Improving the audit process of fixed assets in financial audits conducted by VACO auditing company limited

LIST OF FIGURESFigure 1.1: Accounting items system of fixed assets...5 Figure 1.2: Generalization of fix assets accounting procedures...6 Figure 1.3: Objectives and Contents of Internal

TABLE OF CONTENTS

TABLE OF CONTENTS

LIST OF FIGURES

LIST OF DIAGRAMS

INTRODUCTION 1

CHAPTER I: THEORETICAL FRAMEWORK ON AUDIT OF FIXED ASSETS IN FINANCIAL AUDIT CONDUCTED BY VACO AUDITING COMPANY LIMITED 3

1.1 Features of fixed assets 3

1.1.1 Nature and content of fixed assets 3

1.1.2 Accounting for fixed assets 4

1.1.2.1 Accounting items system 4

1.1.2.2 Bookkeeping and documents system of fixed asset 5

1.1.2.3 Organization of accounting of fixed assets 6

1.1.3 Potential errors and frauds 7

1.1.3.1 The errors exist in the transaction of fixed assets 8

1.1.3.2 The frauds exist in the transaction of fixed assets 8

1.1.4 Key internal controls of fixed assets 9

1.2 Audit objectives in auditing fixed assets 12

1.3 Sequence in auditing fixed assets in financial audits 14

1.3.1 Audit planning 15

1.3.1.1 Initial audit planning 15

1.3.1.2 Understanding the entity’s business and its environment 15

1.3.1.3 Preliminary analytical procedures 15

1.3.1.4 Understanding internal control and assess control risk 16

1.3.1.5 Assessment of audit materiality and audit risks 16

1.3.1.6 Designing the audit program 18

1.3.2 Audit implementation 18

1.3.2.1 Performing tests of control 18

1.3.2.2 Performing analytical procedures 19

1.3.2.3 Performing test of detail 20

1.3.3 Completing the audit 25

1.3.3.1 Additional tests for presentation and disclosure 25

1.3.3.2 Review for subsequent events 25

1.3.3.3 Final evidence accumulation 25

1.3.3.4 Evaluate results and issue audit report 26

CHAPTER 2: PRACTICE OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY VACO AUDITING COMPANY LIMITED 27

2.1 Clients of VACO AUDITING COMPANY LIMITED and the necessity to audit fixed assets in financial audits 27

2.1.1 Clients of VACO Auditing Company Limited 27

2.1.2 The necessity to audit fixed assets in financial audits 27

2.2 Sequence in auditing fixed assets in financial audits at company ABC conducted by VACO AUDITING COMPANY LIMITED 28

2.2.1 Audit planning 28

2.2.1.1 Initial audit planning 28

2.2.1.2 Understanding the entity’s business and its environment 29

2.2.1.3 Preliminary analytical procedures 29

2.2.1.4 Understanding internal control and assess control risk 29

2.2.1.5 Assessment of audit risks and audit materiality 31

2.2.1.6 Designing audit program 32

2.2.2 Audit implementation 34

2.2.2.1 Performing tests of control 34

2.2.2.2 Performing analytical procedures 34

2.2.2.3 Performing tests of detail 38

2.2.3 Completing the audit 55

CHAPTER 3: ASSESSMENTS AND RECOMENDATION TO IMPROVE AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY VACO AUDITING COMPANY LIMITED 57

3.1 Assessments on audit of fixed assets in financial audits conducted by VACO AUDITING COMPANY LIMITED 57

3.1.1 Strengths 57

3.1.1.1 Audit planning 57

3.1.1.2 Audit implementation 57

3.1.1.3 Completing the audit 58

3.1.2 Weaknesses 59

3.1.2.1 Audit planning 59

3.1.2.2 Audit implementation 60

3.1.2.3 Completing the audit 60

3.1.3 Causes of weaknesses 61

3.2 Recommendations for improving the audit of fixed assets conducted by VACO AUDITING COMPANY LIMITED 62

3.2.1 The necessity for improving the audit of fixed assets conducted by VACO AUDITING COMPANY LIMITED 62

3.2.2 Recommendations for improving the audit of fixed assets conducted by VACO AUDITING COMPANY LIMITED 63

CONCLUSION 69

REFERENCES 70

APPENDIX 71

STATUTORY DECLARATION

I herewith formally declare that I myself have written the submitted BachelorThesis independently I did not use any outside support except for the quoted literatureand other sources mentioned at the end of this paper

I clearly marked and separately listed all the literature and all other sources which

I employed producing this academic work, either literally or in content

Hanoi, 27/05/2016

Signature

LIST OF FIGURES

Figure 1.1: Accounting items system of fixed assets 5

Figure 1.2: Generalization of fix assets accounting procedures 6

Figure 1.3: Objectives and Contents of Internal Control for fixed assets in the enterprises 12

Figure 1.4: Specific targets for auditing fixed assets 13

Figure 1.5: Assessing Materiality level 17

Figure 1.6: Procedures for testing increasing or decreasing fixed assets transactions .21

Figure 2.1: Working paper on Internal Control for fixed asset items 30

Figure 2.2: Quoting working papers no [1811]: Determination of materiality 32

Figure 2.3 Detailed audit program for fixed assets designed by VACO 33

Figure 2.4: Quoting lead sheet [5610] about tangible fixed assets 35

Figure 2.5: Quoting lead sheet [5710] about intangible fixed assets and other assets .36

Figure 2.6 Quoting working papers about analytical procedures 37

Figure 2.7 WP no 5640 about checking increase asset 42

Figure 2.8: Quoting working paper no [5640] – Test of detail on decreased transactions for fixed assets in ABC Company 45

Figure 2.9: Quoting working paper - Checking depreciation and amortization account 48

Figure 2.10: Quoting working paper- Summarizing cost for construction in progress .51

Figure 2:11 Quoting working papers about increasing cost incurred to build construction in progress 53

Figure 2.12 Summarizing audit results 55

LIST OF DIAGRAMS

Diagram 1.1: Step to handle the fixed assets transactions 11

1 Rationale for the research

With the strong development of market economy, the process of internationaleconomic integration that requires financing activities must take place in a transparent,fair and public environment, because the increasingly complex economic informationwill lead to a potential risk, misleading and unreliable economic information.Currently, there are growing a number of investors both in local and abroad whoincrease investment and seek profits in Vietnam market Therefore, it is much moreessential to consider the need of using information to make correct decisions And thatthe information provided by the accounting should be assessed and confirmedobjectively by an honest and independent party Thus, auditing activity was born andthe growth of this service is inevitable

Nowadays, auditing service is considered to be one of the most professionalservices which brings many benefits in creating an effective business market InVietnam, auditing service is quite new, but due to the high demands of the economy aswell as the encouragement of the Government, this service is growing strongly andstrongly Currently, along with the development of many auditing firms, the auditing

of services offered is increasing more diversely However, the auditing about financialstatements is still the principal activity of independent audit firms It means that theauditing of financial statements plays an important role in the economy Due to thehigher complexity of these transactions, an audit about financial statements in generalbecomes more difficult and it is needed to study to be more perfect

As a matter of fact, the item "Fixed assets" plays an important position in theaudited financial statements With the inherent nature of fixed asset, it is an essentialpart which is enable to enhance a sustainable growth for businesses; moreover, there is

an intimate relationship between fixed assets with other items on the financialstatements, thus the discovery of violations related to fixed assets, and theinadequacies in the management and using of fixed assets are a necessary job Thevalue of fixed assets in the enterprise is often a large, it also accounts for a significantproportion compared to the total assets on the balance sheet, particularly in themanufacturing enterprises (heavy industry, oil and gas, telecommunicationsconglomerates ) So, if there is a mistake related to fixed assets, the integrity offinancial reporting will be affected largely Moreover, the fixed assets may be subject

to the administrating adjustments of managers that may cause violation in the financialstatements Therefore, the auditing fixed assets is one of the most important stages in

the audit of financial statements that requires the auditor to design and perform auditprocedures in the manner that can detect risk to the lowest level.

Realizing the importance of auditing work, especially in the audit of fixedassets, with the knowledge has been fitted in the school and internship period inVACO- a limited liability company, I chose the topic for the final practice:

"Improving the audit process of fixed assets in financial audits conducted byVACO Auditing Company Limited"

2 Objectives of the research

This topic is studied in order to achieve these objectives: Systematizing the basictheoretical issues on audit process of fixed assets in auditing financial statements,clarifying the situations, assessing the advantages, limitations that have still existed inthe auditing process for fixed assets in auditing financial statements and proposingsome solutions to improve the process at VACO

3 Methods of the research

The topic uses these research methods: general methodology and specificresearch methods

General methodology consists of reasoning allows dialectical materialism and historical materialism and Specific research methods include statistical methods,

integrated analysis, collecting information methods through the study of documentsand interviews, information processing method through mathematical processing withquantitative and qualitative information; to clarify the status about the theoretical inauditing processes of fixed assets

Besides the introduction, conclusion and the list of references the mainstructure of the thesis consists of three chapters:

Chapter 1: Theoretical framework on audit of fixed assets in the financial auditsconducted by VACO Auditing Company Limited

Chapter 2: Practice of audit of fixed assets in the financial audits conducted byVACO Auditing Company Limited

Chapter 3: Assessments and recommendation to improve the audit of fixed assets

in the financial audits conducted by VACO Auditing Company Limited

CHAPTER I: THEORETICAL FRAMEWORK ON AUDIT OF FIXED ASSETS IN FINANCIAL AUDIT CONDUCTED BY VACO AUDITING

COMPANY LIMITED 1.1 Features of fixed assets

1.1.1 Nature and content of fixed assets

First, fixed assets are assets that have great value, long duration of use andinvolved in many business and production cycles Fixed assets is a significantlyproportion of accounting items on the balance sheet

Second, fixed assets are material and technical of the unit It reflects theproduction capacity and the technical level of the application of the unit operations.Fixed assets is an important factor in the ability of sustainable growth, laborproductivity growth, thereby the cost of goods and services will reduce

Third, fixed assets are assets used for production and business purposes and notfor sale In the course of use, the fixed assets are consumed Their value is convertedgradually into operating expenses and will be recovered from the sale of goods andservices for business operations

Tangible assets

According to Vietnamese Accounting Standards No 03, “assets with physicalforms held by enterprises for use in the production and trading in line with recognizedstandards of tangible assets” Tangible assets include: buildings and structures;machinery and equipment; means of transport, transmission equipment; equipment,management tools; perennial gardens, working animals; other type of fixed assets.These assets are recorded as tangible fixed assets to satisfy simultaneously allfour following criteria: certain economic benefit in the future from the use of suchassets, the cost of such assets must be measured reliably, time use estimates over oneyear, qualified valid under current regulations

According to Circular 45/2013/TT-BTC dated 25/04/2013 of the Ministry ofFinance shall prescribe the standards of tangible assets must be valued at 30 milliondong or more (start applying for fiscal year 2014)

Intangible assets

Initially, intangible fixed assets, according to the Vietnam Accounting Standards

No 04, “the property has no material form, but determining the value and business byholding, use in production and business, providing services or other objects for leasing

in line with standards recognized intangible assets” Intangible assets include land userights, distribution rights, patents of invention, trademarks…

An intangible asset is recognized as an intangible asset must satisfysimultaneously definition of intangible assets and four recorded following criteria,which are certain economic benefits in the future by bringing such properties, the cost

of assets must be measured reliably, time use estimates over one year, being qualifiedfor the value according to current regulations

Financial lease fixed assets

Financial lease fixed assets, according to Vietnamese Accounting Standards No

06, "Leases", promulgated and published by Decision No 165/2002 dated 31/12/2002

of the Minister of Finance is an agreement between two parties: lessor and lessee aboutthe lessor transfer use rights of property to the lessee for a certain period of time toreceive money to hire one or more times

Financial lease fixed assets is the leasing of assets which the lessor hastransferred substantially all the risks and rewards associated with ownership of theleased assets Property ownership can be transferred at the end of the lease term

A finance lease agreement must meet 1 of 5 conditions:

First, the lessor transfers ownership of the property to the lessee at the end of thelease term;

Second, t the inception of the lease, the lessee has the option to purchase theleased assets at a price lower than the estimated fair value at the end of the lease term;Third, duration minimum lease assets accounted for most of the time theeconomic use of the property even though there is no transfer of ownership;

Fourth, at the inception of the lease, the present value of the lease paymentsminimum dominate the fair value of the leased asset;

Fifth, leased asset is of specialized kind that only the lessee has the ability to use

no need to change, a major reconstruction

Noticeably, fixed assets is a kind of commodity that exist through trading, it cantransfer the ownership and the using rights from one to another subject on materialmarket, can join in the many business and production processes In the course ofengaging in business, fixed assets will remain the initial physical forms until damaged.Lastly, during using, fixed assets will be worn gradually and its value is shifted to thevalue of the product

1.1.2 Accounting for fixed assets

1.1.2.1 Accounting items system

Under current accounting system, accounting fixed assets track on the followingaccounts:

Figure 1.1: Accounting items system of fixed assets

2111 Buildings and structures perennial gardens

2112 Machinery and equipment

2113 Means of transport, transmission equipment

2114 Equipment, management tools

2136 Permit and license

2138 Other intangible assets

214 Depreciation of fixed assets

2141 Depreciation of tangible assets

2142 Depreciation of financial assets

2143 Depreciation of intangible assets

2147 Depreciation of real estate investment

In addition, in the process of accounting, accountant also uses other relatedaccounts such as: 217 - Real estate investment; 331 - Payable to sellers; 111 – Cash;

112 - Bank deposits…

1.1.2.2 Bookkeeping and documents system of fixed asset

The books are used for accounting purposes of fixed assets include: book of fixedassets, registers of fixed assets, book for monitoring fixed assets where used, thesubsidiary ledger, books of general

The system of accounting documents including: fixed assets increasedaccounting documents, fixed assets decreased accounting documents, depreciationaccounting documents of fixed assets

Fixed assets increased accounting documents: contracts to buy fixed assets, bill

of sale, delivery records of fixed assets, inventory records of fixed assets, amortizationtest records…

Fixed assets decreased accounting documents: decision disposals of fixed assets,liquidation records, sale contracts, delivery records and amortization, revaluation offixed asset records

Depreciation accounting documents of fixed assets: spreadsheets and allocatedepreciation, registration Figures depreciation rate

1.1.2.3 Organization of accounting of fixed assets

Transactions increased / decreased of fixed assets in company occursinfrequently but larger scale and related to multiple accounts on the critical nature offinancial reports of a business, such as capital investment, loan Accounting process

of fixed assets can be summarized through accounting Figure follows:

Figure 1.2: Generalization of fix assets accounting procedures

Historical cost Accumulated depreciation

Increase in the Depreciation expensesperiod Liquidation Liquidation in the period

Profit / Loss of liquidation Depreciation costs

Fixed assets is one of the most important parts of assets in the enterprise In thecourse of using, fixed assets will be worn gradually, its value is shifted partially intothe value of the product or the services they produced, and this shift is considered inthe form of depreciation fixed assets The key characteristics of the fixed assets thatare dominant in auditing is their great value This is because the procurement processand equipment and amortization of enterprises does not occur sporadically, this isusually done in one sequence with relatively tight control of the business, thus thefixed assets will be used in a long period, and the time for managing these assets isoften large In the course of using, businesses must depreciate this assets, and theapplication a reasonable depreciation policy greatly influence the level of honesty andreasonableness of the information related to fixed assets in the financial statements Onthe other hand, during using period, these assets can be upgraded or repaired, whichcan also affect the information on the financial statements In fact, the recordingtransactions related fixed assets will be in compliance with the principles: materiality,cautiousness, and the historical cost principal However, in the course of auditing, theauditors have to note the risks related to fixed asset items such as original cost that can

be reflected opposite to the reality, noting incorrect increasing and decreasing propertyvalues, improperly transferred resources

Depreciation and amortization fixed assets: Unsuitable methods in calculatingdeprecation expenses, the unreasonable calculation and allocation and the inconsistent

1.1.3 Potential errors and frauds

When conducting the audit of fixed assets, the auditor needs to understand theunderstanding of audit risk with fraud and errors in the economic transactions related

to fixed assets Common risks in the audit of its fixed assets including:

1.1.3.1 The errors exist in the transaction of fixed assets

Fixed asset management is not close: incomplete records of fixed assets, fixedassets not transfer ownership to the unit but is recognized in the balance sheet; nobooks and cards detailing each fixed asset

The accountants forget to record its transactions related to fixed assets thatshould have been recorded in the book For example, accountant only record increasedfixed asset accounting which are not recording transferred funds

Wrong determination of accounts in the case should have been Debit or Credit inthis accounting item but the accountant record to another accounting item inconsistentwith transaction such services incurred when businesses conduct minor repairs of fixedassets, cost of repairs may that must be accounted into business expenses in theaccounting periods, the accountant recorded in the Debit fixed assets (No 211) toincrease the value of its fixed assets on the balance sheet

Errors in the record accounting process and the transfer of accounting books.This is a common mistake of fixed assets that auditors have to pay attention In therecord process, the accountant may inadvertently record the amount of bias, the upsidethan the amount stated in the documents; accountants can also confuse whiletransferring data from the journal to the ledger

Misclassification: assets are not sufficient indicators recorded fixed assets butare recognized as fixed assets, accounting confuse between tangible fixed assets andintangible assets Incorrect classification of intangible assets: land use rights, the cost

of compensation and site clearance Noting increase their costs of intangible assetsthat are not strictly defined as the cost of establishing the company, the cost for theperiod research…

Duplicate errors: recorded several times a transaction in the different books.Errors due to poor level of accountant lead to mistake when record transactions arising

in the book or when the new regime issued, accountant don’t know the content of alltransaction or do not fully understand the transaction should lead to wrong errors in theaccounting process

1.1.3.2 The frauds exist in the transaction of fixed assets

In fact, the cause-related transaction of fixed assets being reflected discrepancies

by the accountant deliberately because many different purposes In terms oftransactions nature, intentional violations are critical nature, the frauds often havearrangements so during the audit fixed assets items, the auditor need special attentionreviews Some fraud generally occurs in practice

Firstly, the frauds to embezzle appropriation difference value between invoicesand actually incurred, such as false invoicing recorded additional cost of fixed assets

by falsifying invoices when shopping or decrease the liquidation value by collusionwith third parties, repair documents, forgery of vouchers relating to procurement fixedasset’s cost Accountant records repair costs higher than the fact to appropriate thedifference as compared with the reality

Secondly, records of economic transactions involving fixed assets, such as record

to the cost of fixed assets some incurred cost as interest expense; cost overhaul fixedassets non-upgrade, do not increase the capacity or time to use

Thirdly, attempt to conceal documents, omitting the economic transactions inorder to achieve their own interests as deliberately not record the proceeds from theliquidation fixed assets fully depreciated to usurp part of this money

Fourthly, deliberately misapplied existing accounting regulations and legaldocuments related as applicable depreciation rates faster than prescribed, depreciatedagainst fixed assets fully depreciated to increase spending charges to reduce corporateincome tax

1.1.4 Key internal controls of fixed assets

Internal Control for fixed asset includes all policies, controlling procedures thatare set up with the purpose of managing and operating activities related to fixed assets

in the unit

Steps done to process transactions on fixed assets include:

First, identifying investment needs and making investment decisions for fixedassets: this work is usually done by the planning department The determination of theneed for investment and making investment decisions for fixed assets should be based

on long-term investment plans, as well as the actual demand of the unit, and it must beapproved by board of directors After the new fixed assets investment decisions areapproved, purchase department will carry out the purchase of fixed assets

Second, organizing the reception of fixed assets: The most important objective ofthis stage is to ensure that the departments will receive the assets under good quality aswell as it must be ensured about technical standards and quality

Third, organizing the management and preserving the fixed assets during usingperiod: and this should be ensured both in terms of quantity and quality to avoiddamage and loss during using Moreover, when fixed assets are damaged, it should bepromptly detected and measured and repaired

Fourth, organizing and managing fixed assets records include internal controlprocedures With recognizing fixed assets, after fixed assets was handed over andmade record to the users, accountant for fixed assets will open the card and record inthe book of firm Each fixed asset needs to be saved in a separate file Accountants areresponsible for classifying the assets to group that is suitable for the standards andaccounting regulations Next, with depreciating fixed assets, the level for depreciationfixed assets must be approved through the approval the usage and in the deliveryrecords of fixed assets Time for using of fixed assets is based on the regulations onthe use and depreciation of fixed assets (stated by the Ministry of Finance).

Moreover, handling and recording the expenditures used for investing fixedassets require accountant to inspect and review the documentation related toinvestment activities and purchasing of fixed assets These documents must be made inaccordance with regulations that have been approved, while accountant will makepayment procedures When there is demand for payment, it need to be checked andreconcile between invoices, contracts, estimating expenses and other relevantdocuments to ensure that the payment value is reasonable, accurate and true which arespecified clearly in the contract

Next, considering, approving and processing the repair transactions, liquidation,and sale of fixed assets consists of the internal control procedures With repairing fixedassets: the repairing plan will be approved by the Board of Directors When it iscompleted, it is needed to have a record of liquidation and profile of completion Andthen accountant will inspect and review documents related to repairing andmaintaining activities to ensure that all documents are made in accordance with Withliquidating and selling fixed assets: Every year, accountant will check the depreciationFigure to make a list of fully depreciated assets during the year and make a plan toliquidate fixed assets during the year When there is arising a need for liquidation offixed assets that are not fully depreciated, but there is no need to use or inability torecover, there should be a minutes of the identified technical condition for the property(With the confirmation of the parts use) Accountant check the expenses and incomereceiving from liquidation process At the end of the period, accountant reconciles thebook and Figure of depreciation and amortization for fixed assets to ensure theremoval assets from the list

Diagram 1.1: Step to handle the fixed assets transactions

* The contents of the Internal Control can be generalized as follows:

Initially, entity of Construction will issue the regulations on Internal Control forthe buying and liquidating fixed assets It includes the provisions about functions,responsibilities, rights and obligations of person or related parts in handling work ofinternal control

Then, the entity will implement the regulations about managing, controlling, andthey will participate in organizations assignment, management, using and liquidation

of fixed assets

While implementing the principle of internal control, performing concurrentprinciples for the system requires a separation between the managing and recording offixed assets; between managing and buying assets Moreover, while performingauthorization rule the entity must have clear rules on each level about managing andusing of fixed assets The good controlling these functions will avoid collusion orfraud in the management of fixed assets

Identifying investment needs and making decisions

Organizing to receive fixed assets

Managing and preserving fixed assets during using period

Organizing and managing in recording the value of fixed assetsRecording the liabilities incurred in the investing process of fixed assets

Handling and recording the expenditures used to pay for fixed assets investment

Considering the disposals of fixed assets

Figure 1.3: Objectives and Contents of Internal Control for fixed assets in the

Independent control process is needed for approval

2 Ensuring that all

The documents must be valid, and they have been processed to ensurethat they are not erased, repaired and they had to be controlled

The documents must be numbered and managed according to the number

Having internal control for above contents

5 Ensuring full

recording on time

for all transactions

Each records related to fixed assets must be numbered and monitored closely

The recording these transactions incurred must be made immediately after the operation occurred and completed

The data must be calculated correctly

(Source: Book "Audit of other financial information", Academy of Finance)

1.2 Audit objectives in auditing fixed assets

That in accordance with the overall objectives of the audit of financial statements

is the confirmation about the reliability of the financial statements that are audited, thespecific objectives of the audit are fully collected appropriate evidence, and therebyauditors can give confirmation about the reliability of the financial information It alsoprovides information and documents that are all relevant when auditing fixed assets

To achieve the general audit objectives, auditors must achieve specific audit objectivesfor fixed assets Which are professional objective for auditing increase (decrease) infixed assets and objectives for audit overbalance of fixed assets

Figure 1.4: Specific targets for auditing fixed assets

Audit objectives and ending balance of fixed assets

Completeness: the transactions incurred during the period are fullyreflected and monitored in the accounting books

Correctness: all transactions of fixed assets during the period areclassified correctly in accordance with the provisions, accountingregulations and the characteristics of the business These transactions arerecorded correctly under the method of accounting

Correct period: transactions are accounted under accrual accountingprinciples

The rights and obligations: all fixed assets that are reported are under theownership of the business; for financial leasing fixed assets, they must beunder permanent control of the leasers

Rating: account balances are evaluated according to accountingregulations, and based on the specific provisions of the enterprise

Calculation: there is no flaws in determining the proper balance

- Completeness: all fixed assets are shown fully on the financialstatements (no missing or errors)

- Correctness: Fixed assets are classified correctly for presentation on thefinancial statements

- Cumulating: cumulated data on fixed asset records are properlyidentified There are no flaws in transferring data from detailed ledger tothe general ledger

- Reporting: criteria related to fixed assets on financial statements shall bedetermined in accordance with the provisions of the Standards

1.3 Sequence in auditing fixed assets in financial audits

Without doubt, fixed assets plays an important role in production line in business,therefore the recording of as well as depreciation and amortization fixed assets need to

be recorded properly and accurately Moreover, on the balance sheet, the fixed assetitems accounts for a large proportion of errors, so its errors will result in a materialeffect on the financial statements of the enterprise

Actually, auditing procedures of fixed assets helps the auditor to collect evidence

to achieve the audit objectives In general, the audit process of fixed assets is done inall three phases: audit planning, audit implementing and completing the audit Theprocess is usually as follows:

Clearly, planning a suitable audit processes with consistent guidance will help

auditors save costs and time, as well as to help stakeholders assess the quality of theaudit and find whether the audit is in compliance with current standards or not.Conversely, if the audit process is not built in a scientific way, the audit will not go inthe right direction, which increases the cost for the firm Thus, building an auditprocess is regarded as the soul of an audit, which helps the auditors achieve auditingobjectives.

1.3.1 Audit planning

Audit planning is considered the first step in an audit and it has an importantinfluence on subsequent stages An appropriate audit plan will allow auditors to followthe right track, avoid mistakes and finish the work quickly

After assessing the preliminary information about the client, the auditor acceptsthe audit and signs an audit contract The next step, auditors will make audit plan thattypically includes the following key issues:

1.3.1.1 Initial audit planning

Initial audit planning is established for all audits of financial statement It mustshow the expected range and how to conduct the audit To set up the initially auditplan, the auditors are assigned to conduct research, study and collect information

1.3.1.2 Understanding the entity’s business and its environment

First, auditors collect general information about the economy and thecharacteristics of the business which have an impact on the audited entity and thelegal obligations of the client Auditors also collect legal documents such as theminutes of the capital contribution, capital delivery records, certificates of jointventures, affiliate

Then, auditors search about the business sectors of clients, financial results andthe obligation in providing information, the management apparatus and the capacity ofthe Board of Directors, the possibility in continuing operation of the client…

Moreover, the information about accounting system and internal control system:Considering all the accounting policies applied by clients and changes in accountingpolicies; and paying attention to the impact of new policies on accounting andauditing; the important point should be noted in the operation of the two systems

1.3.1.3 Preliminary analytical procedures

Apparently, analytical procedures are applied to all audits and are implemented

in all stages of the audit by the auditors According to the Vietnam Auditing Standards

No 520- Process analysis: "Analysis is the analysis of data, information, the important

ratio to find out trends and the relationship or there is a conflict between relevantinformation with the expected value”

After collecting preliminary information about clients, auditors start to performanalytical procedures In this stage, auditors often adopt two most popular analyticalprocedures, which are trend analysis and ratios analysis

In trend analysis, with fixed asset items, auditors compare the Figures last yearwith current year, and compare the data of clients with industry Figures to identifyabnormal movements and find out the reasons

Meanwhile, ratios analysis is based on comparing the correlation ratio betweenthe index and the items that have been linked together For fixed assets, auditors canuse some ratio such as: investment ratio, self-financing rate …

1.3.1.4 Understanding internal control and assess control risk

Researching about client’s internal control and assessing control risk will helpauditors design the appropriate auditing procedures for fixed assets, assess the volumewhich is estimated to calculate the volume and complexity of the audit

The more effective internal control is, the smaller the risk control is and viceversa Auditors often check the system regardless of the internal control in twoaspects, which are design and operation

When it comes to checking out the client’s internal control, auditors will checkdocuments and books related to fixed assets, visit the actual fixed assets of client, andinterview with employees of the company or get third-party certification or observeinternal control procedures for fixed assets then implement the internal controlprocedures (if necessary)

After conducting these steps above, auditors should assess control risk and designtests of control to define the type of fraud and errors that may occur in fixed assetitems and assess the existence of internal control to detect and prevent fraud anderrors In addition, auditors can continue to conduct tests at a reasonable level based onthe level of control risk that is assessed

1.3.1.5 Assessment of audit materiality and audit risks

* Assessing audit materiality

Auditors inform about the materiality for the entire enterprise's financialstatements which information is available and auditors can make professionaljudgment Actually, materiality level will help auditors make specific plan to collectaudit evidence This materiality levels will be adjusted to suit each specific situation in

the audit process In auditing process of financial statements, auditors can evaluate themateriality level as follows:

Figure 1.5: Assessing Materiality level

Step 1 Initially estimates materiality level

Step 2 Allocates initial estimate about materiality for fixed assets

Step 3 Estimates total violations for fixed asset items

Step 4 Estimates combined error

Step 5 Compares the estimated error with the original estimate or revises the

initial estimate of materiality for fixed assets

When identifying materiality on the entire financial statements, auditors willdistribute this level for each item With those items that relate directly to businessresults in the period, auditors need pay more attention This materiality level will beconsidered as a basic adjustment for auditors using during the audit

* Assessing audit risks

Based on the materiality level that is attributable to fixed assets, auditors willassess the likelihood of errors in the audit process for fixed assets based on three types

of risk assessment, which are inherent risk, control risk and audit risk Firstly, for fixedassets, inherent risks are often judged based on the characteristics of the client'sbusiness, or the results of previous year's audit, or policy management and accountingreports of clients for fixed assets For example, in buying fixed assets, frequentlyliquidation may also contain more risks and mistakes Secondly, for control risk,assessing audit risk is mainly based on information about the validity, through theresearch on Internal Control systems which based on interviewing client and observingreal situation Weak controlling environment will make it more difficult to prevent,detect violations, so it leads to high risk and vice versa Thirdly, for audit risk, auditorsshould assess the possibility of auditors in case they cannot detect errors related tofixed asset items Thus, auditors should be alert to avoid these situations that may lead

to undetected errors, such as detect evidence but no noticeable flaws; incompletelyimplement audit procedures that leads to ignored violations

1.3.1.6 Designing the audit program

Audit program is all detail expectation that is detailed in contents, auditingprocedures, completion time and the tasks allocation among auditors as well asprojections of material, related information that are used and collected The focus ofthe audit program is necessary in audit procedures to perform each item in an audit.Usually, the content of audit program consists of documents that requires clients

to prepare, the specific audit objectives for fixed asset items, the work that needs to becarried out, the specific audit procedures, analytical balances procedures of fixedassets, detailed audit procedures for increase or decrease transactions, and procedures

to check the balance of fixed assets

1.3.2 Audit implementation

1.3.2.1 Performing tests of control

Tests of control are carried out to gather audit evidence about the design and theoperation of regulating and controlling audit procedures for fixed assets Test ofcontrol is done only after finding about Internal control and this stage is assessed aseffective Thereby, auditors assess the control risk to determine the scope of the auditand thus they can design the appropriate basic survey For fixed assets, test of controlprocedure will be included:

* Learning and evaluating about control policies and regulations for Internal Control

To get an understanding about the provisions of Internal Control for fixed assets,auditors should ask the business to provide relevant documents such as: regulationsabout functions, tasks and rights of individuals who work in approving procurement orliquidation of fixed assets When studying about these documents, auditors need to payattention to the adequacy of provisions for controlling of fixed assets, tightness andsuitability of Internal Control with activities related fixed assets

* Survey on the operation of Internal Control

The purposes of this survey are to collect the evidence about the effectiveness ofthe operation for Internal Control, namely the existence and regularity in operatingcontrol regulations

To examine internal control regulations in the operation for items of fixedassets, auditors usually observe the operation of the system by observing theimplementing, receiving and managing fixed assets, thus they can make an

assessment about the value of fixed assets They also interview with staff who areresponsible for building and maintaining the operation (such as the implementation

of buying, receiving, managing and liquidating fixed assets) Furthermore, auditorscheck the document and demonstrate the signs that internal control procedures havebeen implemented (signs of approval on the contract, delivery records of fixed assets,liquidation of fixed assets records )

* Survey on implementing the principles of organization for internal control

Besides checking the design of internal control regulations for fixed assetitems, auditors also need to conduct some surveys about the implementation ofinternal control principles for this fixed assets including: division of responsibility,and approval, authorization The proper implementation of these guidelines willensure and enhance the operational effectiveness of internal controls in thebusiness The survey is usually applied by auditors which are reading,understanding the text and the regulation that specify clearly the responsibilitiesand working scope for people who are involving in the work (considering theindependence between the approval of procurement operations with person whodecide whether to have a liquidation for fixed assets), interviewing with peoplewho are responsible and are carrying out work such as procurement of fixed assets,receipt of fixed assets, fixed asset management and liquidation of fixedassets ,checking the signs of controlling on documents such as: checking thesignature of the person doing the work, checking the signature of the person whoapproved the procurement operations and liquidation of fixed assets

1.3.2.2 Performing analytical procedures

Before checking in details about the increase or decrease of fixed assets duringthe year, auditors should ensure that all data on the detail book will match with thedata on the account ledger, balance sheet Thus, there is a need of comparison betweenthe total number on the detail book with those on the ledger, and balance sheet.Auditors will base on the balance sheet and other documents to collect information forcomparing data, indicating the volatility of the information and providing orientationfor the next detailed inspection

Depending on each characteristic of client, auditors can use many different ratioanalysis techniques such as horizontal, vertical analysis for comparison between thisperiod and the preceding period

Trend analysis includes comparing the original cost existing fixed assets with the previous period cost in business and comparing the accumulated depreciation and

amortization with those in the previous period, comparing the residual value of assetswith those in the previous period, comparing the total depreciation cost with those inthe previous period and making the lists for increasing or decreasing each type of fixedassets compared to the previous period

Ratios analysis consists of comparing the average depreciation rate of the

current period to the previous period, comparing the average depreciated ratios ofall fixed assets with each asset in current period with the previous period andcomparing the ratio between the total costs for repairing of fixed assets and a totalcosts of fixed assets

When conducting comparisons, auditors need to consider the impact ofdepreciation policy, the increase or decrease in fixed assets in the period to makeappropriate conclusions

1.3.2.3 Performing test of detail

Test of detail on fixed assets is mainly testing the operations that have beenrecognized in the accounting records for fixed assets, to find out whether depreciationand amortization can ensure the specific databases or not The databases are also thegoal that auditors are responsible for collecting the relevant evidence as a basis data topresent in the financial statements

 Test of detail in the increase or decrease transactions of the business

Checking in detailed the increase or decrease transactions in fixed assets haveimportant implications for the auditing process Properly reflecting these transactionshave a lasting impact on the unit's financial statements The errors in the recording willnot only affect targets on the accounting balance sheet but also affect materially on theindicators to report business results, cash flow statement and notes to the financialstatements

The specific audit objectives and audit procedures are commonly applied whenexamining the details in increasing or decreasing transactions: (Figure 1.3)

Figure 1.6: Procedures for testing increasing or decreasing fixed assets

Assessing the reasonableness of buying and selling prices for increased or decreased fixed assets in the period

Test the buying process, the vouchers and documents related to theacquisition of fixed assets, the cost of transportation, installationcommission

Test the records for approving increase or decrease in fixed assets,the approval of the competent is true or not, whether the sequencematches with regulations on Internal Control or not, whetherapproving of the contract is reasonable with invoices, records ornot?

Checking the exchange rates used for transactions in foreigncurrencies

Recalculating the original costs on the basis of documentsexamined: invoices, shipping documents, installation, and deliveryrecords

Ensuring fully

recording

Comparing increase, decrease documents (invoices, deliveryrecords) with ledger details to ensure that the recording transaction

Checking whether the presentation of fixed assets on financialstatements is in line with regulations or not and comparing data offixed assets on financial statements with data on fixed asset ledger.(Source: Book "Audit other financial information" - Finance Academy)

 Checking fixed assets balance

Auditing balance of fixed asset account is made on the basis of auditing openingbalances and the auditing results of increase or decrease transactions in the period

With opening balance: Considering the beginning balance of fixed assets was

carried out depending on how many the business is audited, the first or second time

If the audit of previous year was performed by the auditing company that is doingthis year's audited financial statements, thus the opening balances have beendetermined to be true, it is not necessary to perform additional audit procedures If theaudit in last year was performed by other auditing companies, auditors must review theprevious financial statements and documents, especially the issues related to fixedassets If the results are reasonable, the auditors can also accept the results of theprevious year's audit without adding additional audit procedures In this case, auditorsjust consider to ensure the financial year-end balances are transferred correctly or areclassified appropriately on this year's financial statements

If the financial statements are not audited in last year (first time for auditing); orthe previous year's audit was carried out by other audit firms which auditors do nottrust the results; or the previous year financial statements are not fully accepted forfixed asset balances; auditors have to take into account the causes for this reasons Inthis case, auditors must apply additional audit procedures, such as: checking thedocuments which are the evidence for the opening balance of the year, choosing oneitems to check the actual existence of the property, reviewing the results whenchecking inventory, or checking the status of mortgage fixed assets (especially for thecase that using fixed assets as mortgage)

With the ending balance: The ending balance is confirmed based on the audit

results from beginning and increase or decrease transactions in fixed assets during theperiod Auditors collected the summary for fixed assets (beginning balance, theincrease or decrease the amount arising, ending balance) which based on some criteriasuch as: original cost, accumulated depreciation expense, residual value and the Figure

of asset liquidation

 Testing depreciation expenses for fixed assets

The basic objective of this step is to consider the calculation process of fixedasset, to evaluate, determine and allocate the level of depreciation for the objects thatneeds to be reasonable and consistent To achieve this objective, auditors can reviewthe depreciation policy of firm to find out this policy is matched with currentaccounting standards or not, consider whether the methods used are consistent withprevious periods or not, and if there is change, it is suitable or not; and this amount hasbeen made necessary or not, check the correctness of the data used to calculate, checkthe calculation of depreciation expense, comparing with the general ledger, noting that

the new assets that have put in use or the assets have been fully depreciated but still inuse, review the allocation of depreciation expenses for the departments of businesses,compare the depreciation rate between current year to the previous year andinvestigating the difference (if any), compare the number of account 214 (credit side)with depreciation expense recorded on the account.

 Checking accumulated depreciation expenses for fixed assets

First, checking the accumulated depreciation balance by analyzing account no

241 "depreciation and amortization" into detailed parts of assets, and comparing withaggregate data on the book, considering the accuracy of the ending balance

Second, debit side of account 214 -"depreciation and amortization" associatedwith decreasing transactions, and credit side of account 214 associated with checkingdepreciation expenses

Recalculating the accumulated depreciation expenses for fixed assets

Comparing the data on the detailed accounting books with data on ledger account

 Checking the costs incurred after the initial recognition of the asset

The most important audit objectives to the costs incurred after the initialrecognition of the asset, (such as repairs, upgrades, renovation) is to ensure that thecosts incurred actually that is suitable with business’s conditions, and the expensesmust be recorded completely and correctly based on regulations prescribed byaccounting Standards

This process typically includes checking the completeness and accuracy inrecognizing expenses through determining whether these expenses can certainly bringeconomic benefits in the future or not? If the detection of the costs incurred are notsatisfied with this condition, they must be recognized as business expenses in theperiod; checking the completeness and accuracy in collecting huge repairing costs,paying attention to the overstate costs incurred; considering cost according to expectedand unexpected costs

When conducting huge repairing as planned, businesses often incur the repaircosts first, auditors will consider the level of accruals to find whether it is appropriate

or not, or has been fully approved or not

For a huge repair that is unexpected, enterprises must allocate the expenses thatare spent for repairs in production and business expenses in the period Auditors alsoconsider the reasonableness of the allocation and its impact to the production andbusiness results in the period

Considering the settlement of costs to check whether it is according toregulations or not; checking the accounting cost and the repair costs to upgradefixed assets.

1.3.3 Completing the audit

1.3.3.1 Additional tests for presentation and disclosure

Additional tests might be performed on presentation and disclosure in order tocomplete the audit

1.3.3.2 Review for subsequent events

The audits were conducted after the end of the accounting year Thus, during theperiod from the balance sheet date until the completion of financial statementsprobable events that affect the financial statements, auditors are responsible forreviewing events occurring after the balance sheet date

To collect and review the events that occur after the date of the financialstatements, the auditor can interview with the Managing Board, review the internalreport after the date of the financial statements, review of the book is made after thedate of the financial statements, check the records released after the date of thefinancial statements, check the result of unanticipated liabilities are rated as critical,consider fixed assets unused and sold after the closing date has cost prices belowhistorical cost recorded on the books

Normally, auditors check all transactions occur at the intersection of thesettlement period, conduct a review of the measures that the management application

to ensure those events occurring after the balance sheet date have been identified

1.3.3.3 Final evidence accumulation

Auditor will perform integrated assessment of the errors and frauds Auditors willdraw conclusions about the financial statements had recorded all fixed assets ofbusiness at the time stated in the balance sheet to be honest or not based on a generalevaluation of the errors detected

First, the auditor should assess aggregate immaterial errors to establish theaccounting adjustments and synthesis of the expected errors then compare to the flawscan skip to watch can accept fixed assets item or not Then, the auditor conductaggregate errors and frauds about fixed assets items to see they exceed the materiality

of the financial statements or not, while auditors must ensure the accompanyingexplanations are made for each fixed assets such as the depreciation method was

applied, time use and depreciation rates were applied, the entire depreciation for theyear, total fixed assets and the corresponding accumulated depreciation, restrictions forfixed assets, if any.

On the basis of synthetic conclusions on all portions of the audit, specifically,auditors established audit report including giving their opinion about the truthfulnessand relevance of financial statements audit unit

1.3.3.4 Evaluate results and issue audit report

After completion of the about works, the auditors draw up a report section sum ofthe part, often, the partial fixed assets unable to comment immediately but must becombined with the results of the other sections In cases where audit fixed assets hasrestrictions on the scope of the audit that cannot collect sufficient audit evidence toconfirm the truthfulness and reasonably, auditors can make except opinion

At the end of audit, auditors and auditing company will establish and issue auditreports in accordance with auditing standards Also auditors can establish and releasemanage letter to consult clients about the existence of the audited units

CHAPTER 2: PRACTICE OF AUDIT OF FIXED ASSETS IN

FINANCIAL AUDITS CONDUCTED BY VACO AUDITING COMPANY

LIMITED2.1 Clients of VACO AUDITING COMPANY LIMITED and the necessity

to audit fixed assets in financial audits

2.1.1 Clients of VACO Auditing Company Limited

The company's clients are so diverse who come from many different sectors;such as enterprises established and operated under law firms, insurance law and creditinstitutions, enterprises with foreign investment Especially, it can be mentioned thatsome joint stock company (operating in many fields such as real estate investment,construction industrial buildings, civil engineering, oil trading, telecommunications,and information technology), the company has the public interest (listed company,public company), state and foreign enterprises Some typical clients of VACO are:

- Dinh Vu Port Joint Stock Company

- FIT Joint Stock Company

- Telecommunications Postal-Informatics Corporation

- Bach Dang Construction Company

- Master Vina Co., Ltd

2.1.2 The necessity to audit fixed assets in financial audits

Conducting regular audits of fixed asset ensures your company’s asset recordsare accurate Without accurate asset records, your financial balance sheets will beincorrect, loss may occur, or fixed assets necessary for the continued functioning ofyour business may not be available when needed

 Accurate Financials

If your asset records are not accurate, your balance sheet will be incorrect Thiscan be extremely detrimental to a company, especially where depreciation and taxationare concerned Fixed asset reporting is an intrinsic part of the balance sheet

Inaccurate asset documentation implies there is an issue with the overall validity

of transactions If your company’s fixed asset listing is considerably different thanwhat is detailed (either in a software program or on paper reports), there is asignificant problem with the process of managing your company’s assets

Both private and public companies are required to keep accurate reports for avariety of reasons Government, charity, and educational institutions may need to

classify and track asset details by funding source or grant Having incorrect fixed assetreporting can be incredibly problematic in these situations; a non-profit organizationthat does not properly track its fixed assets by grant could potentially lose or be forced

to repay funds

Additionally, companies and organizations that depend on their fixed assets –where missing or lost assets impede employee productivity – are able to immediatelycorrect asset management problems by regularly conducting thorough asset audits

 Loss Prevention

Fixed asset audits also determine if your company is experiencing inordinateshrinkage If losses form a pattern and are consistent across all assets, evaluating howyour assets are assigned, moved, or stored should identify the weakness within yourcompany’s asset management procedures; allowing you to address and correct thoseprocedural gaps before your losses become too severe Choosing to skip auditingmeans you will not identify equipment loss in a timely fashion, and your companymay continue to lose equipment

Furthermore, the longer an asset is missing, the more difficult it is to trace itspath – a path that would lead to recovery of the asset Timely identification of missingassets means you have greater opportunity of retrieval and less chance you’ll have topurchase a replacement

2.2 Sequence in auditing fixed assets in financial audits at company ABC conducted by VACO AUDITING COMPANY LIMITED

Auditing fixed assets process also follows the work steps in the auditing process

of VACO To clarify more clearly about this process, I would take the case of ABCPetroleum Company as an illustration

2.2.1 Audit planning

2.2.1.1 Initial audit planning

VACO has begun providing auditing service for ABC Petroleum Corporationsince 2012 and it is the annual client of VACO until now Following ABC’srequirements, VACO audit firms will continue to provide audit services until31/12/2014 Although ABC is the old client of VACO, VACO has implementedprocedures for accepting clients to get the changes of ABC Auditors will assess theaudit on the basic criteria as the Figure below This document is then saved to the auditrecords in AS2 software

Essential content on these papers are presented at paper No [1107]: "Acceptingold clients" in Appendix No 1 and Appendix No 2 about "Independence claim"

2.2.1.2 Understanding the entity’s business and its environment

The objective of this phase is to help auditors get an understanding aboutproduction’s characteristics of business, thereby they can determine the focus and theneed to carry out the audit process

Regarding the information that needs to be collected, to get an understanding

about the characteristics of business, auditors need to collect information from thecompany's charter, the establishment licenses, the minutes of the Shareholders'Meeting, the Board of Management and the board of directors; and from the rules andpolicies of the clients as the accounting policies, staffing, credit

About collecting method, because the auditing process for ABC has been

conducted from the previous year, the information about client has already been stored

in the general audit file Therefore, auditors conducted the audit for the financial yearended on 31/12/2015 and they also will review the information on the units in thegeneral audit profile and client requirements to provide information on changes inproduction and business activities, internal control system, personnel and accountingorganization of the unit during the audit This new information will be saved byauditors on general audit profile

You can see Working paper no 1400 in Appendix about getting understandingabout client

2.2.1.3 Preliminary analytical procedures

2.2.1.4 Understanding internal control and assess control risk

About Internal Control of ABC Company, auditors generalize about the integralpart internal control 8to help make audit plan and they should make critical evaluationabout audit risk

Regarding the information that needs to learn, for internal control of fixed assets,

auditors need to be aware of procedures for buying and liquidating fixed assets, theregulation managing and monitoring fixed assets

Regarding method used to learn, auditors will consider general audit profile of

firm, and pay attention to the regulations about managing fixed assets of the firm;besides auditors should review the audit records of the previous years in operatingfixed assets parts to consider about the regulations and rules on amortization of firmsurveyed last year and we can determine whether an audit is efficient in the previousyear or not

I quote some information on internal control of fixed assets which auditorslearned through working papers follows:

Figure 2.1: Working paper on Internal Control for fixed asset items

Performer: DVT-26/01/2016 Reviewer: TTA-27/01/2016

INTERNAL CONCTROL FOR FIXED ASSETS ITEMSClient’s name: ABC company

Client charging: (Deputy Director):

Accounting period: 31/12/2015

1 Approving authorities

- General Director is person who takes responsibility in making decisions about buying,changing, liquidating, contributing fixed assets

2 Process for buying new assets

- Department which needs fixed assets up will propose the procurement to get director’sgeneral approval

- Purchasing part will buy the asset and check the price (03 quotes for price) and sending it toprice and quality assessment department

- After selecting, the vendors will set up a report to get approval from the general director

- Conducting the purchase and accepting the new fixed assets

- Forwarding the original documents to the accounting department to save documents

3 Liquidation process

- Based on the inventory records in year and the inventory record at current time of liquidation

to verify the status of the property;

- Quality valuation room makes a report to get approval from general director

- Establishing a liquidation group and performing other liquidation procedures (selectingbuyer, making contract, trading, invoicing)

- Forwarding the original documents to accounting department to save documents

Comment: The internal control was performed relatively tightly

You can see Figure 2.6 about risk assessment and controlling environment at ABC inAppendix

To evaluate internal control of client, auditor has used the questionnaire aboutInternal Control Auditors complete these questions by interviewing relevantmanagers, observers, thus auditors will have a comprehensive view and canunderstand about the client's Internal Control Overall, the internal control of ABC isrelatively tight The work is assigned clearly to each individual in the accountingapparatus Through the questionnaires and evaluation about Internal Control, auditorsnotice that the control risk is assessed at a low level.

2.2.1.5: Assessment of audit risks and audit materiality

a) Assessing audit risk

Based on the preliminary information about the accounting systems, auditorsmade an assessment about the potential risk level and control risk

Inherent risks ABC is considered to be higher than the average level, becausethe company do business in many areas, with diversified operations that arepredicted in the future that the number of competitors is likely to increase rapidly,and the business environment is more volatile so auditors made assessment forfixed assets items is high

Through assessment about Internal control for fixed assets items in ABCCorporation, with auditing experience with clients in previous years, the auditorsevaluated that the Internal control of ABC is efficient and the control risk is low

For fixed assets, ABC have high inherent risks, control risk is low, and thus detection risk is medium Meanwhile, auditors can expand the scope of the audit by

conducting more basic tests and focusing primarily on the databases in accounting,calculation and evaluation that help to ensure risk audit is acceptable

b) Assessing materiality

Before performing the audit, based on the information that was gathered aboutthe operation of the unit, the leader in audit team will assess and determine themateriality level based on the criteria: Total assets, total equity, revenue and profitbefore tax In fact, the overall level of materiality for the financial statements isdetermined that based on the type of enterprise, financial activities and the purpose ofusing information In recent years, ABC has unstable profits, however, revenue is quitestable and this is seen as an important factor to evaluate the operations of the Companythat should be considered here on the basis in establishing the level of materiality.Therefore, auditors will identify the overall materiality level for planning stage andthey will identify the level of materiality that may be omitted After calculatingmateriality levels, it will be used for all items on the financial statements not Specifically,the calculation and determination of materiality will be done on paper work of [1811]

Figure 2.2: Quoting working papers no [1811]: Determination of materiality

DETERMINATION MATERIALITY LEVEL

Client’s name: ABC Company

• The implementing materiality is 12.29 billion

• The materiality of the errors is identified group by 5% of the materiality level:

682 790 658

2.2.1.6 Designing audit program

From initial evaluation, the leader in audit team will conduct the audit program ingeneral and audit programs for fixed assets in particular Audit program will be based

on the sample audit program that was designed by VACO that the content, timing andscope of the specific audit procedures will be estimated time in this part

WP 1811

Figure 2.3 Detailed audit program for fixed assets designed by VACO

A General analysis procedures

Analysis procedure: analyze data of tangible fixed assets,

construction in progress in beginning and ending of the

period, depreciation and amortization

B Checking in details for tangible fixed assets

Making a Figure about volatility of fixed assets based

on original cost and accumulated depreciation; checking the

arithmetic accuracy of the Figure; ensuring balance in the

aggregate Figure matches with data on the general book

 Choosing the sample of assets which increased

during the year to inspect the original related

documents in fixed asset procurement procedures

and the approval of the Board of Managers

 Checking the accuracy in recording liquidation

operations transactions, sale of fixed assets by

category, group, calculating any gain / loss on

disposals of fixed assets on the basis of relevant

documents

 Observing and participating in checking ending

inventory of fixed assets at the end of period,

ensuring that the checking of inventory can be done

in accordance with the procedures and the

difference between the actual and accounting

inventory is handled appropriately

C Checking in details depreciation and amortization

for fixed assets

 Collecting the calculating depreciation in the period,

and comparing it with data on the ledger balances

 Reviewing the appropriateness when starting

depreciating fixed assets to ensure the match

between revenues and expenses as well as the use of

the property

 Estimating the depreciation expense in the period

and comparing it with data from the enterprise

 Considering the reasonableness and consistency in

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[5641]

[5641]

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allocating criteria for depreciation of fixed assets

such as overhead costs of factory, management

costs, cost of sales

D Construction in progress

 Learning and making a summary about construction

work during the year and comparing it with data in

accounting books

 Checking construction in progress costs that

increased during the period with the original

documents (contracts, test records, work logs,

delivery records, payment requests, and invoices)

 Detailed examination of documentation to ensure

their cost was calculated correctly and assets have

been transferred, correct classification and

2.2.2.1 Performing tests of control

2.2.2.2 Performing analytical procedures

The leader of audit team will conduct extensive analysis procedures From thatprocedures, they would identify about abnormal changes or big changes to determinethe concentration in audit process

Based on documents supplied by clients as: balance sheet, trail balance, generalledger account 211…auditors conducted the analyze group of assets that containsindicators about original costs, depreciation and amortization rates for comparison toanalyze increase or decrease in the balance tangible or intangible fixed asset, andauditors can compare the data with data in last year to evaluate the reasonableness ofthe volatility