Characteristics of audit of fixed assets in financial audits conducted by pkf auditing company limited

TABLE OF CONTENTS LIST OF TABLES AND FIGURES 3 INTRODUCTION 4 CHAPTER 1 CHARACTERISTICS OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED 5 1 1 Characteristic of f[.]

TABLE OF CONTENTS LIST OF TABLES AND FIGURES INTRODUCTION CHAPTER : CHARACTERISTICS OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED _5 1.1 Characteristic of fixed assets of clients affecting financial audits _5 1.1.1 Features of fixed assets on financial statements 1.1.2 Accounting for fixed assets _6 1.1.3 Common misstatements related to fixed assets 1.1.4 Internal controls over fixed assets 1.2 Audit objectives of auditing fixed assets in financial audits conducted by PKF AUDITING COMPANY LIMITED 1.3 Audit of fixed assets in financial audits process conducted by PKF AUDITING COMPANY LIMITED 10 1.3.1 Planning the audit _10 1.3.2 Implementing the audit _14 1.3.3 Completing the audit _18 CHAPTER 2: PRACTICE OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED 20 2.1 Planning the audit 20 2.1.1 Accepting a client 20 2.1.2 Audit planning 21 2.1.3 Setting up an audit program 33 2.2 Implementing the audit 34 2.2.1 Performing test of controls _34 2.2.2 Performing analytical procedures _34 2.2.3 Performing test of details 45 2.3 Completing the audit 47 2.3.1 Review the event after the cut-off date 47 2.3.2 Evaluation of results and release of reports _47 CHAPTER 3: ASSESSMENTS AND RECOMMENDATIONS TO IMPROVE AUDIT OF FIXED ASSETS IN THE FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED _ 3.1 Assessments of the audit of fixed assets in financial audits process conducted by PKF Auditing Company _49 3.1.1 Strengths _49 3.1.2 Weaknesses and causes 49 3.2 Recommendations for improving the audit of fixed assets in financial audits process conducted by PKF Auditing Company Limited _50 3.2.1 The legal environment is unstable _50 3.2.2 Regarding the audit work 51 CONCLUSIONS REFERENCES LIST OF TABLES AND FIGURES Table 1.1: Balance-Related Audit Objectives and Test of Details of Balance for Equipment Additions Table 2.1: Extracted from the 2018 audited balance sheet _26 Table 2.2: Extracted from the of 2019 unaudited balance sheet 26 Table 2.3: Compare to column 31/12/2018 after auditing on the table of asset fluctuations, capital sources with the beginning of the year on the balance sheet of 2019 _26 Table 2.4: Fluctuations in assets and capital over the years 2018 and 2019 _28 Table 2.5: Summary of coefficient analysis _30 Table 2.6: Summary of significant risks including fraud risks identified during the planning stage _31 Figure 2.7: A710 working papers – Determine the materiality (planning – implementation) _33 Table 2.8: 2019 ABC’s balance sheet 36 Figure 2.9: D710 working paper - Summary data table 38 Table 2.10: Extract of ABC assets details table 39 Figure 2.11: D740 working paper - Accounts adjustments and reclassification _40 Figure 2.12: D750 working paper - Analytical procedures 41 Table 2.13: Extract of the table: ABC depreciation of fixed assets in 2019 _43 Figure 2.14: D761 working paper - Accounting estimate and judgment of time used _44 Figure 2.15: D701 working paper - Summary of the audit’s findings 47 INTRODUCTION Nowadays, auditing is becoming very important not only for functional agencies but also for business managers and investors The information provided by the audit will be a reliable basis for the state to recognize, evaluate, and properly handle arising economic problems, and at the same time serve as a basis for investors and investors managers when making new business decisions, overcoming errors, and violations in management and observance of state policies and laws Fixed assets and depreciation of fixed assets play a very important role in the production and business process of enterprises Therefore, the accounting of fixed assets, as well as the deduction of depreciation expenses, need to be properly recorded and calculated accurately Moreover, the fixed assets item on the balance sheet usually accounts for a large proportion, so errors for this item often have a significant impact on the financial statements of the enterprise Recognize the importance of auditing, especially auditing of fixed assets Therefore, I chose the topic with the desire to bring a certain understanding of the process of auditing fixed assets theoretically as well as practically at PKF Auditing Company Limited Research purposes Clarify the importance and impact of the fixed assets item on the financial statements of the enterprise, gain a deeper understanding of the audit steps for the item, have a certain understanding of the differences in applying the theory to the reality of auditing fixed assets My internship seminar is divided into three chapters as follows: CHAPTER 1: CHARACTERISTICS OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED CHAPTER 2: PRACTICE OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED CHAPTER 3: ASSESSMENTS AND RECOMMENDATIONS TO IMPROVE AUDIT OF FIXED ASSETS IN THE FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED Due to limited time, the scope of research and knowledge, I hope to receive guidance to improve my content and presentation Through the introduction, I also want to send my sincere thanks to Dr Ha Hong Hanh and all staffs in PKF Auditing Company Limited, who helped me to complete this bachelor thesis CHAPTER 1: CHARACTERISTICS OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED 1.1 Characteristic of fixed assets of clients affecting financial audits 1.1.1 Features of fixed assets on financial statements 1.1.1.1 Definition and Characteristic Fixed assets refer to long-term tangible assets that are used in the operations of a business This type of asset provides long-term financial gain, has a useful life of more than one year, and is classified as property, plant, and equipment on the balance sheet Their characteristics are: - Their service period is longer than one year - Their turnover coefficient is less than one - They are gradually consumed during their service period - Only their depreciable value is allocated to a new product The following items are examples of general categories of fixed assets: Buildings, Computer equipment, Computer software, Land, Machinery, Perennial plants, Vehicles Patents, Means of transport, Licenses, etc 1.1.1.2 Fixed assets classification Entity reports fixed assets in the balance sheet and normally assets are classified into a different classification based on types of assets and their usages The following are the list of general categories of fixed assets: - - Buildings: These include an office building, warehouse, and another similar kind of Their useful life normally longer compared to other fixed assets Computer equipment: These include a laptop, desktop, servers, printers, and other similar kinds of equipment Useful life is around three to five years depending on the type of equipment Computer software: These are the software that entity purchases or business processing or it could be the software that entity builds by their team Furniture and fixtures: These are tables, chairs, closets, cabinets, and others similar Intangible assets: These are franchise, copyright, trademark, and sometimes software also including here Land: Land is classed separately from building and land improvement Land could not be depreciated Leasehold improvements: They are mainly related to the decoration or interior expenses incurred by the entity on the leased office or building Machinery: These are the list of machines example cutting machines - Vehicles: These are cars, trucks, and other related vehicles 1.1.2 Accounting for fixed assets 1.1.2.1 System of accounts related to fixed assets Ledger accounts - Account 211: Tangible fixed assets - Account 212: Fixed assets under financial leasing - Account 213: Intangible fixed assets - Account 214: Depreciation of fixed assets - Account 217: Investment properties Other relevant accounts: Account 241: Construction in progress Documents used in accounting of fixed assets include: - Contract of buying fixed assets Sale invoice, delivery bill of the seller Minutes of transfer of fixed assets; the liquidation of fixed assets Minutes of acceptance of the completed major repair volume Minutes of fixed assets revaluation; inventory of fixed assets Minutes of the settlement, liquidation of the contract of property purchase Spreadsheet and amortization of fixed assets 1.1.3 Common misstatements related to fixed assets The audit risks related to fixed assets are vary based on the nature of fixed assets, control that entity has, and auditor limitation The following are the risks that normally attach to an audit of fixed assets: - Incorrect Depreciation rate and calculation: Depreciation rate is normally decided by management In some cases, management might intend to manipulate the depreciation rate to get the depreciation expenses based on what they want The auditor needs to ensure that the assessment of the depreciation rate is performed The rate should be based on the expected useful life, as well as the capacity of assets - The reported fixed assets are not existing: The assets that report in the financial statements are normally material compare to other assets and the existence of those assets is normally the concern of auditors To address this, the audit might need to check between book value in the financial statements to fixed assets listing And then check the listing to the fixed assets count sheet - Overstatement of fixed assets: It is important to assess the recoverable amount of fixed assets For example, the business units of the entity have their revenues down over that last twelve months This indicates that book values of fixed assets that use in these business units are lower than the reported amount 1.1.4 Internal controls over fixed assets Internal controls over fixed assets fall into two categories: Physical Controls - - - There must be a register or ledger of fixed assets to identify a particular asset, the date of purchase, model number, serial number, acquisition cost, expected life, and assignment to any debt instrument At a minimum, assets must be accounted for annually A physical inspection should be carried out for those assets that have a high exposure to damage like vehicles, site development equipment, and tools to identify any possible valuation adjustments Good management teams should periodically review their insurance policies related to the particular assets that have exposure to damage and loss Financial Controls - - - - A policy should be in a place that sets the requirements for capitalization of an asset, that is the minimum dollar amount, useful life expectancy, and salvage value A policy with a corresponding set of procedures should determine the depreciation formula and the frequency of journal entries related to depreciation An inventory of all fixed assets (see physical controls above) should be conducted on an annual basis to ensure that ghost assets are not being accounted for when they are either missing or unusable Acquisitions and disposals of assets must be approved by management and then properly recorded to the books of record Fixed asset ledgers need to be reviewed regularly to confirm the segregation of non-fixed asset purchases to the fixed assets account The most common error is construction in process expenses being recorded to the fixed assets account It is a challenge for companies to keep up with ever-changing tax rules that affect asset depreciation methods based on the classification of the property but this is crucial to the effective control of fixed assets and property tax reports that need to be filed with tax jurisdictions Segregation of Duties is the requirement for more than one person to complete a task so that the risk of fraud or theft is eliminated This is essential when carrying out the internal control of fixed assets For example, the person who sells a fixed asset cannot take payment for the asset 1.2 Audit objectives of auditing fixed assets in financial audits conducted by PKF AUDITING COMPANY LIMITED Fixed assets always account for a large proportion of the total asset value of the unit and depend on each industry, according to each type of business of the unit Therefore, in all cases, the fixed assets item reflects the status of equipment and facilities of the enterprise This makes the fixed asset item an important item when conducting an audit of financial statements On the other hand, because the cost of forming fixed assets is high and the ability to revolve capital slowly, the Audit of fixed assets will help the Auditors to evaluate the economic and efficiency of investing in fixed assets thereby bringing Also, the investment orientation and resources used to invest in fixed assets are most effective At the same time, auditing of fixed assets will contribute to discovering errors in determining the costs constituting the historical cost of fixed assets, repairing expenses, depreciation expenses These errors in calculating costs generally lead to material errors in the financial statements For example, depreciation of fixed assets into expenses is often deducted higher (or lower) than reality, thereby affecting the cost and profit targets of the business The failure to distinguish the type of repair costs recorded as an increase in the historical cost of fixed assets from the repair costs included in the cost of production and business in the period also leads to deviations in the fixed assets item, as well as the production cost item Investments in intangible fixed assets such as land use rights, patent value, scientific research costs often contain many errors as well as frauds and it is difficult to gather costs and assess accurately value Therefore, fixed asset items are often concerned about The audit of fixed assets is the inspection and control of issues related to the actual situation of assets as well as the increase or decrease of the unit With the progress of science and technology, the audit of fixed assets not only detect errors in operations related to fixed assets but also contribute to improving the efficiency of fixed asset management Audit of fixed assets is also aimed at the general objective of auditing financial statements, defined in Vietnam Auditing Standard No 200 - "Objectives and basic principles governing the audit of financial statements" Accordingly, the audit objectives of fixed assets include: Table 1.1: Balance-Related Audit Objectives and Test of Details of Balance for Equipment Additions Balance-Related Audit Objective Current year acquisitions in the acquisitions schedule agree with related master file amounts, and the total agrees with the general ledger (detail tie-in) Common Tests of Details of Balance Procedures Foot the acquisition schedule Trace the individual acquisitions to the master file for amounts and descriptions Trace the total to the general ledger Current year acquisitions are listed exist (existence) Examine vendor’s invoices and receiving reports Physically examine assets Comments Footing the acquisitions schedule and tracing individual acquisitions should be limited unless control is deficient All increases in the general ledger balance for the year should reconcile to the schedule This objective is one of the most important for equipment Existing acquisitions are recorded (completeness) Current year acquisitions as listed are accurate (accuracy) Current year acquisitions as listed are correctly classified (classification) Current year acquisitions are recorded in the correct period (cutoff) The client has rights to current year acquisitions (rights) Examine vendor’s invoices of closely related accounts such as repairs and maintenance to uncover items that should be recorded as equipment Review lease and rental agreements Examine the vendor’s invoices Examine vendors’ invoices in various equipment accounts to uncover items that should be classified as manufacturing or office equipment, part of the buildings, or repair Examine vendors’ invoices of closely related accounts such as repairs to uncover items that should be recorded as equipment Examine rent and lease expense for capitalizable leases Review transactions near the balance sheet date for the correct period Examine vendors’ invoices It is uncommon to physically examine assets acquired unless controls are deficient or amounts are material This important is important if there are significant repairs that may extend the life of assets, or if there have been trade-ins or disposals of assets Extend depends on the inherent risk and effectiveness of internal controls The objective is closely related to tests for completeness It is done in conjunction with that objective and tests for accuracy Usually done as part of accounts payable cutoff tests Ordinarily, the main concern is whether the equipment is owned or leased Purchase or lease contracts are examined for equipment; property deeds, abstracts, and tax bills are frequently examined for land or major buildings 1.3 Audit of fixed assets in financial audits process conducted by PKF AUDITING COMPANY LIMITED 1.3.1 Planning the audit To perform the audit effectively, it is necessary to build specific audit procedures and following the objectives Audit procedures are performed at three stages of an audit, namely planning, implementing, and completing 1.3.1.1 Before planning  Accepting client Receive customers as described in paragraph 12 Vietnam Standards on Auditing (VSA - Vietnamese Standards on Auditing) No 220 - "Quality control of auditing activities" and paragraph F - Customer retention and acceptance and paragraphs 278, 279 of VSA 2005 "Professional Ethics" “In the process of maintaining existing clients and evaluating potential customers, the auditing company must consider the independence, auditing capacity of the auditing company and the integrity” To avoid risks, businesses often assign experienced auditors to receive and research customers, because the risks may be a very high liability and ensure that they not violate the law and professional ethics 1.3.1.2 Audit planning When becoming an incumbent auditor of the customer, the auditor starts an audit planning Following Auditing Standard No 300 - "Making an audit plan": "Auditors and auditing companies must prepare an audit plan to ensure the audit is conducted effectively." Strategic planning - - “The strategic plan is the basic orientation, the central content and the general approach of the audit outlined by the steering committee based on an understanding of the operational situation and business environment of the entity being audited.” (Paragraph 04 VSA 300) “Strategic plans must be prepared for large-scale, complex, large-scale audits or audits of financial statements of many years” (Paragraph 13 VSA 300) Thus, in this case, the firm has to make a strategic plan, while in other cases it is not required Planning a general audit plan “The general audit plan is to concretize the strategic plan and the detailed approach to the content, schedule, and expected scope of the audit procedures The objective of the overall plan is to be able to carry out the audit effectively and on time.” (Paragraph 05 VSA 300) The overall audit plan may also be considered as a preliminary plan for audited items so that the auditors based on which to perform their audit work, including the following contents: - Auditors must understand about customer activities Understand about the internal control system (Internal Control System), learn the accounting system, accounting cycle, and business cycle Preliminary analysis of financial statements - Analytical process that applies when planning the audit Preliminary assessment of the internal control system and control risks for fixed assets Assessment and estimation of initial materiality and audit risk Specifically, these contents are as follows: Auditors must understand about customer activities 10 ... CHARACTERISTICS OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED CHAPTER 2: PRACTICE OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED. .. FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED CHAPTER 2: PRACTICE OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED 2.1 Planning... CHARACTERISTICS OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY PKF AUDITING COMPANY LIMITED 1.1 Characteristic of fixed assets of clients affecting financial audits 1.1.1 Features of fixed assets