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Tiêu đề Practice of assessment of audit risk and materiality in financial audits conducted by Deloitte Vietnam Company Limited
Trường học Dai Hoc Kinh Tế TP.Hồ Chí Minh
Chuyên ngành Auditing / Financial Audit
Thể loại Study
Năm xuất bản 2023
Thành phố Ho Chi Minh City
Định dạng
Số trang 75
Dung lượng 427,18 KB

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Cấu trúc

  • PART 1. THEORITICAL FRAMEWORK ON (8)
    • 1.1. Audit risk and materiality in financial audits (8)
      • 1.1.1. Audit risk (8)
        • 1.1.1.1. Definition (8)
        • 1.1.1.2. The component of audit risk (8)
        • 1.1.1.3. Audit risk model (9)
        • 1.1.1.4. Relationship between components of audit risk model (11)
      • 1.1.2. Materiality (12)
        • 1.1.2.1. Definition (12)
        • 1.1.2.2. Relationship between materiality and audit risk (12)
    • 1.2. Process of assessment of audit risk in financial audit (14)
      • 1.2.1. The concept and implications of risk assessment (14)
        • 1.2.1.1. Essentiality and major purpose of risk assessment procedure in financial (14)
        • 1.2.1.2. The concept of risk assessment (14)
        • 1.2.1.3. The implications of risk assessment (15)
      • 1.2.2. Assessment of acceptable audit risk (15)
      • 1.2.3. Assessment of inherent risk (18)
      • 1.2.4. Assessment of control risk (19)
      • 1.2.5. Assessment of planned detection risk (20)
    • 1.3. Process of assessment of materiality (21)
      • 1.3.1. Basis of assesment of materiality (21)
      • 1.3.2. Process of assessment of materiality (22)
        • 1.3.2.1. Set preliminary judgement about materiality (22)
        • 1.3.2.2. Allocate preliminary judgment about materiality to segments (23)
        • 1.3.2.3. Estimate misstatement and compare with preliminary judgment (24)
    • 2.1. Brief description of client ABC and client XYZ (25)
      • 2.1.1. Brief description of client ABC (25)
      • 2.1.2. Brief description of client XYZ (25)
    • 2.2. Practice of assessment of audit risk conducted by Deloitte Vietnam (26)
      • 2.2.1. Assessment of acceptable audit risk (26)
        • 2.2.1.1. For client ABC (26)
        • 2.2.1.2. For client XYZ (33)
      • 2.2.2. Assessment of inherent risk (38)
        • 2.2.2.1. For client ABC (38)
        • 2.2.2.2. For client XYZ (39)
      • 2.2.3. Assessment of control risk (40)
      • 2.2.4. Assessment of planned detection risk (41)
        • 2.2.4.1. For client ABC (41)
        • 2.2.4.2. For client XYZ (42)
    • 2.3. Assessment of materiality conducted by Deloitte Vietnam (42)
      • 2.3.1. General method of assessment of materiality by Deloitte Vietnam (42)
        • 2.3.1.1. Performance Materiality (PM) (42)
        • 2.3.1.2. Monetary Precision (MP) (45)
        • 2.3.1.3. Threshold acceptable misstatements for the overall financial statements – (46)
      • 2.3.2. Assessment of materiality in client ABC (49)
        • 2.3.2.1. Determining materiality, performance materiality, monetary precision and (49)
        • 2.3.2.2. Determining the threshold of acceptable mistatements for each item in the (50)
      • 2.3.3. Assessment of materiality in client XYZ (53)
        • 2.3.3.1. Determining materiality, performance materiality, monetary precision and (53)
        • 2.3.3.2. Determining the threshold of acceptable mistatements for each item in the (54)
    • 2.4. Comparison in assessment of audit risk and materiality conducted by (56)
      • 2.4.1. Comparison in assessment of audit risk (56)
      • 2.4.2. Comparison in assessment of materiality (57)
    • 3.1. Evaluation on assessment of audit risk and materiality conducted by (59)
      • 3.1.1. Achievements (59)
      • 3.1.2. Limitations (61)
      • 3.1.3. Reason of limitation (63)
    • 3.2. Recommendation on assessment of audit risk and materiality in (64)
      • 3.2.1. Recommendation on assessment of control risk (64)
      • 3.2.2. Recommendation on assessment of materiality (68)
      • 3.2.3. Recommendation on enhancing the audit software AS2 and using (71)
      • 3.2.4. Recommendation on enhancing the quality of the audit team (71)

Nội dung

TABLE OF CONTENTS TABLE OF CONTENTS 1 LIST OF TABLES AND FIGURES 2 ABBREVIATIONS LIST 2 FOREWORD 2 PART 1 THEORITICAL FRAMEWORK ON ASSESSMENT OF AUDIT RISK AND MATERIALITY IN FINANCIAL AUDITS 2 1 1 Au[.]

THEORITICAL FRAMEWORK ON

Audit risk and materiality in financial audits

Audit risk, also known as acceptable audit risk, measures the auditor’s willingness to accept the possibility that the financial statements may be materially misstated after an unqualified opinion has been issued It encompasses two main categories: risk related to assessing the financial statements and risk concerning assertions derived from evaluating those statements When auditors select a lower acceptable audit risk, they aim to be more confident that the financial statements are free of material misstatements While zero risk represents complete certainty and 100% risk indicates total uncertainty, achieving absolute assurance of accuracy is neither economically feasible nor practically possible, as auditors cannot guarantee the absence of material misstatements.

1.1.1.2 The component of audit risk

Inherent risk in a financial audit refers to the auditor's assessment of the likelihood that material misstatements due to error or fraud exist in a segment before evaluating internal control effectiveness When the auditor determines a high likelihood of misstatements, they conclude that inherent risk is high Inherent risk is assessed independently of internal control, as controls are evaluated separately within the audit risk model under control risk.

1 Alvin A.Aren, Randal J.Elder, Mark S.Beasley (2011), Auditing and Assurance Services - An Integrated Approach, Prentice Hall, 14th edition (April 1, 2011)

Control risk assesses the likelihood that material misstatements in a financial segment will not be prevented or detected promptly by the client’s internal controls Effective internal controls are essential for organizations to prevent and detect fraud and errors, ensuring the accuracy of financial statements When an entity's internal controls are inadequate, control risk is considered high, increasing the potential for undetected misstatements Proper evaluation of control risk is crucial for auditors to determine the extent of substantive testing needed to achieve accurate financial reporting.

Detection risk is the risk that audit evidence for a segment fails to detect misstatements exceeding a tolerable misstatement.There are two key points about the detection risk:

Detection risk is independent of the other three factors in the audit risk model and changes only when a corresponding risk factor is adjusted It directly influences the amount of substantive evidence an auditor plans to gather, with a lower detection risk requiring the collection of more evidence to ensure audit effectiveness Reducing detection risk leads to a need for increased substantive evidence, thereby strengthening audit quality and improving audit reliability.

Audit risk is the product of various risks encountered during an audit, making risk assessment crucial for effective engagement management To ensure the overall audit risk remains within acceptable limits, auditors must evaluate the risk level associated with each component of the audit risk model The audit risk model provides a framework for identifying and measuring potential risks that could impact audit quality, enabling auditors to implement appropriate risk mitigation strategies Proper assessment of audit risk components helps maintain audit effectiveness and enhances the credibility of financial statements.

Planned detection risk = Acceptable audit risk

Auditors face critical decisions regarding which controls to trust, inspect, and the scope of testing needed when auditing a company's financial statements Managing these decisions can be complex, often resulting in a lengthy list of considerations tailored to each specific business To streamline this process, auditors utilize the audit risk model as a vital tool to create an effective framework for inspections and risk assessment.

Below are some factors that create the importance of the audit risk model:

+ To comply with laws and regulations

The audit risk model has gained increasing importance as stricter regulations for business accountability, driven by new laws and legislation, aim to enhance auditing practices and provide more transparent information to investors Its flexible and comprehensive approach enables auditors to incorporate these standards effectively, ensuring reliable audit outcomes that instill confidence among both businesses and investors.

An audit risk model is a vital tool used by auditors to assess potential risks and determine the appropriate audit procedures tailored to a specific business Originating in the United States, this model is based on concepts derived from Generally Accepted Auditing Standards (GAAS) It helps auditors decide which controls to evaluate through detailed testing, identify necessary control tests, and establish the optimal scope and extent of audit procedures to ensure accurate and reliable results.

The audit risk model is essential for complex audits as it offers a flexible approach that allows auditors to adapt their procedures based on the specific circumstances of the company By moving beyond fixed audit steps, the risk model enables auditors to assess the current situation accurately and tailor their audit strategies accordingly This flexibility ensures that the audit is more effective, comprehensive, and capable of identifying particular errors, ultimately enhancing the quality and usefulness of the audit process.

The audit risk model incorporates the importance of intangible skills that auditors possess, such as expertise gained from experience with similar businesses Experienced auditors understand common faults and weaknesses within specific industries, enabling them to focus their testing procedures more effectively By leveraging their knowledge, ideas, and past encounters, auditors can tailor audit procedures, translating their practical expertise into a more accurate and efficient audit process This approach enhances audit quality by using professional judgment informed by relevant industry experience.

1.1.1.4 Relationship between components of audit risk model

Inherent risk and control risk are fundamental components of the audit process that exist independently of financial information, unlike planned detection risk and audit risk, which are interconnected Due to their close relationship, inherent risk and control risk are typically assessed together to effectively evaluate audit risks Understanding these risks and their interactions is essential for auditors to design appropriate audit procedures and ensure financial statement accuracy.

Planned detection risk and audit risk are assessed and determined based on the auditors' professional judgment Auditors typically identify audit risk at the start of the audit process when accepting the audit engagement After identifying inherent risks and control risks, auditors assess planned detection risk to ensure that overall audit risk is maintained at the desired level, facilitating effective and efficient audit planning.

When inherent risk and control risk are both high, detection risk should be set lower to minimize overall audit risk Conversely, if inherent and control risks are assessed as low, detection risk can be higher, provided it stays within acceptable limits to maintain a low audit risk Properly adjusting detection risk based on the levels of inherent and control risks is essential for effective audit risk management.

The fluctuations of detection risk based on the auditor's assessment of inherent risk and control risk are presented in the following table:

- Inherent risk and control risk are divided into three levels: high, medium, low.

- Shaded area represents the level of planned detection risk.

- Planned detection risk is divided into five levels: highest, high, medium, low,and lowest.

Materiality is a major consideration in determining the appropriate audit report to issue FASB Concept Statement 2 defines materiality as:

An omission or misstatement of accounting information refers to a significant error or omission that, considering the circumstances, is likely to influence a reasonable person's judgment Such inaccuracies could alter the decision-making process of users relying on the financial information Ensuring accurate and complete accounting data is essential to maintain the trustworthiness and reliability of financial statements.

In an audit engagement, the auditor uses professional judgment to determine materiality, which is essential for assessing financial statement accuracy If a material misstatement is identified, the auditor is responsible for notifying the client to request correction, ensuring the financial statements reflect true and fair information Should the client refuse to amend the misstatement, the auditor must issue a qualified or adverse opinion based on its severity Accurate determination of materiality relies on the auditor’s thorough understanding of its application, which is crucial for maintaining audit quality and compliance.

1.1.2.2 Relationship between materiality and audit risk

The International Standards of Auditing No 320, Clause 9, 10, 11 has emphasized how materiality and audit risk relates to each other, as follow:

The relationship between materiality and audit risk

Process of assessment of audit risk in financial audit

1.2.1 The concept and implications of risk assessment

1.2.1.1 Essentiality and major purpose of risk assessment procedure in financial statements audit

The 2 nd standard of Field work performance of the audit, in GAAS, requires auditors to obtain an understanding of the entity and its enviroment, including internal control, to assess the risk of material misstatements 1

Assessing risk is essential for determining the appropriate amount of audit evidence required, guiding the auditor's workload and scope Moreover, the risk assessment directly influences the auditor’s final opinion, highlighting its significance in the overall audit process.

Therefore, the risk assessment procedure is very important step that need to be carried out at the planning phase of the audit.

1.2.1.2 The concept of risk assessment

A risk assessment involves identifying and analyzing potential risks that could hinder an organization's ability to achieve its objectives It begins with defining clear operating goals and systematically pinpointing factors that may prevent their success Essentially, risk assessment is a thorough evaluation of what could go wrong, enabling organizations to determine how best to manage and mitigate these risks for better decision-making and overall success.

Management’s risk assessment plays a crucial role in designing and operating internal controls to minimize errors and fraud, while auditors evaluate these risks to determine the appropriate amount of audit evidence needed Although their risk assessments are related, they serve different purposes; effective management risk assessment can lead to auditors assessing a lower overall risk When management accurately identifies and responds to risks, auditors can reduce their evidence collection, streamlining the audit process.

Typically, auditors obtain an understanding about management’s risk assessment process using questionnaires and discussions with management in oerder to determine

Alvin A Aren, Randal J Elder, and Mark S Beasley (2011) in "Auditing and Assurance Services - An Integrated Approach" highlight that management is responsible for identifying risks relevant to financial reporting, assessing the significance and likelihood of these risks, and determining appropriate actions to mitigate them Effective risk management is essential for ensuring accurate financial statements and maintaining stakeholder trust Understanding how management evaluates potential financial risks helps auditors design effective audit procedures and strengthen internal controls This comprehensive approach enables organizations to proactively address financial reporting risks and enhance overall audit quality.

1.2.1.3 The implications of risk assessment

During a financial statement audit, the auditor conducts risk assessment procedures to evaluate the likelihood of material misstatements This crucial step helps determine whether the reported financial statements are materially accurate, ensuring the overall reliability and integrity of the financial reporting process.

The auditor conducts risk assessment procedures to identify and evaluate the risks of material misstatement at both the financial statement and assertion levels While these procedures are essential for understanding potential risks, they do not in themselves provide sufficient appropriate audit evidence to support the issuance of an audit opinion.

A client’s contribution to audit risk plays a crucial role in shaping the audit plan, regardless of the required audit evidence or the personnel involved Elevated audit risk necessitates increased workload and comprehensive audit procedures to ensure effective risk management Understanding the impact of audit risk helps auditors allocate resources efficiently and implement appropriate audit strategies.

The auditor follows various risk assessment procedures:

+ Recognizing the nature of the company and management,

After completing all relevant risk assessment procedures, the auditor evaluates these results to determine the likelihood of material financial misstatements in the client’s financial statements Not all errors are considered significant; only those that could impact users’ decisions are deemed material and require further attention This process helps ensure an effective audit focused on significant risks and enhances overall financial statement reliability.

1.2.2 Assessment of acceptable audit risk

To assess acceptable audit risk, the auditor must first assess each of the factors affecting acceptable audit risk, which includes:

Assessing acceptable audit risk involves evaluating the potential for risk when an audit firm accepts a specific engagement, which can impact long-term client relationships This risk assessment is conducted prior to signing the contract, and a thorough evaluation helps in mitigating future audit risks Proper estimation of acceptable audit risk is crucial for effective audit planning and ensuring the overall reliability of the audit process.

The initial step for an audit firm upon receiving an engagement is assessing the acceptable audit risk, which involves gathering essential information about the client This includes understanding the client’s business operations, evaluating the integrity of the Board of Directors, and reviewing contact with previous auditors Conducting this preliminary assessment is crucial for planning an effective and reliable audit process.

 External users’ reliance on financial statements

When external users depend heavily on financial statements, decreasing acceptable audit risk is advisable to prevent significant undetected misstatements Heavy reliance on financial information can pose substantial risks to society if material errors go unnoticed Auditors are more justified in incurring costs for additional evidence when the potential harm from undetected misstatements to users is significant, emphasizing the importance of stringent audit procedures in such cases.

Auditors are more likely to be required to defend their audit quality when a client experiences bankruptcy or substantial losses following an audit, especially if the client faces financial distress This increased liability risk stems from concerns that the auditor may have failed to perform an adequate audit, as well as the user's desire to recover losses linked to perceived deficiencies in the audit work Consequently, financial strain on clients heightens scrutiny on auditors' performance and accountability.

In situations that the auditor believes the risk that financial failure or loss is high and a corresponding increase in acceptable audit risk occurs, acceptable audit risk should be reduced.

Predicting financial failure before it occurs is challenging; however, auditors can identify key indicators such as a company's liquidity position, previous year's profits or losses, financing methods used for growth, the nature of the client’s operations, and management competence to assess potential risks effectively.

When a client's integrity is questionable, auditors tend to assess a low acceptable audit risk to mitigate potential issues Companies with low integrity often engage in business practices that lead to conflicts with stockholders, regulators, and customers, negatively impacting audit quality These conflicts can increase the likelihood of lawsuits and disputes, emphasizing the importance of thorough risk assessment during audits.

Following factors may affect management integrity: relationship with current or previous auditors, frequency of turnover of key financial or internal audit personnel, relationship with employees and labor unions.

Process of assessment of materiality

1.3.1 Basis of assesment of materiality

When applying materiality, auditors follow five interconnected steps Initially, they establish a preliminary judgment of materiality and allocate this estimate to different audit segments during the planning phase The third step takes place during the engagement, where auditors assess potential material misstatements in each area based on evaluated audit evidence The final two steps are carried out during the engagement's completion phase to ensure accurate identification and evaluation of materiality.

Figure 1.1 Steps in applying materiality 1 1.3.2 Process of assessment of materiality

1.3.2.1 Set preliminary judgement about materiality

Auditing standards mandate that auditors make an initial judgment on the total amount of misstatements in financial statements that would be considered material during the planning phase of an audit This preliminary materiality assessment helps shape the overall audit strategy and is subject to change as the audit progresses It is essential for auditors to document this initial judgment in the audit files to ensure compliance and facilitate audit review.

The preliminary judgment about materiality represents the maximum amount of misstatements in financial statements that the auditor believes would not influence the decisions of reasonable users This critical decision requires extensive professional expertise and significantly impacts the audit planning process Setting an appropriate materiality threshold helps auditors determine the scope of audit procedures; a lower materiality level necessitates gathering more audit evidence to ensure accuracy and reliability of financial information Properly establishing materiality is essential for effective audit planning and achieving an accurate assessment of financial statements.

1 Alvin A.Aren, Randal J.Elder, Mark S.Beasley (2011), Auditing and Assurance Services - An Integrated Approach, Prentice Hall, 14th edition (April 1, 2011)

Ste p 1 y lit ria ate m bout t a en judm ry limina pre Set

Ste p 2 y to lit ria ate m bout t a en gm jud inary elim e pr cat Allo se gme nts

Ste p 3 nt gme se in ment ate sst l mi ota e t mat Esti

Ste p 4 nt me ate misst ined omb e c mat Esti

Ste p 5 r o ary in elim pr ith e w mat esti ined omb e c mpar Co re vis ed ju dgme nt a bo ut mat eria lity

During an audit, auditors frequently revise their initial materiality judgment due to changes in key influencing factors These adjustments ensure that the materiality assessment remains accurate and aligned with the most current financial information, thereby enhancing the overall reliability and effectiveness of the audit process.

Factors affecting preliminary materiality judgment

+ Materiality is a relative rather than absolute concept

A misstatement's materiality depends on the entity's size, with small and medium-sized companies affected differently than large corporations While a minor error may be material for smaller entities, it could be immaterial for larger organizations Consequently, fixed dollar-value thresholds are inadequate for assessing misstatement significance across all audit clients, emphasizing the need for a tailored approach based on entity factors.

+ Bases are needed for evaluating materiality

Materiality is relative, necessitating clear bases for determining whether misstatements are material Profit-oriented firms primarily use net income before taxes as the key reference point, as it provides critical information for users Additionally, factors like net sales, gross profit, and total or net assets serve as primary bases for assessing materiality Once the main base is established, auditors must consider whether misstatements could significantly impact other financial elements such as current assets, total assets, current liabilities, and owner’s equity, influencing the overall materiality assessment.

+ Qualitative factors also affect materiality

Depend on theirs nature, certain types of misstatements are likely to be more important to users than others, even if the dollar amounts are the same.

1.3.2.2 Allocate preliminary judgment about materiality to segments

Allocating preliminary materiality to individual segments is essential because auditors gather evidence based on specific accounting sections rather than the entire financial statements This approach enables auditors to determine more appropriate audit procedures and evidence collection for each segment, enhancing audit effectiveness The primary goal of this allocation is to reduce audit costs while maintaining high audit quality and ensuring a thorough evaluation of financial information.

Most auditors allocate materiality on balance sheet rather than income statement accounts, because both of them have equal effect from a misstatement due to the nature of double-entry accounting.

1.3.2.3 Estimate misstatement and compare with preliminary judgment

The final three steps in the audit process involve performing audit tests and thoroughly documenting any misstatements identified These misstatements are categorized into two types: known misstatements, which are confirmed errors, and likely misstatements, which are suspected but not yet verified Proper documentation of these misstatements is essential for accurate financial reporting and effective audit completion.

+ Known misstatements are those where the auditor can determine the amount of the misstatement in the account.

Misstatements can be categorized into two types: those resulting from differences between management and auditor judgments regarding account balance estimates, and projections of misstatements derived from the auditor's sample testing of a broader population Understanding these distinctions is essential for effective financial statement analysis and audit risk assessment Identifying and evaluating these misstatements helps ensure accurate financial reporting and compliance with auditing standards.

Auditors assess the total misstatements by combining known and estimated likely misstatements and comparing the total to the preliminary materiality judgment Known misstatements are added directly, while likely misstatements are estimated before inclusion If the combined misstatements exceed the preliminary materiality threshold, the financial statements are deemed unacceptable To address this, auditors can perform additional procedures to verify whether estimated misstatements surpass the materiality limit or require the client to make necessary adjustments.

PART 2 PRATICE OF ASSESSMENT OF AUDIT RISK AND METRIALITY IN FINANCIAL AUDITS CONDUCTED BY

Brief description of client ABC and client XYZ

2.1.1 Brief description of client ABC

Company ABC is a Limited One Member State Company, operating independently as a member unit of Corporation D Specializing in the production of clothes, fabric panels, and various textile products, ABC Company has established a strong presence in the textile industry Additionally, the company is involved in joint ventures, associates, and other strategic investments to expand its business activities.

Company ABC prepares its financial statements in accordance with the accounting regulations issued by Decision 15/2006/QD-BTC dated March 20, 2006, alongside Vietnam accounting standards The company's financial reports are primarily prepared in Vietnamese Dong (VND) and follow principles of historical cost accounting These standards ensure that the company's financial statements are accurate, reliable, and compliant with Vietnamese accounting regulations.

+ Decisions issued by the State and Ministry of Finance.

+ Decisions about the accounting system from the internal Corporation.

As a member of Corporation D, Company ABC is required to adhere to Vietnamese accounting standards as well as the regulations issued by its parent corporation These guidelines are aligned with national legal requirements and have been officially approved by the Ministry of Finance, ensuring compliance and consistency in financial reporting.

2.1.2 Brief description of client XYZ

Company XYZ is a member of the accounted dependly on its Coal Corporation V TheCompany is not engaged in the production of coal but primarily engaged in the

+ Export of coal to foreign countries such as: China, Japan, Northwest Europe, South America, Compnay is selling coal at FOB price and through L/C as method of payment.

+ Sales for large units in domestic areas: Sale for the contracts signed by the Corporation with the price specified by the Corporation.

The company exclusively contracted with individual households, ensuring direct sales to these units while also supplying other entities outside the contracted group All sales conform to the minimum price guidelines set by the corporation, maintaining pricing compliance across different buyers.

Company XYZ primarily focuses on its core business activities while also offering additional services such as waterway transportation, port operations, and shipping charge collection These shipping charges are determined annually by the Ministry of Finance and are exempt from Value Added Tax (VAT) Furthermore, the company is not involved in joint ventures, associates, or other activities that could impact its production and overall business operations.

Company XYZ adheres to accounting regulations issued by Decision 15/2006/QD-BTC dated March 20, 2006, along with Vietnam accounting standards Its financial statements are prepared in Vietnamese Dong (VND), based on historical cost principles, and aligned with Vietnamese accounting standards As a member of Corporation V, Company XYZ also complies with additional regulations set by the corporation, which are consistent with state laws and approved by the Ministry of Finance.

Practice of assessment of audit risk conducted by Deloitte Vietnam

2.2.1 Assessment of acceptable audit risk

Customer ABC Corporation comprises a total of six affiliates and a headquarters, with the Company itself serving as one of the affiliates Each year, the Company operates based on the production plan set by the headquarters, focusing primarily on manufacturing clothes and towels for sale to the headquarters, which then distributes them to the market Recently, the headquarters has intensified investments in new equipment and technology to boost the Company's productivity In 2015, the Ministry of Finance issued Circulars related to these operational and investment activities, ensuring compliance with regulatory standards.

In 200, the company replaced the previous Decision 15 related to the accounting regime, with headquarters developing comprehensive guidance for its subordinate units to implement Circular 200 Despite this transition, the company experienced minimal impact from the application of the new Circular, indicating a smooth adaptation process Implementing Circular 200 has helped streamline accounting practices within the organization, ensuring compliance with updated regulations while maintaining operational efficiency This shift highlights the company's proactive approach to regulatory changes and commitment to accurate financial reporting.

Company ABC is a new client of Deloitte Vietnam, yet auditors can leverage previous audit records from other firms and initial planning information indicating that the company's substantial debt and low profitability of its affiliates pose challenges to financial autonomy and ongoing operations in 2015 However, market research shows strong product demand driven by high growth rates, prompting the company to invest in machinery and equipment to enhance productivity and meet market needs Despite the complexity of managing an additional affiliate introduced in 2015, the experienced members of the Board of Directors, many transferred from the Headquarter or with extensive expertise, are well-positioned to address these management challenges effectively.

Auditors conduct assessments base on the table below:

Control Eviroment Acceptable audit risk Notable

1 Is there any significant changes in the management apparatus that may materially affect the truthfulness of the Company’s financial statements ?

2 Did the internal control system change in an unreasonable manner to the scale, type and status of the customer’s business ?

3 Did the status of customer’s operations turn out bad ? No No No

4 Is there any issues that the customer’s operation can not continue ? No No No

5 Does the separation of duties and responsibilities match the size and features of the business ? No No No

6 Do we recognize something suspicious about the management methods of the customer’s administrator ? No No No

7 Does the application of computers and technology match the size and features of the business? No No No

8 Are the customer’s Board of Directors under any pressure in announcing financial results? No No No

9 Is there any reason that auditors lack of knowledge about customer’s operations ? No No No

10 Is there any reason to believe that there may be fraud in customer’s business ? No No No

11 Is there any reason to doubt about auditors ability to provide services ? No No No

From analysis above, did the auditor detect any risk ? No

Overall assessment and treatment for the detected risk

Assessed acceptable audit risk Normal

Is this the fiest time audit for customer ? No

Conclusion: Effective control environment contributed to provide a realiable accounting system and effective internal control.

Table 2.2 Assess the acceptability of the audit contract with client ABC (new client)

After accepting the audit contract, Deloitte Vietnam assigns a team of auditors to perform the required services Prior to their assignment, these auditors must complete a questionnaire assessing their independence, ensuring adherence to ethical standards and maintaining professional integrity throughout the audit process.

Questions about the indepence of auditors

Client: Company ABC For the year ended: 31/12/2015

1 Do the auditors have contributed capital or shares in the

2 Does the auditors have loans to customer’s Company ? x

3 Are the auditors the dominant shareholders of the

4 Does the customer have any borrowings from auditors ? x

5 Did the auditors and the customer engage in any previous business contract ? x

6 Do the auditors provide any materials or services, rather than audit, to customer ? x

7 Do the auditors have any kinship with the people in the x customer’s management apparatus (Board of Managements;

Board of Directors; the deputy chief, manager or the equivalent positions there) ?

8 Are the auditors working as customer’s agents to sell product ? x

9 Do the auditors provide customer with book keeping and financial statements reporting service ? x

10 Conclusion: Auditors that is assigned to the engagement have ensure compliance with the principles of professional ethics and independence x

Table 2.3 Question table about the independence of auditors that conduct the audit for customer ABC

This questionnaire aims to verify the independence of auditors during the audit process, ensuring objective and unbiased judgment Based on the responses, the Audit Director selects the most suitable auditors for the engagement, aligning their expertise with the engagement's requirements Additionally, the audit team is required to provide a formal commitment to maintaining independence, which is documented in the audit contracts to uphold ethical standards and compliance.

The sample of the commitment to the contract is as follows:

MINUTES OF COMMITMENT TO INDEPENDENCE OF AUDITORS

Name of documents: Commitment to independence of auditors

After reading, we have understood the regulation on independnece of auditors in the staff regulations by Deloitte Vietnam Limited Company On which, we commit with absolute honesty that:

(a) We have to comply with regulations and;

(b) There is not any signs that could be considered a violation of the regulation about the independence of the auditors.

Members of the audit team Positions Signature Date

1 Dang Chi Dung Vice Directors in charge of the engagement

2 Phan Ngoc Anh Leader of the audit team

3 Bui The Anh Audit Senior

4 Nguyen Thi Hanh Linh Audit Associate

5 Nguyen Duc Hiep Audit Associate

Table 2.4 Minutes of commitment to independence of auditors for client ABC

Auditors identified ongoing operational issues at ABC Company during their initial evaluation, highlighting the need for continued attention Despite these concerns, they determined that the risks associated with the audit remain manageable and decided to accept the engagement at a normal risk level Deloitte Vietnam officially agreed to proceed with the audit contract and prepared a formal minute to confirm their commitment to provide auditing services for ABC Company.

Please tick the appropriate box

General economic Temporary operation Preparing for operation Already listed

Tracking changes in the current year and previous years that can affect the audit::

Criteria Briefly explained (risks identified by the Company to each item)

Compare to audit file No 1210

Independence and integrity of the management No No 1, 2, 3

Features of accounting system No No 14, 15, 16

Relationship with related parties No No 17

Undetstanding of the auditors about the customer No No 18, 19

Possibility that there are misstatements in issuing accounting reports

ADDITIONAL ASSESSMENT ABOUT RISKS RELATED TO THE AUDIT

Accounting/auditing issues in the previous audit

Time for conducting the audit Expactation for this year: 1080 hours Does the fees meet requirements for both parties Yes

Is there any signs that customer would hire other audit firms

Overall assessment when engaging the audit Normal

Independence and conflicts of interests No

DECISION OF THE ADVISORY OF CUSTOMER SERVICES

(Signature of member of the Board of Directors in charge of customer)

(Signature of member of the Board of Directors in charge of customer)

(Signature of member of the Board of Directors in charge of customer)

When an audit risk is assessed as higher than normal, auditors must develop a comprehensive risk management plan if they choose to continue providing services This approach ensures that the increased risks are effectively monitored and mitigated throughout the engagement Proper risk management strategies are essential to uphold audit quality and maintain compliance with professional standards.

Approval of members of Risks management Board of Directors (risks exceeded normal levels):

Signature of member of the General Board of Directors (audit contract has been signed)

Table 2.5 Minutes of providing audit service for customer ABC

After taking steps to accept the contract and making the appropriate selection of the audit team, the contract will be signed.

Company XYZ is a member company that operates dependently under its parent corporation and has longstanding client relationships with Deloitte Vietnam All business operations are governed and controlled by the parent corporation, including pricing strategies where coal prices are dictated by the corporation to ensure they do not fall below the minimum cost Additionally, coal production is subject to inspection and quality assessment by authorized agencies such as Vinacontrol or Measurement and Evaluation Company, verifying the amount, type, and quality of the coal The company primarily focuses on selling coal, aligning its activities with the corporation’s directives.

The Company operates its headquarters with dedicated transport ports, and when other firms require coal deliveries to their locations, it engages third-party transportation services and collects service fees from these buyers Its Board of Directors oversees daily business activities, maintaining direct oversight of operational performance and ensuring the company’s growth and profitability.

Before commencing the audit engagement, Deloitte Vietnam will designate the audit team responsible for the project Similar to the procedures followed by Company ABC, prior to assigning personnel, the auditors assigned to the engagement must verify their independence They are required to complete a detailed questionnaire to confirm there are no conflicts of interest, ensuring unbiased and objective audit results This process emphasizes the importance of auditor independence in maintaining audit quality and compliance with professional standards.

Questions about the indepence of auditors

Client: Company XYZ For the year ended: 31/12/2015

1 Do the auditors have contributed capital or shares in the

2 Does the auditors have loans to customer’s Company ? x

3 Are the auditors the dominant shareholders of the

4 Does the customer have any borrowings from auditors ? x

5 Did the auditors and the customer engage in any previous business contract ? x

6 Do the auditors provide any materials or services, rather than audit, to customer ? x

7 Do the auditors have any kinship with the people in the customer’s management apparatus (Board of Managements;

Board of Directors; the deputy chief, manager or the equivalent positions there) ? x

8 Are the auditors working as customer’s agents to sell x product ?

9 Do the auditors provide customer with book keeping and financial statements reporting service ? x

10 Conclusion: Auditors that is assigned to the engagement have ensure compliance with the principles of professional ethics and independence. x

Table 2.6 Question table about the independence of auditors that conduct the audit for customer XYZ

After auditors complete the questionnaires, the Audit Director will select the most suitable team members to conduct the audit The chosen auditors will then prepare an independence declaration to ensure objectivity, which will be included as part of the audit contract This process aligns with best practices to maintain audit integrity and compliance.

MINUTES OF COMMITMENT TO INDEPENDENCE OF AUDITORS

Name of documents: Commitment to independence of auditors

After reading, we have understood the regulation on independnece of auditors in the staff regulations by Deloitte Vietnam Limited Company On which, we commit with absolute honesty that:

(a) We have to comply with regulations and;

(b) There is not any signs that could be considered a violation of the regulation about the independence of the auditors.

Members of the audit team Positions Signatur e

1 Pham Hoai Nam Vice Directors in charge of the engagement

2 Le Anh Son Leader of the audit team

3 Hoang Tuyen Duong Audit Senior

4 Trinh Dinh Tuan Audit Associate

5 Nguyen Duc Hiep Audit Associate

Table 2.7 Minutes of commitment to independence of auditors for client XYZ

For existing customers of Company XYZ, once the appropriate audit group has been selected, Vice Directors overseeing the engagement will sign the Approval of Audit Contract Continuation This approval ensures a formal confirmation to proceed with the audit services The Approval of Audit Contract Continuation follows standardized templates designed to streamline the approval process and maintain consistency across engagements.

DELOITTE VIETNAM LIMITED COMPANY APPROVAL OF AUDIT CONTRACT CONTINUATION

Previous auditors: Phạm Hoài Nam, Lê Anh Sơn, Nguyễn Mạnh Tuấn, Mai

Thị Hồng Nhung, Nguyễn Thanh Tâm

Reason for change of auditors:

Services provide: Audit of financial statements

Financial statements for the year ended 2013

CUSTOMER’S BUSINESS CLASSIFICATION: Dependent Company

OVERALL ASSESSMENT OF AUDIT RISK

Criteria Briefly explained (risks identified by the Company to each item)

Compare to audit file No 1210

Independence and integrity of the management No No 1, 2, 3

Purpose and nature of the audit contract

Purpose of the audit is to certify the truth and fairness of the Company financial statements for the year ended 31/12/2015

Relationship with related parties No No 17

Undetstanding of the auditors about the customer

Auditors have thourough understanding about customer’s operation through previous year audits

Nature of the inherent mistatements No No 20

ADDITIONAL ASSESSMENT ABOUT RISKS RELATED TO THE AUDIT

Is there any issues with audit contract in previous year ? No

Is there any signs that customer would hire other audit firms ? No

OVERALL ASSESSMENT OF ACCEPTABLE AUDIT RISK: Normal

Expected audit fees 6000 USD (Excluding VAT)

Independence and conflicts of interests

Auditors ensure their indepence with the client and there is no conflicts of interest between Deloitte Vietnam and Company XYZ.

Decision of the members of Board of Directors to continue Yes providing audit service for customer XYZ

Table 2.8 Approval of audit contract continuation for customer XYZ

During the approval of the audit contract renewal, auditors provide initial comments on audit risk, which are not used to determine materiality or guide audit procedures These initial risk assessments are based on general information about the client and serve as a preliminary overview As the audit progresses, auditors gather additional information to refine their understanding of the client's risk levels Ultimately, these initial risk assessments help Deloitte Vietnam decide whether to proceed with the audit, ensuring a tailored and effective audit process.

During the initial phase of the audit of Company ABC, auditors gathered detailed information about its accounting system and overall operations Based on their findings, they determined that the inherent risks associated with Company ABC were higher than average These observations served as the foundation for their risk assessment and audit planning.

Since July 1, 2015, the Company transitioned from Vietnamese accounting software to M3, a European-based accounting system This change may have led to discrepancies or errors in recorded financial information due to inconsistencies between the two accounting platforms.

Assessment of materiality conducted by Deloitte Vietnam

2.3.1 General method of assessment of materiality by Deloitte Vietnam

Under the guidance of Deloitte Vietnam, the process of assessing materiality on the financial statements will be done by assessing the following steps:

Performance materiality refers to the threshold of misstatements that can be tolerated across the entire financial statements without significantly affecting users' decisions It serves as a crucial criterion for assessing overall materiality, guiding auditors in determining the acceptable level of errors during the audit process Understanding performance materiality is essential for ensuring accurate financial reporting and maintaining audit effectiveness.

After evaluating the internal control systems and assessing control risk, the auditor then determines the performance materiality, a process requiring significant professional judgment and expertise At Deloitte Vietnam, this critical task is conducted by the audit team leader, leveraging their experience to ensure accurate and reliable assessments.

Performance materiality assessment is essential for establishing the audit scope and guiding the nature, timing, and extent of audit procedures It also enables auditors to estimate the potential level and impact of irregularities on financial statements, helping to identify possible misstatements and assess their significance.

According to audit guidelines, performance materiality serves as the primary basis for defining the scope of an audit Materiality is generally regarded as the threshold of combined misstatements that could significantly impact a company's financial statements Auditors typically do not establish separate materiality levels for individual components or reports within the financial statements, focusing instead on the overall materiality to ensure audit effectiveness.

Deloitte Vietnam also has specific guidelines for each type of customer, as follows:

Pre-tax profit 5 - 10 Enterprises with stable profits over the years

Revenue 0.5 - 3 Enterprises has losses during the year or has low profitability Gross profit 1 - 2

New enterprises’ operations or 1 st year audit Total assets 1.5 - 3

Table 2.11 Guidelines to determine materiality level + For businesses listed on the stock market:

Auditors commonly use profit before tax as a key criterion for assessing financial statement materiality To estimate current period profit before tax, they typically analyze previous period data and apply a standard rate of 5-10% to the estimated pretax margin In certain situations, pre-tax profit may decline to a negative figure, prompting auditors to use a substitute company’s data as a basis for determining materiality, ensuring accurate and reliable financial assessment.

+ For businesses not listed on the stock market:

Auditors can use the following guidelines from Deloitte Vietnam:

- 2% of the total assets or equity.

- From 5% to 10% of profit after tax of the current period.

- From 0.5% to 3% of revenue base on Deloitte guidance table.

The selected materiality ratio generally does not exceed the limits specified in Table 2.12; however, auditors may choose a lower rate if deemed necessary It is essential that the selected materiality is sufficiently high to enable auditors to obtain reasonable assurance over all aspects of the financial statements.

Following are the Guidance for assessing materiality base on revenue Because of its special characteristics, Deloitte Vietnam has developed a specific guidance table for criteria revenue in assessing materiality.

Table 2.12 Guidance for assessing materiality base on revenue

+ For middle and small market entities:

Revenue can be a more appropriate basis to estimate the level of materiality than profit because profit tends to have large fluctuations between the operating periods.

These guidelines are specifically designed for companies fully dependent on their parent organization Quantitative assessments of materiality necessitate professional judgment and are typically applied in special circumstances An increase in the materiality level can be considered after a thorough review of Deloitte Vietnam's policies While the materiality level may be elevated, it must not surpass the levels set by the parent company.

In cases where the audits contain high risks, auditors need to combine other additional guidelines to support the above instructions to make a appropriate level of materiality.

Auditors must evaluate a company's monetary precision, which is determined by performance materiality Performance materiality represents the total acceptable misstatements in financial statements, guiding auditors in their assessments Monetary precision refers to the acceptable misstatements in financial statements, excluding uncorrected misstatements from prior periods and those identified during the audit planning phase This process ensures accurate financial reporting and effective audit quality.

When assessing materiality, the auditor first identifies performance materiality and then estimates the monetary precision This estimate is calculated based on the established materiality level and the inherent risk identified during the audit planning process, ensuring accurate and reliable financial reporting.

According to the Internal Audit Approach, auditors must determine *monetary precision* to tailor their audit procedures effectively Monitory precision refers to the acceptable level of misstatements that can be detected during the audit When performing audit procedures on specific items or balances, auditors need to obtain sufficient assurance that any misstatements do not exceed the predetermined monetary precision, ensuring the accuracy and reliability of financial information.

Understanding the differences between performance materiality and monetary precision requires professional judgment, as setting the right level is crucial for an effective audit If auditors set the monetary precision too high, audit procedures may fail to meet their objectives, compromising the audit's effectiveness Conversely, setting the monetary precision too low can result in excessive audit work, leading to inefficiencies Striking the right balance ensures that audit procedures are both effective and efficient, aligning with professional standards.

To determine the value of monetary precision , auditors using the formula:

In which: EAM is the combine of the mistatements from previous periods that has not been adjusted and the misstatements collected during the planning phase of the audit.

To determine the value of EAM, auditors estimate the total misstatements detectable throughout the audit, including those unadjusted in previous years Monetary precision is typically set at 80-90% of performance materiality, ensuring accurate assessment of financial statement errors.

Monetary precision is crucial in auditing as it provides the essential basis for comparing recorded values with customer records and determining acceptable levels of misstatements Accurate monetary assessment helps establish thresholds for materiality, ensuring financial statement accuracy The evaluation of performance materiality and monetary precision is documented in the audit file under No 1710 - Determine Materiality, highlighting its importance in the audit process.

2.3.1.3 Threshold acceptable misstatements for the overall financial statements –

After assessing performance materiality and monetary precision, auditors need to evaluate the threshold of acceptable misstatements for:

- Each item and balance in the financial statements (Clearly trivial threshold – CTT)

- The financial statements as a whold (De Minimis Threshold - DMT)

According to Deloitte guidance, the Confirmed Tolerance Threshold (CTT) represents the maximum acceptable difference between an auditor's estimate and the actual customer data, eliminating the need for additional audit procedures For each item on the financial statements, auditors must establish a CTT to assess the potential for misstatements The CTT reflects not only detected misstatements but also the level of certainty regarding possible errors When the discrepancy between actual figures and auditor estimates exceeds the established threshold, it indicates a higher likelihood of misstatements in that specific financial statement item.

After identified misstatements possible, auditors will combine the misstatements on the scope of the overall financial statements The level of combined mistatements must not exceed the level of DMT.

Both CTT and DMT are estimated base on the performance materiality and monetary precision Besides, base on each customer, auditors will have specific assessments appropriate to these value.

Determining the CTT for each items and balances in customer’s financial statements

According to Deloitte Vietnam, auditors establish the threshold for acceptable misstatements by assessing the identified monetary precision, the ability to differentiate within the population, and the population's characteristics, along with the coefficient R This comprehensive approach ensures accurate evaluation of material misstatements, enhancing audit reliability and compliance with standards.

Comparison in assessment of audit risk and materiality conducted by

by Deloitte Vietnam between client ABC and client XYZ

2.4.1 Comparison in assessment of audit risk

We can see the differences in the processes applied to two units, in accepting the client phase, that:

Company ABC is a new client of Deloitte, prompting a more thorough assessment process Auditors are required to gather comprehensive information about the company's business operations and internal controls to ensure a robust evaluation A key step involves conducting the Table of Assessment Acceptability for the audit contract with the client, as outlined in Table 2.2, to determine the feasibility and risk factors associated with the engagement.

For Company XYZ, the audit process is streamlined, as Deloitte has previously conducted audits, reducing the workload compared to Company ABC Auditors mainly need to update existing information and are not required to prepare the assessment table for the acceptability of the audit contract The audit process begins with reviewing the minutes of commitment to auditor independence and then involves seeking approval from the Vice Audit Director to continue the engagement.

In the planning phase of the audit, the auditors found in the company ABC a few issues as follow:

+ From 07/2015, Companies changed accounting software so auditor assessed that there shall be some mistatements because of the inconsistent of information.

Frequent personnel changes in the company's accounting department disrupt the continuity of financial record management Additionally, inadequate focus on the proper handover and secure storage of accounting documents leads to potential discrepancies and operational challenges for accountants Ensuring consistent personnel training and robust documentation processes is essential for maintaining accurate financial records and enhancing accounting efficiency.

Auditors have determined that the inherent risk for Company ABC is higher than normal due to specific factors impacting its operations In contrast, Company XYZ's business operations remain stable, with no significant changes in its Board of Directors or accounting department, leading to an assessment of inherent risk at a normal level.

As a new customer, Company ABC requires a higher control risk assessment despite having the same control risk table as other companies Auditors must therefore evaluate the control risk for Company ABC as higher than usual, whereas the control risk for Company XYZ remains at a normal level This distinction is essential for accurate risk assessment and audit planning.

Therefore, auditors estimated number of substantive tests must be carried out in the Company ABC will more than those at Company XYZ.

2.4.2 Comparison in assessment of materiality

Auditors assess the materiality level based on information from both companies, which is essential for accurate financial analysis A key distinction lies in the items within the financial statements that auditors select when determining performance materiality This process ensures the audit focuses on areas of greatest significance, enhancing the overall reliability of financial reporting Proper evaluation of materiality helps auditors identify material misstatements and supports informed decision-making by stakeholders.

At Company ABC, revenue is a key performance indicator, reflecting the company's operational success and serving as the primary target in its development strategy This focus underscores the importance of revenue as a crucial measure for assessing overall business performance and guiding growth initiatives Prioritizing revenue helps align company efforts with long-term goals and ensures sustainable development.

At Company XYZ, pre-tax profit is a key financial metric because the company operates as a dependent accounting unit, with income distributed based on the profits it generates for the corporation As a result, pre-tax profit is a top priority for Management, reflecting its significance in evaluating the company's financial performance and informing strategic decisions.

The auditor conducts an assessment of audit risk across the entire financial statements based on the client's specific information Due to varying business line characteristics and control environments, the assessed level of audit risk differs for each client These differences in risk levels influence the methods used to calculate materiality thresholds, ensuring audit procedures are tailored to each client's unique risk profile.

Auditors assess control risk for items in financial statements, as demonstrated in the example of ABC Company, where it was found that collected funds were not deposited immediately into the bank This delay in deposit raises concerns about internal control effectiveness and potential financial misstatements.

Converting VND to USD does not rely on the exchange rate at the transaction date, leading to a higher-than-normal assessment of control risk In contrast, company XYZ faces no associated issues, resulting in a control risk evaluation at a normal level.

When determining the threshold of acceptable misstatements for cash items, similarities between the two companies are evident This calculation relies significantly on the auditor's professional judgment, ensuring accuracy and compliance with auditing standards.

Analyzing two client examples highlights that risk assessment is directly linked to establishing value performance materiality, which in turn influences the acceptable misstatement thresholds for each financial statement item Proper risk evaluation ensures accurate determination of materiality levels, helping auditors identify significant errors while maintaining audit quality Understanding this relationship is essential for ensuring financial statements reflect true and fair information, minimizing audit risks.

Chapter 2 of the report reviews Deloitte Vietnam's risk assessment and materiality evaluation for both new client ABC and existing client XYZ, demonstrating a flexible yet standard approach tailored to each client’s characteristics The audit work, thoroughly documented in working papers, reflects adherence to established procedures while accommodating specific client needs The analysis highlights that Deloitte Vietnam’s risk assessment process has notable strengths and some limitations, which will be examined in detail in Chapter 3.

PART 3 EVALUATION AND RECOMMENDATIONS TO

IMPROVE ASSESSMENT OF AUDIT RISK AND

MATERIALITY IN FINANCIAL AUDITS CONDUCTED BY

Evaluation on assessment of audit risk and materiality conducted by

Recently, Deloitte Vietnam is one of the largest audit firm in Vietnam Those achievements of Deloitte result from:

+ Having a professional team of auditors that is passionate in their careers;

+ Flexible management system and effective working method;

+ Consistency between audit phases as well as between the members of the audit group;

Deloitte Vietnam excels in developing a comprehensive, innovative, and dynamic approach to assessing materiality and risks across a diverse range of clients This capability not only sets Deloitte Vietnam apart from other audit firms but also significantly contributes to the company's overall success in the region.

Specifically, the advantages of the process of assessing materiality and risks that constructed by Deloitte Vietnam are listed below:

1 Process of assessing materiality and risk is consistently constructed based on the basis of instruction system of Deloitte Touche Tohmatsu global, though, it still follows international audit standards and Vietnamese audit standards.Instruction for auditors, which is established particularly for each specific customer, creates better conditions for auditors to minimize auditing time and workload This process is supported with audit software AS2 which has high quality and efficiency provided by Deloitte Touche Tohmatsu global.

2 The process of assessing materiality and risks at Deloitte Vietnam is assessed on both the aspect of entire financial statements as well as of specific items and transactions Therefore, it demonstrates prudent level of auditor According to the assessed materiality and risks level, auditor will collect evidence to illustrate his/her opinion Thus, it decreases the audit risks that auditors can encounter during the engagement, whereas material mistatements may still exist in the financial statements It means that audit report’s accuracy will be likely to rise.

3 Materiality levels of the entire financial statements consists of two components which are: the performance materiality and the monetary precision This will help auditors to be able to calculate a reasonable materiality level which is suitable with the information in the financial statements Thereby, it will enhance the quality of the audit.

4 The level of materiality is maintained consistently throughout the audit that help Deloitte Vietnam to save audit time and audit costs, while ensuring the quality of the audit Because it is the performance materiality that has been adjusted appropriately by auditors.

5 The evaluation of materiality and risks in Deloitte Vietnam is always done by the audit senior with high experienced and qualified professions Because process for assessing materiality and risk are mostly based on professional judgments so that assignments like this will ensure the accuracy and reliability of the audit decision for materiality and risks level.

6 Before planning the audit, whether old or new customers, audit preparation phase must be carried out adequately The information of customer is always fully and timely updated not only in the planning stage of the audit but also throughout the financial year of the company The questionnaire for assessing the acceptability of the audit contract with client is estalished with sufficient criteria so that auditors can make the right decision for accepting the engagement.

In addition to the advantages, the process of evaluating materiality and risks at Deloitte Vietnam still inevitablely contains some shortcomings as follow:

1 During the audit, the materiality level has always been to maintain consistenly. Although it may saves audit costs and time but also has certain limitations. Under the guidance of Deloitte Vietnam: MP = PM – EAM

Determining the appropriate level of Estimated Additional Material (EAM) is a critical issue, as it relies heavily on the auditor's professional judgment Accurately evaluating EAM, typically expressed as a percentage within the Planning Materiality (PM), presents significant challenges If the EAM is set at an unreasonable level, it can compromise the overall quality and reliability of the entire audit process.

2 The materiality is determined on the entire financial statements and not allocated to each specific item of the financial statements For those specific items, auditors only calculate the threshold of acceptable mistatements The allocation of materiality plays an important role in assessing the fluctuations of each item So, Deloitte Vietnam need to consider whether to allocate the materiality among the items in the financial statements.

3 In the risk assessment process, although the company's customers have many large corporations with a significant number of affiliates and dependent unit, therefore, the internal control systems of these companies are complex, auditors still mainly used questionnaires, and do not focus on more effective method such as flowcharts or narrative tables The utilization of questionnaire cause ambiguity in the structure and operations of the business and in the seperation of responsibilities in the internal control system This will create difficulties for the auditors who does not directly collect information about customers as well as the auditors who will continue to conduct the audit afterwards Besides, if the dishonest answers exists, it will be difficult for auditors to figure out the weaknesses of the internal control system Thereby, it can lead to incorrect conclusions about control risk and will affect the efficiency of the audit risk

4 In the assessment of control risk for these companies which are small or do not maintains an internal control system, due to the professional prudence, the auditors tend to set the level of control risk at the highest level and not perform tests of control and only carried out substantive tests Accordingly, it will lead to increase the amount of work and cost of the audit Therefore, the economics and efficiency of the audit will not be achieved.

5 The process of evaluating materiality and risks in audit of financial statements conducted by Deloitte Vietnam was established base on the basis of the US economy It is a large modern economy with large-scale Corporations If apply to a developing economy as Vietnam, then there are some points not appropriate due to the relatively large differences between the two economies. The most remarkable issue is the Guidance for Assessing materiality base on your revenue (Table 2.11) The revenue given in the table is the level of US companies This figure is too high compared to operating firms in Vietnam. Therefore, auditors may fail to assess an appropriate coefficient and would assess a higher level of materiality, affecting the quality of the audit.

6 AS2 software is a comprehensive software It supports the auditor in conducting an audit from the beginning to the end However, it still has a number of significant errors the affect the audit process and, especially, the planning process Sometimes, it damages the files stored in the audit records of customers that make the file unusable Upon the occurrence of such cases, the auditor will have to re-work all the damaged papers that will waste time and effort Besides, AS2 software’s interface is friendly and easy to understand, but the interaction between the user and the software has not been good Operations when using the tools of AS2 is not really easy and suitable that cause auditors to take some time to get used to the software.

7 When obtaining an understanding of customers and evaluating theirs internal control systems, the information the auditors collect is from the many sources such as: customers, books, newspaper, website, predecessor auditor, Sometimes, the information that auditors collected is incorrect The objectively reason is due to the information system in our country is not yet completed The information has not been publicized widely and transparently, so auditors still facing many difficulties in gathering information Therefore, most of the information the auditors collect is provided by the customer so it can not ensure high independence of the auditors.

Recommendation on assessment of audit risk and materiality in

3.2.1 Recommendation on assessment of control risk

 Utilize flow charts and reporting tables for recording the internal control systems

In the process of assessing audit risks, auditors must understand and describe the internal control system of the customer on work papers Auditors can use questionnaires, reporting tables, flowcharts, or a combination of those methods to describe the internal control system Among the tools used to describe the internal control systems, flow chart is considered as the effective tools for describing because a chart is always more visual and more receptive than reading a text.

However, in practice, auditors of Deloitte Vietnam only used questionnaires and narrative table (especially questionnaires) to describe the internal control system of the customer on work papers Thus, if the interviewees answer the questions dishonestly, auditors will find difficulties in exploring the weaknesses of the internal control system, which may lead to unwarranted conclusions about control risk Consequently, the incorrect conclusion will affect the process of assessing audit risks.

To enhance the assessment of audit risks, auditors should utilize flowcharts in documenting clients’ internal control systems within working papers, as they effectively identify system weaknesses Particularly for large, complex organizations, traditional questionnaires and narrative tables may overlook issues or become too lengthy for quick review Incorporating flowcharts allows for clear visualization and summarization of internal controls, improving audit efficiency Combining flowcharts with questionnaires or narrative tables enables auditors to conduct more comprehensive and streamlined internal control evaluations, ultimately reducing control risk.

Deloitte's auditing system AS2 utilizes standardized symbols in flowcharts, creating a favorable environment for auditors to visually represent a client’s internal control system The consistent use of these symbols enhances clarity and understanding during audits Additionally, this symbol system aligns Deloitte Vietnam with international auditing standards, facilitating seamless integration and ensuring compliance with global best practices.

Deloitte Vietnam's auditors are highly qualified professionals, supported by top-tier recruitment and training programs considered the best in the country This extensive training enables them to effectively utilize symbols and flowcharts to clearly illustrate clients' internal control systems, ensuring accurate and comprehensive assessments.

Currently the Board of Directors of Deloitte Vietnam is implementing the employee training plans according to the new guidelines of Deloitte In this training plan,

Deloitte experts will deliver professional guidance to Deloitte Vietnam auditors on effectively utilizing flow charts to understand and describe clients' internal control systems To maximize training effectiveness, the company will conduct specialized classes tailored to various professional levels, incorporating relevant content and appropriate training methods.

 Enhancing the process of assessing control risk

Risk assessment during the planning stage of an audit involves evaluating audit risks through inherent risk, control risk, and detection risk Deloitte Vietnam's auditors have effectively conducted inherent risk assessments in accordance with AS2 standards, enhancing the overall audit quality This comprehensive risk assessment process is essential for identifying potential audit challenges and ensuring accurate financial reporting.

Identifying control risk is a crucial step in the audit process, as it directly influences the determination of the appropriate sample size for inspection and evidence collection Assessing the reliability of the internal control system helps auditors determine the extent of testing needed to obtain sufficient and appropriate audit evidence Proper control risk assessment ensures auditors allocate audit resources efficiently while maintaining audit quality.

According to AS2, the identification of the amount of audit evidence is built on the following basis:

Audit reliability is essential for ensuring that financial statements are free from material misstatements, thereby providing accurate information to users It is assessed based on overall standard reliability, control reliability, and detailed inspection reliability, collectively contributing to the credibility of the audit process.

Standard reliability reflects the level of trust in the accounting process, which is established through a thorough assessment of inherent risks and previous audit outcomes This measure ensures that the accounting procedures are dependable, based on initial risk evaluations and past audit results By evaluating these factors, auditors can determine the overall reliability of financial information, supporting accurate and trustworthy financial reporting.

+ Control reliability: the reliability based on checking the customer control steps designed to prevent and detect potential errors.

+ Detailed inspection reliability: the reliability that only through detailed inspection procedure can the occurred material mistatements, which were not detected by customer’s internal control, be detected.

Auditor can dectect detail risks Auditor can not detect detail risks

Rely on internal Not rely on Rely on internal control Not rely on control system internal control system system internal control system

Test the controls for determining inherent mistatements

Test the controls to ensure the reliability on customer’s accounting system

Planning and conducting audit plan

Focus purely on substantive tests

Low level of substanstive tests

Minimum level of substanstive tests

Low level of substanstive tests

Moderate level of substanstive tests

Table 3.18 Table of reliability level of Deloitte Vietnam

Auditors must develop a comprehensive audit plan to evaluate the internal control system, ensuring their reliability in assessing financial accuracy This planning process helps determine the appropriate amount of evidence, as well as the timing and type of audit procedures required Following a structured approach aligned with Deloitte Vietnam's standards ensures a thorough and efficient audit process.

Understanding the internal control system involves accumulating information based on both recent evidence and experience from previous years When assessing the system, auditors should carefully evaluate all evidence collected during the current year as well as historical data It is essential for auditors to consider these factors to ensure a comprehensive evaluation of the internal control system's effectiveness and compliance.

+ Bussiness risk assessed by the Board of Directors

+ Managment of internal control system

State companies and private enterprises in Vietnam have not established comprehensive internal control systems, which prevents Deloitte Vietnam's auditors from relying on these controls As a result, the control reliability remains consistently at zero, impacting overall audit effectiveness.

When auditors do not believe in the internal control system of the customer (control reliability equals zero), there will be two circumstances:

+ If auditors detect risks in detail, standard reliability will equal 0 The audit reliability is always equal to 3 so that the detailed inspection reliability will be

3 Auditors must perform substantive tests in the most concentrated level.

If auditors fail to identify risks in detail, the standard reliability remains at 1 When audit reliability is increased to 3, the detailed inspection reliability improves to 2 Consequently, auditors continue to perform substantive tests at an average level to ensure accuracy and completeness.

Auditor skepticism towards a customer's internal control system increases the reliability of detailed inspections, leading to higher audit costs To balance audit quality and cost efficiency, Deloitte Vietnam auditors should conduct thorough yet reasonable assessments of clients' internal controls Establishing an appropriate reliability level for the internal control system is essential to optimize audit expenses while maintaining high standards of audit quality.

3.2.2 Recommendation on assessment of materiality

Recommendation on assessment of performance materiality

As mentioned earlier, the coefficiency given in the table 2.11 were not fair enough because its basis is established base on the developed economies such as the US,

EU, Meanwhile, Vietnam’s company are mainly economy small and medium ones. This can cause discrepancies when assessing the materiality.

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