Improving audit planning in financial audit conducted by deloitte vietnam

NATIONAL ECONOMICS UNIVERSITY SCHOOL OF ACCOUNTING AND AUDITING *** BACHELOR THESIS Major: Auditing TOPIC: IMPROVING AUDIT PLANNING IN FINANCIAL AUDIT CONDUCTED BY DELOITTE VIETNAM VU TIEN DAT Hanoi, 2020 TABLE OF CONTENTS Table of contents i Abbreviation iii List of Figures iv List of Tables v List of illustration vi Introduction CHAPTER 1: CHARACTERISTICS OF AUDIT PLANNING IN FINANCIAL AUDIT CONDUCTED BY DELOITTE VIETNAM 1.1 Overview of audit planning in financial audit conducted by DELOITTE VIETNAM 1.1.1 Process of financial statements audit 1.1.2 Organization of audit planning 1.1.3 The role of audit planning 1.2 Order of planning and designing audit methods in the audit of financial statements at Deloitte 1.2.1 Prepare audit plan and establish overall audit strategy 1.2.2 Establish detailed audit plan 31 CHAPTER 2: PRACTICE OF AUDIT PLANNING IN FINANCIAL AUDIT CONDUCTED BY DELOITTE VIETNAM – AT ABC joint stock company 34 2.1 Introduction of the ABC Joint Stock Company 34 2.2 Prepare audit plan and establish overall audit strategy 35 2.2.1 Assess and respond to risks, decide to accept and continue audit contract 35 2.2.2 Select the engagement team and agree on terms in the audit contract 44 2.2.3.Collect customer information about business operations and the accounting cycle 47 2.2.4 Understand internal control 56 2.2.5 Determine materiality 62 2.2.6 Studying audit reports, inspection results of previous years, considering the use of expert opinions .65 2.2.7 Risk assessments of balances, transactions and disclosures in the financial statements 68 2.2.8 Present an overall audit strategy 75 2.3 Establish detailed audit plan 77 2.3.1 Planning test of controls 78 2.3.2 Planning substantive tests .82 CHAPTER 3: ASSESSMENTS AND RECOMMENDATIONS TO IMPROVE AUDIT PLANNING IN FINANCIAL AUDIT CONDUCTED BY DELOITTE VIETNAM 85 3.1 Assessments on the audit planning in financial audit conducted by Deloitte Vietnam 85 3.1.1 Strengths 85 3.1.2 Limitations and causes 89 3.2 Recommendations to improve the audit planning in financial audit process conducted by Deloitte Vietnam 91 Conclusion 93 ABBREVIATION CTT Clearly Trivial Threshold DRMS Deloitte Risk Management System D&I Design and Implementation EM Estimating Misstatements EMS Engagement management system EQCR Engagement Quality Control ISA International Standards on Auditing IT Information technology JSC Joint Stock Company M Materiality MEMO Memorandum OE Operational Effectiveness PM Performance Materiality RAWC Risk associated with the control ROMM Risk of material misstatements VSA Vietnamese Standards on Auditing LIST OF FIGURES Figure 1.1: Organizing the audit of financial statements at Deloitte Figure 1.2: Risks classification before signing audit contracts 12 Figure 1.3: List of members participating in the audit contract .13 Figure 2.1: Summary of risks when accepting an ABC JSC audit and how to respond to risks 41 Figure 2.2: Letter to previous year auditor .42 Figure 2.3: Response letter from previous year auditor 43 Figure 2.4: Decision to accept the ABC JSC 2019 audit contract .43 Figure 2.5: Calculation of audit fees ABC JSC 2019 45 Figure 2.6: Preliminary analytical procedure of items on the financial statements .69 Figure 2.7: Criteria to assess the risk level of material misstatement .70 Figure 2.8: Scale table of sample selection applied for Significant RoMMs 78 Figure 2.9: Example of OE test for sales 81 Figure 3.1: Deloitte Vietnam's audit approach and subphase entries in the audit files 90 LIST OF TABLES Table 1.1 Factors determining risks of audit contracts Table 2.1: Multiple-choice questionnaire about risks of conflicts of interest and information security affecting the independence of auditors 38 Table 2.2: List of members participating in the audit contract ABC JSC 44 Table 2.3: Understanding the internal control environment ABC JSC .57 Table 2.4: Understanding internal control monitoring activities ABC JSC .59 Table 2.5: Calculation of materiality, performance materiality, and clearly trivial threshold 64 Table 2.6: Questionnaire for review audit files 65 Table 2.7: Detail Questions 67 Table 2.8: Annotation of criteria to assess the risk level of material misstatement 71 Table 2.9: Assessing the risk of material misstatement of certain audit sections 72 Table 2.10: Planning of operational effetiveness revenue section 80 Table 2.11: Substantive test planning 83 LIST OF ILLUSTRATION Illustration 2.1: Excerpt of working papers "Assessing the risk of audit contracts at ABC customers for the 2019 audit year" 35 Illustration 2.2: Excerpt of working papers "ABC JSC audit contract for the year of audit 2019" 46 Illustration 2.3: Excerpt of working papers "Understanding the entity and its environment external factors affecting the entity" 48 Illustration 2.4: Excerpts of working papers "Understanding the entity and its environment internal factors affecting the entity" 49 Illustration 2.6: Excerpt of working papers “Accounting policies currently in use at ABC JSC” 53 Illustration 2.7: Excerpt of working papers "Process of revenue cycle at ABC JSC" .56 Illustration 2.8: Excerpt of working papers "Understanding of the entity’s risk assessment process" 58 Illustration 2.9: Excerpts of working papers "Overview of the financial reporting process at ABC JSC" 60 Illustration 2.10: Excerpt of Working Paper “Determining materiality for the financial statements of ABC JSC” 63 Illustration 2.11: Excerpt of working papers “overall audit strategy - Summary content at ABC JSC customers" 75 INTRODUCTION The technological change is taking place at an unprecedented and almost instantaneous scale, which results in a growing focus on data, structured and unstructured, created inside or outside the business This new and huge source of data has led to such dramatic changes in the accounting industry, auditing that auditors increasingly need to adapt to the changing demands of users of audit information on data interpretations In order to successfully complete the task and provide the best professional services, the auditing firms pay attention to the audit planning step - the decisive step to the success of financial auditing reports in particular and other types of audits in general In order to meet the quality needs of the financial reporting audit in the digital age, the planning stage has also made timely changes At Deloitte Vietnam Co., Ltd (hereinafter referred to as "Deloitte Vietnam") one of the world's leading auditing brands, always captures the trend and pioneers in adapting to all auditing environment changes, thereby developing the most comprehensive and preeminent audit planning method However, the rigor of elements of the audit method at Deloitte Global (hereinafter referred to as "Deloitte") will sometimes be a challenge for specific audits of regional Deloitte companies, because specific audits will need separate and flexible planning methods Within the scope of this internship, I will delve into the most complete analysis of the steps in the financial statement audit planning being applied at Deloitte Vietnam At the same time, from the internship experience at the client company, I would like to make comments and comparisons between the audit planning method agreed on the same at Deloitte Vietnam and the jobs that the auditor at Deloitte Vietnam proceeds in practice Thesis: Improving audit planning in financial audit conducted by Deloitte Vietnam includes three chapters: Chapter 1: Characteristics of audit planning financial audit conducted by Deloitte Vietnam Chapter 2: Practice of audit planning in financial audit conducted by Deloitte Vietnam – at ABC Joint Stock Company Chapter 3: Assessments and recommendations to improve audit planning in financial audit conducted by Deloitte Vietnam I would like to sincerely thank all my colleagues at Deloitte Vietnam, and my instructor PhD Nguyen Thi Lan Anh has accompanied and commented on me to complete this thesis I hope to receive constructive comments from experts and readers Sincerely thank you Hanoi, May 18, 2020 Students, Vu Tien Dat 2.3.2 Planning substantive tests In each section when defining risk items for items on the ABC financial statements, Deloitte auditors designed corresponding procedures to ensure the assertions related to that part These procedures correspond to the specific assertion that will be entered by auditors on the “Risk Strategy View” section on the EMS audit software, which is also a level display showing the level of risk and reliance on such internal control When conducting substantive tests, audit associates will collate the work performed with the required procedures when planning, and ensure that these procedures have been fully implemented and obtain sufficient and appropriate audit evidence It is required in all audit section that the first sheet‘s objective is to perform analytical procedure to summary, breakdown and analyze the variance between the previous year and the current year This will help the auditors focus on the abnormal fluctuations and pay more attention to those areas Also for small and simple nature item balance, this will help reduce the test of details to be performed After performing the analytical procedure, the auditors will carry on to perform the procedures that have been previously planned by the Manager and Senior The author cites the substantive procedures planned for some items that Deloitte auditors have prepared for the year-end 2019 audit at ABC 88 Table 2.11: Substantive test planning Risks identified Management override of control Significant Risk/ Risk Significant risk (SR) Planned Responses - Interview with the Board of Management about the process of controlling the preparation of the financial statements - Gathering the minutes of the Board meeting, checking the matching between the plan and the actual business performance Revenue recognition Significant risk (SR) - Test Journal entries, test unusual transactions and accounting estimate for bias To test occurrence of revenue, beside DI testing related to control procedure of the Company, auditor perform substantive test procedures as below : - Select a sample of revenue transactions from GL - Trace to sales invoice (taking note of date) and other supporting document (handover minutes, sales contract) and ensure that the sale recorded actually incurred Inventory is misstated Higher risk (HR) Inventory is misstated because adjustments required as a result of inventory counts are not recorded correctly or the inventory stated in the general ledger does not reconcile back to the inventory records or the reconciliation contains invalid items, resulting in inventory being misstated Equity may be misstated because the Company distribute funds inappropiately with current regulation Higher risk (HR) Lower risk (LR) Inquiry and Investigate any differences might arise Test unit costs of inventories from the final inventory compilation For those items selected in the final inventory compilation, trace prices used to build up the average cost to purchase invoices in the latest period Test and assess the reasonableness of production overheads to the cost of inventory and whether any standard costs used are reasonable For costs affected by exchange rates, agree a selection of these rates to independent published records Obtain the final costed inventory compilation, and test the reconciliation to the general ledger as well as to the quantities tested during the inventory count Test cut-off of inventories by using the cut-off documents obtained during the inventory count Perform tests of details to test items from the final inventory compilation by tracing quantities of items test counted or confirmed by us on the physical observation date to the compilation Test quantities of inventories from the final inventory compilation by making a selection of items from the final inventory compilation and tracing the quantities to the original count documents - Obtain BOD meeting related to distrubition of retain earnings end other funds of the Company - Reconcile between BOD meeting with recorded entries in GL - Evaluate the results 89 Financial statements not include the required disclosures for operating expenses/selling, general, and administrative expenses; or disclosed amounts are not accurate or classified appropriately; or the disclosed events, transactions, management assertions, and other matters may not have occurred or may not pertain to the entity PPE balances are not appropriately classified in the financial statements Higher risk (HR) Inventory may be overstated or understated Higher risk (HR) Test disclosures, if applicable, related to OPEX/SGA to confirm they have been disclosed in line with the applicable accounting standards Request disclosure information and evaluate whether the disclosures are in line with the applicable accounting standards and reporting requirements using relevant disclosure checklists or other available tools Lower risk (LR) At year-end - Test disclosures of Property, Plant and Equipment to confirm they have been disclosed in line with the applicable accounting standards - Request disclosure information and evaluate whether the disclosures are in line with the applicable accounting standards and reporting requirements, using relevant disclosure checklists or other available tools Plan the physical observation of the entity's physical inventory and on the date of the physical-inventory observation, tour the entity's facilities to identify any deficiency of the count process and any item(s) that may need to be provided for or written off Perform test counts of inventories based on the entity's count records or the most recent prior perpetual records (overstatement) Perform test counts of inventories from the floor and trace to the entity's count records (understatement) Obtain the relevant documents relating to receiving and shipping of goods, and determine whether these items were appropriately excluded from or included in the physical count Prepare confirmation requests for inventories owned by the entity but held by others as of the balancesheet date Assess whether inventories that not belong to the entity have been excluded from the inventory count (Source: Extracted from audit files ABC JSC, 2019 – Working paper 13300.T02 Assess engagement risk) 90 CHAPTER 3: ASSESSMENTS AND RECOMMENDATIONS TO IMPROVE AUDIT PLANNING IN FINANCIAL AUDIT CONDUCTED BY DELOITTE VIETNAM 3.1 Assessments on the audit planning in financial audit conducted by Deloitte Vietnam 3.1.1 Strengths 3.1.1.1 Audit preparation stage and overall audit strategy Evaluate the acceptance or continuance of the audit engagement The auditors at Deloitte learn preliminary information about customers from a variety of channels, possibly from audit records, from the firm's auditors who have audit experience at the customer, even from sources on the internet All information collected by auditors is verified and guaranteed by interview and observation procedures For continuous customers, auditors also updated promptly and did not overlook the investigation of important information related to business risks in the current financial year through survey procedures and multiple-choice questionnaires This helps Deloitte strictly screen customers and minimize risks related to reputation and big audit fees Establishing engagement team The key members of the engagement are selected based on audit expertise and experience working at clients or businesses in the same industry This helps the engagement run efficiently and save the cost of training, audit associates at the same time learn more from colleagues The Audit Partner and Audit Manager can monitor the audit team at any time, thanks to synchronization when working on EMS software The plan to select an audit team is always important to ensure professionalism when providing professional services to Deloitte customers 91 Drafting and signing audit contracts The audit agreement drafted and signed by Deloitte is fully legal and meets international standards based on the 2011 Independent Auditing Law and Vietnam Auditing Standard No 210 and Auditing Standards in case of contracting with foreign-invested companies The audit engagement at Deloitte expresses the content clearly and rigorously, demonstrating the responsibilities and obligations of a company providing professional audit services, ensuring independence and ethical standards to avoid unwanted disputes that may occur with customers Gathering information Customer inquiries are also conducted in a timely manner by the middle of the financial year, to ensure that a mid-year or year-end review is carried out smoothly Regarding internal control and accounting processes, Deloitte has available multiple-choice questionnaires and based on that, auditors can flexibly manipulate, depending on customers, so that data collection becomes easily and logically Materiality The standards for calculating materiality at Deloitte are scientific and logical Depending on the type of customer and professional judgment of auditors, Deloitte identifies the attention of information of financial statements users, thereby making an objective assessment to quantify the materiality However, auditors are not rigid in considering the material risks when relying only on quantitative values but taking into account the qualitative factors of financial and non-financial information to give opinions as they proceed with the audit 92 3.1.1.2 Detailed audit planning phase Preliminary analytical procedure and risk assessment on the items At Deloitte Vietnam Co., Ltd., preliminary analytical procedures and tests of details are used skillfully by the auditor The use of preliminary analytical procedures greatly reduces the number of tests of details works At the same time, detailed testing collects additional evidence, supplement or confirm the results of the analytical procedure In addition, the combination of these two procedures helps the auditor avoid inherent risks when auditing items The method of applying preliminary analytical procedures in auditing at Deloitte Vietnam also adheres to the most common standards as in other companies However, the methods of calculating the overall materiality, or the clearly trivial threshold are very different from other companies Taking advantage of preliminary analytical procedures in the audits at Deloitte Vietnam helps the auditor to expand knowledge and enhance the work experience Auditors will gain in-depth insights about many aspects of customers by seeking information, from which a proper estimation model can be built These insights, together with common insights from similar customers, help auditors to better advise clients At Deloitte Vietnam, the choice of using analytical procedures or other procedures is carefully considered by auditors The auditor may only use analytical procedures when this is more effective than the use of other procedures and when financial and non-financial sources are independently collected which are highly reliable 93 Preliminary analytical procedure is applied to all items, accounts on the Balance Sheet, Income Statement, financial ratios and is conducted through many analytical directions such as: horizontal analysis, vertical analysis or rationality analysis This allows auditors to evaluate the information comprehensively Of course, the auditors will not select all the items to be analyzed, but for different engagements, the auditor will select a reasonable number of items to apply the analytical procedure depending on actual conditions Besides, at Deloitte Vietnam Co., Ltd., the preliminary analytical procedure also has the advantage that auditors not only use the accounting data provided by the customer but also uses the information source from other parties In addition, industry information in conducting the preliminary analytical procedure will help auditors' conclusions are more accurate and sharper At Deloitte, the risk assessment is based not only on the analysis of the financial information that customers provide, the auditors also rely on the information of experts in the fields, and their own expertise Therefore, the results at this step will create a premise for the audit team and audit associates to grasp the overall situation before going into the test of controls and substantive tests Plan tests of controls and substantive tests Test of controls at Deloitte mainly focus on critical control points related to the core business activities that generate profits and are conducted for material testing to save audit time, including design and implementation and operating effectiveness of control activities The testing procedures are all designed through knowledge of the internal control, and the number of samples for testing is also allocated in branches, departments appropriately, from which creates unity and helps auditors easily follow the objectives and procedures of the tests The substantive tests are tailored to each assertion database for each specific part of the operation, based on material risks and well planned, even if the 94 controls are valid and effective These tests are included by the Audit Senior in auditing software to help audit associates easily grasp, combined with the initiative and flexibility in the working of Deloitte auditors, this will bring about high effective results for the audit 3.1.2 Limitations and causes The selection of the engagement team is not reasonable enough In theory, all audits will be adequately staffed and given enough time for employees to work under small pressure to ensure quality work But in fact, the job always puts great pressure on time for Company employees Employees should always work overtime if they want to keep on schedule Each audit team may actually have only people with a time of working days (from Monday to Friday) to audit a small and medium-sized company If the firm receives support from the company accountant, the auditor may be able to complete its work, otherwise, it may require prolonged work and overlap of subsequent audits This creates great pressure, especially for auditors in the audit team The audit job is divided into busy and non-busy seasons, but in fact the whole year is a busy season After performing year-end audits for businesses, auditors have to conduct mid-term audits or audit of investment projects The audit procedures are sometimes for the presenting purpose only Most of the tests of controls and substantive tests are rather vague, only to guide the auditors on how to ensure the assertions on the items have been checked in detail This makes audit associates, especially new employees or first-year clients, will feel confused when doing In some more serious cases, after completing the fieldwork, the audit associates realized that they had done wrong or did not complete the audit procedures properly Overlap of collected information 95 Due to the lack of coherence in the audit planning approach and the retention of audit files, the presentation of information on working papers has been usually repeated and lack of scientific and concise nature For example, the risk assessment of material items is presented in the working paper "13300 Assess risks and plan audit responses", which is then repeated on working paper in the subphase "13200 Identify material classes of transactions, account balances and disclosures ” Another example, according to Deloitte's audit approach, to understand the business activities and accounting cycle is done in the final preparation of the audit plan, but is stored and presented in subphase “12100 Understand the entity and its business” and subphase “15000 Business cycle” This storage makes the audit files more complex and inconsistent in the process of performing audit planning Overlaps when arranging audit files Audit planning An improvement in Deloitte's audit methodology is the development of a specific audit approach, which was introduced and implemented by the author in Chapter of this thesis However, the Audit files that are stored include the EMS Number (Subphase) and the content is little or somewhat disconnected from this audit approach Consequently, the audit supervision is not tight or auditors are difficult to monitor when seeking necessary information about customers 96 Figure 3.1: Deloitte Vietnam's audit approach and subphase entries in the audit files (Source: Website Deloitte Vietnam and Deloitte's audit file sample, 2020) 3.2 Recommendations to improve the audit planning in financial audit process conducted by Deloitte Vietnam Assign audit personnel appropriately with the size and nature of the audit At the present time, to solve this problem the firm should invest more time and cost more for each audit Therefore, right at the beginning of the audit process, the company should have a more specific plan to build a reasonable relationship between the duration of each audit and the personnel to perform the audit Detailed guidelines for the implementation of audit procedures Control and substantive tests need to be designed in more detail By understanding the internal control and accounting processes at the client, it is essential that the SIC of the audit team clearly notes in the strategy that details the necessary procedures, documents or resources that the auditor associates should 97 look for With specific instructions, the associates will have a certain confidence in the performance of their work, and further show their professionalism when providing financial statements auditing services on fieldworks Keeping the audit file Planning complying to the audit approach The audit files at Deloitte are stored on the EMS software, and also on hard copy files at the Deloitte office The fact that the audit files are presented clearly and in the right order according to Deloitte's audit approach will help Deloitte internal employees to follow and comply with the company's audit methods More importantly, audit files will be made public in case of necessity (litigation or disputes with customers), which is the clearest evidence to explain the responsibilities of the work that auditors have done because it should be arranged in a scientific and easy to follow way 98 Strengthening professional training Although Deloitte Vietnam has a good policy of training and retraining employees, both in terms of professional skills and necessary skills, such as training courses for new employees, online training programs, annual training courses for company-wide employees… But the company should also focus on further enhancing these programs, especially with the recently introduced online training program, to further improve not only the quality of auditing in general and also the preparation of audits in particular 99 CONCLUSION Modern audit technology is always in line with and adaptable to changes in the economic environment And Deloitte, which brings together the leading experts in the field of financial statements auditing, has always been the pioneer audit firm in terms of technology change, taking the most optimal trends These trends are clearly and easily realized at the audit planning process, a professionally prepared audit plan with thorough and thorough preparation, which helps the audit run, operate smoothly and bring more value to customers After nearly four months of practicing as an audit associate at Deloitte, I have a better understanding of the practical work that an auditor needs to as well as the importance of the audit planning stage for the year-end financial statements audits When performing the duties of an assistant, I find that adherence to the audit plans is really effective and have assisted me in the proper implementation of audit procedures that I was assigned In general, the planning method at Deloitte is evaluated scientifically and closely, bringing many benefits and minimizing risks related to profits and the reputation of the company The finalization of the thesis with the topic " Improving audit planning in financial audit conducted by Deloitte Vietnam " aims to generalize the method of audit planning in the audit of financial statements, highlight the nature of practical work and individual solutions, with the hope that the audit planning process at Deloitte will promote its inherent role and limit shortcomings Due to the time spent studying and practicing within four months, along with the limited professional knowledge and practical experience of the author, the thesis cannot avoid shortcomings I look forward to receiving constructive 100 suggestions from experts and readers, helping the thesis make sense both theoretically and effectively with practical work 101 REFERENCES Prof Dr Nguyen Quang Quynh, Assoc Prof Dr Ngo Tri Tue, Financial Audit Curriculum – National Economic University Publisher, Hanoi Deloitte Vietnam, About Deloitte Risk Management System (DRMS), https://drms.deloitteresources.com/drms/help/aboutdrms.html Deloitte Vietnam, Our Audit Approach https://www2.deloitte.com/tr/en/pages/audit/solutions/our-auditapproach.html International Auditing and Assurance Standards Board (IAASB) (2009), International Standard on Auditing ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment, revised in March 2012 Ministry of Finance (2012), Circular 214/2012/TT-BTC published Vietnamese Standard on Auditing, on December 6, 2012 Deloitte Vietnam (2020), Audit files ABC JSC 2019, Hanoi ... RECOMMENDATIONS TO IMPROVE AUDIT PLANNING IN FINANCIAL AUDIT CONDUCTED BY DELOITTE VIETNAM 85 3.1 Assessments on the audit planning in financial audit conducted by Deloitte Vietnam ... Introduction CHAPTER 1: CHARACTERISTICS OF AUDIT PLANNING IN FINANCIAL AUDIT CONDUCTED BY DELOITTE VIETNAM 1.1 Overview of audit planning in financial audit conducted by. .. Deloitte Vietnam proceeds in practice Thesis: Improving audit planning in financial audit conducted by Deloitte Vietnam includes three chapters: Chapter 1: Characteristics of audit planning financial