TABLE OF CONTENTS TABLE OF CONTENTS 1 LIST OF TABLES AND FIGURES 2 ABBREVIATIONS LIST 2 FOREWORD 2 PART 1 THEORITICAL FRAMEWORK ON ASSESSMENT OF AUDIT RISK AND MATERIALITY IN FINANCIAL AUDITS 2 1 1 Au[.]
TABLE OF CONTENTS TABLE OF CONTENTS LIST OF TABLES AND FIGURES ABBREVIATIONS LIST FOREWORD .2 PART THEORITICAL FRAMEWORK ON ASSESSMENT OF AUDIT RISK AND MATERIALITY IN FINANCIAL AUDITS 1.1 Audit risk and materiality in financial audits 1.1.1 1.1.1.1 Definition .2 1.1.1.2 The component of audit risk 1.1.1.3 Audit risk model 1.1.1.4 Relationship between components of audit risk model .2 1.1.2 1.2 Audit risk Materiality 1.1.2.1 Definition .2 1.1.2.2 Relationship between materiality and audit risk Process of assessment of audit risk in financial audit 1.2.1 The concept and implications of risk assessment 1.2.1.1 Essentiality and major purpose of risk assessment procedure in financial statements audit 1.2.1.2 The concept of risk assessment 1.2.1.3 The implications of risk assessment 1.2.2 Assessment of acceptable audit risk .2 1.2.3 Assessment of inherent risk 1.2.4 Assessment of control risk 1.2.5 Assessment of planned detection risk 1.3 Process of assessment of materiality 1.3.1 Basis of assesment of materiality 1.3.2 Process of assessment of materiality 1.3.2.1 Set preliminary judgement about materiality 1.3.2.2 Allocate preliminary judgment about materiality to segments 1.3.2.3 Estimate misstatement and compare with preliminary judgment Page PART PRATICE OF ASSESSMENT OF AUDIT RISK AND METRIALITY IN FINANCIAL AUDITS CONDUCTED BY DELOITTE VIETNAM COMPANY LIMITED 2.1 Brief description of client ABC and client XYZ 2.1.1 Brief description of client ABC .2 2.1.2 Brief description of client XYZ .2 2.2 Practice of assessment of audit risk conducted by Deloitte Vietnam 2.2.1 Assessment of acceptable audit risk .2 2.2.1.1 For client ABC .2 2.2.1.2 For client XYZ .2 2.2.2 Assessment of inherent risk 2.2.2.1 For client ABC .2 2.2.2.2 For client XYZ .2 2.2.3 Assessment of control risk 2.2.4 Assessment of planned detection risk 2.3 2.2.4.1 For client ABC .2 2.2.4.2 For client XYZ .2 Assessment of materiality conducted by Deloitte Vietnam 2.3.1 General method of assessment of materiality by Deloitte Vietnam .2 2.3.1.1 Performance Materiality (PM) .2 2.3.1.2 Monetary Precision (MP) 2.3.1.3 Threshold acceptable misstatements for the overall financial statements – De Minimis Threshold (DMT) 2.3.2 2.3.2.1 DMT Assessment of materiality in client ABC .2 Determining materiality, performance materiality, monetary precision and .2 2.3.2.2 Determining the threshold of acceptable mistatements for each item in the financial statements 2.3.3 2.3.3.1 DMT Assessment of materiality in client XYZ Determining materiality, performance materiality, monetary precision and .2 2.3.3.2 Determining the threshold of acceptable mistatements for each item in the financial statements 2.4 Comparison in assessment of audit risk and materiality conducted by Deloitte Vietnam between client ABC and client XYZ 2.4.1 Comparison in assessment of audit risk .2 2.4.2 Comparison in assessment of materiality .2 Page PART EVALUATION AND RECOMMENDATIONS TO IMPROVE ASSESSMENT OF AUDIT RISK AND MATERIALITY IN FINANCIAL AUDITS CONDUCTED BY DELOITTE VIETNAM COMPANY LIMITED 3.1 Evaluation on assessment of audit risk and materiality conducted by Deloitte Vietnam .2 3.1.1 Achievements 3.1.2 Limitations 3.1.3 Reason of limitation 3.2 Recommendation on assessment of audit risk and materiality in financial audits conducted by Deloitte Vietnam 3.2.1 Recommendation on assessment of control risk 3.2.2 Recommendation on assessment of materiality 3.2.3 Recommendation on enhancing the audit software AS2 and using professional advice 3.2.4 Recommendation on enhancing the quality of the audit team .2 CONCLUSION REFERENCES Page LIST OF TABLES AND FIGURES LIST OF FIGURES Figure 1.1 Steps in applying materiality LIST OF TABLES Table 1.1 Planned detection risk Table 2.2 Assess the acceptability of the audit contract with client ABC (new client) Table 2.3 Question table about the independence of auditors that conduct the audit for customer ABC Table 2.4 Minutes of commitment to independence of auditors for client ABC Table 2.5 Minutes of providing audit service for customer ABC Table 2.7 Question table about the independence of auditors that conduct the audit for customer XYZ Table 2.8 Minutes of commitment to independence of auditors for client XYZ Table 2.9 Approval of audit contract continuation for customer XYZ Table 2.10 Factors affecting inherent risk of the customers Table 2.11 Evaluation table of the internal control of client ABC and client XYZ Table 2.12 Guidelines to determine materiality level .2 Table 2.13 Guidance for assessing materiality base on revenue Table 2.14 Guidance table for calculating the threshold of acceptable mistatements by Deloitte Vietnam Table 2.15 Table of caculation of materiality for Company ABC Table 2.16 Table of assessment of control risk on Company ABC’s cash section Table 2.17 Table of caculation of materiality for Company XYZ Table 2.18 Table of assessment of control risk on Company XYZ’s cash section Table 3.1 Table of reliability level of Deloitte Vietnam Page ABBREVIATIONS LIST Deloitte Vietnam PM MP EAM CTT DMT GAAS IR CR AAR PDR Deloitte Vietnam Limited Company Performance materiality Monetary precision Early assessed materiality Clearly trivial threshold De Minimis threshold Generally accepted auditing standards Inherent risk Control risk Acceptable audit risk Planned detection risk Page FOREWORD Nowadays, along with the continuous growing economy is the ongoing development of the auditing field Many audit firms has been established to meet the needs of investors, business owners as well as the economy itself on transparency in financial activities of the business Currently, under the strong international integration trend, independent audit companies in Vietnam have been having many significant progress to ensure the best services possible to domestic as well as abroad customers After 24 years of development, Deloitte Vietnam Company Limited has become one of the leading company in the provision of audit and consulting services within Vietnam and the SEA region with the quality of services beyond the expectations One of the key points to the success of the company is how to build a proper audit plan for each specific customer in order to ensure the quality and effectiveness of the audit; especially the process of assessment of risk and materiality Particularly, Deloitte Vietnam is known as the company with the most precise and standard audit risk assessment process for materiality and risk in Vietnam This assessment process is the very first and important step for an audit The level of materiality and risk will be used as an effective tool of audit which can help auditors to identify the amount of audit evidences required Therefore, auditors will create a reasonable plan of methods and scope of application of the audit procedure; by the same time, ensure the audit achieves efficiency and economic effectiveness In the planning phase of the audit, materiality level is used to estimate how many mistatements can be accepted, determine the scope of the audit and assess the impact of the possible mistatements on the financial statements Thereby, determining the nature, timing and extent of audit procedures During the internship program at Deloitte Vietnam Company Limited, I had the opportunities to expose and study about the process of evaluating materiality level at the Company as well as its application for specific customers In order to clarify the concept of materiality and risks in audits of financial statements as well as the practical application of this process performed by Deloitte Vietnam, I have decided to write the Page report on the following topic: "Assessment of audit risks and materiality in financial audits conducted by Deloitte Vietnam Company Limited" The report shall includes major chapters: Chapter 1: Theoritical framework on assessment of audit risk and materiality in financial audits conducted by Deloitte Vietnam Company Limited Chapter 2: Practice of assessment of audit risk and materiality in financial audits conducted by Deloitte Vietnam Company Limited Chapter 3: Assessments and recommendations to improve assessment of audit risk and metriality in financial audits conducted by Deloitte Vietnam Company Limited I give my sincere thank to Dr Nguyen Thi Phuong Hoa for her devoted guidance and to the colleagues in the Deloitte Vietnam that have helped me complete this topic Page PART THEORITICAL FRAMEWORK ON ASSESSMENT OF AUDIT RISK AND MATERIALITY IN FINANCIAL AUDITS 1.1 Audit risk and materiality in financial audits 1.1.1 Audit risk 1.1.1.1 Definition Audit risk (Acceptable audit risk) is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued.There are two general categories of audit risk – risk regarding assessment of the financial materials and risk regarding the assertions produced by evaluation of the financial materials When auditor decides on a lower acceptable audit risk, they want to be more certain that the financial statements are not materially misstated Zero risk is certainty, and a 100 percent risk is completely uncertainty Complete assurance (zero risk) of the accuracy of the financial statements is not economically practical Moreover, the auditor cannot guarantee the complete absence of material misstatements.1 1.1.1.2 The component of audit risk Inherent risk Inherent risk, in a financial audit, measures the auditor's assessment of the likelihood that there are material misstatements due to error or fraud in segment before considering the effectiveness of internal control If the auditor concludes that a high likelihood exists, the auditor will conclude that inherent risk is high Internal control is ignored in setting inherent risk because they are considered separately in the audit risk model as control risk.1 Control risk Alvin A.Aren, Randal J.Elder, Mark S.Beasley (2011), Auditing and Assurance Services - An Integrated Approach, Prentice Hall, 14th edition (April 1, 2011) Page Control risk measures the auditor assessment of whether misstatements exceeding a tolerable amount in a segment will be prevented or detected on a timely basis by the client’s internal control Organizations must have adequate internal controls in place to prevent and detect instances of fraud and error Control risk is considered to be high where the audit entity does not have adequate internal controls to prevent and detect instances of fraud and error in the financial statements Planned detection risk Detection risk is the risk that audit evidence for a segment fails to detect misstatements exceeding a tolerable misstatement There are two key points about the detection risk: Detection risk is independent on the other three factors in the model It will change only if auditor changes one of the other risk model factors.Detection risk determines the amount of substantive evidence that the auditor plans to accumulate, inversely with the size of the detection risk If the detection risk is reduced, the auditor needs to accumulate more evidence to achieve the reduced planned risk 1.1.1.3 Audit risk model Audit risk may be considered as the product of the various risks which may be encountered in the performance of the audit In order to keep the overall audit risk of engagements below acceptable limit, the auditor must assess the level of risk pertaining to each component of audit risk.Error! Bookmark not defined The audit risk model is as follow: Planned detection risk = Acceptable audit risk Inherent risk x Control risk An auditor must make key decisions regardless of what controls to trust, what controls to inspect and what scope to place on the tests associated with auditing the financial statements of a company This can quickly form a long list of decisions that auditors must make for each specific business The audit risk model is one of the tools that auditors use to manage those decisions and create a proper framework for inspection Alvin A.Aren, Randal J.Elder, Mark S.Beasley (2011), Auditing and Assurance Services - An Integrated Approach, Prentice Hall, 14th edition (April 1, 2011) Page Below are some factors that create the importance of the audit risk model: + To comply with laws and regulations The audit risk model has become increasingly important Regulations for business accountability became stricter with the Laws and other legislation which designed to enhance auditing practices and provide more information to investors Therefore, the audit risk model, with its flexibility and broad-based approach, allows auditors to incorporate such standards and ensure probable audit results that both businesses and investors can count on + Determine audit procedures An audit risk model is a process for determining risks and deciding on the correct audit procedures needed for a specific business The model concept is a creation of auditors in the United States, but the terms used in the model are derived from Generally Accepted Auditing Standards (GAAS) Under this approach, the auditor decides what controls can be used to run tests of detail, what controls need to be tested of control themselves and what amount and scope of tests that will provide the best results for the audit + Adaptation The audit risk model is a vital step for complex audits because it provides a flexibility approach for auditors If auditors were limited to fixed audit procedures composed of steps they had to follow, they would not be able to change their approach based on the company and audits would not be complete or useful The risk model assesses current situation and makes the resulting audit a flexible tool that can be used to inspect for particular errors + Intangible factors The audit risk model also provides room for certain intangible skills that the auditor capable of For example, auditors may experienced in similar businesses and may know the common faults or weaknesses in those businesses The model allows the auditor to focus on certain tests based on his own history, ideas and experiences in the field This effectively translates auditor knowledge into practice Page 10 ... risk and materiality in financial audits conducted by Deloitte Vietnam Company Limited Chapter 2: Practice of assessment of audit risk and materiality in financial audits conducted by Deloitte Vietnam. ..PART PRATICE OF ASSESSMENT OF AUDIT RISK AND METRIALITY IN FINANCIAL AUDITS CONDUCTED BY DELOITTE VIETNAM COMPANY LIMITED 2.1 Brief description of client ABC and client XYZ ... Vietnam Company Limited Chapter 3: Assessments and recommendations to improve assessment of audit risk and metriality in financial audits conducted by Deloitte Vietnam Company Limited I give my sincere