Characteristics of selling and administrative expenses of clients affecting
Features of selling and administrative expenses on financial statements
Selling expenses are expenses paid by the enterprise in connection with the consumption of products, goods, labor and services in the period such as expenses of sales staff, advertising expenses, selling commission expenses, shipping expenses related to sales activities, depreciation of assets, equipment related to sales, etc. Administrative expenses are expenses incurred in common with the whole enterprise’s operation, which cannot be separated for any specific activity. Administration expenses include salary for management and staff, office expenses, expenses administration fees, depreciation of factory and office equipment, etc.
The general characteristics of selling and administrative expenses are as follows:
- These expenses are indirect expenses, these are not directly related to the production process to create products.
- The basis for recognizing these types of expenses is based on policies and regulations of the State as well as of the units, including the regulations on payment of commissions in sales transactions; regulations on working-trip allowances for salespeople; regulations on guest reception, advertising, etc.
- Operating expenses are one of the basis for determining profit targets and other taxes, so they are very sensitive to frauds arising in the process of determining profits and corporate income tax payable.
Accounting for selling and administrative expenses
Accounting selling and administrative expenses
The accounting of these two types of expenses is described according to diagram 1.1 and diagram 1.2:
Diagram 1.1: Diagram of accounting selling expenses
Payroll expenses and insurance expenses
Depreciation expenses of fixed assets
Finished productions, promotion services, gifts for enterprise’s customers
Expenses of outsourced service, other expenses, commission expenses 133
VAT If the value added tax is not deductible
Amount payable to the unit entrusted for export 338
Provisions cover the expenses of warranty for goods and products 352
The revenues that reduce expenses
Diagram 1.2: Diagram of accounting administrative expenses
Goods and services used for internal consumption, and administrative purposes
Reversing the difference between the provision for doubtful debts in previous year and this year
Payroll expenses and insurance expenses
Depreciation expenses of fixed assets
Pre-paid expenses allocation, accrual
Expenses of outsourced service, other expenses 133
VAT If the value added tax is not deductible
Provisions for restructuring of businesses, risk contracts, other provisions that have to pay 352
License tax and land rent must be remitted to the state budget 333
The revenues that reduce expenses
Documents used for accounting selling and administrative expenses related to many different operating parts.
- Documents about money: Receipt, payment slip, debit note, credit note, confirmation record, the accompanying decisions, etc.
- Document about pre-paid expenses allocation: Policy of pre-paid expenses allocation, allocation spreadsheet, other documents related to the formation of expenses.
- Documents about inventory: delivery notes, import notes, purchase lists.
- Documents about fixed assets: Documents and procurement decisions related to fixed assets, depreciation allocation spreadsheet, handover minutes, minutes of liquidation, etc.
- Documents about employee salaries: time sheets, payroll and salary deductions, etc.
According to circular No 200/2014/TT-BTC dated December 22, 2014, the selling expenses are reflected in account 641 "Selling expenses".
Debit side: The actual selling expenses incurred in the period.
Credit side: Items decreases selling expenses in period, transferring selling expenses to account 911 “Income Summary”
This account has no ending balance
According to Circular No 200/2014/TT-BTC dated December 22, 2014, selling expenses (account 641) has seven sub-account as the following table:
Table 1.1: Sub accounts of account 641 (Selling expenses).
Account Sub account Sub account’s name
Payroll expenses Expenses of materials, package Expenses of tools, supplies Depreciation expenses of fixed assets Warranty expenses expenses of outsourcing service Other cash expenses
Account 6411 - payroll expenses: recording accounts payable to sales personnel, package personnel, transportation and maintenance personnel of products, goods, including salaries, inter shift meal expenses, wages and appropriation of social insurance, medical insurance and labor union fees, unemployment insurance
Account 6412 - expenses of materials, package: recording expenses of materials and package delivered for protection, consumption of products, goods, services, such as expenses of package materials of products, goods, expenses of materials, fuels used for protecting, loading, transporting products, goods used for repairing, maintenance of fixed assets, used for sales department
Account 6413 - expenses of tools, supplies: recording instruments, tools served for consumption process of products, goods, such as measurement tools, computing devices, working facilities
Account 6414 - Depreciation expenses of Fixed assets: recording depreciation expenses of fixed assets in maintenance department, sales department, such as warehouse, stores, quays, loading and transportation facilities, computing and measurement tools, quality verification,
Account 6415 - expenses of warranty: used to record expenses of product and goods warranty Especially, repairing and warranty expensess of construction work are recorded at account 627 “Factory Overhead expensess”, and not recorded at this account.
Account 6417 - expenses of outsourcing services: recording expenses of outsourcing services for selling products, such as outsourcing expenses for repairing fixed assets used directly for selling department, warehouse rent, loading and transportation expenses for sales, commission for sales agency, for exporting consignee
Account 6418 - Other cash expenses: recording other cash expenses incurred is sales operation in addition to above mentioned expenses, such as expenses of entertainment in sales department, demonstration expenses of products and goods, offering expenses, expenses of customer conference.
According to circular No 200/2014/TT-BTC dated December 22, 2014, administrative expenses are reflected in account 642 (administrative expenses)
Debit side: The actual administrative expenses incurred in the period.
Credit side: Items decreases administrative expenses in period, transferring administrative expenses to account 911 “Income Summary”
This account has no ending balance
According to Circular No 200/2014/TT-BTC dated December 22, 2014,administrative expenses (account 642) has eight sub-account as the following table:
Table 1.2: Sub-account of account 642 (Administrative expenses).
Sub account Sub account’s name
Administrative staffs expenses Expenses of administrative materials Expenses of tools, supplies
Depreciation expenses of fixed assets Tax, duties, fees
Provisions expenses of outsourced services Other explicit expenses
Account 6421 - expenses of administrative staffs: Recording payable for administrative staffs, such as: salaries, subsidies, social insurance, medical insurance, labor union expenses, unemployment insurance of board of directors, administrative staffs in business departments.
Account 6422 - expenses of administrative materials: Recording expenses of materials delivered for use in business management, such as stationery products, materials use for repairing fixed assets), instruments, tools, (price is plus VAT or net of VAT).
Account 6423 - expenses of office requisites: Used for management works (price are plus VAT or net of VAT)
Account 6424 - Depreciation expenses of fixed assets: Recording depreciation expenses of fixed assets collectively used for business, such as: offices of departments, warehouses, architectures, means of transportation and transmittance,machinery and equipment used for management in office
Account 6425 - Tax, duties, fees: Recording expenses of tax, duties and fees, such as: license tax, lease rent, and other duties and fees.
Account 6426 - Provisions: Recording provision for bad debts, provision for payable which are charged to expenses of production and trade of business.
Account 6427 - expenses of outsourced services: Recording expenses of outsourced services served for firm management works; purchases and use of technical documents, patents, (having not enough requisition to be recorded a fixed assets) computed by amortizing method to General administration expenses, fixed assets lease, charges paid for subs contractors.
Account 6428 - Other explicit expenses: Recording other expenses belong to business overhead expenses, in addition to above mentioned expenses, such as: expenses of conference, expenses of entertainment, traveling expenses, expenses for finale laborers, etc.
Depending on the management requirements of each industry, each enterprise, accounts 641 and 642 may be have other sub-accounts to monitor expenses belonging to the enterprise management.
At the end of the accounting period, selling expenses and administration expenses are transferring to the debit side of account 911 - "Determination of business results"
In addition, there are relevant accounts to reflect selling expenses and administrative expenses such as accounts 111, 112, 141, 242, 331, 334, etc.
Common misstatements related to selling and administrative expenses
Expenses reflected in reports and accounting books are larger than actual expenses
- The enterprise records expenses that do not have or incomplete valid documents into selling and administrative expenses.
- Enterprises that have accounted expenses that, according to the State's regulations, cannot be accounted into selling and administrative expenses, such as fines for violations of law, expenses in excess of the norms, expenses for capital construction investment, purchase of fixed asset, etc.
- Accounting has a mistake in calculating and recording, therefore, it has made the expenses of recording in accounting books and reports higher than accounting vouchers.
- The enterprise has recorded expenses that have not arisen in the accounting period, or recorded deduction of prepaid expenses, being not actual occur in this financial year, such as: product warranty, interest expenses, etc.
- The enterprise has recorded total value of expenses which due to the nature or magnitude of the expenses, it should be allocated in many business periods.
The expenses reflected in reports and accounting books are lower than actual expenses
When businesses want to more attract investors, or the company is being considered to become a publicly listed company, their financial statement need to more perfect It can lead to risks, the expenses reflected in reports and accounting books are lower than actual expenses Some general situations leading to this risk as follows:
- Some actual expenses have been paid but due to lost documents, the enterprise does not have the necessary measures to have valid documents, so these expenses must not be accounted into expenses in the period.
- Some actual expenses have been paid, such as advances for officials to perform their tasks, but at the end of the period, payment procedures were not completed, so these expenses have not been recorded in expenses in the period.
- Enterprises have recorded expenditures on uncompleted jobs in the accounting period (uncompleted expenses) higher than the actual expenses of these jobs.
- Enterprises do not record expenses incurred from the previous period but are allocated in many periods.
- Enterprises have not recorded expenses, which consumed in the period, it will be recorded in next period.
- For payments related to cash payments (such as purchasing materials used for sales and administrative activities, service expenses, warranty expenses, etc), the possible risk relate to recording these transactions, such as the same invoice was recorded twice, or expenses should be recorded into selling expenses but it recorded in to administrative expenses.
- For depreciation of tools, fixed assets used for sales activities and administrative activities, risks may occur: inappropriate, inconsistent method of calculating; determining the unreasonable useful time, the rate of depreciation in contravention of regulations; still depreciate the depreciated assets which are still in use.
- Put selling, administrative expenses into pending expenses for transfer but not allocate to income summary.
- For taxable, risk that may occur, such as do not record the land rent but there is no official document of the competent authority of the land rental exemption or reduction, has not signed a land lease contract with the Department Local environmental resources.
- For the expenses of salaries, social insurance, health insurance, and reimbursement of sales, administrative staff, the risks may occur:exceptional anomalies in the salary of the Board of Directors and employees Accounting the social insurance, health insurance, and into account 622 without separate allocation for selling and administrative expenses.
Internal controls over selling and administrative expenses
Some internal control procedures applied to control selling, administrative expenses:
Separates responsibilities procedure: This procedure appropriately separates responsibilities among the four functions of approving, performing, keeping assets and recording This is a relatively effective control procedure because the division of responsibilities itself is an element of effective control.
Approval procedure: expenses will be incurred when it obtained full approval.
Approval must be in accordance with the Company's policies and regulations, and must be in accordance with authority When approving, it should comply with regulations such as expenses approval, basis of expenses approval, signs of expenses approval, and authorization.
Reconciliation procedure: When expenses are incurred, the departments in the unit conduct reconciliation This helps detect and prevent fraudulent errors in recording expenses and also contributes to increasing the sense of responsibility among employees in the business.
Setting expenses norms: The norms for administrative expenses are proportional to the annual sales revenue, and also should based on the analysis of business activities and research in previous years.
Investigate the causes of expenses fluctuations: Based on the actual expenses information and compared with the established norms, businesses can determine the difference between the actual expenses and the set norm Knowing where the expenses fluctuations are large, what causes is the reason for the change? Subjective or objective? At the same time, managers can find ways to solve the problems.
Audit objectives of auditing selling and administrative expenses in
General targets: Consistent with the overall objective of the financial statements audit is confirmation of the reliability of the audited financial statements, the objective of the auditing selling and administration expenses is collecting sufficient appropriate evidence from which the technician makes a confirmation of the truthfulness and reasonableness of financial information on the items of selling expenses and administration expenses At the same time, provide information and documents as a basis for reference when auditing other operating sections In addition, it also assesses the effectiveness or weakness of the internal control system for activities related to cash and cash equivalents on the financial statements.
Table 1.3: Specific objective of auditing selling and administration expenses
Generations: Ensure that expenses that have been recorded in the accounting book are actually incurred at the units.
- Check whether the expenses have enough invoices and documents, whether or not such documents are fully and reasonably approved.
- For advertising expenses, commissions expressed in the contract, the full approval of the contract should be checked.
- A confirmation letter can be sent for material expenses related to the third party.
Evaluation: Ensure that the assessment of expenses is in accordance with generally accepted accounting
- Need to consider the depreciation method,expenses allocation, salary calculation for sales staff and business management staff in accordance with the current regulations and done consistently principles and accounting regime. or not (refer to the part of wages and fixed assets)
-Attention to the determination of the accounting rate of the transactions incurred in foreign currencies.
- Especially note some norms for advertising expenses, receptions, expenses for employees, etc.
Calculation: Ensure that the arising expenses are calculated and recorded in the right values.
Consider calculating the expenses of the unit, can choose the sample and recalculate.
Full: Ensuring the incurred expenses must be recorded and fully reflected in the accounting books.
- Check and compare the number entries with the related documents.
- Conduct surveys simultaneously or refer to other cycles or items such as cash, fixed assets, wages to detect cases of duplication or omitting operations if any.
Correct: Ensure expenses incurred accurately in terms of data, correct account.
- Checking the classification and recording transactions arising in accounting books to confirm accurate accounting of data and correct reciprocal relations.
- Compare the vouchers of receipts and payments to the corresponding entries (for cash payments).
Period: Transactions are reflected in the period in which they arise and are eligible to be recognized.
Sampling entries, paying special attention to the transactions arising before and after the closing date, comparing with the date recorded on the voucher invoice with the date on accounting book to determine whether the expenses to be accounted on time
Classification and accounting: Are transactions classified and properly recorded?
- Checking the explain in detail ledger of selling and administrative expenses to check whether the classification of expenses is correct in order to detect expenses that are not allowed to be accounted into these expenses and not be considered as the reasonable expenses in accordance with the law on corporate income tax.
- Check whether the classification of expenses is in accordance with the policy and accounting regime of the enterprise or not?
Accumulation and reporting - Checking the calculation of cumulative selling, administrative expenses on each detail ledger and in the general ledger, to assess the completeness and accuracy of the cumulative data.
- The auditor recalculation the accumulated value which transfer to selling expenses (account 641), the administrative expenses (account 642) and compare with the income statement.
- Review and access the presentation and disclosure of selling expenses and administrative expenses on the financial statements, ensuring that these expenses will be consistent with the accounting policy.
Audit of selling and administrative expenses in financial audits process
Planning the audit
Getting preliminary information about selling and administrative expenses
The work steps in this step are to gain an understanding of the client's business model, the accounting system, the internal control system and related parties to assess risks to the items which are selling and administration expenses Then auditors will assess the possibility of material misstatement to make an preliminary judgment materiality, perform analytical procedures, determine the time required to conduct the audit Specific steps are as follows:
- Understanding the internal control system that applies to selling and administrative expenses
Auditor at T.D.K will collect documents related to selling and administrative expenses, such as regulations on business travel allowances, regulations on expenses for commission, advertising, the provisions that the unit applies to accounting salaries and bonuses for employees In addition, audit team will also investigate how customer control activities apply to selling and administrative expenses, the following questions can be used:
● Does the firm establish regulations on expenses accounting, and whether expenses incurred follow those procedures?
● Whether the payment vouchers comply with the prescribed state form and all necessary signatures.
● Is there a decentralization that approves expenses.
● Are the large-scale expenditures fully approved?
● Is the classification of expenses regulated?
● Is a expenses compared between the general ledger and the detailed ledger?
The analytical procedure in the planning audit is to understand the customer's business situation, evaluate the operational continuity and identify possible material misstatements on the financial statement To achieve the above objective, the auditor uses the ratio analysis method, the most commonly applied ratio is inventory turnover; solvency ratios such as, current ratio, quick ratio from which to find fluctuations Through the fluctuations, the auditor may have initial understanding of the client's business situation, the ability to continue operating, and be able to narrow down important risks Performing analytical procedures during the planning audit is very important for identifying detailed audit procedures to be performed.
In this step, the auditor relies on the information gathered to evaluate and make an appropriate audit plan The purpose of determining materiality is:
● Estimate the degree of acceptable risks.
● Evaluate the impact errors in the financial statements
The auditor determines the overall materiality of the whole financial statement and then proceeds to allocate this estimate to each item on the financial statements. This allocation helps the auditor determine the amount of evidence that must be collected for each item at the lowest possible expenses while ensuring that errors in the financial statements does not exceed the initial materiality The basis for making this allocation is based on the nature of the item, the inherent risk and the control risk of each item, the auditor's experience, and the expenses of the audit for each item
The basic risk for selling and administrative expenses are recorded is the value, recording in accounting book higher than actual This risk can be identified as follows characteristics:
● The recorded transactions do not follow to the company’s policy.
● The first transactions, not common in business activities of customers.
● The entries related other parties which have an unusual size and nature
● The entries are likely illegal
● The Usual mistakes of customers about selling and administrative expenses.
● The entries are estimated by customers
● The entries lacks regular review or reconciliation.
Based on the above signs, if the customer accounting contains many of the above risk characteristics, the materiality’s level is assessed as high However, depending on each specific customer, the auditor access different materiality’s level.
An audit program must be established and implemented for all audits, in which determine the schedule, scope, audit procedures These are necessary to perform an audit.
The audit program is designed into two types of tests: control tests and substantive tests, in which substantive testing includes analytical procedures and tests of details Each section is broken down into business cycles and items on the financial statements The design of the above test includes four steps: Determining the audit procedure, sample size, selected items and execution time The tests of control includes audit procedures designed to reduce the control risk of each internal control objective The analytical procedure is designed to assess the overall reasonableness of the account balances being audited Tests of details are designed to satisfy the specific audit objectives of the item.
Specifically, the audit procedures that apply when audit selling expenses and administrative expenses in the implementation audit.
Implementing the audit
Control testing should only be conducted when the internal control system is effect.
- Reviewing policies and regulations of customers on accounting and checking the implementation of regulations and plans of selling and administrative expenses in this year compared to the previous year, assessing the effectiveness of regulations.
- Observing and verifying the effectiveness of selling, and administrative procedures on accounting documents and reports.
- For expenses such as commission fees for agents, advertising expenses, expenses for receptions, etc It is necessary to check the sign of approval which means these should have all original documents, vouchers full of signatures. Auditor will check whether or not there is periodic control with expenses, such as shipping expenses, discretion expenses.
- When examining selling and administrative expenses, audit team often combined with depreciation of fixed assets, the salary expenses and salary deductions, the raw material expenses, cash, and business cycles:
● Check whether the depreciated fixed assets are actually used for sales and administration, the depreciation method is consistent and registered with the tax authorities.
● Check the order of exporting materials and tools for sales and administration.
- Checking internal control with classifying, recording, adding and transferring selling and administrative expenses Check whether there is a comparison between the detail ledger and the general ledger.
- Checking recorded process of some material entries to review and evaluate the internal control applied in the accounting process For control procedures that leave no trace, it means clients still have internal control for some transaction but it does not record in any document In this case, auditors will conduct interview with the relevant person, such as the Board of Directors, employees, and accountants, etc In addition, if necessary, auditors will review reference documents of internal audit.
The survey of internal control with the items selling and administrative expenses to gather audit evidence about the design and operation of the internal control system Thereby, the auditors will conclude on the appropriate level of control risk, which is the basis for the test of detail selling and administrative expenses.
Depending on the characteristics of each enterprise, the level of audit expenses and audit time, auditors, at T.D.K, may choose to perform one or several of the following analysis contents:
- Make a summary of selling and administrative expenses in this year then compare with the previous period All fluctuations, which analyzed in before step, need to be found the cause specifically to consider the reasonableness or doubts about the possibility of a violation Thereby giving an overview of the fluctuations of the selling and administrative expenses.
- Compare the proportion of selling expenses, administrative expenses over revenue and other income between this period and the previous period Auditors also compare this proportion in actual to the plan or the industry average) This help auditors find out the possibility of abnormal fluctuations.
- Calculating the comparative ratio between selling expenses and administrative expenses in order to assess the reasonableness of this ratio with the activities of the audited units.
- Comparing selling expenses and administration expenses on the financial statements this period with the auditor's estimate of selling expenses and administrative expenses for this period (estimated based on selling expenses,administration expenses of the previous period and the consumption rate, revenue of this period compared to the previous period) in order to detect unreasonable fluctuations.
- Analyze non-financial information related to the selling and administrative expenses.
Depending on each audited enterprise, the analytical procedure will be used flexibly in order to have the most accurate assessment of the selling and administrative expenses.
The implementation of analytical procedures will help auditors have an overall assessment of the unit's selling and administrative expenses in relation to other items on the financial statements At the same time, giving auditors a deep understanding of the accounting and the fluctuations of the these expenses, thereby auditors can find the cause of abnormal signs arising in the period for the two items above.
The auditor review the amount of transactions, relating to selling and administrative expenses, arising in the period If the audited company has a numerous transactions, relating these expenses, auditors will focus on expenses that are easy to make mistakes, such as: selling expenses in cash, administrative expenses in cash, office expenses, advertising expenses, marketing, etc
Tests of details for these expenses are usually:
- Comparing the data between the general ledger and the detailed ledger of each expenses.
- For expenses with abnormal fluctuations, auditors will select a sample to check the vouchers, the calculation and assessment whether book value are correct. Auditors also check the recording of expenses from vouchers into detailed and general ledger of selling and administrative expenses to see whether recording is complete, in the right period, cumulative and transferred correctly.
- For expenses in cash, in addition to comparing with the results of cash audit, the auditors will select a sample of vouchers and detailed ledger to check whether the calculation and accounting of transactions are complete and correct.
- Reviewing the explanation of expense’s entries in the detailed ledger to check whether the classification of expenses is correct in order to detect those expenses which are not allowed to be accounted into selling and administrative expenses.
- Checking whether the calculation and allocation of the selling and administrative expenses in the period are correct, according to the following contents:
● Check the allocation policy of selling and administrative expenses, such as the object, criteria allocation of selling and administrative expenses, to be ensure that these expenses are reasonable, correct and consistent with previous periods.
● Checking the accounted entries, relating the selling and administrative expenses, to be ensure that these expenses have calculated and allocated correctly.
- Checking whether the presentation of selling expenses, administrative expenses on the financial statements are correct.
PRACTICE OF AUDIT OF SELLING AND
Planning the audit
Company A is a continuing customer of T.D.K, T.D.K has one year’s experience in auditing the Financial Statements of this client Information about
Company A, such as investment certificates, personnel documents, tax documents, documents registering accounting regimes, are all saved at T.D.K Therefore, in this case, when receiving the letter invitation to audit T.D.K, T.D.K skip the surveying and assessing client’s risk to quickly expedite meetings and sign contracts with representatives of Company A
- Company A was established under the Investment Registration Certificate No.
4360701733 dated 11/01/2018, changed for the 3rd time on December 26, 2018, issued by Vinh Phuc People's Committee Business Registration Certificate No.
2500597483 dated January 17, 2018, registered for the first change on December 21, 2018, issued by Department of Planning and Investment Vinh Phuc.
- The Company's head office: Binh Xuyen Industrial Zone, Huong Canh, Binh Xuyen District, Vinh Phuc Province, Vietnam.
- The main business activities of Company A: Producing and processing jewelry made of gold, silver, precious stones and other fine jewelry.
- At company A, the company's financial year starts on January 1 and ends on December 31 The unit of currency used is VND The company applies the enterprise accounting regime issued under the Circular 200/2014 / TT-BTC dated 22/12/2014 of the Ministry of Finance The form of accounting book to be applied is the voucher diary The method of calculating the fixed assets depreciation is straight-line method The method of calculating VAT is the deduction method.
Understanding internal control of selling and administrative expenses
Company A is a continuing customer of T.D.K, the auditor assess the internal control system, accounting system based on information from the previous year's audit files Audit also has interviews with the Board of Directors, the Chief
Accountant of the company to allow the auditor to collect additional changes in sales policies, salary, and spending norms of Company A compared to with last year Auditors participating in the financial statements auditing at Company A are those who have been audited at Company A in previous years Therefore, the workload will be limited while ensuring that the audit is of the highest quality.
Transactions related to selling expenses and administrative expenses are not too complicated Client also has experienced accountants and control procedures in Company A have effective, effective.
Through the process of research and examination, the auditor concluded: There are no significant changes in the control of selling expenses and administrative expenses The company's internal control system of selling expenses and administration expenses are relatively effective and quite tight, but are not reliable enough for the auditor to significantly narrow the scope of inspection maths. Control risks are assessed at an average level.
The auditor conducts a preliminary analysis of the financial statements in order to detect abnormal fluctuations, and possible doubts on the financial statements. The auditor conducts a general inspection, assesses the fluctuation of selling expenses, administration expenses in the current period, which compared to the previous period, and the fluctuation in the ratio between operating expenses and revenue This step is the premise for the auditor to conduct tests of detail The general analysis and evaluation of the financial statements of Company A is presented in detail at table 2.1.
Table 2.1 Working paper A511 - Preliminary analysis the financial statement
Table 2.2 Working paper A710 - Determining materialiry (Company A)
Name Date Prepared by NTT 11/2/2020 Checked by ĐKT 11/2/2020
Cost of good sold 77.368.329.385 8.480.277.131 68.888.052.254 812% (2) Gross profit 13.653.234.597 3.634.404.485 10.018.830.113 276%
THANG LONG AUDIT AND VALUATION COMPANY
(1); (2): The revenue and cost of goods sold increase, due to the sharp increase in business activities in the year, need to check the revenues recorded in the year, besides, it is necessary to consider recording in the right period at the end of 2019.
(3); (4): Selling expenses and administrative expenses increased and decreased in opposite directions.
Objective: Preliminary analysis the Financial Statement
Current corporate income tax expense
The criteria used to evaluate the materiality for the whole financial statements of Company A is revenue, at a rate of 0.5% This is the extent to which the auditor can control the significant risk
Prepared by NTT Checked by NTT
Determine the preliminary materiality made and approved according to the
Company's policy to inform the auditing team about the preliminary materiality before auditing at Customer and is responsible for redefining the preliminary materiality during the audit process to determine whether audit work and procedures have been performed adequately.
Criteria are used to estimate Revenue Revenue
The criteria value is selected (a) 91.021.563.982 91.021.563.982 Adjust the effects of abnormal (b) - - Criteria values are selected after adjustment (c) = (a) - (b)
THANG LONG AUDIT AND VALUATION
The reason for choosing this criterion
Revenue is an important criterion affecting receivables, taxes and profits
The reason for choosing this rate
Criteria arise large, valuable skyrocketing compared to the previous year, the above criteria ensure the reasonable for the company.
The ratio used to estimate (d) 0,5% 0,5%
Overall materiality (e)=(c)*(d) 455.107.820 455.107.820 The ratio used to estimate material performance level (f) 75% 75%
The ratio used to estimate (h) 4% 4%
Insignificant error thresholds / omissions that can be ignored (i) = (g) * (h) 13.653.235 13.653.235
The auditor has only determined the materiality level for the financial statements as a whole, not yet allocated to selling and administration expenses.
Based on the information gained from the above steps, auditors develops an audit program for the operating expenses in Company A.
Table 2.3: Working paper A 330 - Audit program (Selling expenses - Company A)
THANG LONG AUDIT AND VALUATION COMPANY LIMITED
Audit procedure Prepared by Reference
Ensure that sales expenses are real; be accurately, completely, timely and presented in accordance with current accounting standards and regimes.
Checking the accounting policies applied consistently with the previous year and in accordance with the applicable financial reporting framework.
Comparing the figures on the General Statistics Table with the balance sheet,general ledger, detailed ledger, and working papers of the previous year's audit (if any).
Compare the selling expense this year with the previous year, combined with the fluctuations in revenue, explain the big fluctuations, if any.
Browse the general ledger to identify unusual operations (content, value, reciprocal account, etc) Finding out the cause and perform the corresponding inspection (if any).
For indirect costs which belong to selling expenses and adminsitrative expense, production costs: Find out and evaluate the reasonableness of the allocation criteria.
Reconciliation of expense items that have been checked at relevant audit sections: salary, material, tool, depreciation, prepaid expense, etc.
For expenses that are less volatile, associated with revenue (rent, commissions, etc.) (1): Develop an independent estimate and compare with the accounting books, find out the big differences (if any).
Audit sampling: check supplier's invoice, payment request, and accompanying spreadsheets, payment vouchers, and other accompanying documents.
For units with financial regulations, spending norms: Compare the policy on spending norms with actual expenses at the enterprise.
Checking the periodicity of expenses:
-Comparing with cash, account payable which are audited. -Reviewing the detailed ledger of selling expenses, cash, and cash equivalent and VAT declarations after the end of the accounting period, identify transactions that are not in the right years.
- Taking into selling expensen in the previous period but recorded in the audit period, this risk assessment is likely to repeat.
For transactions related other party(1): Check the recording, approval, applicable prices, etc Note the transactions arising near the end of the accounting period.
Combine with related operations (pay suppliers, internal payables, etc) to send a confirmation letter about transactions in the period
Reviewing and summarizing unqualified selling expenses are deductible expenses when calculating corporate income tax (in combination with the Tax and other payables to the State).
Table 2.4: Working paper A430 - Audit program (Administrative expenses -
Reviewing and summarizing unqualified selling expenses are deductible expenses when calculating corporate income tax (in combination with the Tax and other payables to the State).
11 Examine and classify sales expenses on financial statements.
Ensure that administrative expenses are real; be accurately, completely, timely and presented in accordance with current accounting standards and regimes.
Checking the accounting policies applied consistently with the previous year and in accordance with the applicable financial reporting framework.
Comparing the figures on the General Statistics Table with the balance sheet,general ledger, detailed ledger, and working papers of the previous year's audit (if any).
Compare the administrative expense this year with the previous year, combined with the fluctuations in revenue, explain the big fluctuations, if any.
Analyze administrative expenses in eacch month, and combining with revenue fluctuations, explain the big changes
Analyze the structure of administrative items arising in the
THANG LONG AUDIT AND VALUATION COMPANY LIMITED
Audit procedure Prepared by Reference
II Analytical procedure year and compare with the previous year, explain the big fluctuations, if any.
Collect a summary of administrative expenses by item by month and the year:
-Compared with related documents: general ledger, detail ledger, etc
Analyze fluctuations of each expense item by month, assess the reasonableness, explain the fluctuating and perform corresponding inspection.
Browse the general ledger to identify unusual operations (content, value, reciprocal account, etc) Finding out the cause and perform the corresponding inspection (if any).
For indirect costs which belong to selling expenses and adminsitrative expense, production costs: Find out and evaluate the reasonableness of the allocation criteria.
Audit sampling: check supplier's invoice, payment request, and accompanying spreadsheets, payment vouchers, and other accompanying documents.
Checking the periodicity of expenses:
-Comparing with cash, account payable which are
III Tests of details audited -Reviewing the detailed ledger of selling expenses, cash, and cash equivalent and VAT declarations after the end of the accounting period, identify transactions that are not in the right years.
- Taking into selling expensen in the previous period but recorded in the audit period, this risk assessment is likely to repeat.
Reviewing and summarizing unqualified selling expenses are deductible expenses when calculating corporate income tax (in combination with the Tax and other payables to the State).
7 Examine and classify sales expenses on financial statements.
2019 is the first year T.D.K performs an audit at Company B, after receiving the audit invitation from Company B Before accepting company B is the new client of T.D.K, to ensure that the audit for company B does not contain risks, T.D.K assess client’s risk T.D.K collects information about business’s client such as: the internal control system, customer needs for audit services (the purpose of inviting audit, requirements for services provided, reporting, etc) , general information about customers (type of business, address, legal documents, main business and production lines, etc.), operational structure (operating area, personnel structure , relevant parties), business situation (main items of supply, characteristics of business activities, product characteristics, production processes, etc.), system accounting
- Company B is an enterprise established and operating under the Business Registration Certificate No 0104069479 issued by the Business Registration Department of Hanoi Department of Planning and Investment for the first time on July 21, 2009, the fifth amendment was on June 15, 2016.
- The main business activities of Company B: Hi-tech - High technology
- At company B, the company's financial year starts on January 1 and ends on December 31 The unit of currency used is USD The company applies the enterprise accounting regime issued under the Circular 200/2014 / TT-BTC dated 22/12/2014 of the Ministry of Finance The form of accounting book to be applied is the ledger Diary The method of calculating the fixed assets depreciation is straight-line method The method of calculating VAT is the deduction method.
Customer B is a new customer, so the auditor needs to understand and evaluate the internal control system thoroughly in order to better understand the internal control system The auditor conducted an preliminary assessment of Company B's internal control system according to the following table.
Table 2.5 Working paper A510 - Internal control of operating expenses
Does the company have ethical values (for example, in its Staff Regulations, Labor Rules, Code of
Conduct, etc) and are these values informed to the enterprise's divisions (eg for example, through staff training, periodic dissemination, etc)?
Employee rules, through regular dissemination in monthly, quarterly meetings
Are there regulations to monitor compliance with the principles of integrity and ethical values?
The departments self-monitor each other, having assessments through meetings of the company party committee, corporate union.
How are violations of integrity and moral values handled? Is the treatment clearly defined and properly applied?
Bị phạt tùy mức độ vi phạm (xếp loại
NV thấp, không tăng lương,
THANG LONG AUDIT AND VALUATION
Objective: Assessment the internal control at comprehensive level
1.1 Communicate and enforce integrity and ethical values in businesses
1.2 Commitment to competencies and qualifications of employees
Does the company specify / describe the requirements on qualifications and skills for each employee position (for example, in the Employee
Through briefings, internal staff training courses
Businesses tend to hire the most qualified employees or the least expensive staff?
How to deal with incompetent employees? Retrain, dismiss PV
Is the organizational structure suitable to the size, business activities and geographical location of the unit?
Is the enterprise architecture different from other businesses of similar size in the industry?
Does the company have policies and procedures for the authorization and approval of operations at each appropriate level?
Company Regulations Decisions of the Board of Directors
Is there proper supervision and inspection of activities delegated to employees?
Do employees of businesses understand their duties or not?
Do supervisors have enough time to carry out their supervision?
Is part-time incompetence carried out appropriately within the unit? (for example, separating accounting positions and asset procurement jobs)
Does the organization have policies and standards for hiring, training, evaluating, promoting, and firing employees?
Are these policies reviewed and updated regularly?
Are these policies communicated to all employees of the unit?
Are new employees aware of their responsibilities and the expectations of the Board of Directors?
Are the performance of each employee reviewed and reviewed periodically?
Does the company have a policy of periodically reviewing internal energy efficiency and evaluating the effectiveness of internal energy efficiency?
Assessments of the audit of selling and administrative expenses in
T.D.K conducts assessment of client’s risk not only new customers but also continuing ones The customer information, such as characteristics of business activities, organizational structure, accounts used, was focused on from which helps the auditor to grasp how to record expenses in the period, identify expenses prone to mistakes Thereby, the auditor has an basis to assess the risks, and the design of effective audit program.
T.D.K carries out the work assignment clearly and scientifically The auditor has correctly performed according to the audit program established in the planning audit The auditor's findings report and consulted by the audit team leader, the tasks are clearly and scientifically presented on the working paper Moreover, the steps in the audit process are properly implemented, the initial step will be the basis, supplement for the following step
In this period, T.D.K actually performed very closely Before making an audit conclusion about the selling and administrative expenses, the auditor conducted a review of the working papers, which was conducted by the auditor who performed that part, then summary of findings At the same time, events arising after the date of preparation of the financial statements are also carefully reviewed by the auditor to ensure its impact on the selling and administrative expenses and the financial statements.
Understanding the internal control system
When understanding the internal control system is applied to the selling expenses, the administrative expenses, the auditor primarily understands the document regulations on policies, interviews of internal control system For continuing customers such as company A, the performance of tests of controls is often omitted unless there are events occurring during the year related to the internal control system Instead, the auditor will review previous audit records to conduct an internal control system audit This is a measure to reduce the workload when performing the audit However, this is a step that can increase the control risks in the audit because the auditor is unable to fully grasp the events arising in the year related to the internal control system, and reread the records in the previous year's audit has not provided the auditor with an overview of the internal control system.
Because selling and administrative expenses are only a small item on the financial statements, T.D.K only determines the materiality for financial statements and other items, not do this for operating expenses
Tests of controls is an important audit procedure, helping the auditor to limit the performance of basic tests, saving time and expenses of auditing Currently, the audit process of the selling expenses, and administration expenses of T.D.K applied is relatively complete But it only performs basic testing, it ignores tests of controls.
There are no guidelines on the conditions to apply, the content of carrying out control testing The auditor has only conducted a brief analysis, not covering all the issues related to selling expenses, and administrative expenses, due to time constraints when performing the audit.
For customers A, T.D.K has just conducted analytical procedure such as comparing the expenses of this year to the previous year, analyzing the expenses structure but not comparing with data of enterprises, in the same industry, have the same business scale of the target as the average expenses of the industry, the ratio of operating expenses / average revenue, etc.
Recommendations for improving the audit of selling and administrative
Understanding the internal controls is a very important step in any audit This work should be assigned to highly qualified and experienced auditors.
At the moment, when evaluating the internal control system for items of selling expenses, administrative expenses, auditors interview accounting, observing the implementation of regulations in the unit Evaluation results are recorded on working papers Doing this helps auditors have an understanding of the design and operation of internal control systems For continuing customers, the auditor needs to complete all control tests, combined with reviewing the audit records of previous years, to conduct internal control system audits to minimize control risks.
To further improve the process of understanding the internal controls and the quality of audits The auditor may make detailed questions to evaluate the internal control system at the audited units Pre-designed questions will help the auditor realize the adequacy or omission of the entity's control activities The following is a questionnaire proposal to evaluate the internal control system in auditing of operating expenses.
Table 3.1 Questions to assess the internal control system
1 Are policies on selling expenses and management expenses specified in writing?
2 Is the voucher system used in the selling expenses and management expenses sufficient?
3 Are accounting records on operating expenses archived and used reasonably?
5 Is there a regulation on sales commission?
6 Regulations on sales department salary?
7 Is there any collation of data between the accounting department and the sales department and related parts?
8 Are there rules about whether or not to approve expenses
9 Are there regulations and strict controls on the use of foreign exchange rates on accounting of selling expenses and administrative expenses?
The material level of selling and administrative expenses
Because operating expenses include only small items in the income statement of the enterprise, the determining material level of these expenses may be omitted during the audit process However, to improve the overall audit process, all small items need to be completed in order to improve the quality audit The following is a proposal on determining material level of operating expenses:
The analytical procedures are conducted to look at the nature of the account in detail, including large-scale, irregular operations, transactions that have not occurred according to the plan of the enterprise, which may affect the audit.
- See the factors that can increase audit risk:
For each important account, all factors that may increase risk should be considered, including consideration of events which may increase the likelihood of fraud and material misstatement on Financial statements The following questions can be used to assess risk:
Table 3.2 Questionnaire for risk assessment
1 Does there exist accounting transactions not according to the system?
2 Is there a decentralization to approve the types of expenses?
3 Does there exist any unusual entries These types of entries may include:
- Strange entries for customers' business activities
- Transactions involving related a large and extraordinary scale parties
- Transactions relate customers' law-breaking activities.
4 Does there exist transactions according to estimates and adjusted at the end of the year?
5 How often is it checked and compared?
6 Are there specific characteristics of the client's business line?
7 Is there pressure or doubt about the integrity of the
After answering all of the above questions, the auditor knows if any risks are identified Based on that design detailed audit procedures for the item to be tested.
For a large number of clients with an effective internal control system, the auditor should perform tests of controls to save time and expenses of the audit.
Tests of controls are designed to assess control procedures to confirm the reliability of such activities Tests of controls for operational expenses may be designed as follows:
Main control activities Control test
Approval Approval of operating expenses within proper authority, with clear assignment.
Check for signs of approval including signature, seal, etc.
Completeness The purchase invoices must be numbered and monitored.
Keep track of a sequence of invoices, check the completeness of the invoice Classify Businesses have enough account diagrams.
Internal testing of classification process
- Checking the procedures in the register according to the account diagram
- Check for signs of internal testing Timely Enterprises have regulations on professional bookkeeping as soon as possible after making expenditures
- Checking the entry procedures and observing whether any invoices have not been entered yet.
- Check the signs of internal inspection
Performing analytical procedures during the audit process helps the auditor gather appropriate and complete evidence faster and does not take much time In order to improve the efficiency of analytical procedures, T.D.K needs to further strengthen the analytical procedure so that it can reduce the analytical procedures effectively The analytical procedure during implementing the audit of the selling and administrative expenses should not stop at the horizontal analysis (trend analysis), but can also enhance vertical analysis such as the ratio of expenses to revenue of each month, then comparing this ratio between months will see the increase or decrease of expenses compared to revenue, thereby having a better basis to conduct a tests of details In addition, if the unit has an operational expenses norms in the period, the auditor should consider whether the plan is feasible and then analyze amount between the plan and actual.
The analysis should also be done through comparison of financial information with non-financial information such as the number of business managers (sales) and salary expenses to see the compatibility
The analysis needs to be extended over many financial years to see the development trend of the business, which can be analyzed across the selling and administrative expenses of this year compared to the previous year or in the same month to see the fluctuation trend.
If the discrepancies are found, the auditor will conduct an inquiry and interview the accountant or persons responsible for obtaining an explanation of the discrepancy At the same time, auditor conducted a sample selection to check the reasonableness of the difference from which to present opinions.
When applying analytical procedures, auditor should consider the objective of the procedure, the characteristics of the unit and the industry in which it operates,the ability to collect financial and non-financial information, independence and usability of the information.