Audit of fixed assets in financial auditing implemented by kpmg vietnam company limited

29 CHAPTER 2: AUDIT OF FIXED ASSETS IN THE PROCESS OF AUDITING FINANCIAL STATEMENTS IMPLEMENTED BY KPMG VIETNAM COMPANY LIMITED .... LIST OF TABLES AND FIGURES Table 1.1: Internal contro

THEORETICAL BASIS FOR THE AUDIT PROCESS OF

Characteristics of fixed assets affecting the audit of financial statements

a Definition of fixed assets on financial statements

Fixed assets are categorized under the Long-term assets section of a company's financial position statement, encompassing tangible fixed assets, intangible fixed assets, and lease assets While Vietnamese law does not provide a comprehensive definition of fixed assets, they are generally considered to be items with a useful life exceeding one year and a value greater than 30 million VND These assets can be depreciated over time, are typically illiquid, are utilized in business operations, and offer long-term benefits to the entity Article No 2 of Circular 45/2013/TT-BTC outlines the definitions and classifications of various types of fixed assets.

Tangible fixed assets are essential components of a business, categorized into detailed items such as buildings, machinery, vehicles, and office equipment These assets possess physical substance and are utilized to generate future financial benefits To qualify as tangible fixed assets, they must have a useful life exceeding one year, a value greater than 30,000,000 VND, and contribute to various business cycles while maintaining their physical form.

Intangible fixed assets encompass non-physical long-term resources such as limited land use rights, patents, copyrights, designs, and goodwill These assets are defined in value, owned by the entity, and play a crucial role in various business cycles.

Lease assets are fixed assets where most risks and benefits have been transferred to the lessee, with ownership rights potentially passing at the end of the lease term The financial lease contract must equal the market value of the assets at the time of the agreement Depreciation is a crucial concept in accounting, reflecting the decrease in value of fixed assets, such as factory equipment, over time due to usage It involves allocating the original cost of the asset in financial statements According to VAS, financial statements must present the original cost, accumulated depreciation, and the net present value of fixed assets, calculated as cost minus accumulated depreciation Consequently, auditors focus primarily on the depreciation of fixed assets during audits.

Fixed assets play a crucial role in financial statements, often representing a substantial portion of total assets, particularly in heavy industries and fuel sectors, where they can exceed 50% of total assets These assets are categorized into two primary types: property, plant, and equipment, and intangible assets, each with distinct characteristics that are essential for understanding their impact on financial health.

Property, plant, and equipment: For this kind of fixed assets, there are 3 factors that the accountant has to consider when classifying:

Property, plant, and equipment are essential assets utilized in standard business operations rather than for resale For instance, an unoccupied building should be considered a separate investment, while land is categorized as inventory by land developers or subdividers.

Property, plant, and equipment are long-term assets that typically undergo depreciation, allowing companies to allocate the costs of these investments over time While these assets provide services for extended periods, land is only depreciated in cases of significant value loss, such as reduced agricultural fertility from poor crop rotation, drought, or soil erosion.

Tangible assets, such as property, plant, and equipment, possess physical substance, setting them apart from intangible assets like patents and goodwill Unlike raw materials, these tangible assets do not become part of a product intended for resale.

Intangible fixed assets: we consider about 2 main factors that differentiate them with property, plant, and equipment:

Intangible assets differ from tangible assets like property, plant, and equipment, as they do not have a physical presence Instead, their value is derived from the rights and benefits they provide to the company utilizing them.

Bank deposits, accounts receivable, and long-term investments in bonds and stocks are examples of intangible assets that lack physical form In contrast, financial instruments hold no value unless they provide a legitimate claim to future cash or cash equivalents It is important to note that intangibles do not encompass financial instruments.

In most cases, intangible assets provide benefits over the years Therefore, companies normally classify them as long-term assets

Fixed assets are subject to depreciation over time due to usage, which reduces their overall value Depreciation is an accounting estimate rather than a direct expense, influenced by three key factors: historical cost, estimated disposal cost, and useful life While historical cost is straightforward, useful life and estimated disposal cost rely on the accountant's judgment Consequently, auditors cannot depend solely on invoices or documentation for precise calculations; they must reassess and verify the entity's estimates.

Depreciation is the systematic allocation of historical cost, minus estimated disposal costs, and its appropriateness hinges on the chosen calculation method, such as straight-line, double-declining balance, or unit of production Consequently, auditors must verify the proper application of these accounting methods Understanding the significance of fixed assets in financial statements is crucial for accurate financial reporting.

Fixed assets are essential components of a company's operational cycle, providing the necessary technical and physical foundation for business activities They encompass machinery, equipment, and various technical stages that determine a company's size and capacity The critical role of fixed assets underscores their irreplaceable importance in driving business success.

Fixed assets provide a clear insight into an entity's infrastructure and scale, helping to assess its ability to meet market demands and align with its business nature.

Fixed assets play a crucial role in the production process, significantly influencing both the quality and quantity of goods produced Their long-term utilization fosters sustainability within the business cycle, adapting to the unique characteristics of each production cycle.

The process of audit of fixed assets in auditing financial statement

1.2.1 Objectives and assertions for auditing fixed asset items

Auditing fixed assets primarily focuses on collecting relevant evidence to verify the accuracy of financial data reported in financial statements, including costs, depreciation, expenses, and profits Additionally, it provides essential information and documentation that can be referenced during other periodic audits.

The specific audit objectives of an audit of fixed assets:

- Verifying assertions on the process of accounting for fixed assets:

 Occurrence: All fixed asset transactions recorded in the period are incurred, there is no overwritten transaction

 Accuracy: Fixed asset transactions are determined under current accounting principles and regimes and are correctly calculated without errors

 Completeness: Transactions of fixed assets arising in the period are fully reflected and monitored in the accounting books

All fixed asset transactions within the period are accurately classified in accordance with applicable accounting standards and specific regulations of the enterprise, ensuring that these transactions are recorded using the correct order and accounting methods.

Transactions and events are accurately aggregated or disaggregated and are clearly described, ensuring that related disclosures are relevant and easily understandable within the context of the applicable financial reporting framework.

 Cut-off: Fixed asset transactions are recorded in the correct period according to the accrual accounting principle

- Verifying assertions of fixed asset balance:

All fixed assets reported by the enterprise in its financial statements must be verifiably present at the reporting date, ensuring that the reported figures align with the actual inventory data of the business.

All fixed assets reported by an enterprise must be owned by it; for assets acquired through financial leases, the enterprise must maintain long-term control as stipulated in the signed lease agreement.

 Completeness: There are no omissions and fixed assets that should be recorded and disclosed have been In other words, there has been no understatement of assets

 Accuracy, valuation, and allocation: Determining the balance of fixed assets is correct without errors

 Classification: Fixed assets are recorded in the proper accounts

- Verifying assertions for presentation to financial statements:

 Sufficient: all fixed assets are fully presented in the financial statements (no omissions or omissions)

 Classification: Fixed assets are properly classified for presentation in the financial statements

 Reporting and Presentation: Indicators related to fixed assets in the financial statements are determined following the provisions of accounting standards and regimes

To make comments on the items related to fixed assets in the financial statements, the auditors must base on the following information and documents:

 The internal rules and regulations of the unit related to the procurement, management, liquidation, and sale of fixed assets;

 The legal assertions for transactions of increase, decrease, purchase, sale, and repair of fixed assets such as investment decisions, purchase and sale contracts, contract liquidation, etc;

The essential documents involved in the transportation, installation, and repair of fixed assets include payment slips, debt notices, and minutes related to the liquidation and sale of these assets.

 General ledger and detailed accounting books of related accounts such as General ledger of related accounts, Detailed book of fixed assets, Table of depreciation of fixed assets, etc;

 General and detailed accounting reports of related accounts such as reports on the increase and decrease of fixed assets, repair reports, payment reports, etc;

 The major sources of accounting treatment documentation provide evidence directly related to the assertions of the financial information presented in the audited financial statements;

 Circulars of The Ministry of Finance and Vietnamese Accounting Standard

An audit begins when an audit firm and auditor formally engage with a client by signing an audit contract Prior to this, the auditor evaluates the feasibility of conducting the audit For returning annual clients, the auditor performs specific procedures to decide on the renewal of the audit contract.

1.2.2.1 Evaluate the acceptability of the audit and the contract’s risk

The initial phase of audit planning involves the auditor evaluating potential risks related to the engagement, which is crucial for making an informed decision on client and contract acceptance This assessment requires careful consideration of various factors.

The auditor carefully assesses the acceptability of potential clients and the continuation of contracts with existing ones to safeguard the profitability and reputation of the audit firm This evaluation considers essential factors such as professional competency, independence, and the integrity of leadership.

Determining the audit's purpose is crucial for understanding how the client's financial statements will be utilized by both the client and stakeholders This understanding helps define the audit's scope and the necessary level of assurance for the audit opinion For new clients, conducting interviews with management can provide valuable insights, while past audit experiences can guide decisions for existing clients.

1.2.2.2 Selecting the audit team and preparing the audit engagement

An audit contract is signed by both parties to establish a legal framework that defines the objectives, scope, rights, responsibilities, audit reporting format, timeline, fees, and dispute resolution terms The audit firm assembles a team of qualified auditors and assistants, ensuring they possess the necessary competency and experience Prior to advancing with the audit process, the team must pledge their independence to maintain the integrity of the audit.

1.2.2.3 Understand the client and its environment

Upon signing the auditing contract, the auditor initiates the preparation of the overall audit plan, necessitating a comprehensive understanding of the client, including the following facets:

- General comprehension of the economic landscape encompassing factors such as economic conditions, governmental policies, inflation rates, etc

- Familiarity with the environment and the sector in which the audited entity operates, comprising market dynamics, competitive landscape, sector-specific characteristics, etc

- Identification of stakeholders associated with the client, including departments, official company owners, branches, affiliations with other entities, etc

- Insight into the internal dynamics of the audited entity, encompassing ownership structure, management style, operational status, financial capabilities, etc., facilitated through methods such as:

The process involves gathering and reviewing essential documents related to the client's business operations, such as the articles of incorporation, business license, key contracts or agreements, internal regulations and policies, legal documentation, and applicable regulatory frameworks.

 Review of findings from prior audits and the overarching audit dossier

 Site visits to the company's facilities such as workshops, warehouses, retail outlets, offices, etc

 Conducting interviews with company management and employees to glean insights into business practices and operations

Drawing from the broad information amassed from clients, auditors proceed to gather and refine specific details concerning fixed assets

Preliminary analytical procedures are crucial for evaluating clients' overall activities, starting with the receipt of the official audit report These procedures help assess risks and uncover potential errors in financial statements.

The procedures utilized involve comparing prior year balances, calculating ratios and proportions for benchmarking against previous indicators, and analyzing trends in account balances These metrics offer auditors preliminary insights into the financial health of the client company.

Higher payment ratios indicate a company's strong financial health and reduced risk of credit violations A longer payment ratio signifies enhanced payment capability, providing insights into the company's revenue, expenses, and loan repayment capacity Understanding the financial status of borrowing entities is essential for assessing their reliability.

- Profitability ratios reveal the company's business efficiency, measuring how much profit is generated per dollar of assets

- Ratios such as Fixed assets/total assets and Current assets/total assets demonstrate the investment structure in fixed and current assets, allowing assessment of its reasonableness

- Capital structure ratios illustrate the formation of capital structure and assets in the company A higher Owner's equity/Total capital ratio signifies a better financial situation and lower risk

AUDIT OF FIXED ASSETS IN THE PROCESS OF

Introduction to KPMG Vietnam Company Limited

2.1.1 The process of formation and development

Company name: KPMG Vietnam Company Limited

Head office address: 46th Floor, Keangnam Landmark Tower, Lot E6, Pham Hung Street, Nam Tu Liem District, Hanoi

Email: dpp-vn@kpmg.com.vn

Legal representative: Mr Warrick Antony Cleine, CEO

Currently, KPMG has 3 branch offices in Vietnam: Hanoi, Da Nang, Ho Chi Minh City

KPMG, a global leader in professional services, was formed in 1987 through the merger of Peat Marwick International (PMI) and Klynveld Main Goerdeler (KMG) With a presence in 143 countries, KPMG boasts a network of over 265,000 professionals dedicated to delivering exceptional services worldwide.

In 1870, William Barclay Peat founded an accounting firm in London, which later evolved through several key mergers and expansions Notably, in 1911, Peat's firm merged with Marwick Mitchell & Co to create Peat Marwick The formation of KMG in 1979 resulted from the merger of Klynveld Kraayenhof & Co., Thomson McLintock, and Deutsche Treuhandgesellschaft, establishing an international presence The most pivotal moment came in 1987 when KMG and Peat Marwick united to form KPMG, a name the organization has maintained since 1995.

Founded in 1994, KPMG Vietnam has grown to become one of the largest professional services firms in the country, boasting nearly 30 years of expertise The firm serves a diverse clientele, including state-owned and private enterprises, start-ups, and family businesses KPMG employs a multi-dimensional approach, leveraging extensive industry knowledge to help clients navigate challenges and seize opportunities Recognized by the Ministry of Finance and VACPA, KPMG is the leading auditing firm in Vietnam, distinguished by its revenue, client base, and number of qualified auditors.

KPMG's motto, "Cutting through complexity," embodies its aim to guide employees in navigating challenges by simplifying complex issues and facilitating clear and straightforward decision-making processes

Integrity: We do what is right

Excellence: We never stop learning and improving

Courage: We think and act boldly

Together: We respect each other and draw strength from our differences

For Better: We do what matters

KPMG's culture not only focuses on effective business operations but recognizes the importance of efforts to eradicate poverty, support education and protect the nation's environment

KPMG's transparency report for the fiscal year ending on September 30, 2023, indicates that KPMG has 41 licensed practicing auditors The company conducted audits for 134 entities with public interest in 2023

In 2023, the company achieved a total revenue of 669.3 billion VND, with 144.2 billion VND generated from financial reporting audit services for public interest entities and 525.1 billion VND from other services Total expenses were 667.1 billion VND, leading to a post-tax profit of around 2.2 billion VND, reflecting a remarkable 53% growth compared to the previous year.

Table 2.1 Financial information of KPMG Vietnam Company Limited during the period from 2021 to 2023

Unit 30/9/2021 30/9/2022 30/9/2023 Total revenue VND million 580,450 598,089 669,311

Revenue from statutory audits of audit clients listed

Revenue from other services VND million 469,942 479,739 525,152

Profit after tax VND million 2,112 1,441 2,199

2.1.2 Functions, duties, and main business lines

According to Circular No 22/TC-CDKT issued on March 19, 1994, by the Ministry of Finance, foreign-invested enterprises, limited liability companies, and joint-stock companies in Vietnam are required to conduct annual audits and submit finalization reports along with audit reports from authorized independent auditing firms KPMG’s audit services comply with these legal requirements, ensuring that businesses meet their regulatory obligations.

- Auditing financial statements and verifying accounting reports,

- Auditing the statements of finalization of imported goods according to the localization rate,

- Audit to determine joint venture capital contribution,

- Review and advise on internal control

The company's primary service segment, which constitutes nearly 80% of its annual revenue, is auditing services These services encompass the auditing of annual financial statements, internal audits, investment capital settlement audits, capital construction audits, and financial information audits Additionally, the audit department employs the largest proportion of the company's workforce, highlighting its significance within the organization.

Navigating tax compliance and legal regulations can be challenging for foreign investors in Vietnam, where the legal system may have notable deficiencies In this context, KPMG's partnership is crucial for foreign enterprises aiming to establish operations in the country KPMG focuses on helping businesses optimize their tax obligations while ensuring adherence to the law, providing a variety of tailored services to meet their unique needs.

- Dispute Resolution and Controversy Services

2.1.2.3 Financial and Business Consulting Services

Financial and business consulting is a vital service for investors looking to navigate the complexities of launching ventures in Vietnam KPMG aims to enhance business efficiency by deeply understanding investors' business lines, structures, activities, and strategies This knowledge allows KPMG to offer customized recommendations that improve organizational effectiveness, operational efficiency, personnel management, and internal control systems Their comprehensive approach covers everything from strategy formulation to business transformation, addressing all aspects of organizational change Key consulting services include tailored solutions designed to meet the specific needs of each client.

Audit I Audit II Audit III &

KPMG's management structure is globally aligned with the company's operational characteristics while also adapting to the cultural nuances of each country In Vietnam, this organizational framework is specifically tailored to meet local needs, reflecting the company's commitment to regional adaptability.

Diagram 2.1 Departmental organizational structure of KPMG Vietnam

The Board of Directors, comprising the General Director and Deputy General Director, oversees the company's operations, strategic planning, and business activities The General Director serves as the plenipotentiary representative, holding accountability for the enterprise's business operations and legal responsibilities.

Vietnam is Mr Warrick Cleine In addition, at KPMG Vietnam office there are currently 20 Deputy General Directors

The administrative block includes the information technology department, accounting department, and human resources department, including:

- The Information Technology Department ensures the information network system operates effectively, safely, and securely, in conjunction with the operations department to perform information technology-related work for customers

The Finance Department plays a crucial role in managing the Company's finances and accounting, overseeing document management, asset tracking, and supplying necessary forms and materials across the organization Additionally, this department develops comprehensive financial plans for revenue and expenditures, collaborates with operational teams to address financial challenges for the Board of Directors, and ensures effective internal network administration.

- The Human Resource Department is responsible for organizing the recruitment and training of employees, issues related to employee welfare, and periodically evaluating employees' professional qualifications

The professional division has 3 main departments including Audit Department, Consulting Department, and Tax Department corresponding to the services provided by the departments:

- Audit Department 1 (Audit 1) is the department that audits projects and non- governmental organizations

- Audit Department 2 (Audit 2) is a department specializing in providing audit services related to banks and financial institutions (Financial Services)

The Audit Department 3,4 (Audit 3, 4) offers specialized audit services tailored for various industries, including Chemicals, Energy, Consumer Goods, Health Care, Industrial Production, Infrastructure, Retail, Technology, Transportation, Real Estate, Automotive, and Private Enterprises.

- Consulting Department is a department providing financial consulting services, corporate governance, risk consulting, and support in information technology development in management

- Tax and Law Department (Tax&Legal) is a department specializing in tax and legal consulting services

Each department and department have separate tasks but with the same goal of contributing to the company

2.1.4 Audit procedures of financial statements conducted by KPMG Vietnam Company Limited

2.1.4.1 The process of auditing general financial statements conducted by KPMG Vietnam Company Limited

KPMG conducts audits following a globally standardized procedure outlined in the KPMG Audit Execution Guide This method serves as a comprehensive tool for auditors in executing financial statement audits, drawing on the expertise of top professionals at KPMG It is regularly updated to reflect current economic conditions and advancements in science and technology specific to each country where KPMG operates.

KPMG utilizes Clara, its proprietary auditing software, to update and manage all auditors' working papers related to audit procedures, internal control, and Board of Directors reviews Clara serves as a comprehensive audit management tool, providing essential methods, guidance, and industry insights to ensure compliance with KPMG and international auditing standards This software enhances the effectiveness of audits by enabling senior auditors to monitor work progress efficiently Uniformly adopted by KPMG members worldwide, Clara supports the financial statement audit process at KPMG Vietnam, which consists of three distinct stages, as illustrated in diagram 2.2.

KPMG is dedicated to providing exceptional services, which has solidified its reputation in audited financial information among clients and stakeholders The firm focuses on transforming expertise and insights into real value for clients and the capital markets, enhancing its role as a responsible and influential community entity This commitment fosters trust between businesses and investors, while KPMG aims to be acknowledged for its professionalism and unparalleled quality in all its offerings.

To uphold these standards, KPMG adheres to five key principles:

1 Strategic analysis: Understanding clients' objectives and strategies within their specific industry and business landscape

2 Business process analysis: Identifying and drawing conclusions regarding significant business risks

3 Risk assessment: Conduct a comprehensive evaluation of business risks, including critical processes, associated controls, and the client's approach towards them

4 Business Performance Assessment: Summarizing the client's performance through analysis of financial and non-financial metrics to ensure audit objectives are met

5 Continuous quality improvement: Enhancing both client and KPMG's performance throughout the audit process by drawing upon relevant insights

Audit of fixed assets in financial auditing performed by KPMG Vietnam

2.2.1 Overview of the process of auditing fixed assets in financial auditing conducted by KPMG Vietnam Company Limited

The financial audit process at KPMG Vietnam Limited is also divided into 3 main stages including planning the audit, implementing the audit, and completing the audit

At the planning phase of an audit, KPMG requires auditors to complete the following steps: a Assess the audit acceptability

KPMG follows global regulations and internal guidelines during the audit process for both new and existing clients Clients are categorized into two types based on the duration of their engagement with KPMG: existing clients and new clients.

KPMG distinguishes between existing clients, for whom audits were conducted in the previous year, and new clients, who have not yet received audit services For existing clients, auditors evaluate last year's audit files and gather information on any changes during the current period to determine the continuation of assurance services.

Upon receiving an audit invitation or acceptance from new clients, KPMG gathers comprehensive information regarding the clients' operations, business types, and the ethical standards of their Board of Directors Additionally, the firm may reach out to the clients' previous audit firms to evaluate their history and inform their decision-making process.

When accepting audit engagements, the firm will select an audit team to draft a contract and collaborate with clients to finalize the terms, ensuring conflicts of interest are avoided This process necessitates comprehensive documentation in the audit file (eAudit), detailing any resolved issues prior to client acceptance KPMG's global guidelines for accepting audit clients are clearly summarized in Appendix 2.1.

The audit phase planning involves creating a tailored overall strategy that aligns with the unique characteristics of each client while establishing an effective timeline for the audit process This stage also facilitates the allocation of human resources, utilizing tools like the retain-web schedule at KPMG, to ensure seamless coordination among audit team members and professionals.

The audit manager assesses the audit's complexity by analyzing the client's audit rationale and subsequently selects appropriate personnel for the audit team The Partner in Charge (PIC) or Manager in Charge (MIC) oversees this selection process, ensuring it meets the necessary criteria for team size, qualifications, and professional competencies Various factors are considered by the PIC and MIC when choosing the professionals to conduct the audit.

- The independence of the engagement team

- The ability of team members to effectively supervise less experienced staff

- The inclusion of highly qualified personnel in audit teams for new clients to identify and address risks efficiently

- The avoidance of frequent changes to the audit team for the same client, as long-term involvement fosters in-depth knowledge and understanding of the client's operations

- The selection of auditors with relevant knowledge and experience in the client's industry

In the first year of working with new audit clients, it is essential to establish a detailed contractual agreement that addresses all terms and potential legal issues This audit contract should be created in duplicate, with both parties retaining a signed and sealed copy While contracts for long-term clients may be simpler, they still require careful consideration, and any changes must be mutually agreed upon Additionally, the contract should be renewed annually, followed by a direct meeting between both parties to finalize and sign the agreement Understanding the client and their environment is also a vital component of this process.

During this stage, auditors aim to gather comprehensive information about clients to understand relevant government laws and regulations, as well as details such as the founding date, market operations, management systems, accounting standards, and internal controls This information enables auditors to assess the management of fixed assets, identify related risks, and detect potential material misstatements in accounts, ultimately allowing them to develop a detailed and effective audit plan.

Essential documents play a crucial role in assisting auditors with initial risk assessments and guiding professional judgments throughout the audit process At KPMG, these records are meticulously organized in the physical audit file, referenced as 1xxx in the audit library, and are integral to performing preliminary analytical procedures.

According to VSA 520, analytical procedures require a thorough examination of financial information to identify reliable relationships between financial and nonfinancial data, typically by comparing book values with auditor estimates During the data collection phase, auditors assess this information to facilitate effective audit planning, focusing on specific objectives.

- Understanding changes in the enterprise's accounting system and business operations during the previous audit period

- Enhancing auditors' comprehension of clients and identifying any questionable aspects of the business's financial performance

At KPMG, auditors frequently utilize two main types of analytical procedures:

Horizontal analysis and Vertical analysis e Internal control and risk assessment

At KPMG Vietnam Co Ltd., auditors are required to describe internal control as a crucial step in the audit process This procedure aligns with Vietnamese Standards on Auditing 315 (VSA 315), which emphasizes the importance of identifying and assessing risks of material misstatement through a comprehensive understanding of the entity and its environment.

An effective internal control system at the audited entity consists of five key components: the control environment, the entity's risk assessment process, the information system pertinent to financial reporting, control activities, and the monitoring of controls.

Assessing the quality of an internal control system is crucial for identifying its ability to prevent, detect, and manage risks associated with daily operations Furthermore, the evaluation focuses on the practical effectiveness of these controls The results of this assessment are directly related to the potential risk of material misstatement in financial statements.

Audit risk is the possibility that an auditor may provide an incorrect opinion due to material misstatements in financial statements, as outlined in VSA 315 Although auditors cannot influence inherent and control risks, which are dependent on the client's characteristics, they can evaluate these risks by gaining insight into the client's business operations and market conditions By assessing the risk of material misstatement, auditors can estimate acceptable misstatements, which helps them plan the scope and timing of their audit work effectively.

Audit risk (AR) is the result of the risk of material misstatements (control risk and inherent risk) and detection risk

- Inherent risk (IR): Judgments based on item level here may focus on revenue on item sensitivity, item complexity, etc

- Control risk (CR): This risk is determined by considering the ineffectiveness of audit procedures or weak control environment

Detection risk (DR) is influenced by auditors and can arise from factors such as an inadequate audit scope or improper application of audit procedures The relationship between audit risk and its material components is clearly defined by the formula AR = IR x CR x DR Understanding this formula is essential for determining materiality in the auditing process.

Comments and evaluations on the audit of fixed assets in financial auditing

Effective audit planning involves thorough analysis and assessment Prior to finalizing an audit contract, the audit manager or partner collaborates with the audit senior to perform analytical procedures, evaluating the client's financial condition and any relevant changes in their business environment and industry This evaluation informs the audit senior in creating a detailed plan that specifies the necessary human resources and outlines the audit approach to be utilized.

An analysis of last year's financial statements alongside the current year's figures is compiled in master lead sheets, which are then shared with team members, managers, and partners This distribution aids in gaining a comprehensive understanding of both the previous and current year's financial data, highlighting variances in both percentage and amount for further review.

To ensure a successful audit of each financial statement item, the senior in charge assigns tasks according to team members' capabilities and expertise Prior to fieldwork, an audit request list or client-provided PBC list is distributed to facilitate efficient processes and timely completion of working papers Additionally, KPMG's strength is enhanced by its use of modern technology, particularly the independent automated monitoring software, Sentinel.

Sentinel supports the audit team in validating KPMG's global service relationships, ensuring compliance with legal regulations across all client service lines When evaluating potential new clients, the audit partner utilizes documents and benchmarks provided by KPMG Global within the Sentinel system.

The audit program for fixed assets is designed to be both reasonable and flexible, allowing auditors to easily adhere to the audit plan and strategy during actual audits Daily updates are made by auditors to meet deadlines and requirements, fostering collaboration among auditors of different items For instance, while auditing fixed assets, auditors may identify depreciation costs not properly excluded for tax calculations, as clients may use a different depreciation period than outlined in Circular 45, thus aiding the tax audit process Additionally, fixed asset auditors can work alongside cost item auditors to accurately allocate scientific costs to the appropriate accounts.

KPMG's KAEG audit guide assists auditors in selecting the appropriate number of samples to verify the reliability of customer-provided information, streamlining the audit process while ensuring effective outcomes This guide enables auditors to gather comprehensive audit evidence that influences their opinions, which is then meticulously documented in the company's Clara audit software.

Auditors of fixed assets items use pre-designed working paper templates to help save time in presentation and auditors can track the work of members

One of KPMG's strengths at this stage lies in its comprehensive quality control framework, which encompasses both internal and external audit quality control measures

Internal audit quality control involves a systematic review process where audit team members update their working papers in the eAudIT IN system, focusing on general audit quality and fixed assets The senior auditor reviews these papers, raising queries for clarification or additional documentation to reduce the risk of material misstatements Following this, the manager evaluates all working papers before the audit partner authorizes them, including the audit opinion on fixed assets This structured review, along with query resolution, effectively minimizes risks and enhances audit quality For high-risk contracts, KPMG appoints an Engagement Quality Control Reviewer (EQCR) to perform thorough checks, while a designated Quality Partner Risk reassesses results and associated audit risks for clients with complex issues.

KPMG Global enforces a stringent audit quality control process across all its subsidiaries and branches, overseen by VACPA Each year, KPMG conducts random assessments of selected engagements, with the potential risk of losing KPMG brand authorization if audit quality standards are not met Additionally, KPMG prioritizes client feedback on service quality, allowing the firm to evaluate client satisfaction and implement improvements to enhance audit quality organization-wide.

The preliminary assessment of internal control often lacks thoroughness, relying heavily on the senior auditor's practical experience and professional judgment, which introduces subjectivity Additionally, the effectiveness of this evaluation is influenced by the transparency of the customer unit The challenges arise from a high volume of customer units and an overwhelming workload, resulting in a shortage of auditor resources and insufficient time to conduct a comprehensive assessment of internal control procedures.

Materiality is typically assessed for overall financial statements rather than specifically for fixed assets, which can lead to significant oversight Auditors frequently overlook items below the materiality threshold, resulting in substantial errors that may ultimately influence the audit opinion.

This limitation also stems from the limited time for each audit and the auditor's insufficient professional capacity to calculate individual materiality levels for each item

The implementation of sampling in auditing remains subjective, as auditors primarily depend on their personal judgment and experience when selecting samples, especially in situations where the total sample space is smaller than the predetermined materiality (PM).

Due to the limitations of sample running software, when the total sample interval is smaller than the predetermined minimum (PM), auditors typically end up with only a few samples (usually three) Consequently, they often rely on professional judgment to select between three to five samples for testing, which can compromise objectivity Auditors tend to focus on larger, more valuable samples, frequently overlooking those with smaller value and quantity, potentially allowing errors to remain undetected.

Second, auditors have not used a variety of methods when performing analysis

Auditors typically concentrate on the fluctuations in fixed assets over two financial years, often neglecting to analyze monthly or quarterly data, as well as comparisons with industry peers and average benchmarks This oversight extends to external objective factors, which are frequently disregarded during analytical procedures Consequently, these shortcomings can hinder the effectiveness of the analytical process, leading to suboptimal results.

Auditors often face limitations in their effectiveness due to a lack of comprehensive knowledge across various business sectors, which hinders their ability to fully optimize analytical procedures.

The inventory witnessing procedure is ineffective, as auditors often struggle to understand the nature and characteristics of each type of fixed asset, hindering their ability to accurately assess its operating status.

RECOMMENDATIONS FOR IMPROVING THE AUDIT OF

The oriented development of KPMG Vietnam Company Limited

The company's goal is to become one of the top three leading firms both globally and in Vietnam, reflecting the evolving landscape of auditing on a regional and global scale To achieve this objective, the Company has developed a series of strategic initiatives.

Firstly, expanding the company's scale: To cater to a growing clientele and deliver superior quality services, a key focus is on bolstering the ranks of highly qualified auditors

To adapt to the ever-changing financial market, the company is prioritizing the diversification of its service offerings This includes a stronger emphasis on tax advisory and risk consulting services, while also working to broaden its client base.

To improve the quality of auditors, the company implements regular training programs and offers employees the chance to obtain international certifications such as ACCA Additionally, the organization is enhancing its human resource policies to attract and retain top talent in the industry.

In 2023, KPMG plans to enhance the Clara audit software, which has been in use for one year and was developed to address the limitations of the previous eAudit software Despite its improvements, Clara still faces certain challenges that the upcoming enhancements aim to resolve.

The need for improving the audit of fixed assets in the financial auditing

Completing the audit process for fixed assets is crucial for KPMG to uphold the quality of financial statement audits As fixed assets constitute a significant portion of a company's total assets and are essential for effective production and business operations, their accurate assessment is vital This auditing process addresses potential errors that could impact various financial indicators, including costs and corporate income tax Therefore, ensuring a thorough fixed asset audit is necessary for the truthful and fair representation of financial statements.

To address the evolving needs of financial statement users, enhancing the quality of financial statement audits, particularly fixed asset audits, is a key priority for independent audit firms, especially KPMG, in a developing economy.

Solutions to improve the audit of fixed assets in the financial auditing

implemented by KPMG Vietnam Company Limited

To effectively evaluate the fixed assets of the audited entity, KPMG should extend the on-site audit duration by an additional 2-3 days This extension will allow auditors to engage more thoroughly with the client and gain a deeper understanding of the fixed assets To enhance the reliability of the audit evidence and avoid solely depending on the client’s honesty during interviews, auditors should implement techniques such as reperformance and document verification However, given that reperformance can lead to increased costs and higher audit fees, it is essential for auditors to discuss these considerations with the client before moving forward.

Auditors currently apply a universal significance level to all items in financial statements, which may not accurately reflect the varying risks of material misstatement across different accounts To enhance objectivity, KPMG should develop a method to calculate significance levels for each audit area individually This tailored approach is crucial, as audit evidence is gathered for specific items rather than the entire financial statement By appropriately allocating significance levels, auditors can determine the necessary amount of evidence for specific transactions, thus optimizing audit procedures while ensuring effectiveness Additionally, establishing a distinct significance level for fixed assets will enable auditors to collect comprehensive audit evidence in this area.

SDV, a long-term client of KPMG, has demonstrated minimal significant errors in its fixed assets according to past audit files and preliminary financial analysis Additionally, there have been few transactions related to the acquisition or disposal of fixed assets over the year Consequently, the auditor, utilizing professional judgment and experience, should set a higher materiality threshold for fixed assets compared to that of the overall financial statements.

To reduce subjective sampling, KPMG should establish specific criteria for selecting samples based on the unique characteristics of each business type, including quantity, nature, and value For instance, in the manufacturing sector, where there may be substantial fixed asset disposals, the sample value should represent 50-70% of the total sample space In contrast, for service-oriented companies with stable fixed assets, a smaller sample value of 15-20% of the total sample space may suffice, or even a comprehensive review of all transactions to minimize errors.

To enhance the analysis procedure, auditors should utilize analytical techniques alongside predictors to investigate variations and identify the causes of deviations in financial statements, particularly focusing on fixed assets By gathering industry and business documents relevant to the client's operations and comparing them with competitors, auditors can gain insights into any unusual fluctuations Additionally, analyzing investment proportions and sponsorship can help assess the company's capacity and its investment levels in equipment and machinery for effective management and operation.

KPMG should enhance its staff audit courses by incorporating the effective application of analytical techniques, highlighting essential ratios to calculate during audits Regularly updating analytical approaches through workplace and online training will empower auditors to identify correlations between component proportions and the firm's capabilities This improved analytical skill set will enable auditors to provide more accurate estimates of potential fluctuations and errors, ultimately saving time and reducing omissions in gathering audit evidence.

To enhance the fixed asset inventory witnessing process, it is essential for auditors and clients to agree on a specific time for inventory witnessing in advance, ensuring the collection of adequate evidence Auditors should seek basic information about fixed assets from clients to streamline the witnessing process For clients with multiple facilities, rotating observation locations annually is crucial to maintain a comprehensive observation scale In instances where auditors are unable to attend in person, they can request visual documentation, such as videos, from the client to support remote observation.

Auditors are required to compile comprehensive audit documentation, retaining all evidence collected while auditing the fixed asset section and reporting daily progress to the audit engagement team It is crucial that auditors do not overlook any opinions related to the audited section The engagement team should establish deadlines for completing procedures, ideally 1-2 days before the on-site audit concludes, to allow for timely supplementation of any identified deficiencies Furthermore, integrating reminder features and alerts in Clara audit software is essential to ensure auditors complete procedures and update audit working papers effectively.

Secondly, to enhance the efficiency of audit quality review procedures MIC and

PIC must thoroughly assess all audit procedures for each audited item KPMG can facilitate appropriate scheduling for auditors overseeing specific sections It's crucial to schedule this meeting between the on-site audit with the client and prior to the preparation of the audit report, ensuring a timely review and objective evaluation of the audit team's findings This process is essential for shaping the auditors' conclusions in the final audit report.

To optimize personnel allocation during peak audit seasons, companies should conduct early recruitment sessions to hire final-year students or recent graduates as interns, alleviating the workload of permanent employees This proactive approach allows sufficient time for training and enhances the overall efficiency of the audit process Additionally, the Retain department must gather insights from past auditors and consider the current year's audit plan to ensure a balanced distribution of auditors, preventing scenarios of overstaffing or understaffing during audits.

To enhance the Clara software, it is essential to incorporate features that enable auditors to directly input their findings, minimizing the risk of overlooked document updates Additionally, when providing sample run results, the software should save files in PDF format to ensure that auditors cannot make any alterations.

Recommendation to complete the audit process of fixed assets performed by

by KPMG Vietnam Company Limited

The Ministry of Finance must continuously enhance and update the standards, regulations, and legal frameworks to ensure that independent audit firms perform comprehensive audits of financial statements while adhering to all necessary procedures.

The Ministry of Finance must conduct regular inspections and evaluations of the audit quality provided by independent audit firms Additionally, it is essential to implement regulations that impose penalties for any violations of audit standards.

The Ministry of Finance has released a roadmap for the implementation of International Financial Reporting Standards (IFRS) and is expected to provide guidance to ensure businesses can adopt IFRS effectively It is recommended that the Ministry collaborate with the Vietnam Association of Certified Public Accountants (VACPA) to develop instructions for auditors on how to audit financial statements prepared in accordance with IFRS.

Collaborating with global accounting and auditing organizations like the Association of Chartered Certified Accountants (ACCA) and the Institute of Chartered Accountants in England and Wales (ICAEW) offers domestic auditors valuable access to international standards and insights It is essential to ensure close coordination in organizing certification exams and training workshops for professional auditors to enhance their skills and knowledge.

3.4.2 Regarding KPMG Vietnam Company Limited

 Auditors at KPMG are always required to adhere to professional principles and ethics during the audit process

To enhance auditors' understanding of IFRS, the company should implement regular internal training programs focused on international accounting and auditing certifications like ACCA, ICAEW, and CPA Australia Additionally, KPMG should offer free online courses to accommodate auditors' frequent travel, ensuring they can access training at their convenience It is also essential for the company to evaluate auditors' professional competence to effectively allocate human resources based on varying client requirements.

 KPMG needs to regularly update instructions for audit procedures based on

KPMG, a leading global audit firm with certified auditors, can partner with the Ministry of Finance and relevant accounting and auditing associations to assist businesses in preparing financial statements in accordance with IFRS, ensuring compliance ahead of the mandatory implementation of these standards.

To complete the audit process effectively, support from client organizations is essential Client organizations should create favorable conditions for auditors during the audit process:

 Provide all requested documents, records, and evidence to auditors

 Client organizations should organize the storage of invoices, documents, and ledger records in a reasonable manner to facilitate audits

 In cases of obstacles or doubts, client organizations should provide specific explanations to auditors

Chapter 3 of the thesis recommended some solutions to help KPMG Vietnam complete the audit process of fixed assets items when auditing financial statements

In addition, in chapter 3, the author makes recommendations to state agencies, KPMG Vietnam Company Limited, and customers to complete the audit process of fixed assets items

During my three-month internship at KPMG Vietnam, I gained valuable experience by participating in multiple financial statement audits This opportunity enhanced my understanding of the audit process, including its key stages and procedures.

This thesis integrates theoretical knowledge from academic studies with practical insights from an internship, focusing on the financial statement audit process, particularly the audit of fixed assets It utilizes theoretical frameworks related to fixed asset auditing and practical experience from auditing at SDV Company, a KPMG Vietnam subsidiary The work assesses KPMG Vietnam's auditing practices for fixed assets, identifying strengths and weaknesses, and provides recommendations for procedural improvements Additionally, I appreciate and welcome constructive feedback from academic mentors to enhance the thesis content.

I would like to express my heartfelt thanks to Dr Nguyen Thi Phuong Thao and the senior auditors at KPMG Vietnam for their exceptional support and guidance, which played a crucial role in the successful completion of my graduation thesis.

Once again, I sincerely thank you

1 Audit program of KPMG Co Ltd

4 Audit documents of KPMG Vietnam Company Limited for SDV Company

5 Circular guiding the corporate accounting regime, TT200/2014/TT-BTC

6 Nguyen, Q Q.; Ngo, T T (2008) Financial Auditing Textbook - National Economics University, National Economics University Publishing House

7 Nguyen, Q Q (2010) Textbook of Theory and Practice of Auditing - National Economics University, National Economics University Publishing House

8 ACCA Global (n.d), “The audit of assertions”, retrieved on April 25 th 2023, from

9 Dr Pham Hoai Nam & Nguyen Thi Mai Anh (2023), “Enhancing the audit of fixed assets in the audit process of financial statements implemented by KPMG Vietnam Company Limited.”, Graduate thesis, Banking Academy

Client acceptance process of KPMG

Content Acceptance of new clients Continuance of current client

Before submitting bids or accepting potential customers, KPMG regulations mandate that contract managers and deputy directors conduct comprehensive risk assessments This process includes evaluating general customer information, researching online and media sources, analyzing industry activities, gathering insights from member companies and third parties, and reviewing financial statements and other relevant data provided by customers.

It is essential to review and evaluate potential risks to identify any new threats When there is a significant change in contract terms, the re-engagement of a previous customer is treated as the acceptance of a new customer, necessitating compliance with regulations governing the onboarding of new clients.

Gather financial statements and customer information, including their business activities, products, and goods produced Additionally, analyze the enterprise's organizational structure, the composition of the Board of Directors, and the company's financial position over the years.

Regularly update customer information to identify any significant changes in their activities, business sectors, organizational structure, or capital structure Gather insights from audit reports, assessments from relevant authorities, annual audit documents, and evaluations of the Board's integrity to ensure comprehensive understanding and compliance.

Directors and the client's accounting system

Check and confirm the independence of the auditor and the audit firm related to this potential client

Liaise with predecessor auditors to collect audit-related issues

Preliminary analysis of the financial situation, assessment and classification of the risk level of the contract (low, medium, high)

This article evaluates the contract performance capacity of auditors, specifically KPMG, by comparing the previous year’s audit report to the current year’s financial statements It examines whether the opinions expressed in the prior year’s audit continue to influence the financial reporting of the current year.

Reconfirm the independence of auditors and KPMG in relation to this client

Preliminary analysis of the current year's financial situation, assessment and classification of contract risks (low, medium, high) Assess the contract performance capacity of auditors and KPMG