of client assistance, and gives an initial insight into potential areas of audit focus.

❖ Client and engagement acceptance and continuance

The partner in charge of the audit determines that the appropriate procedures including all necessary approvals, have been performed The partner in charge of the audit validates that the conclusions regarding client and engagement acceptance and continuance are appropriate, based on understanding of the entity and its industry sector

❖ Evaluate compliance with ethical requirements, including independence

At this stage, EY perform procedures to determine compliance with ethical requirements, including independence, prior to performing other significant activities for the current audit period.

❖ Collect information related to selling expenses

Understand the business lines and current business areas of the enterprise; characteristics of management apparatus (structure, decentralization, decentralization in management), understanding of goods consumption activities

of enterprises in the market (sales methods, advertising activities), promotion for product consumption); These activities will give rise to selling expenses and administrative expenses.

1.3.1.2 Identify and assess risks

❖ Identify significant and limited risk accounts

- A significant account is an account that could contain a material misstatement based on its size (i.e., materiality of the account to the financial statements as a whole) or that has an identified risk of material misstatement

associated with it As a starting point, an account with a balance that approaches

or exceeds the amount set for tolerable error (TE) is likely to be significant as the relative size of the account makes it possible that it may contain a material misstatement When financial statements users place a high level of importance

on an account even though the account may not be quantitatively significant, the account or disclosure is significant and we develop our audit strategy using a lower level of materiality and therefore TE to be responsive to the users’ expectations When determining whether an account is significant, EY also consider the inherent risks identified and how these risks are related to the different accounts in the financial statements.

- An account with a balance approaching or exceeding TE that has limited risk of material misstatement to be a limited risk account when we determine that There are no significant risks associated with the account and the inherent risk at the account balance level is very low.

- Individual accounts that are less than TE are considered insignificant accounts unless we consider the accounts to be susceptible to material misstatements

After identifying the significant accounts, EY determine which financial statement assertions are relevant to the significant accounts and disclosures Certain assertions related to selling expense account is stated above.

❖ PM, TE and SAD nominal amount

- PM reflects the preliminary determination of what is material to users of thefinancial statements and the amount that EY consider material in forming opinion as towhether the financial statements as a whole are materially misstated Determining PM

requires the exercise of professional judgment Although influenced by many factors, it

is driven by the Perspectives and expectations of users of the financial statements,appropriate measurement basis and appropriate percentage to apply to the measurementbasis

- TE is set at either 50% or 75% of PM based on various considerations includingthe past history of misstatements, the ability to assess the likelihood of misstatements,the effectiveness of the control environment and other factors affecting the entity andits financial reporting TE is set at 50% of PM when the audit is designated as closemonitoring in the client and engagement acceptance and continuance process and whenthere is a higher likelihood that misstatements may occur within the financialstatements

- SAD nominal amount is set at 5% of PM

❖ Combined risk assessments

- Assess inherent risk

Inherent risk is the susceptibility of an assertion about a class of transactions, accountbalance or disclosure to a misstatement that could be material, either individually orwhen aggregated with other misstatements, before consideration of any relatedcontrols

Inherent risk is assessed for each relevant assertion, based on Knowledge obtainedfrom previous audits and Information gathered during planning procedures performed

- Assess control risk

Control risk is the risk that a material misstatement, either individually or whenaggregated with other misstatements, can occur in an assertion about a class oftransactions, account balance or disclosure, and will not be prevented, or detected andcorrected, on a timely basis by the entity’s internal control

We assess control risk as either ‘rely on controls’ or ‘not rely on controls’, for eachrelevant assertion for each significant account and disclosure by evaluating theeffectiveness of the design and operation of individual controls.

- Assess combined risk

The table below illustrates how EY combine risk assessments of inherent and controlrisks into one CRA

Table 1.2 Combine risk assessments of inherent and control risks into one CRA.

Combined risk for each relevant assertion have on the substantive procedures designedand performed (i.e., to address the detection risk)

The following diagram illustrates for each CRA how the combination of tests ofcontrols and substantive procedures provides the necessary audit evidence to drawreasonable conclusions

Diagram 1.2 The combination of tests of controls and substantive procedures

❖ Scoping the group audit

The audit of group financial statements requires the Primary Team to determine whichcomponents to include in the group audit scope (“in-scope components”) and the work

to be performed on those components (full scope, specific scope, review scope orspecified procedures) The graphic below summarizes the group audit scoping strategy:

Diagram 1.3 Group audit strategy

The table below summarizes the extent of work to be performed at each of the in-scopecomponents by category:

Table 1.3 The extent of work to be performed at -scope components by category

❖ Significant classes of transactions

For each significant class of transaction (SCOT) and significant disclosure process:

• Identify whether the process is routine, non-routine, or an estimation process

• Determine a preliminary audit strategy (controls reliance strategy or substantive onlystrategy)

 In a controls reliance strategy, identify, understand, confirm understanding of andtest the relevant controls with the expectation to place reliance on them

 In a substantive only strategy, consider the following special circumstances:

• For significant risks and the financial statement close sub-process over journalentries, identify and understand the relevant controls (but may choose not to test them)

• For lower risk estimates for which we plan a substantive only approach, obtain anunderstanding of controls over the estimation process sufficient to design substantiveprocedures

• For highly-automated SCOTs, always take a controls reliance strategy

For each SCOT and significant disclosure process, identify those IT applications andservice organizations that support its critical path or data used as electronic auditevidence

EY program (e.g., Process Map View, Account Activity View) may help to identifyclasses of transactions and IT applications supporting those classes of transactions(sources) by providing information about the nature, timing and volume of transactionswithin each source, including those subject to differing processing risks

❖ Team planning event

At planning stage, EY hold team working sessions at various stages of the audit to plan

an effective audit, determine overall audit strategy, and develop the detailed audit plan.Team events include:

•Team planning event (TPE)

•Discussion of estimates

•Discussion of fraud and error

•Post interim event (PIE)

❖ Identify fraud risk

Diagram 1.4 Identify risks of material misstatement due to fraud

1.3.2 Implementing audit program

1.3.2.1 Test of control

❖ Content of control test

- Considering the policies and regulations of customers for the accounting andchecking the implementation of regulations, selling expense plan this year compared tothe previous year in reality, assessing the effectiveness of the that regulation

- Observe reality and verify the effectiveness of sales and managementprocedures on accounting documents and reports

- For expenses such as agency commissions, advertising expenses, receptioncosts, outside purchase costs, check the approval signs, that is: original documents,invoices, vouchers full of valid and reasonable sign Check whether or not periodiccontrol of costs such as the cost of shipping goods, the costs decided by employees toensure the amount spent is reasonable

- When surveying selling expenses, auditors often combine with surveying fixedasset depreciation costs, salary costs and salary deductions, raw material costs,money, in other cycles:

 Check whether the fixed assets being depreciated are actually used for sales andmanagement, whether the depreciation method is consistent and registered withthe tax authority

 Examining the order of material export, tools for sales and businessmanagement

- Check control signs for gathering, classifying, recording, adding books andtransferring selling expense books Check if there is a comparison between the detailsbook and the summary book

- End-to-end testing takes place through each step of a number of specific keyoperations recorded in the ledger for review and evaluation of the control steps applied

in the process of accounting a business until into the ledger For control procedures that

do not leave traces, it is necessary to interview the relevant person: the Board ofDirectors, officials, employees, Chief accountant, accountants directly account, etc.Also, if necessary, refer to the data of internal audit.

The investigation of internal control with the cost of sales item is to collect auditevidence about the design and operation of the internal control system Thereby, theauditor will have conclusions about the level of appropriate control risk, as a basis forchecking the detailed cost of sales

❖ Methods for conducting control tests:

 Inquiry: Seeking information from knowledgeable people, both financial and financial, throughout or outside the entity Inquiries can be written or oral

non- Observation: Watching processes or procedures being performed by entitypersonnel

 Inspection: Examining records or documents

 Reperformance/recalculation: Independent execution, by the audit team, of controlprocedures originally performed as part of the entity’s internal control (e.g.,reperforming a reconciliation to confirm it was properly performed as input to thecontrol) Reperformance may include recalculation, i.e., checking the mathematicalaccuracy of documents or records Reperformance may be manual or via computer-assisted audit techniques (CAATs)

 Data analysis: Using automated tools to test controls (e.g., SAP table authorizationlimits have not changed throughout the period, confirming that all documentnumbers run in sequence and the sequence is complete)

1.3.2.2 Substantive procedure

❖ “Substantive analytical procedures – these provide evidence when applied tolarge volumes of transactions that tend to be predictable over time These proceduresare designed based on the expectation that relationships among data exist and continue

in the absence of known, contrary conditions The design of a substantive analyticalprocedure is limited only by the availability of reliable data and the experience andcreativity of the audit team

Substantive analytical procedures for selling expense generally is Ratio analysis —Ratio analysis is useful for analyzing asset and liability accounts as well as revenue andexpense accounts An individual balance sheet account is difficult to predict on its own,but its relationship to another account is often more predictable (e.g., the sellingexpense balance related to sales) Ratios can also be compared over time or to theratios of separate entities within the group, or with the ratios of other companies in thesame industry

❖ Tests of details – these provide direct audit evidence of transactions or balances.They are used to verify that transactions or balances are properly accounted for orexist EY designed tests of details that respond to the identified risks of materialmisstatement, assertions and characteristics of the account.”v

EY generally do not identify key items based on a testing threshold for expenseaccounts as primary concern is with its completeness, and not its existence Therefore,our criteria for selecting items to test may depend on other factors

There are several audit sampling tools available to determine sample sizes, selectingsamples and evaluating the sample results This section provides an overview of thetools and when they can be used

Table 1.4 Audit sampling tools

Tool Use

Sampling strategy advisor Help audit teams to select an appropriate sampling

strategy and evaluating sample results

EY/MicroSTART Determine sample sizes and evaluate sample results

EY/Random Select sampling units when the population is

available as a list of items or electronic format

EY/Sampling Assistant Select sampling units when the population is

available in Excel

ACL Select sampling units when the population is

available in electronic format

❖ Tests of items to obtain information – these involve examination of specificitems to obtain further information about matters such as their purpose or accountingtreatment

Diagram 1.5 The hierarchy of substantive audit evidence: zzz

1.3.3 Completing audit program

❖ Prepare, evaluate and conclude on the Summary of Audit Differences

Accumulate corrected and uncorrected misstatements identified during the audit,related to both the current period and prior period, above our SAD nominal amount onthe Summary of Audit Differences (SAD) However:

• Corrected misstatements in the statement of cash flows are accumulated on the SADbased on professional judgment

• Misstatements in disclosures that merit the attention of those charged withgovernance are added to the SAD

Evaluate and conclude whether the uncorrected misstatements are material to thefinancial statements, both individually and in the aggregate Consider the potential forundetected misstatements when concluding on the significance of the uncorrected andcorrected misstatements for the financial statements as a whole

❖ Obtain management representation

Management representations letter will be prepared and signed after Partner in charge

of the audit checks that it contains all the required representation, identifies theappropriate members of management to sign the letter and be dated properly

❖ Reassess combined risk assessment

Evaluate whether our combined risk assessments (CRA) continue to be appropriatebased upon control deficiencies, misstatements and risks identified, proceduresperformed and evidence obtained When we modify our original CRAs, determine theeffect on other areas of the audit

❖ Evaluate the effect of audit findings on significant risks, including risks of material misstatement due to fraud and non-compliance with laws and regulations

Based on accumulated results of audit procedures, determine whether the identifiedsignificant risks, including risks of material misstatement due to fraud, remainappropriate Determine whether any new information has come to our attention duringthe audit that indicates a new significant risk

Determine whether we identified misstatements in the financial statements that mayindicate fraud and/or non-compliance with laws and regulations

❖ Revisit the audit stzategies documentation

Determine that issues documented in the audit strategies documentation have beenappropriately addressed during the audit Revisit significant risks identified in the auditstrategies documentation and confirm that these have been appropriately addressed inour risk assessment, tests of controls (when appropriate) and substantive procedures

In a group audit, an audit strategies document is required for full scope engagements.For specific scope and review engagements, an audit strategies document is prepared

by component teams upon request by the Primary Team

❖ During the wrap-up of an audit, EY finalize open items and complete theSummary review memorandum (SRM) and Review and approval summary (RAS)before issuing our auditor’s report

• SRM is prepared to summarize and document audit results and conclusions,including any matters to be communicated in our auditor’s report; A description of theimportant matters and the significant accounting and auditing issues; Conclusionsabout whether auditors have obtained sufficient appropriate audit evidence to supportaudit opinion and evaluation of whether the financial statements as a whole are free ofmaterial misstatements

• RAS is signed to document completion of the review of the audit, document theconclusions of the audit executives, including the partner in charge of the audit and the

engagement quality reviewer and confirm that clients have fulfilled theirresponsibilities

At the end of the audit, EY deliver a written auditor’s report to the entity containingaudit opinion on the entity’s financial statements and have a communication withmanagement to confirm specific facts and circumstances and to provide an opportunityfor management to respond to the audit findings

All working papers, evidences and findings are fully signed and stored on EY Canvas

as document for next audit period

CHAPTER 2: AUDITING SELLING EXPENSES IN AUDIT OF LPN LIMITED COMPANY’S FINANCIAL STATEMENTS CONDUCTED BY EY VIETNAM

2.1.1 Understand client business and obtain information

Table 2.1 LPN’s information

Production and business

activities The current principal activities of the Company aredevelopment of residential property for sale,

investment property for lease and provision ofproperty management and related services in LPNHanoi Project

Ownership, governance

structure,

organizational structure

and finance

LPN Company Limited (“the Company”) is originally

a joint venture established in Vietnam in accordancewith Investment Licence No.xxx, issued by theMinistry of Planning and Investment on 30 December

1996 and is re-registered as a limited liabilitycompany with two or more investors in accordancewith the Investment Certificate No 0110220001xxdated 16 June 2008 issued by the Hanoi People’sCommittee The Company obtained subsequentAmended Investment Certificates with the 2ndamendment on 10 October 2016 as the latest

The investors in the Company are ABC Pte Ltd Theparent company of the Company’s foreign investor isMNO Pte Ltd., a private limited companyincorporated in xxx.

The Company’s head office is located at xxx

Mr B Vice Chairman

Mr K The First Deputy General Director

Mr E The Second Deputy General Director

2.1.2 Identify and assess risks

❖ Identify significant accounts and disclosures and relevant assertions

Table 2.2 Determination of significant

Sections Accounts/

Disclosure

s

Amount at 31/12/2018 Base on size Determination of significant

(> TE) Base on risk

Regarding Selling expense section, this is a significant account with risk of unrecordedand understated account payable and balance higher than TE