Audit of trade receivables item in financial audits conducted by uhy auditing and consulting company limited

NATIONAL ECONOMICS UNIVERSITY EXCELLENT EDUCATIONAL PROGRAM o0o BACHELOR THESIS Major Auditing AUDIT OF TRADE RECEIVABLES ITEM IN FINANCIAL AUDITS CONDUCTED BY UHY AUDITING AND CONSULTING COMPANY LIMI[.]

NATIONAL ECONOMICS UNIVERSITY EXCELLENT EDUCATIONAL PROGRAM

CONSULTING COMPANY LIMITED

VU THI NHU QUYNH

HANOI - 2020

NATIONAL ECONOMICS UNIVERSITY

EXCELLENT EDUCATIONAL PROGRAMS

: Vu Thi Nhu Quynh : Auditing

Supervisor : Ph.D Doan Thanh Nga

HANOI, 2020

During participating in internship program and completing myBachelor thesis, I received many supports from Board of Director and theauditors at UHY Auditing and Consulting Company Limited I would like toexpress my sincere thank to you for assisting me to be able to accumulateknowledge and hand-on experience as audit assistant and complete this thesis

I would also like to send my special gratitude to Ph.D Doan ThanhNga who has invested her efforts in guiding me to complete Internship Reportand Bachelor Thesis

Due to the limited time and knowledge, it is difficult to avoid thelimitations and shortcomings in my Bachelor thesis I hope to receivecomments from the lecturers to further improve this thesis

TABLE OF CONTENT

ACKNOWLEDGEMENT

TABLE OF CONTENT

STATUTORY DECLARATION

LIST OF TABLES

LIST OF FIGURES

LIST OF DIAGRAMS

INTRODUCTION 1

CHAPTER 1: CHARACTERISTICS OF AUDIT OF TRADE RECEIVABLES IN FINANCIAL AUDITS CONDUCTED BY UHY CONSULTING AND AUDITING COMPANY LIMITED 3

1.1 Characteristics of trade receivables of clients affecting financial audits 3

1.1.1 Features of trade receivables on financial statements 3

1.1.2 Accounting for trade receivables 4

1.1.3 Common misstatements related to trade receivables 7

1.1.4 Internal controls over trade receivables 8

1.2 Audit objectives of auditing trade receivables in financial audits conducted by UHY Consulting and Auditing Company Limited 9

1.3 Audit of trade receivables in financial audits process conducted by UHY Consulting and Auditing Company Limited 10

1.3.1 Planning an audit of trade receivables item in auditing financial statements conducted by UHY Ltd 12

1.3.2 Performing the audit of trade receivables in auditing financial statements onducted by UHY Consulting and Auditing Company Limited 18

1.3.3 Completing the audit of trade receivables in auditing financial statements conducted by UHY Consulting and Auditing Company Limited 22

CHAPTER 2: PRACTICE OF AUDIT OF ACCOUNTS RECEIVABLES

IN FINANCIAL AUDITS CONDUCTED BY UHY CONSULTING AND AUDITING COMPANY LIMITED – AT ABC JOINT STOCK

COMPANY 24

2.1 Planning an audit 24

2.2 Performing the audit 37

2.3 Completing the audit 57

CHAPTER 3: ASSESSMENTS AND ECOMMENDATIONS FOR IMPROVING THE AUDIT OF ACCOUNTS RECEIVABLES IN FINANCIAL AUDITS CONDUCTED BY UHY CONSULTING AND AUDITING 59

COMPANY LIMITED 59

3.1 Assessments of the audit of accounts receivables in financial audits process conducted by UHY Consulting and Auditing Company Limited 59

3.1.1 Strengths 59

3.1.2 Weaknesses 63

3.2 Recommendations for improving the audit of accounts receivables in financial audits process conducted by UHY Consulting and Auditing Company Limited 65

CONCLUSION 68 REFERENCES

STATUTORY DECLARATION

I herewith formally declare that I myself have written the submittedBarchelor Thesis independently I did not use any outside support except forthe quoted literature and other sources mentioned at the end of this paper

I clearly marked and separately listed all the literature and all othersources which I employed producing this academic work, either literally or incontent

Ha Noi, 22/05/2020

Vu Thi Nhu Quynh

ISA International Standard on Auditing

LIST OF TABLES

Table 1.1: Internal control over trade receivables 8

Table 1.2: Objectives of auditing accounts receivables 9

Table 1.3 Quesionnaire of audit’s independence at UHY Ltd 13

Table 2.1: Horizontal analysis – ABC Joint Stock Company 28

Table 2.2: Vertical analysis – ABC Joint Stock Company 29

Table 2.3 Questionnaire of ABC’s internal control system 31

LIST OF FIGURES Figure 2.1 Audit program for trade receivables at UHY Limited Company 33

Figure 2.2 <4340> General summary of accounts receivables from client 39

Figure 2.3 <4341> Contra account analysis of trade receivables 41

Figure 2.4 <4342> Reconciliation and balance analysis of trade receivables 43

Figure 2.5 Confirmation of receivables 47

Figure 2.6 <4343> Test of detail the balance of trade receivables 48

Figure 2.7.<4344> Payment after the balance sheet date 51

Figure 2.8 <4346> Examine balance of receivables derived from foreign currencies 52

Figure 2.9 <4345> Cut-off testing in trade receivables 53

Figure 2.10 <4348> Analysis the aged of trade receivables 55

Figure 2.11 <4349> Summary of trade receivables 58

LIST OF DIAGRAMS Diagram 1.1: Accounting diagrams of account receivables 5

Diagram 1.2: Audit process in financial statement audit conducted by UHY Ltd 10

On the path of national development and international economicintegration, open economic mechanism has created opportunities forenterprises of all economic sectors throughout the country to exchange andintegrate Therefore, information about the financial situation, solvency, ofthe enterprise is not limited only within the enterprise but has also become theconcern of many intended users such as investors, creditors, banks, taxauthorities The demand for public, transparency and objectivity of financialstatement is becoming more essential; For instant, investors need to know thecurrent financial performance and future potential of the enterprise whenconsidering investing capital into the enterprise; Creditors, banks need toknow the economic potential and payment ability of businesses whenapproving loans for businesses to operate The function of financial audit isexpressing audit opinions on whether the Financial statements are true andfair in all material respects, in accordance with applicable financial reportingframwork Futhermore, it creates the confidence of the financial informationusers, gives them a basis to consider and make right and approprite decisions During the audit of financial statements, the audit of account receivablesitem is very important because it is associated with revenue from sales andservice item, it’s nature is complex and directly affect the going concernprinciple of business, which is specifically that receivables taking significant anddirect impact to cash flow of the enterprise This item is also contained manyerrors and potential fraud Therefore, the audit of trade receivables item is animportant content and accounts for large amounts in the audit process

Trade receivables are one of the main items in the revenue cycle.Recognizing the importance of the audit of trade receivables item so I have

choosed my thesis topic is:" Audit of trade receivables item in financial audits conducted by UHY Consulting and Auditing Company Limited "

to demonstrate my understanding about the audit process at a specific clientsand a few comments on the audit operations.

My thesis consists of 3 chapters:

Chapter 1: Characteristics of audit of trade receivables in financial audits conducted by UHY Consulting and Auditing Company Limited Chapter 2: Practice of audit of trade receivables in financial audits conducted by UHY Consulting and Auditing Company Limited – at ABC Joint Stock Company

Chapter 3: Assessments and recommendations for improving the audit of trade receivables in financial audits conducted by UHY Consulting and Auditing Company Limited

I would like to express my sincere thanks for the caring and supporting

of members at UHY Auditing and Consulting Company Limited, as well asthe enthusiastically instruction of Ph.D Doan Thanh Nga helps me tocomplete this thesis

CHAPTER 1: CHARACTERISTICS OF AUDIT OF TRADE RECEIVABLES IN FINANCIAL AUDITS CONDUCTED BY UHY CONSULTING AND AUDITING COMPANY LIMITED

1.1 Characteristics of trade receivables of clients affecting financial audits 1.1.1 Features of trade receivables on financial statements

Based on the economic subject and content of account receivables , thereceivables must include four types:

According to Article 17 of Circular 200/2014/TT-BTC on accountingprinciples of receivables:

“Trade receivables include commercial receivables generating from purchase-sale related transactions, such as: receivables from sales, services, liquidation or transfer of assets (fixed assets, investment property, and financial investments) between enterprises and buyers (independent unit against buyers, including receivables between parent companies and subsidiary companies or joint-venture companies) Those receivables include receivables from sale of exported goods given by the trustor through the trustee.”

Receivables are a very important item and have a close relationship withmany items on the balance sheet as well as the income statement Enterprises

that sell goods or provide their services in the form of prepayment or creditsale will appear debt collectors In the course of operation, many transactionsrelated to payment and receivables accounts for a large proportion When thebusiness offers credit sale, the amount of receivables debt increase, the cashreceived from the sale will decrease and contrariwise In addition, receivablesincreased with the increase of goods and services, the reduction of inventory,raw materials In addition, the receivables are always accompanied withprovision for doubtful debt, this will affect the financial cost, output valueadded tax and indirectly affect t personal income tax account of goods soldincreases, receivables are also increased if the company's selling policies donot change Some items in the income statement, such as revenue, cost ofgoods sold also have a relationship with account receivables Generally,when revenue or cost of goods sold increase, receivables are also increased ifthe company’s selling policies do not change.

1.1.2 Accounting for trade receivables

Principles for recognizing receivables

 Trade receivables must be accounted in detail for each subject to becollected, each item must be collected and monitored for short-termreceivables, long-term receivables and detailed records for eachpayment

 The subject of receivables are the client who has economic relationswith the company on the purchase of products, goods, services,including fixed assets and real estate investment

 Do not reflect in this account the operations of selling products, goods,providing services that collect money immediately (Cash, check orbank draft)

 In the accounting of this account, the accountant must classify the debtsthat can be paid on time, bad debt or irrecoverable debts, so that thereare grounds to determine the amount of provisions for bad debts or take

measures to deal with irrecoverable debts

 In relation to the sale of products, goods or services as agreed betweenthe companies and clients, if the products, goods or services have beentransacted In the economic contract, the buyer may request thecompany to reduce the selling price or return the delivered goods

The system of vouchers and accounting books of trade receivables

In order to record true and fair accounts receivables from clients, theentity need the types of accounting books: subsidiary ledger to monitoraccounts receivables for each specific customer, general ledger of tradereceivables, summary of trade receivables, analysis of debt ages, subsidiaryledger to monitor the provisions for bad debts, the number of accountreceivables for doubtful debts, the decisions of the Board of Directors whendeciding to solve one bad debt and related ledgers

In addition, one of the mandatory control solutions for many companiestoday is that accountants need to make a reconciliation of debts to clients todetect the difference (if any) at the end of the period

Documents relating to the accounting of trade receivables

Economic contract or purchase request;

- Delivery invoice;

- Sales invoice;

- Payment vouchers: Bank's receipt, credit note, transferred money;

- Accounting vouchers (when setting up reserves);

- Records related to the elimination of bad debts;

Diagram 1.1: Accounting diagrams of account receivables

131

Exchange rate difference decreases

when assessing the receivables of

customers in foreign currency at the

end of the period

VAT

Total amount paid by customer

Irrecoverable debts written off

Clients pay their debts by

1.1.3 Common misstatements related to trade receivables

In receivables, trade receivables account for the largest proportion Inaddition, trade receivables are tied to the revenue and sales cycle of thebusiness, which is the most common fraud and error Some common mistakesfor this item are:

- There is no financial regulation on debt collection, the approval process

of selling on credit is incomplete, not tight (there is no regulation on themaximum amount of debt to a customer payment term )

- In some companies, there is no separate monitoring ledger for eachcustomer or the same object but monitoring on multiple accounts, resulting inoffsetting not the same object At the end of the period, foreign currencyaccounts receivables were not evaluated

- Debt comparison has not been conducted or incomplete reconciliation

at the time of preparation of the financial statements, the difference betweenthe debt comparison voucher and the accounting ledger has not explained thecauses and solved timely

- Accounting of wrong content, amount, nature of receivablestransaction, accounting of non-commercial receivables into account 131, oraccounting of trade receivables into account 1388

- Accounting of reducing trade receivables due to the sale of goodsreturned, reducing the selling price of goods without sufficient invoices andvouchers, recording an increase in receivables not match to the revenue

- Not yet conducted the debt age analysis of trade receivables

- Do not set up a provision for doubtful receivables or have made aprovision but lacked or excess the permitted ratio, the file of making theprovision is not sufficient as prescribed, does not set up a public council tohandle doubtful debts This has resulted in inaccurate reflection of net value

of receivables in the balance sheet

1.1.4 Internal controls over trade receivables

In order to manage the receivables well, ensuring that enterprises do notlose capital and be paid on time, it is necessary to have an effective andcoherent internal control system Internal control of customer receivables arecarried out in parallel with the process of sales and collections Specifically,

in each step of the process of selling and collecting money, internal control isexpressed as follows:

Table 1.1: Internal control over trade receivables

The steps of process of selling

- Determining a reasonable paymentmethod based on the interests of bothparties

- To sign a commercial contract whichrecords the rights and obligations ofthe parties, which is the legal basis forthe dispute

- Goods, service delivery - When delivering goods, conducting

the procedures for delivery andreceipt, there must be vouchers such asreceipt note, delivery bills, transportdocuments

- Transfer invoices to buyers - The seller must make a bill for the

and keep track of transaction

records

buyer in accordance with the type,quantity, sale price and must recordthe book of each transaction

- Processing and recording

accounts receivables

- When collecting goods, transactionsmust be recorded in full and in time

- Attention should be paid to the ability

to hide and omit collections, especiallyfor direct cash receipts

- Handling reduce the carrying

amount of sales arising

- Revenue deductions must be properlyand promptly handled and recorded

1.2 Audit objectives of auditing trade receivables in financial audits conducted by UHY Consulting and Auditing Company Limited

Trade receivables are always a very important item in the audit offinancial statements In general audit objective, the auditor collects sufficientand appropriate audit evidence to verify assertions related to the accountingprocess and summarize data of all items in financial statements At UHY Ltd,when it comes to trade receivables, the specific audit objective is conductedfollowing the general audit objectives including audit assertions such as:existence, completeness, rights and obligations, accuracy, valuation,presentations and cut-off

Table 1.2: Objectives of auditing accounts receivables

Specific audit objective in account receivables

items

General audit objective

Recorded account receivables must be available at

the time of making the report

Existence

All receivables are reflected fully in the report CompletenessAccount receivables are all owned by the company Rights and ObligationsReceivables must be recorded in the correct

amounts on the financial statements and consistent

Accuracy

between subsidiary ledger of receivables and

general ledger

Provisions for bad debts are appropriately

evaluated in accordance with accounting standard

and exchange rate receivables derived from foreign

currencies must be recognized at the end of the

period

Valuation

Receivables are classified and presented properly,

disclosed fully and clearly Receivables are

classified according to their payment terms:

short-term receivables and long-short-term receivables

Classifiaction andPresentation

Receivables are recognized at the arising time

Cash receipts are recorded promptly and on time

 Planning an audit

 Performing the audit

 Completing the audit

The main steps in the FSs auditing process performed by UHY Ltd aresummarized in Diagram 1.2

Audit of trade receivables are a part of FSs auditing so the auditing of trade receivables should also follow this process

Diagram 1.2: Audit process in financial statement audit conducted by

Materiality and Risk assessmentDesign audit plan

Perform Test of ControlPerform Substantive testPerform Test of Detail

Summary audit resultDiscussion meeting with clientSet up a draft in audit report and managementletter (if any)

Issue the official audit report and managementletter (if any)

1.3.1 Planning an audit of trade receivables item in auditing financial

Planning an audit

Performing the audit

Completing the audit

statements conducted by UHY Ltd

Planning an audit is the first step but it plays a role since it creates thenecessary conditions for an audit In the stage of planning auditingreceivables, the auditor of UHY Ltd performs the following work steps

1.3.1.1 Audit planning and documentation

Acceptability of an audit

When considering the ability to accept an audit, UHY Ltd bases on therequirements of clients, the ability to provide services of the company andconsider whether conducting audits for that clients increase risks for theauditor or affect the company's reputation or not

For a traditional client, the auditors still have to update and evaluateregularly whether there are any high-risk changes or not and from then, UHYLtd makes the decision whether continue auditing for client or not

For a new client, the auditor needs to find out information about theclient through the media, magazine, newspaper, website and assess theintegrity of the management, contact the predecessor, find out the reason whyclients change audit firm From there, UHY Ltd makes the decision whetheraccept audits for client or not

Identify the Clients Reasons for an Audit

The nature of identifying the reason for a client's audit is theidentification of users of the financial statements and their intended use, theseare the two main factors affecting the amount of evidence to be collected andthe level of accuracy of the opinions that KTV gave in the audit report

If the reason for auditing is to check the operation situation of theaccounting system, evaluate the effectiveness of the internal control system,then when audit trade receivables item, the auditor will focus more onapprovals for sales, payment discount, sales discount, returned goods, salesreturn and allowance and expense ; understand about the operation of the

accounting system and the internal control system; examine whetheraccounting policies applied to receivables are appropriate or consistent.

If the reason for auditing of clients is to make financial informationtransparent because they are in need of loans, attract investment to expandproduction, list securities then when conducting auditing of tradereceivables, the auditor will concentrade more on verifying the truth ofaccounts receivables and their ability to recover them, verifying theownership of client company for trade receivables

Prepare member in an audit

At UHY Ltd, the audit director chooses the audit team, the number andstructure of team members depends on the size of the client, the volume andthe complexity of each specific audit When choosing an audit team, UHYLtd usually selects the auditors who have knowledge and experience inclients' business industry UHY Ltd is compliance with the fundamentalprinciples of professional ethics to evaluate auditor’s independence beforeselecting specific auditors for auditing one client This below questionnaireshown that

Table 1.3 Quesionnaire of audit’s independence at UHY Ltd

Threat category Yes No N/A Note

1 Audit team members may fall into the

category of self interest threat:

b) Loans, guarantees or gifts received from

client

X

e) Ability to become a employee of client in the

future

X f) An additional service charge arising not X

related to audit contract

2 Audit team members may fall into the

category of self-review threat:

a) Members of the audit team have been / are

currently a member of client board

X

b) Preparing accounting record and financial

statement for client

X

3 Audit team members may fall into the

category of advocacy threat:

a) Member of the audit team is transaction agent

who trade or promote the sale of stocks and

securities of client.

X

b) Member of the audit team is as a represent

advocacy on behalf of client when client

disputes with third parties.

X

4 Audit team members may fall into the

category of familiarity threat:

a) Members of the audit team have a close

relationship with the employees at client

company who are a significant and direct

influence on the material matter of the

contract.

X

b) Have more than 3 years working as an audit

senior for the same client.

X c) Receive special offers from Customer X

Sign an audit contract

Once UHY Ltd has decided to accept the audit and consider the abovematters, UHY Ltd holds discussions with the clients' management to gainagreement on the terms of the audit contract and the two side will sign auditcontract This is the official agreement between UHY Ltd and the clientcompany to provide audit services and other related services

At the same time, UHY Ltd also sends clients the list of documents to beprovided for clients to understand and prepare which helps to conduct theaudit convenient and save time

1.3.1.2 Obtain client information

Understand about industry of client

The auditor need to find out about clients' business activities in order toget information related to obiective trade receivables of clients regularly; salesand credit policies; conveniences and difficulties in debt collection At thesame time, the auditors need to consider the criteria of the financial situation,business results, solvency through the FSs of the client company in thecurrent year and previous years

Identify related-party transaction

Economic transactions arising between related parties may bepurchases and sales between the parent and subsidiaries; collection, paymentbetween branches The large, unusual transactions between the clientcompany and these parties may contain mistakes related to receivables.Therefore, the identification of stakeholders is very noticeable by the auditor

of UHY Ltd in collecting information about clients

1.3.1.3 Perform analytical procedure

The two types of analysis used by auditors of UHY Ltd are horizontaland vertical analysis

In auditing trade receivables, horizontal analysis is shown in comparingthe balance of receivables at the end with the beginning of the period,

comparing the provision for bad debts in this period compared with theprevious period

The vertical analysis is expressed in the calculation, evaluation andcomparison of trade receivables turnover, trade receivables day, current ratio,quick ratio, the ratio of bad debts to total receivables of clients this yearcompared to the previous year

1.3.1.4 Understand internal control system and preliminary evaluate ofcontrol risk

For auditing trade receivables, once understand about the internalcontrol system of the customer, the auditor pays attention to the controlprocedures that the client company applies to the operations related to theestablishment and fluctuation of the trade receivables

Through the results of understanding about the internal control system

of customers in this period, the auditor gives initial judgments about thesuitability in the design and the effectiveness of the operation of the system.And from those judgments, the auditor initially evaluates the control risk(CR) to orient the next steps

1.3.1.5 Materiality and Risk assessment

Materiality assessment

During the auditing planning period, the auditor of UHY Ltddetermined the materiality level for the entire FSs, this is the maximumamount that the auditor believes at this level, the FSs may be wrong but hasnot affected the decisions users; from then the auditor will orient on the time,scope and ways of the subsequent jobs

First, the auditor determines the PM - the materiality level planned forthe entire financial statements According to the guidance document ofmateriality assessment in the auditing of financial statements of UHY Ltd,

PM is determined by one of the following ways:

2% Current assets or Equity

10% Profit after tax (in case the enterprise operates continuously)

0.5% - 3% Revenue (depending on the level of revenue)

However, the indicators used to determine PM are unaudited so theyhave not reliable Therefore, in order to reduce risks and ensure the quality of

an audit, the auditor should determine MP based on PM and lower than PM

MP = PM x (1 - Estimated error rate)

At UHY Ltd, the estimated error rate is usually 10% - 20% so MP isusually calculated by 80% - 90% PM

PM and MP determination should be based on professional judgments

of the auditor based on client knowledge, contract risk assessment, error rateestimation so this work is conducted by the auditors who are highlyspecialized and experienced

UHY Ltd's auditor does not conduct allocation of materiality level foreach item on the FSs During the auditing process, after determining the level

of errors in each item, the auditor will summarize Then, depending on theresult of the comparison between the total of errors on the FSs and themateriality level for the entire FSs identified and depending on the nature ofthe errors, the auditor will consider the proposal adjusment entries and giveconclusions

Risk assessment

Risk assessment means that the auditor based on the identifiedmateriality level to assess the possibility of a mistatement that has a materialimpact, thereby designing appropriate audit procedures for each item

We have an audit risk model: AAR = IR x CR x DR (1)

In which: AAR - Acceptable Audit Risk

IR - Inherent Risk

CR - Control Risk

DR - Detection Risk

1.3.1.6 Design audit program

The audit program for trade receivables of UHY Ltd is designed foreach a specific audit mainly based on the standard audit program that thecompany has built, combined with additions, changes (if any) to suit theunique characteristics of each client

The main contents of the trade receivables audit program include:

 Client name and audit period

 Preparer and Reviewer names

 Date of preparation, date of revision

 Name of the auditing program: the auditing program for tradereceivables and the auditing program for other receivables

 Audit objectives

 Assignment of work: the preparer's and reviewer's names

 Auditing procedures to be performed

The detailed audit program after being prepared will be reviewed andsaved into an audit file (audit file)

1.3.2 Performing the audit of trade receivables in auditing financial statements onducted by UHY Consulting and Auditing Company Limited

1.3.2.1 Substantive test

UHY Ltd's auditors only perform the substantive test when auditingtrade receivables if the internal control system for this item is initiallyassessed as a continuous and effective operation The implementation ofsubstantive tests helps the auditor to collect evidence on the appropriatedesign and effective operation of the accounting system and internal controlsystem for this item Some of the substantive tests that used by UHY Ltd'sauditor included:

 Interview with the director or chief accountant of the client about credit

policy; regulations on sale limit, payment term, payment discount;provisions on recording, monitoring and controlling receivables

 Considering whether the accounting ledger system to be fully organizedand scientific

 Verify the separation of duty between the book keeper and the cashier,between the seller and the sale manager through interviews andobservations

 Sample a number of invoices to check the serial number; check thesignatures and seals on invoices; compare the amount on the invoicewith the accounting book on revenues, trade receivables

 Select a sample of sale credit transaction to check whether the approval

of sale discount complies with the regulations; authority andresponsibilities of the approver in accordance with the regulations;whether the trade receivables are fully and promptly accounted andcarefully monitored

 Interview clients about the reconciliation of receivables periodicallywith the customers, check the confirmation records, debts reconcile 1.3.2.2 Analytical procedure

Performing the analysis procedure for receivables items, havegone through the following main stages:

 Develop a model

 Examine the independence and reliability of financial and business data

 Estimate values and compare with book values

 Analysis of differences (if any)

 Review detects through audit

The auditor builds and develops a model based on the relationshipbetween trade receivables and the quantity of sold goods, the selling price,and the selling ratio Based on the built model and the collected data, the

auditor made an estimate the value of trade receivables and compared withbook value

If there is a significant difference, firstly, the auditor reviews theirestimation process, correct mistatement (if any) Then, if a difference stillexists, depending on whether the these figure that is estimated by the auditor

is greater or smaller than the carrying value, the auditor has the nextprocessing solve

If the auditor's estimation is greater than the book value, the receivablesare suspected to be understated or omitted In this case, the auditor willinspect of invoices, sales documents

Conversely, if the auditor's estimation is smaller than the book value,that is, the receivables are suspected to be overstated or the accountant forgets

to record twice for one trade receivables in the book In this case, the auditorwill guide the checking of books, checking details of collection documentssuch as credit notes, receipts, etc

The implementation of analytical procedures helps the auditor to collectvaluable evidence and time saving, helping the auditor to assess the overallwithout detail specific transactions In addition, if the analytical procedure isperformed more effectively, it may reduce test of detail procedure

1.3.2.3 Test of detail

Because the detailed test is a time-and-costly procedure, the detailedexamination of the audit of receivables should be based on the results of theabove control tests and analysis However, no matter how perfect the controltest and analytical procedure are, performing a detailed test is still not to betaken lightly, especially for an item that contains many risks risks likereceivables

In auditing trade receivables, some test of detail procedures are oftenconducted by the auditor of UHY Ltd, including:

 Compare the opening balance with the ending balance of the previous

period (for traditional clients).

 Sample a number of trade receivables generating regular transactions orlarge value transactions and reviewing the subsidiary ledger of eachsubject Test of detail to supporting documents for major or unusualtransactions

 Compare and compare the amount of goods sold and the selling unitprice on the unpaid sales invoice with the corresponding information onthe contract, the price list has been approved to verify thereasonableness and basis of the calculation of receivables In case thereceivables have been partially paid, the receipt or notice of paymentcorresponding to the money amount must be checked

 Collect the detailed list of trade receivables, compare the endingbalance of each object with receivables reconcilaition

 Send a confirmation letter to the subjects The auditor can send aconfirmation letter to all subjects (if there are few objects) or samplethe subjects with large balances, long-term overdue receivables,receivables without debt reconciliation to send a confirmation Aconfirmation letter is prepared by the auditor, the client verifies andsigns for approval, then the auditor sends the letter The auditor mustcontrol the entire process of sending and receiving the confirmationletter to ensure the objectivity and reliability of the collected evidence

 Check the payment operations after the closing date for accountsreceivables without a record of debt closing at the end of the period

 Interview clients about the policy of short-term and long-termreceivables, check the classification of the entity

 Check the revaluation of foreign currency receivables of the entity atthe time of preparation of the financial statements

 From the subsidiary ledger, select a number of sales / service

transactions recorded 15 days prior to the BS date, collating with theshipping documents or evidence of service delivery, review periodrecognition.

 Select a number of original documents (delivery notes, invoices )about 15 days after BS date and make a check to the accounting book

to consider the timely recording

 Interview with the chief accountant or accountant to manage thereceivables about whether or not the bad receivables debts need to bemade provision, considering the duration of the receivables debts to re-verify

 Check whether the appropriation of doubtful debts has been made bythe entity or not, considering the appropriateness rate applied by theentity in accordance with the overdue period

 Select trade receivables that are written off in the year Check therelevant documents to confirm the recording of the cleared debt isreasonable

At the end of the audit period, the audit team has collected sufficientand appropriate evidences for the trade receivables in particular and the items

on the FSs in general, which forms the basis for forming the opinion of theauditors The audit enters into the next and final stage, which is the end of theaudit

1.3.3 Completing the audit of trade receivables in auditing financial statements conducted by UHY Consulting and Auditing Company Limited

At the end of auditing trade receivables, the internal control andaccounting systems will re-operate its process, assesses the errors detectedduring the audit, presents conclusions about the truthfulness andreasonableness of the items and recommends the Adjustment entries (if any)

The manager or senior audit summarizes audit results based on

members' performance The audit team and client conduct a meetingimmediately after the audit is completed in order to inform and discuss theaudit results This discussion usually around the mistatement that exist on theclient's FSs, which the audit team has detected The audit team givesrecommends to correct these mistatement Depending on whether the clientagrees to adjust or not and the overall importance of the mistatement that theclient does not adjust, the auditor will decide its final opinion.

Finally, the draft audit report and management letter (if any) areprepared by the audit manager, the chairman and members of BOD of UHYLtd These will send to BOD of client within one week When there is acomplete agreement between the client and UHY Ltd, the audit report andmanagement letter (if any) are officially issued

CHAPTER 2: PRACTICE OF AUDIT OF ACCOUNTS RECEIVABLES IN FINANCIAL AUDITS CONDUCTED BY UHY CONSULTING AND AUDITING COMPANY LIMITED

– AT ABC JOINT STOCK COMPANY

General introduction about ABC Joint Stock Company

The subject is specialized in doing business on Construction of roads.ABC Investment Mechanization and Construction Joint Stock Company withhead office located at Floor 6, No 138 Pham Van Dong Street, Xuan DinhWard, Bac Tu Liem District, Ha Noi, Vietnam The company is established

on August 7th 2004, with registered capital of 10,000,000,000 VND Legalrepresentatives of enterprise is Mr Pham Xuan Kiem

The company is a traditional client of UHY auditing firm for the fiscalyear ended on December 31, 2019 This is a large-scale client withcomplicated economic transactions and involving some foreign objects

2.1 Planning an audit

Prepare the audit planning

When receiving the request to audit the financial statements for thefiscal year ended on December 31, 2019 from ABC company, because this is

a traditional client, the auditor of UHY Ltd reviewed the previous year's auditfile of clients At the same time, through research, the auditor determined thatABC had no change in organizational structure as well as accounting system

in the 2019 The auditing of the financial statements for the financial yearended on December 31, 2019 of ABC is suitable with the ability of UHY Ltdand ensures the risks are controlled, so UHY Ltd decided to continue auditingfor this client

The reason for ABC's audit is to audit the financial statements to servethe shareholders of the company and to serve the consolidated financial

statements of the parent Company, and ABC also wants to attract moreinvestment capital in 2020 Therefore, for with trade receivables, effectivetargets, caculate price, rights and obligations will be more focused by auditorBecause ABC is a large company with many complex transaction, the auditdirector has selected an audit team for this client audit consisting of qualifiedand experienced auditors Besides, since ABC is a traditional client, theauditing team include the auditors who participated in the auditing ABC lastyear, only two audit assistants are new members.

UHY Ltd held a discussion with the Board of Directors of ABC JSC,the two sides came to a consensus and the audit contract was signed

Obtain client information

Because ABC is a traditional client, the collection of information aboutthis customer is conducted by reviewing the previous year's audit files andupdating new information

 Production and business operation of ABC JSC under BusinessRegistration Certificate include:

- Construction of domestic and foreign transport works includingbridges, roads, railway stations, airports, ports and tunnels

- Construction of industrial works: warehouses, factories, yards, erection

of antenna transceiver columns, infrastructure construction, leveling

- Construction of civil works: houses, offices

- Construction of irrigation works: pumping stations, sluices, dams,dykes, embankments, canals

- Investment in construction of infrastructure works, residential clusters,urban areas, industrial parks, transportation and transportation

- Design consultancy, testing materials, consulting investment,consulting supervision of works not executed by the company

- Producing, exploiting and trading in construction materials

- Producing and erecting steel structure, normal reinforced concrete

structure and prestressed concrete, plastic concrete

- Producing and supplying commercial concrete

- Repairing motorcycles, vehicles, construction equipment and othermechanical products

- Exploitation of stone, sand, gravel and clay

- Producing wooden furniture

- Manufacture of other wood products; producing products from straw,thatch and plaited materials

- Producing concrete and products from cement and plaster

- Producing metal components

- Mechanical; Metal processing and coating

- Manufacture of mining and construction machinery

- Producing other specialized machines

- Repair of machinery and equipment

- Installation of machinery and industrial equipment

- Producing, transmitting and distributing electricity

Construction of houses of all kinds

 The organization of the accounting system has not changed compared

to the previous year, specifically as follows:

ABC Joint Stock Company applies the enterprise accounting system issuedunder the Decision No 15/2006/ QD-BTC dated 20 March 2006 of theMinistry of Finance

The fiscal year begins on January 1 of the calendar year and ends onDecember 31

The currency unit used for accounting and preparation of FSs is VND

Trade receivables recognition principles: Receivables are recognized on thebasis of issuing invoices, recording an increase in revenue, income andreceivables Revenue is recognized when the entity is able to gain economicbenefits and can be reliably determined Sales and provide of services are

recognized when risks, benefits and ownership of the goods are transferred tothe buyer; At the same time, ABC company can determine the expensesassociated with the sales The time of recognition of revenue coincides withthe time of delivery of goods or services, issuance of invoices to buyers andbuyers accepting payment.

 The related party is identified as D Joint Stock Company (ParentCompany)

 Because ABC is a traditional client of UHY Ltd, the auditor uses theinformation about the client's legal obligations collected in the auditfiles of previous years, combined with interviewing clients in 2019 arethere any changes and collect additional Minutes of Shareholders'Meetings, Board of Directors in 2019

Perform analytical procedure

During this period, the auditor carries out preliminary analysis of theentire manual statements of the ABC company of 2018-2019 The objective

of this step is to give the auditor a first glimpse of the changes in balances ofthis year's items over the previous year, and to draw conclusions about thecontinued operation of customer During the analysis of abnormal fluctuationswill also reveal

UHY auditors conducted horizontal analysis with all the indicators onthe balance sheet and reported the business results of ABC company andvertical analysis with some important financial ratios important to enhancethe understanding of the business situation of customers, grasp the importantchanges compared to the previous year

Table 2.1: Horizontal analysis – ABC Joint Stock Company

(cited for auditing accounts receivables)

ASSET Code 31/12/2019 01/01/2019 Difference

Amount % A: CURRENT ASSETS 100 80.299.243.213 120.243.369.125 (39.944.125.912) -33,22%

Table 2.2: Vertical analysis – ABC Joint Stock Company

(cited for auditing accounts receivables)

Criteria Formular Ending

balance

Beginning balance

Difference

Account receivables of ABC Company are only short-term receivables,which are mainly from trade receivables (accounting for 99% of totalreceivables) This item is of great value, so it requires the attention of the

The provision for bad debts was zero at the end of the year, this could bedue to the good management and control of the account receivables by theABC, the effective receivables recovery policy, so that bad debts will notarise Besides, it is also possible that ABC has not made provision fordoubtful debts to avoid increasing costs and reducing profits Therefore, in theprocess of auditing receivables, the auditor should pay attention to verify thisissue

Table 2.2:

Current ratio at year end increased slightly compared to the beginning ofthe year (December 31, 2019: 1,59; January 1, 2019: 1,3) However, at boththe begin and the end of the year, this ratio is greater than 1, showing thatABC is still able to pay short-term debts and the financial situation is normal.The quick ratio at the end of 2019 of ABC is slightly higher than thebeginning of the year (December 31, 2019: 1,24; January 1 2019: 1,1)showing that payment ability’s ABC company is high

Trade receivables turnover in 2019 decreased by 0,13 (round) compared

to 2018, respectively, making the time of 1 trade receivables turnover in 2019increased by 10,13 (days) compared to 2018 Due to the fact that the averagerevenue and trade receivables in 2019 decreased compared to 2018, but therate of turnover decreased faster This may be because in 2019, ABC has beentightening in the approval of selling debts, controlling receivables carefullyand effective debt collection measures, so the average trade receivablesdecreased compared to 2018 Moreover, besides the company's credittightening policy, in 2019, inflation also increased, making consumption ofgoods and services difficult, so the revenue in 2019 decreased compared to

2018 is also reasonable

Understand internal control system and preliminary evaluate of control risk

Because ABC is a traditional client of UHY Ltd, in order to carry out