Auditing accounts payable in a financial audit at UHY ACA limited company

In the accounting system, trade payables are recorded in a separate accounts payable account, with a credit to the accounts payable account and a debit to whichever account most closely

BACHELOR THESIS Major: Auditing

Topic:

Auditing accounts payable in a financial audit at UHY ACA Limited Company

NGUYEN TUNG LAM

HANOI, 2016 NATIONAL ECONOMIC UNIVERSITY EXCELLENT EDUCATIONAL PROGRAM

Topic:

Auditing accounts payable in a financial audit at UHY ACA Limited Company

Student: Nguyen Tung Lam

Still, implementation would not have been possible if i did not have a support of many individuals and organizations Therefore, i would like to extend our sincere gratitude to all of them.

Foremost, I would like to express my sincere gratitude to my instructor Dr To Van Nhat for the continuous support of my research, for his patience, motivation, enthusiasm, and immense knowledge His guidance has helped me in all the time of research and writing of this thesis Without his superior knowledge and experience, the Internship report would not like in this quality of outcomes, and thus his support has been essential

My sincere thanks also goes to my manager – Mrs Ha, my seniors – Mr Thang, Mr Giang and Ms Ngoc and staffs working in Korean Desk of UHY ACA Co., Ltd for offering me the summer internship opportunities in their groups and leading me working on diverse exciting projects

Nevertheless, I express my gratitude toward our families and friends for their kind operation and encouragement which help me in completion of this Internship report Hanoi, 24/ 04 / 2016

Nguyen Tung Lam

Signature

I herewith formally declare that I myself have written the submitted Bachelor Thesis independently I did not use any outside support except for the quoted literature and 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

PM Planning materiality

1 Rationale

Our country is developing day by day in almost all fields from culture to economic and politics In accompany with the integration trend of worldwide economy, there are more and more entities established in both governance and private section expanding in most of areas as manufacturing, services, importing, exporting, real estate and construction As a result, the competition in the stock market is now increasingly strong and drastic Therefore, it is required that the companies must provide people with more transparent financial reporting to reflect fairly about the financial position of the companies in the market Besides, successfully joined ASEAN Economic Community (AEC) and Trans-Pacific Strategic Economic Partnership (TPP) have also created many developing opportunities When Vietnam took part in these two organization, it allows all of the members to freely exchange goods, freely invest and even free from skilled labor movement Therefore, it is necessary for labor in every sections, especially for students who just graduated to enhance their major not also in knowledge but also technical

The external users of the companies’ financial statement are usually interested in the ratios of profitability, solvency and operating of the business Among the financial statements’ indicators, trade payables have affected directly and significantly to those above ratios because these ratios can only be reasonably when accounts payables are stated honestly In fact, the accounting for trade payables often occurs frauds and errors Therefore, auditors always need to pay attention when they conduct this cycle of auditing financial statement

I had opportunity to work for UHY ACA Limited Company - one of top ten auditing firms as an internee in 3 months I have gained a lot of experiences through by the practical financial audits

For these reasons I would like to choose the subject for my thesis: “Auditing accounts

payable in a financial audit at UHY ACA Company Limited”.

2 Objectives

The objectives of this thesis are not only to learn about auditing accounts payable in financial audits performed by UHY ACA but also to find out the strengths and weaknesses in audit procedures of the Company Based on that basis, I will also would like to give recommendations in order to improve audit of accounts payable in financial audits performed by UHY ACA Co., Ltd.

3 Scope

The scope of this thesis is about audit of accounts payable in financial audits conducted

by UHY ACA Limited Company

Sincerely, Nguyen Tung Lam

CHAPTER I THEORETICAL FRAMEWORK ON AUDIT OF

ACCOUNTS PAYABLE IN FINANCIAL AUDITS BY

AUDITING FIRMS

1.1 Feature of accounts payable

1.1.1 Definition and classification of accounts payable

Accounts payable obtain obligations of the firm, money which a firm owes to vendors for purchased of goods and services on credit This item appear in firm balance sheet under current liability section, represent negative cash flow for the firm when its paid, sometimes accounts payable happen when a firm wants to get a discount by purchased

of a good and services paying in term like, 2/25 and 1/30, and by this, it helps to firm cash flow There are two category of accounts payable: Trade payable and Non-trade payable

Accounts payable trade are attached or related directly to the company’s primary

operations It is an amount billed to a company by its suppliers for goods delivered to

or services consumed by the company in the ordinary course of business In the case of construction business, this account shows payables to contractors For example,

purchase of raw materials used to production (items that related to company operation)

In the accounting system, trade payables are recorded in a separate accounts payable account, with a credit to the accounts payable account and a debit to whichever account most closely represents the nature of the payment, such as an expense or an asset

Accounts payable non-trade are payable not related directly to the core operating

business of the company such as accrued expenses, dividends payable, or payroll and they are recorded in other accounts in order to more easily identify them

Trade payables belong to capital source of business and are significant items in the acquisition and payment cycle of every business, directly related to other significant items such as cash, property, plant and equipment, material purchases, inventories, prepaid expenses…

We typically classify trade payables as a significant account due to either of two

 High volume of transactions

 Materiality of the balance to the financial statements (e.g., trade payables as a percent of total liabilities)

1.1.2 Accounting for trade payables

1.1.2.1 Policies to record trade payables

According to Article 51 of Circular No 200/2014/TT-BTC issued by Ministry of Finance on December 22nd, 2014, accounting for trade payables must be complied with the following principles:

a) This account is used to reflect the payment of the liabilities of the business by suppliers for materials, goods, services, fixed assets, investment real estate, financial investments followed by signed contracts This account is also used to reflect the payment of the liabilities for contractors of main and extra construction This account

is not used to reflect purchase transactions that are immediately paid

b) Payables for sellers, suppliers, contractors should be recorded in detail for each creditor In detail of each creditor, this account reflects the amount of advance for sellers, suppliers, contractors that have not received products, goods, services or volume of constructions that are completed and handed over

c) The enterprise must keep track in detail of trade payables for each currency For trade payables in foreign currencies, the company must comply with the following principles:

- When incurs the payables to the suppliers (credit side of account 331) in foreign currency, the accountant must convert into Vietnam dong at the actual exchange rate at the date of transaction (the selling rate of commercial bank which has regular transactions) Particularly for the advance to the contractors or suppliers, when there have enough conditions to recognize assets and expenses, the accountant must credit account 331 at the specific identification rate for amount of advance

- When pays for the payables to the suppliers (Debit side of account 331) in foreign currency, the accountant must convert into Vietnam dong at the specific identification rate for each creditor (in case creditor has a lot of transactions, the specific identification rate is determined by name on the basis of roving weighted average of

those transactions) Particularly in case of advance transaction for the suppliers and contractors, the Debit side of account 331 is applied by actual exchange rate (the selling rate of bank which has regular transactions) at the time of advance;

- Enterprises must re-evaluate payables to suppliers denominated in foreign currencies

at the time of financial statements in accordance with law Actual exchange rate for evaluating trade payables is selling foreign currency rates of commercial bank which regularly traded with the company at the date of the financial statements The units in a Group apply a general rate specified by the parent company (to ensure close to the actual exchange rates) to re-evaluate payables to suppliers denominated in foreign currencies arising from inter-company transactions

re-d) The import trustor recorded in this account amounts payable to suppliers of imported goods through the import trustee as usual trade payables

e) Supplies, goods or services received, warehoused, but the company is not received invoices by the end of the month, the accountant use temporary unit price for bookkeeping and to adjust to actual price when receiving invoices or official quotation from suppliers

f) When accounting in detail this account, the accountant must record clearly, coherent trade discounts, cash discount of suppliers if these amounts are not reflected in invoices

1.1.2.2 Source documents and records to recognize trade payables

There are two main transactions involved in trade payables: Firstly, when the acquisition of goods or services occurred Second is when the payment for those goods

or services occurred Respective to these transactions, these below documents and records are used to recognize trade payables:

 Purchase Requisition: A purchase requisition is used to request goods and services

by an authorized employee This may take the form of a request for such acquisitions as materials by production staff or the storeroom supervisor, outside repairs by office or plant personnel, or insurance by the vice president in charge of property and equipment

 Purchase Order: A purchase order is a document to order goods and services from

and services the company intends to purchase and is often used to indicate authorization of the acquisition.

 Vendor’s invoice: A vendor’s invoice is a document received from the vendor and

shows the amount owed for an acquisition It is including of VAT invoices, direct invoices and retail invoices They are source document drawn by suppliers in order

to establish obligation and request payment to materials, good and services delivered They indicates the description and quantity of goods and services received, price (including freight), cash discount terms, date of the billing and total amount The vendor’s invoice is important because it indicates the amount recorded

in the acquisition transaction file

 Good receipt notes, delivery records or handed-over minutes: these documents to

ensure the ownership and risks of materials, goods delivered, serviced provided or constructed handed-over

 Payment Vouchers: including Payment voucher, debit notices, payment orders, etc.

 Acquisition Transaction File: This is a computer-generated file that includes all

acquisition transactions processed by the accounting system for a period, such as a day, week, or month It contains all information entered into the system and includes information for each transaction, such as vendor name, date, amount, account classifications, and description and quantity of goods and services purchased The file can also include purchase returns and allowances or there can

be separate file for those transactions

 Acquisitions Journal or Listing: The acquisitions journal or listing, often referred to

as the purchases journal, is generated from the acquisitions transaction file and typically includes the vendor name, date, amount, and account classifications for each transaction, such as repair and maintenance, inventory, or utilities It also identifies whether the acquisition was for cash or accounts payable

 Accounts Payable Master File: An accounts payable master file records

acquisitions, cash disbursements, and acquisition returns and allowances transactions for each vendor This file is updated from the acquisition, returns and allowances, and cash disbursement computer transaction files

 Vendor’s Statement: A vendor’s statement is a document prepared monthly by the

vendor and indicates the beginning balance, acquisitions, returns and allowances, payments to the vendor, and ending balance These balances and activities are the vendor’s representations of the transactions for the period, not the client’s Except

for disputed amounts and timing differences, the client’s accounts payable master file should be the same as the vendor’s statement.

Besides, there are some other related documents for specific transactions: contracts, debit memo…

1.1.2.3 Accounts to record trade payables

The business often use an account to reflect trade payables to suppliers The increase in amount of trade payables will be recorded in credit side and factors that make decrease will be recorded in debit side This account can be separated into detailed accounts to reflect specific payables to suppliers

According to VAS, the account used to reflect trade payables is account 331

Account 331: Trade Payables to suppliers: This account reflects payables to external suppliers outside the business of materials, goods or other services suppliers

This below diagram shows the structure of account 331:Account 331

Payment for sellers, suppliers and contractors

Advance for sellers, suppliers and contractors but have not received materials, goods, services and constructions

Sales allowances of goods or services delivered in contract

Cash discounts, trade discounts agreed by suppliers to reduce payable amount

Shortage in value of materials, goods when receiving or sales return

Re-evaluate trade payables in foreign currency (in case foreign currency decreases comparing with VND)

Payables to suppliers of materials, goods, service or to contractors for constructions

Adjust to variance of temporary unit prices which are lower than actual unit prices

Re-evaluate trade payables in foreign currency (in case foreign currency increases comparing with VND)

Figure 1.1 Structure of accounts payable

1.1.2.4 Accounting books

Due to specific operating features of each business, the governance should design an appropriate and suitable system of accounting books for trade payables However, the company must comply with basis system of accounting books in which including:

 Subsidiary ledger: Keep track daily of all transactions related to purchase goods,

services It contains all information of each transaction such as: vendor name, date, amount, account classifications, descriptions and quantity of goods and services purchased

 Listing: is generated from subsidiary ledger and typically includes the supplier

name, date, amount and account classification for each supplier The total of individual account balances in the listing equal the total balance of trade payables in the general ledger

 General ledger : is used to record transactions to payables in a fiscal year or an

accounting period

In addition, there can be separate ledgers for purchases returns and allowances or payables in foreign currency

1.1.2.5 Internal control on trade payables

According to ISA 315: “Internal control is the process designed and affected by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of the entity's objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulation.”

An understanding of internal control assists the auditor in identifying types of potential misstatements and factors that affect the risks of material misstatement, and in designing the nature, timing and extent of further audit procedures

Therefore, to implement the audit of trade payables, the auditor must obtain a profound understanding of internal control for this account Having determined which controls are relevant, and are adequately designed to aid in the prevention of material misstatements in the financial statements, the auditor can then decide whether it is more efficient to seek reliance on those controls and perform tests of controls in that area, or more efficient to perform substantive testing over that area

If the controls are not adequately designed, the auditor needs to perform sufficient substantive testing over that financial statement area in light of the apparent lack of control and increased risk There are some control activities which are activities and procedures that help ensure that management directives are carried out:

 Segregation of duties

Ensure that payment-related documents are processed correctly by having different people involved in the payment process This principle is called separation of duties.Functions should be segregated: approve purchases, receive ordered materials, approve invoices for payment, review and reconcile financial records

Potential consequences if duties are not segregated: erroneous or fraudulent invoices

 Accountability, authorization, and approval

Accountability ensures that invoices are authorized, reviewed, and approved for payment based on signed agreements, contract terms, and purchase orders

Best practices should be carried out: review and update signature authorizations periodically, obtain pre-approval of consultant agreements by purchasing, verify receipt

of goods and services to contract/ purchase order and invoice information, reconcile ledgers for accuracy of recorded transactions, monitor that invoices are paid in a timely manner

Potential consequences if accountability does not exist: unauthorized, unnecessary, or fraudulent payments or purchases, unauthorized work performed by vendors, loss of supplier discounts due to late payments, improper charges to incorrect account/ funds, conflict of interest when paying a UCSD employee for unauthorized outside work

 Security of assets

Since receiving purchased goods the entity should secure the materials in a safe location In order to account for resources, periodically count inventory and compare the results with amounts shown on control records

There are some main control activities: secure goods received in a restricted area, restrict inventory access to appropriate staff, lock up goods and materials, the access to the store will need to restrict as few people as possible, keep inventory records and periodically calculate beginning and ending inventory amounts

There are potential consequences if your assets have not been secured: Theft of goods, inventory shortages, and additional costs incurred for replacement of goods

 Review and reconciliation

Reconciliation activities confirm that trade payables are for approved purchases and being billed correctly Perform monthly ledger reconciliations to catch improper charges and validate transactions

Department of function should: review vendor invoices for accuracy by comparing charges to purchase orders, verify that the goods and services purchased have been received, perform monthly reconciliations of operating ledgers to assure accuracy and timeliness of expenses

Potential consequences if review and reconciliation is not performed: improper charges made to your department budgets, disallowances resulting from costs charged to incorrect accounts/funds, payments made for items or services not provided.

1.2 Audit objectives in auditing trade payables in financial audit

According to ISA 200 “Overall objectives of the independent auditor and the conduct

of an audit in accordance with International Standards on Auditing”, the overall objectives as well as objectives of the audit of trade payables perspective as stated as following:

'To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and to report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor's findings.'

1.2.1 Inherent risk of misstatements when audit trade payables

Inherent risk is the susceptibility of an assertion to a misstatement that could be material individually or when aggregated with other misstatements, assuming there were no related internal controls (according to ISA 200).

When consider about misstatements that may happen with accounts payable, there are more likely to be understated than overstated by the client because enterprises always try to lower their liability in order to enhance their financial position Besides, answer

of why trade payables are more likely to be understated than overstated also come from the nature of purchased goods and services Invoices are usually received after related goods or services are received This requires the company to "hold the books open" for

a specified time after a period ends The books are held open to make sure that all invoices (especially those without corresponding purchase orders) are properly recorded in the period in which they belong If the company's procedures for establishing an accurate cutoff are not adequate, liabilities could be recorded in the wrong period

Due to specialized characteristics of account, trade payables often raise the

- Trade payables can be recorded incompletely or omitted intentionally that leads to incorrect calculation of debt ratio and solvency ratio Therefore, the financial position of the business will be reflected better than actual In addition, expense can

be not fully recognized and profit can increase that affect significantly to the financial statement The incompleteness of recording trade payables is often difficult to detect than the omission of occurred transactions If detected, the auditor also find hard to recognize these misstatement as intentional or unintentional to infer personal responsibility

- Trade payables can be overstated by recording transactions that did not occur, therefore leads to the untrue of financial ratios then reflects dishonestly the financial position of the business These misstatements are often occurred by personal fraud due to purpose of stealing cash from business for private advantages The overstatement of trade payables are usually easy to detect and infer to personal responsibility

- A common misstatement is incorrect classification among the advances to suppliers and advances for employees, trade receivables, or compensation of payables among suppliers This misstatement does not affect the business results in the period Nevertheless, those misstatements affect liquidation ratios of the business and mislead compensation of payables among suppliers

1.2.3 Assertions of trade payables in an audit of financial statements

As stated by ACCA – F8 Audit and Assurance: “Audit tests are designed to obtain

evidence about the financial statement assertions Assertions relate to classes of transactions and events, account balances at the period-end, and presentation and disclosure”.

ISA 315 has states that “Assertions are the representations by management, explicit or

otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur”.“The auditor must use assertions for classes of transactions (i.e income statement), account balances (i.e statement of financial position), and presentation and disclosures in sufficient detail to form the basis for the assessment of risks of material misstatement and the design and performance of further audit procedures”.

Audit procedures to audit trade payables aim to ensure those following assertions:

Existence: All trade payables on the balance sheet are real debts due to suppliers or

other creditors of the entity for goods received or services performed

Completeness: All trade payables owed by the entity at the balance sheet date are

included on the balance sheet

Valuation: Trade payables are stated at the amounts owed at the balance sheet date Rights and Obligations: The trade payables on the balance sheet represent of the

entity at the balance sheet date and are not secured by liens on assets, security interest,

or other collateral unless otherwise indicated

Presentation and Disclosure: Trade payables are properly classified, described, and

disclosed in the financial statements, including notes, in conformity with prescribed accounting principles

1.3 Sequence in auditing trade payables in financial audits

1.3.1 Audit Planning

1.3.1.1 Evaluate the ability to accept the audit

When receiving an offer for audit engagement from client, the audit firm must carry out analysis and reviews to decide whether to accept or refuse the audit This work is done through the following steps:

 Initial assessment of audit risk of client’s company:

This work plays a very important role and helping audit firm to assess generally risk of client’s company at high, medium or low level then to decide whether accept the audit

or not Because of that, the assessment is often conducted by Partner or Manager who have high profession competence and long-time experience Information of business area, business environment, management structure, internal control of client’s company should be collected

 Establish the team:

After decision of accept the financial audit, Partner or Manager should establish audit team A typical audit team consists of 5 members: Partner, Manager, Senior, and Junior Auditors are selected basing on experience and competence as well as nature of client’s

business The number of auditors can be changed depending on the scale of client’s company, the complexity of the audit.

 Negotiate auditing contract:

After considering necessary factors, the audit firm negotiates with the client to establish audit contract which is an agreement between audit firm and client for audit performance and other related services This work must be completed prior to the audit The contract will consist the following terms: the objective and scope of audit, responsibility of board of management and auditor, timing of the audit, audit fee, approach to issue audit result, etc

1.3.1.2 Understanding the business

The overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan

Audit team will conduct to understand the business of client’s company The auditor must obtain information about following aspects:

 Business field and main operating activities of client’s company

 Objectives and strategy in market

 Main products, materials, which are used for manufacturing and selling process of client’s company and external factors related to acquisition and payment cycle

 General information about suppliers, competitors, market, etc

 Accounting policies for trade payables of the client: document flow, cycle of purchase and payment, etc

 IT application for accounting

For annual client, the auditor should review audit file of previous audit to see the misstatements that often occurred when recording trade payables Besides, the auditor should visit factory to observe directly manufacturing, material receiving process of the client

1.3.1.3 Evaluate the internal control system

After having general information about the client, the auditor must understand more clearly the cycle of acquisition and payment and internal control systems designed for this cycle and evaluate the effectiveness of internal control system

As discussed above, in evaluating internal control for trade payables, the auditor must concentrate on:

 Segregation of duties in purchasing, recording, approving, payment, etc

 Authorization and approval of invoices for payment based on signed agreements, contract terms, and purchase orders

 Material security

 Review and reconciliation with suppliers

To evaluate internal controls, procedures are usually conducted by the auditors are observing and inquiring

1.3.1.4 Define level of materiality

Based on point 2 of ASA 320 (ISA 320) indicated that from a financial reporting framework perspective, materiality means information, individually or in aggregate, that if misstated or omitted from a financial report may adversely affect decisions about the allocation of scare resources made by users of the financial report

According to point 10 of ISA 320, it requires that, when establish the overall audit strategy, the auditor must determine materiality for the financial report as a whole Nevertheless, if there is one or more particular classes of transactions, account balances

or disclosures for which the misstatements of less amounts than materiality for the financial report as a whole, it could reasonably expected to influence users’ economic decisions taken on the basis of the financial report Therefore, the auditor must determine the materiality level or levels to be applied to those particular classes of transactions, account balances or disclosures

ISA 320 also requires the auditor to set performance materiality for the purposes of assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures that need to be performed

As stated by ISA 320 “Materiality in Planning and Performing an audit”,

“Performance materiality means the amount or amounts set by the auditor at less than

materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than the

materiality level or levels for particular classes of transactions, account balances or disclosures”(Point 9.Definition)

To estimate an amount of planning materiality, the auditor selects a base and a suitable

percentage apply to that base This requires professional judgment, and not all auditors do it in the same way Some audit firms use a rule of thumb to estimate materiality for planning purposes Table below summarizes possible percentage methods:

Table 1.1: Rules of thumb for planning materiality

APPLIED TO BASE

RELATIVE ADVANTAGES

ISA 320 desires that the auditor consider materiality at both the financial report level

and in relation to individual account balances including trade payables, classes of transactions and disclosures However, ISA does not mandate the specific step that an auditor should take to achieve that goal In practice, some auditors use rules of thumb

to explicitly relate materiality to substantives tests at the account balances, classes of transactions and disclosure level Other auditors use judgment to establish materiality for this purpose

1.3.1.5 Assess combined risks

Base on the degree of control risks and inherent risks, audit team will summarize information in order to deliver combined risk assessment (CRA) There are 4 levels of combined risks including high, average, low and minimum Combined risks are assessed like the below table:

Table 1.2: Combine Risk Assessment

Control risk

Control effective Control not effective

The degree of combined risks is assessed by auditors about scope, timing of audit and further necessary procedures to detect errors

1.3.1.6 Designing test of control

Basing on the degree of combined risks, auditors will design suitable tests of controls

If internal control system of the client is evaluated as effective, control points in the cycle of acquisition and payment are reliable, the auditor can reduce amount of samples and procedures then cut down timing of audit as well as the audit fee

Test of control are usually performed in the interim engagement to decrease amount of work in final engagement especially to accounts which have many transactions as trade payables

1.3.1.7 Designing substantive procedure

On the basis of combined risks, auditors will decide the scope, timing and extent of substantive tests Overall, mandatory substantive tests are conducted for trade payables include:

 Comparing payables sub-ledger to general ledger (GL) and listing to general ledger

 Sending confirm letter and reconcile between confirmation and GL balances

 Cut-off testing

 Re-evaluate payables items which have balance in foreign currency

 Investigating about unrecorded liabilities

In additions, based on each circumstance, the company may design other substantive procedure (if CRA is high) These basic procedures are designed to help the auditor draw conclusion about the account

1.3.2 Audit Implementation

After having audit planning, the auditor should conduct procedures which have designed in the previous phase There are 2 procedures to carrying out: Tests of controls and substantive test (consists of analytical procedure and test of transactions, tests of details of balances) and disclosures

1.3.2.1 Performing tests of controls

Common tests of controls for trade payables at the assertion level are shown as table below:

Table 1.3: Common tests of controls for trade payables at the assertion level

Assertion Control objectives Controls Tests of controls

Occurrence and

existence

• Recorded purchases represent goods and services received

Authorization procedures and policies in place for ordering goods and services

Segregation of duties Purchase orders raised for each purchase and authorized by appropriate senior personnel.

Approved purchase order for each receipt of goods Staff receiving goods checks them to the purchase order.

Stores clerks sign for goods received.

Purchase orders and GRNs are matched with the suppliers' invoices.

Inspect policies and procedures and inquire about them.

Observe and evaluate segregation of duties.

Examine a sample of purchase orders

to ensure they have been appropriately authorized.

Review the delegated list of authority for purchases.

For a sample of GRNs, ensure there

is a related purchase order that it has been properly approved

Observe receipt of goods by staff to confirm whether the check is done Inspect a sample to confirm whether stores staff undertake this check Examine supporting documentation

to ensure it has been matched for a sample of invoices.

Completeness • All purchase

transactions that occurred have been

recorded

Purchase orders and GRNs are matched with the suppliers' invoices Periodic accounting for pre-numbered GRNs and purchase orders.

Independent check of amount recorded in the purchase journal.

For a sample of purchase orders in the year ensure each has been matched to a related invoice that was subsequently recorded

Review entity's procedures for accounting for pre-numbered documents.

Examine application control Examine documentation for evidence

of this check.

Rights and

obligations

• Recorded purchases represent the liabilities of the entity

Purchase orders and GRNs are matched with the suppliers' invoices.

Examine supporting documentation

to ensure it has been matched for a sample of invoices.

Accuracy,

classification and

valuation

Purchase transactions are correctly recorded

in the accounting system.

Purchase orders and GRNs are matched with the suppliers' invoices.

Mathematical accuracy of the supplier's invoice is verified

Examine supporting documentation for a sample of invoices.

Review a sample of invoices for evidence the accuracy has been verified (e.g signature or initials) and re-perform the check

Review reconciliations for evidence

of this check.

(Source: F8 – ACCA)

1.3.2.2 Performing Substantive procedures

Common substantive procedures to audit trade payables are shown as below:

Table 1.4: Common substantive procedures for accounts payable

Completeness • Obtain a listing of trade payables and agree the total to the general ledger by

casting and cross-casting.

• Test for unrecorded liabilities by inquiries of management on how unrecorded liabilities are identified and examining post yearend transactions.

• Obtain selected suppliers' statements and reconcile these to the relevant suppliers' accounts

• Examine files of unmatched purchase orders and supplier invoices for any unrecorded liabilities.

• Perform a confirmation of accounts payables for a sample

• Complete the disclosure checklist to ensure that all the disclosures relevant to liabilities have been made.

• Compare the current year balances for trade payables and to the previous year.

• Compare the amounts owed to a sample of individual suppliers in the trade payables listing to amounts owed to these suppliers in the previous year.

• Compare the payables' turnover and payables' days to the previous year and industry data.

Existence • Vouch selected amounts from the trade payables listing and supporting

documentation such as purchase orders and suppliers' invoices.

• Obtain selected suppliers' statements and reconcile these to the relevant suppliers' accounts.

• Perform a confirmation of trade payables for a sample.

• Perform analytical procedures comparing current year balances to the previous year to confirm reasonableness, and also calculating payables' turnover and comparing to the previous year

Rights and

obligations

• Vouch a sample of balances to supporting documentation such as purchase orders and suppliers' invoices to obtain audit evidence regarding rights and obligations.

Valuation and

allocation

• Trace selected samples from the trade payables listing to the supporting documentation (purchase orders, minutes authorizing expenditure, suppliers' invoices etc.).

• Obtain selected suppliers' statements and reconcile these to the relevant suppliers' accounts.

• Compare the current year balances for trade payables to the previous year.

• Compare the amounts owed to a sample of individual suppliers in the trade payables listing to amounts owed to these suppliers in the previous year.

• Compare the payables' turnover and payables' days to the previous year and industry data

Cut-off For a sample of vouchers, compare the dates with the dates they were recorded

in the ledger for application of correct cut-off.

• Test transactions around the year-end to determine whether amounts have been recognized in the correct financial period.

• Perform analytical procedures on purchase returns, comparing the purchase returns as a % of sales or cost of sales to the previous year.

Accuracy • Recalculate the mathematical accuracy of a sample of suppliers' invoices to

confirm the amounts are correct.

Occurrence • For a sample of vouchers, inspect supporting documentation such as

authorized purchase orders.

• Read the disclosure notes relevant to liabilities in the draft financial statements and review for understandability

1.3.3 Completing the audit

After finishing the implement of audit, the auditor in charge of accounts payable must collect related working papers and audit evidences then submit them to senior in charge Senior must reconcile the variances in trade payables to materiality level to determine whether to make adjustment entry If any, the senior need to discuss with client and carry out the adjustment entries After that, the auditor must draw final conclusion about audit of accounts payable:

- The accounting for trade payables whether to comply with regulations, current accounting standard and government law

- Balance of trade payables in financial statement whether to be stated honestly

- Finally, at the end of the audit, senior must assess the entire performance of the team by following tasks:

 Reviewing transactions after the cut-off date

This is an important task because the events after the cut-off date may affect the auditor’s opinion There are two levels of influence:

- Events that have material effect on financial statements: the auditor must discuss with manager’s board, make adjustment entries and change audit opinion

- Events that have immaterial effect on financial statement: the auditor must disclosure these event in note to financial statements

 Collect management presentation letter

Management presentation letter is acknowledging responsibility of board of management for ensuring that preparation and presentation of financial statements are truthful, reasonable, and consistent with regulation and current account standards This

is an important evidence to be collected

A management representation letter is a form letter written by a company's external auditors, which is signed by senior company management The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis The CEO and the most senior accounting person (such as the CFO) are usually required to sign the letter

In essence, the letter states that all of the information submitted is accurate, and that all material information has been disclosed to the auditors The auditors use this letter as part of their audit evidence The letter also shifts some blame to management, if it turns out that some elements of the audited financial statements do not fairly represent the financial results, condition, or cash flows of the business Following is a sample of the representations that may be included in the management representation letter:

• Management is responsible for the proper presentation of the financial statements in accordance with the applicable accounting framework

• All financial records have been made available to the auditors

• All board of director minutes are complete

• Whether or not unrecorded transactions

• The net effect of all uncorrected misstatements is immaterial

• The management team acknowledges its responsibility for the system of financial controls

• All related party transactions have been disclosed

• All contingent liabilities have been disclosed

• All assessments have been disclosed

Auditors typically do not allow management to make any changes to the content of this letter before signing it, since this would effectively reduce the liability of management Besides, an auditor typically will not issue an opinion on a company's financial

statements without first receiving a signed management representation letter

 Issue audit report

After drawing official conclusion of the audit, the auditor will issue audit report The audit report is final result of an engagement with client and attached with the financial statements for publishing Audit opinion is given in the audit report There are 4 types

of audit opinion: Unqualified Opinion, Qualified Opinion, Adverse Opinion, and

Disclaimer of Opinion

 Issue management letter

The management letter is issued for giving some recommendations on the weaknesses

of business about internal control, accounting operation in general and accounting for trade payables in particular Since, the auditor offer solutions to help businesses

streamline and overcome the weaknesses The management letter is a result of the audit, but not necessarily attached to the financial statements when publishing.

CHAPTER II PRACTICE OF AUDIT TRADE PAYABLES IN

FINANCIAL AUDITS CONDUCTED BY UHY ACA

2.1 Overview of 2 clients of UHY ACA Limited Company

2.1.1 Overview of ABC

ABC Co., Ltd is a 100% foreign capital company which was establish on 30th March

2012 It has official office at Hoa Hanh Hamlet, An Hai Commune, Ninh Phuoc District, Ninh Thuan province

The Company now has branch located at Hoa Hanh Village, An Hai Ward, Ninh Phuoc District Investor of the company is Kembang Subur International Co., Ltd, which has headquarter in Malaysia Company’s charter capital is $500,000 and project’s investment capital is $1,000,000 Duration of the project is 50 years until 16 March

2062 On 31st December 2015, the Company’s total staff are 150 people

The main products of ABC Co., Ltd are aquatic breeds Capacity of plant are 9 billion nauplii /year; 600 million larvae/year; 2 million fish breeds/year

2.1.2 Overview of XYZ

XYZ JSC is joint stock company which was established on 25 January 2010 by Department of Planning and Investment of Ha Nam XYZ JSC was renamed from Thanh My JSC on 19 May 2015

Total amount of charter capital on 31 December 2015 was VND 116,000,000,000 At the end of fiscal year, there were 89 employee work for the Client The following are principal operational activities of XYZ JSC:

- Construction activities:

o Civil and industrial and transportation construction such as bridge, drain

o Invest for constructing industrial, resident zone

o Irrigation and electricity construction

o Installation equipment relate to construction

o Leveling and site preparation

- Trading activities:

o Furniture stuff

o Steel, other spare part

- Business activities:

o Gasoline, liquefied gas

o Product from cement, stone carving

o Transportation by waterways and roads

o Manufacture wood products

o Rental services on machine, equipment for construction

o Travel service

o Hotel, motel services

o Import and export, consignment agent

2.2 Sequence in auditing trade payables in financial audits conducted by UHY ACA at ABC Co., Ltd

2.2.1 Audit Planning

2.2.1.1 Understanding service and establish the team

This engagement is the initial audit of ABC Co., Ltd executed by UHY ACA The audit was performed for the financial statement ended in 31 December 2015

The audit team for ABC Co., Ltd consists of 6 members: a manager in charge, a senior

in charge, two juniors and an internee

2.2.1.2 Understanding the business

a) Obtain an understanding of characteristic of the client

The Company is a limited liability company incorporated under the Law on Enterprise

of Vietnam pursuant to the Investment License No 935/GP dated 4 August 1994 issued

by the Hanoi People’s Committee

On 16 March 2012, the Company obtained Investment Certificate issued and is amended under the first Amendment of Investment License dated 22 January 2014 which is granted by Ninh Thuan People's Committee

The Company’s principal activities: Production and sales of aquatic breeds

Authorized investment capital and chartered capitals of the Company are USD 1,000,000 and USD 500,000, respectively As at 31 December 2014, the Company has

180 employees

The Company’s head office is located at Hoa Hanh Hamlet, An Hai Commune, Ninh Phuoc District, Ninh Thuan province

 Operations (e.g., products and services manufactured and/or sold): Related party

transactions were made in an arm-length basis: the selling price is determined on market price

 Ownership, governance structure, organization’s structure and financing.

The Company’s contributed capital are:

Table 2.1: Contribution of capital of ABC Co., Ltd

Project’s Investment

 Types of investments (e.g., acquisitions and disposals, special purpose vehicles):

The Company has not any official plan for new investment in next years

b) Applied accounting policies :

The accompanying financial statements, expressed in VND, have been prepared under the historical cost convention and in accordance with Vietnamese Accounting Standards, Vietnamese Corporate Accounting System and related legal provisions on the preparation and presentation of financial statements

The Company adopts the Corporate Accounting System issued in accordance with Decision No.15/2006/QD-BTC dated 20 March 2006 and amended and supplemented under Circular No.244/2009/TT-BTC dated 31 December 2009 of the Ministry of Finance The Company’s registered accounting format is General Journal

c) Relevant industry, legal and regulatory framework and other external factors

 Industry factors

- Significant Trends in the Industry: The production of aquatic breeds still play an integral role in aquatic segment in Vietnam The Company’s objective is to develop branch name and gradually increase its output

- Competitors: The revenue almost come from sale of aquatic breeds such as: fish breed, shrimp breed, etc Main competitors: Uni-President Vietnam Co., Ltd, Thien Phu Vietnam Aquatic Hatchery Co., Ltd, etc

 Legal and regulatory framework :

- Regulatory requirements: the Company is exposed to VAT, PIT, CIT, Import tax.

- Under amended CIT Law No 32/2013/QH13 dated 19 June 2013, CIT rate is 20% for the year 2015

d) Key stakeholder influences

 Investor: The Company is solely invested by Kembang Subur International Co., Ltd

 Customers: The Company’s products is for local agency.

 Bankers and creditors: At that Moment, the Company has accounts in Vietcombank

and Agribank which are guaranteed by Kembang Subur International Co., Ltd

 Employees: Given the competitive remuneration scheme (salary and bonus), the

Company could attract and retain labor workforce (especially local labor) at sustainable level

 As at 31 Dec 2015, the Company has 150 employees

e) The Client’s Objectives

- Most important thing is to maintain and develop the quality, diversify products and meet expectations of customer

- Maintain positive performance indicator (sales/profit) and sustainable growth rate

- Improving human resource and management capacity

2.2.1.3 Evaluate the internal control

To evaluate the internal control of the Company for trade payables, the auditor observed the document process and inquired accounting department for further information related to purchasing and payment process The results are below:

 All the document of trade payables transactions were authorized by purchase department, accounting department and director of branches

 The segregation of duties was complied with regulations of the Company

The auditor included that the internal control of the Company was effective.

2.2.1.4 Calculating Planning materiality, Tolerable Error and Summary of audit

differences

Based on the ground of information from the previous step, the auditor must determine materiality level in both levels of whole financial statements and accounts, including trade payables:

On the level of financial statements: Planning Materiality is degree of materiality which is determined on the basis of revenue, profit or total assets of the business in

each situation In the case that the auditor uses other basis to determine PM, it is necessary to explain more the basis for selection

On the level of accounts: TE is the degree of tolerable errors which is considered to the degree of materiality of each account TE determined remains the same for every account, as a certain percentage of PM However, using the same TE level for every account can affect to audit performance because of some higher risky account such as payables, assets in compared with lower risky account like financial expenses, administrative expenses, provisions…Total TE must not exceed PM Following to UHY ACA’s resolution, TE = 50%PM for listed companies, and TE = 75%PM for unlisted entities

Moreover, there is another significant target is Nominal Amount Nominal amount is the amount where if mistakes occur under this, whether this is a single mistake or summary of a number of misstatements, there is no material effect on financial statements Mistakes that are larger than nominal amount are shown on Summary of Audit Differences (SAD) Nominal amount is set by 5%PM

Determining material in this step dominates designing and running procedures in the following step, deriving from effects on scope of audit and to what extent of mistakes that financial statements are not given an unqualified opinion

The planning materiality of ABC Company is determined by Net sale of 2015

In addition, ABC is an unlisted company so PM is set by 75% net sale The criteria determined by Senior in charged are shown as below:

Table 2.2: Assessed materiality for ABC Co., Ltd

As discussed above, UHY ACA used an assessed materiality for every account

including trade payables It means that the materiality of trade payables for ABC

Company is TE which is over VND 45 million and SAD of trade payables is about VND 4,5 million.

2.2.1.5 Understanding document flows, transactions process and account related

to trade payables in ABC Company

In this phase, depending on the template of UHY ACA, the auditor should inquire the accounting department for those below information:

 Significant transactions related to trade payables

 Accounts related to trade payables

 IT application that supports for accounting of trade payables

 Document flows in the acquisition and payment cycle

The working paper of understanding significant classes of transactions and significant disclosure process is illustrated as below:

Table 2.3: Understanding significant classes of transactions and significant

disclosure process of trade payables in ABC Co., Ltd

ABC Co., Ltd Ending period : 31 December 2015

Significant class of

transactions/significant disclosure

process name:

Purchase and trade payable

Significant class of transactions/

significant disclosure process

Significant classes of transactions embedded*:

• Inventory

• Cost of Sales

Relevant assertions:

• Existence, Valuation, and Completeness of Trade Payables.

• Existence Inventory and FA

• Beginning point: Purchase Requisitions Form

• Ending point: Record the Trade Payable

Specific circumstances affecting the form and extent of the documentation: N.A

Name of the IT application that supports the SCOT: Fast accounting

Inputs/Outputs of the Significant Class of

These tables below describe all information about document flow of purchase and

payment cycle in ABC Company

Table 2.4: Understanding flow of documents of trade payables in ABC Co., Ltd

PURCHASE OF FIXED ASSETS Request to purchase

When there is a demand on the purchase of equipment, each department will prepare a request to purchase, signed by the Head of the department, Director of the department and the Director of the factory After that, this purchase request is sent to Purchasing Department The purchasing department will obtain at least two quotations from the suppliers and the price approval is then be done by the Management Director

Signing the contract

After the supplier is chosen and approved by the Management Director, the contract will be prepared and signed by the General Director.

Warehouse Receipt and Handover minutes

When equipment are delivered at the warehouse, the department requested this equipment will be in charge of the quality checking If the department does not approve the quality, equipment will be sent back to the suppliers If they approve the quality, the hand over minute will be signed between two parties, or in some case, there will be a report completed projects approved that the equipment is fully installed (signed and authorized by the head of the department, department director and factory director) the liquidation of the contract is also signed between the two parties, and there will be an invoice sent from the supplier

Record to fast accounting system

When equipment are received and the documents including handover minute, liquidation, invoice are transferred to the Purchasing department, the Purchasing department will record

N/A

ACQUISITION OF RAW MATERIALS Signing the contract

The frame contract is signed between the suppliers and the Company.

Planning the purchase

On a monthly basis, there will be a production plan prepared by the production department From this production plan, there will be a supply plan (for the month and approved by the Management Director) This supply plan is transferred to each department and also to the purchasing department to prepare for the purchase

Creating Purchase order (PO)

The purchasing department will create PO on accounting software PO is then printed out and signed and approved by the manager and the director

Warehouse receipt

When goods are delivered, goods are checked against PO to see if the quantity match After that, there will be a goods receive note stamped that it has been checked

Recording to Fast accounting

When the documents are transferred to the Purchasing department, AP will be recorded.

IMPORT OF FIXED ASSETS AND RAW MATERIALS

The procedures for import of fixed assets and raw materials are similar from the step of purchase request until a PO was prepared and approved.

However, the import was done by Ms D from the purchasing department

When all documents are collected:

a Purchase of Raw Materials: she will create a PO on Fast and input the date that goods are shipped based on Bill of Lading => no cut off error.

Purchase of equipment: at the end of the month, Ms D will transfer the documents to Ms C for recording => there might be chance of cut off error when documents are transferred late.

2.2.1.6 Perform walkthrough tests

Basing on the template of understanding SCOTs and Significant Disclosure process, the auditor must inquire the accounting department to provide a package of source document of a random trade payables transaction Finally, the auditors reserved those documents in audit file as audit evidences

The table below shows the result of walkthrough tests in ABC Company:

Table 2.5: Walkthrough tests of trade payables in ABC Co., Ltd

No

.

Describe the critical path for the significant class

of transactions/significant disclosure process

PIC

1 Purchase request (was made by staff of Department

approved by Head of Department, Director of the department and director of the factor and transferred

to Purchasing Department)

Each department

3 Purchase staff would collect Quotation (minimum

are 2 quotations) The quotation approval will be done by the Management Director

Purchasing department

6 Contract was prepared and signed by Director (if

require)

Director

7 “Hand over minute” was prepared when goods were

delivered or service was provided This form require The Company and

2 signature:

- Staff of Request Department or Staff of Purchasing Department

- Supplier

9 All supporting documents was transferred to

Purchasing Department and posted to GL

Purchasing department

2.2.1.7 Assess threshold level

In UHY ACA procedures, threshold is assessed relying on TE in 2 bases: the first one

is assets and revenue and the second one is liability and expenses In the circumstance

of ABC Co., Ltd, the senior determined that threshold is calculated by TE in base of assets and revenue The auditor usually use threshold at moderate level to test transactions The amount of transactions is higher than moderate level of threshold will

be considered as significant.

This table below shows the assessment of combined risk for ABC Co., Ltd:

Table 2.7: Level of threshold in ABC Co., Ltd