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

BANKING ACADEMY FACULTY OF ACCOUNTING - AUDITING

Hanoi, May 2024

STATUTORY DECLARATION

I herewith formally declare that I have written the submitted Graduation Thesis independently I did not use any outside support except for the quoted literature and other sources mentioned at the end of this paper

I clearly marked and separately listed all the literature and all other sources that I employed in producing this academic work, either literally or in content

Hanoi, May 2024 Signature

Pham Thuy Hang

ACKNOWLEDGEMENT

Throughout the completion of my bachelor's thesis, I have been fortunate to receive generous support, guidance, and encouragement from dedicated lecturers during my four years at the Banking Academy Additionally, I am grateful for the invaluable advice provided by mentors and colleagues during my three-month internship at KPMG Vietnam Company Limited

First and foremost, I extend my sincere gratitude to my supervisor, Dr Nguyen Thi Phuong Thao, whose insightful suggestions have shaped the direction of my study and facilitated the timely completion of my essay Dr Thao's valuable feedback and corrections have greatly contributed to the refinement of my paper

I would also like to express my appreciation to all lecturers in the Faculty of Accounting and Auditing for their informative lectures across various courses, which have significantly enriched my understanding of accounting and auditing, thereby aiding me in the completion of this thesis

Lastly, I am thankful to my friends and seniors who have consistently offered their encouragement and assistance throughout the process of completing this bachelor's thesis

While I acknowledge that my thesis may contain certain errors due to limited capacity and time constraints, I eagerly await feedback from lecturers on how to enhance the quality of this topic Thank you sincerely for your support!

Hanoi, May 2024 Signature

Pham Thuy Hang

TABLE OF CONTENTS

LIST OF ABBREVIATIONS v

LIST OF DIAGRAMS vi

LIST OF TABLES AND FIGURES vii

INTRODUCTION 1

CHAPTER 1: THEORETICAL BASIS FOR THE AUDIT PROCESS OF FIXED ASSETS IN THE FINANCIAL AUDITING 6

1.1 Characteristics of fixed assets affecting the audit of financial statements 6

1.1.1 Features of fixed assets on financial statements 6

1.1.2 Accounting for fixed assets 9

1.1.3 Common misstatements related to fixed assets 13

1.1.4 Internal control over fixed assets 14

1.2 The process of audit of fixed assets in auditing financial statement 16

1.2.1 Objectives and assertions for auditing fixed asset items 16

1.2.2 Planning the audit 18

1.2.3 Implementing the audit 24

1.2.4 Completing the audit 29

CHAPTER 2: AUDIT OF FIXED ASSETS IN THE PROCESS OF AUDITING FINANCIAL STATEMENTS IMPLEMENTED BY KPMG VIETNAM COMPANY LIMITED 33

2.1 Introduction to KPMG Vietnam Company Limited 33

2.1.1 The process of formation and development 33

2.1.2 Functions, duties, and main business lines 35

2.1.3 Mechanism of organization structure 37

2.1.4 Audit procedures of financial statements conducted by KPMG Vietnam Company Limited 39

2.2 Audit of fixed assets in financial auditing performed by KPMG Vietnam Company Limited 43

2.2.1 Overview of the process of auditing fixed assets in financial auditing conducted by KPMG Vietnam Company Limited 43

2.2.2 Audit of fixed assets in financial auditing performed by KPMG Vietnam

Company Limited at a specific client 54

2.3 Comments and evaluations on the audit of fixed assets in financial auditing conducted by KPMG Vietnam Company Limited 75

2.3.1 Strengths 75

2.3.2 Limitations and causes 77

CHAPTER 3: RECOMMENDATIONS FOR IMPROVING THE AUDIT OF FIXED ASSETS IN FINANCIAL AUDITING IMPLEMENTED BY KPMG VIETNAM COMPANY LIMITED 82

3.1 The oriented development of KPMG Vietnam Company Limited 82

3.2 The need for improving the audit of fixed assets in the financial auditing implemented by KPMG Vietnam Company Limited 82

3.3 Solutions to improve the audit of fixed assets in the financial auditing implemented by KPMG Vietnam Company Limited 83

3.3.1 Planning the audit 83

3.3.2 Implementing the audit 84

3.3.3 Completing the audit 85

3.3.4 Other solutions 86

3.4 Recommendation to complete the audit process of fixed assets performed by KPMG Vietnam Company Limited 86

3.4.1 Regarding government and associations 86

3.4.2 Regarding KPMG Vietnam Company Limited 88

3.4.3 Regarding client organizations 88

CONCLUSION 90

REFERENCES 91

APPENDIX 92

LIST OF ABBREVIATIONS

AMPT Audit Misstatement Posting Threshold

VACPA Vietnam Association of Certified Public Accountants

LIST OF TABLES AND FIGURES

Table 1.1: Internal control of the operation of fixed assets 14 Table 1.2: Table of Estimated Materiality Thresholds 22

Table 2.1: Financial information of KPMG Vietnam Company Limited

during the period from 2021 to 2023

34

Table 2.4: Test of control for new fixed assets at SDV in 2023 61 Table 2.5: Detailed depreciation of Rectangular Conference Table - 16

Figure 2.1: Preliminary analysis of fixed assets at SDV Company 57

Figure 2.3: Leadsheet of fixed assets working paper of SDV 65 Figure 2.4: Movements of tangible fixed assets of SDV in 2023 67 Figure 2.5: Movements of intangible fixed assets of SDV in 2023 67 Figure 2.6: Addition of fixed assets of SDV in 2023 70

INTRODUCTION

1 The rationale

Alongside the process of global economic integration and the development of the market economy in Vietnam, as it stands today, the demand for financial information is increasingly rising Independent auditing has emerged as a necessity, playing a crucial role in providing reliability and transparency of financial information

Financial statement audits (FSAs) are among the primary types of auditing services provided by independent audit firms Financial statement audits are vital documents that provide information about the financial position and business performance results of an entity

Fixed assets (FA) have always been a concern for every entity as they are crucial

in transforming inputs into outputs and serving the operations of a business Recording fixed assets and determining depreciation expenses require accurate and proper documentation and calculations Furthermore, fixed asset items on the balance sheet often constitute a significant proportion, and transactions related to fixed assets are prone to fraud or errors Each instance of fraud or error related to this item typically has a significant impact on the entity's financial statements Therefore, auditing fixed asset items plays an extremely important role in financial statement audits

For an independent audit firm, effectively completing the fixed asset auditing process equates to enhancing the efficiency and quality of financial statement audits For client entities, the results of fixed asset audits provide reliable information to identify inconsistencies in fixed asset accounting and management practices, thereby addressing lingering issues, strengthening fixed asset management, and improving business operations efficiency

Recognizing the importance of financial statement audits in general and fixed asset audits in particular, as a student majoring in auditing equipped with knowledge from academic institutions and practical experience gained through an internship at

KPMG Vietnam, I have chosen the topic "Audit of Fixed assets in financial auditing

implemented by KPMG Vietnam Company Limited" for my graduation thesis

research

2 Literature review

Fixed assets represent a significant proportion of the total assets, reflecting the financial capacity of a company most clearly, and they tend to harbor many irregularities Each irregularity associated with fixed asset items often correlates with discrepancies in other specific items, such as those in the income statement (depreciation expenses) and the balance sheet items like long-term borrowings, equity, etc This can affect the accuracy and fairness of the financial statements Therefore, there are many research topics related to auditing fixed asset items in financial statement audits from various perspectives

Recognizing the significance of fixed asset management, numerous domestic and international dissertations have extensively explored and proposed solutions to enhance the auditing process of this asset category In 2017, Klychova G., Zakirova

A., Mukhamedzyanov K., and their colleagues conducted a study titled "Development

of an audit system for managing fixed assets as a means to enhance the efficiency of enterprise social activities."; the aim was to offer practical recommendations for

improving the audit system for fixed assets to enhance overall corporate performance

By gathering audit evidence, documents, and audit working opinions, the authors identified fixed asset metrics impacting the enterprise's regular operations However, their study applied analytical procedures in theory without delving into specific audit practices

In Vietnam, research on the audit of fixed assets has become increasingly common in recent years As a student at the Banking Academy, I can readily access theses and research papers focusing on fixed assets Notable examples include:

"Enhancing the audit of tangible fixed assets in financial statement audits conducted

by An Viet Auditing Co., Ltd." (2018) by Chu Thi Hoa; "Enhancing the auditing process of fixed assets in financial statement audits conducted by AASC Auditing Firm Co., Ltd." (2022) by Nguyen Thi Quynh, and others While these theses share

commonalities, each one elucidates theoretical foundations related to fixed assets,

analyzes the current state of fixed asset audits in various companies, and proposes recommendations and solutions

Research on auditing fixed asset items in financial statement audits conducted

by KPMG in recent years has also produced some notable works The thesis

"Enhancing the fixed asset audit process in financial statement audits conducted by KPMG Vietnam Limited Liability Company" by Nguyen Thi Thao Dan (2019)

compares the differences in fixed asset audit processes between annual and first-year audit clients at KPMG However, this study relied on the outdated eAudit audit

software of the company, thus lacking updateability In 2022, the thesis "Auditing fixed asset items in the financial statement audit process conducted by KPMG Vietnam Limited Liability Company" by Tran Thu Ha provided a general overview of

the fixed asset audit process From there, the study identified the current situation of the fixed asset audit process and proposed solutions to overcome fixed asset audits in the context of the economy facing challenges due to the COVID-19 pandemic The study was based on the old KPMG Audit Methodology (KAM) audit guide and only assessed the strengths and weaknesses of the entire financial statement audit process without specific recommendations for fixed asset audits

Therefore, I chose the topic "Audit of Fixed assets in financial auditing implemented by KPMG Vietnam Company Limited" for my graduation thesis

research, with the hope of inheriting previous research and finding solutions to the limitations in fixed asset audits according to KPMG's new audit guidance in the context of the rapidly recovering economy after the COVID-19 pandemic

3 Research objectives

- Systematically summarize the theoretical understanding of the audit procedure

of fixed assets in the financial statements according to the existing accounting standards applied in Vietnam (VAS, IFRS, Circular 200 )

- Illustrate the application of fixed assets audit method in a specific case at KPMG Vietnam Limited to point out strengths, weaknesses, and the difference between the theory and practice of the researched topic

- From the result of the research, propose some analysis and recommendations

4 Research subject and scope

- Research subject: Auditing procedures of fixed assets implemented by KPMG Vietnam Company Limited

- Scope of content: The audit of fixed assets in the financial auditing conducted

by KPMG Vietnam Company Limited

+ Theoretical basis for the audit process of fixed assets in the financial auditing + Audit of fixed assets in the process of auditing financial statements

implemented by KPMG Vietnam Company Limited

+ Recommendations for improving the audit of fixed assets in financial auditing implemented by KPMG Vietnam Company Limited

- Scope of space: The research is performed at KPMG Vietnam Company Limited

- Scope of time: The research is performed from December 2023 to March 2024

5 Research questions

This thesis topic raises the following research questions:

- What is the theoretical basis for the audit process of fixed assets items in auditing financial statements at independent audit units?

- What is the current status of the audit process for fixed assets items in financial statement audits performed by KPMG Vietnam? What are the advantages of that process and are there any limitations? What is the cause of that limitation?

- What solution needs to be proposed to help KPMG Vietnam complete the fixed asset audit process?

6 Research methodology

- General methodology: The topic is studied and implemented based on dialectical materialism, the study of things, and the phenomenon of interrelated relationships The topic used mainly qualitative methods

- Specific methods: The topic used a combination of methods such as research and document collection; interviews and actual observations at the customer unit; analyzing, comparing, and processing data, synthesizing results,

+ Gathering secondary and primary data during the audit of fixed assets within the financial statement audit framework established by KPMG Vietnam involves

various elements such as audit standards, audit files, audit documentation, work papers (WPs), and more

+ Observation and practical experience: This aspect aimed to provide an overarching summary and understanding of the firm's strengths and weaknesses before formulating conclusions

+ Inquiry method: Directly obtaining insights and documentation from senior personnel responsible for the audit procedure of fixed assets at the client's company

to propose appropriate recommendations for enhancement

7 Research structure

The main content of the thesis consists of 3 chapters:

Chapter 1: Theoretical basis for the audit process of fixed assets in the financial auditing

Chapter 2: Audit of fixed assets in the process of auditing financial statements implemented by KPMG Vietnam Company Limited

Chapter 3: Recommendations for improving the audit of fixed assets in financial auditing implemented by KPMG Vietnam Company Limited

CHAPTER 1: THEORETICAL BASIS FOR THE AUDIT PROCESS OF

FIXED ASSETS IN THE FINANCIAL AUDITING 1.1 Characteristics of fixed assets affecting the audit of financial statements 1.1.1 Features of fixed assets on financial statements

a Definition of fixed assets on financial statements

Fixed assets are presented in the Long-term assets section of the statement of financial position of the company which includes tangible fixed assets, intangible fixed assets, and lease assets Currently, there is no overall definition of fixed assets

in Vietnamese law and regulations but usually those with useful life longer than 1 year and worth more than 30 million VND are classified as such Additionally, fixed assets can be depreciated over time, illiquid, be used in the business operation, and provide a long-term benefit to the entity Article No.2 Circular 45/2013/TT-BTC regulated the understanding and definition of each type of fixed asset as follows:

- Tangible fixed assets: Tangible fixed assets are usually divided into smaller detailed items such as buildings and structures, machinery, and equipment, motor vehicles, office equipment, or any other types that are suitable to the entity’s business nature They must have physical substances (whether separated or systematically including smaller parts aggregated together to perform specific tasks) and can be used

to gain financial benefit in the future The useful life of tangible fixed assets must be longer than 1 year, worth more than 30,000,000 VND, and take part in various business cycles but remain in the physical state in the first place

- Intangible fixed assets: Intangible fixed assets include limited land use rights, patents, copyrights, design, goodwill, These are long-term assets that do not have physical substance whose value is defined, owned by the entity, and used in various business cycles

- Lease assets: Lease assets are those fixed assets whose most risk and benefit has been transferred to the lessee by the lessor The owning right to the assets can be transferred by the end of the leave term The total amount of the financial lease contract must be equivalent to the market value of those assets at the contract time Another term that should be mentioned when recording and presenting fixed assets on financial statements is depreciation As time goes by and the entity uses its

fixed assets in its daily operation to gain profit, the value of fixed assets can never remain the same Depreciation refers to the actual decrease in value of assets over time such as the decrease in value of factory equipment Moreover, it is the allocation

in accounting statements of the original cost of the asset in which the asset is used According to VAS, the financial statements must reflect both the original cost, depreciation, and net present value of the fixed assets which is calculated by cost minus accumulated depreciation Therefore, the main task of an auditor when auditing fixed assets focuses on depreciation

b Characteristics of fixed assets

Fixed assets are significant items on financial statements that account for a huge number of total assets on a statement of financial position, especially for those who work in heavy industry or fuel, the amount can be more than half of total assets As mentioned above, fixed assets are divided into 2 main types: property, plant, and equipment, and intangible assets Each type has its characteristics which are described

as follows:

Property, plant, and equipment: For this kind of fixed assets, there are 3

factors that the accountant has to consider when classifying:

● They are acquired for use in operations and not for resales: Property, plant, and equipment refers to assets that are used in typical business activities An empty building, for example, should be recognized as an investment individually Land is classified as inventory by land developers or subdividers

● They are long-term by nature and usually depreciated: Property, plant, and equipment provide services for a long time Companies use periodic depreciation charges to spread the expense of their asset investments out across time Land, on the other hand, is only depreciated if there is a material drop in value, such as a loss of agricultural land fertility due to inadequate crop rotation, drought, or soil erosion

● They have physical substance: Physical existence or substance distinguishes tangible assets such as property, plant, and equipment This distinguishes them apart from intangible assets like patents and goodwill Property, plant, and equipment, unlike raw materials, do not physically form part of a resold product

Intangible fixed assets: we consider about 2 main factors that differentiate

them with property, plant, and equipment:

● They lack physical existence: Property, plant, and equipment are examples

of tangible assets On the other hand, intangible assets are valued based on the rights and advantages granted to the company that uses them

● They are not financial instruments: Bank deposits, accounts receivable, and long-term bond and stock investments are examples of assets that lack physical form Financial instruments, on the other hand, are worthless unless they have the right (claim) to receive cash or cash equivalents in the future Intangibles do not include financial instruments

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

Fixed assets cannot last forever, due to time and usage of the entity, the fixed assets can be drained and depreciated which decreases their value Moreover, depreciation is an accounting estimation rather than the actual expense of the entity The amount of depreciation depends on 3 main factors: historical cost, estimated disposal cost, and useful life Which, historical cost can be easily defined, and constant but useful life and estimated disposal cost depend on the estimation and decision of the accountant Therefore, the auditor cannot rely on invoices or any documents to have an actual calculation or a definite result, but they have to recalculate and audit the estimation made by the entity

Moreover, depreciation is a systematic allocation of historical cost after deducting estimated disposal cost, the appropriateness then depends on the method

of calculation (straight-line, double-declining balance method, unit of production method, ) the result can be different from one another As a result, auditors must also check for the suitable application of accounting methods

c The importance of fixed assets on financial statements

Fixed assets are the main and most important means of labor that directly join the operating cycle of the company They serve as a technical and physical base for any business operation including machinery, equipment, and technical stages that

define the size and capacity of a company The irreplaceable importance of fixed assets is further illustrated as follows:

First, fixed assets reflect the actual situation of infrastructure and the scale of

the entity to see whether it can meet the requirements of the market and its business nature

Secondly, fixed assets can have a decisive responsibility throughout the goods-

making process Depending on the characteristics of each production cycle, fixed assets can be used long-term, creating sustainability for the business cycle in both qualitative and quantitative aspects

Thirdly, in the market industry, the higher the demand of customers is, the more

competitive the market can become, which requires all enterprises to develop and increase productivity to create high-quality products, reduce costs, and gain more market share A good investment in the right fixed assets can bring success to the company, and develop advantages over other entities in either quality and price of the product which enables the management to gain more market share without any waste

of resources or marketing expense

Lastly, fixed assets of a company can act as a useful tool for increasing capital:

From a bank aspect, fixed assets can be collateral assets for the loan The more valuable the assets are, the more money that the bank can decide to give to the company For those big corporations, fixed assets are mostly used for defining the size of it When a corporation wants to raise more investment from stock or bonds, investors or lenders will pay attention to fixed assets to decide the reliability and ability to fulfill their liability and gain profit in the future

1.1.2 Accounting for fixed assets

Most companies use historical costs as a basis for valuing fixed assets Historical cost measures the cash or cash equivalent price of obtaining the asset and bringing it

to the location and condition necessary for its intended use Historical cost involves actual, not hypothetical, transactions and so is the most reliable Companies should not anticipate gains and losses but should recognize gains and losses only when the assets are sold

According to Circular 200/2014/TT-BTC authorized on December 22, 2014, the regulation for recording fixed assets, investment properties, and construction in progress includes the following:

- Historical cost of fixed assets, investment properties, and construction in progress must be recorded accurately according to the existing regulation:

+ Fixed assets obtained from purchasing include: buying cost (minus trade discount, deduction), taxation (excluding refundable tax), and any other cost relating

to the process of putting the fixed assets into usage (site clearance cost, shipping cost, installation expense, ), expat cost, and other direct cost

+ Historical cost of real estate: With this type of fixed assets, the historical cost

is divided into 2 distinct costs: land use rights and assets on land according to the law and regulation All of the assets that exist on the land should be recorded as tangible fixed assets On the other hand, land use rights should be recorded as intangible fixed assets or prepayments in different situations and regulations

+ Historical cost of tangible fixed assets generated from construction in progress: In the case of tendering, the historical cost of fixed assets should be the final cost announced and agreed upon by the construction company according to the existing investment management and construction law In the case of fixed assets generated from construction, historical cost is the final cost when the assets are put into use or the actual expense adding other direct costs related to putting the assets into a certain stage of usage

The process of preparing and transferring documents can be summarized in the figure below:

Figure 1.1: Process of preparing and transferring documents of fixed assets

Constructs, purchase

or disposal of fixed

assets

Hand over or disposal minutes

Fixed assets accountant

Purchase or disposal

decision

Purchase or disposal vouchers

Constructs, purchase

or disposal of fixed

assets

Source: Financial Auditing Textbook –National Economic University

- The accounting standard and method of calculating depreciation should be applied systematically from one year to another

- The accountant should follow and record conservatively the source of fixed assets for an appropriate allocation according to the current accounting standards:

+ For fixed assets generated from borrowings or owner’s equity to use for the production process, depreciation expense should be allocated to the cost of goods sold (Account 632)

+ For fixed assets generated from other funds such as technological and scientific funds, the depreciation cost should be recorded as the deduction of the source

- The accountant classifies fixed assets and investment property according to the usage purposes of the company In case the assets are used for various purposes, the accountant should estimate the value and portion of usage of each part to record accurately and appropriately If the company decides to change the purpose of each part of the assets, the accountant should reclassify the assets by the new purpose according to related accounting standards

- For those fixed assets that are newly purchased including other accessories and replaceable parts (in case of broken) the accountant should identify and record separately those accessories by fair value If the accessories satisfy the requirement

of fixed assets they can be recorded as fixed assets or else they will be recorded in

inventory The historical cost of purchased fixed assets should be the total buying amount minus the cost of spare parts

Accounting code used for recording fixed assets:

To illustrate the movements and fluctuation of fixed assets, the entity must use some of these accounting codes as follows:

- Account 211 “Tangible fixed assets”: This account is used to describe the historical cost as well as the increase and decrease of all tangible fixed assets The historical cost of tangible fixed assets can increase because of addition, increased adjustment, and physical over-count Historical costs can decrease due to disposal, decreased adjustments, and physical under-count Account 211 is divided into various secondary accounts for a throughout follow of the movements of fixed assets:

+ Account 2111 Housing and architectural assets + Account 2112 Machinery and equipment + Account 2113 Motor vehicles

+ Account 2114 Office equipment + Account 2115 Long-term tree and working animals to make products + Account 2118 Other tangible fixed assets

- Account 212 “Leased fixed assets”: This account is used to describe the fluctuation of both tangible and intangible assets generated from leasing by historical cost The cost of leased fixed assets can be decreased due to: repurchasing or turning back to leasers

- Account 213 “Intangible fixed assets”: This account is used to illustrate the fluctuation of the historical cost of intangible fixed assets which is divided into smaller secondary accounts to follow the changes as follows:

+ Account 2131 Land use right + Account 2132 Copyrights + Account 2133 Patents + Account 2134 Trademarks & Brand names + Account 2135 Software

+ Account 2136 Licenses and Franchises + Account 2138 Other Intangible fixed assets

- Account 214 “Accumulated depreciation and amortization”: This account is used to record and follow the amortization and depreciation of fixed assets throughout the operating life of the entity

Fixed asset is a significant account on a financial statement, a small error or fraud can affect the reliability and accuracy of the financial statements Therefore, in charge, accountants must have sufficient knowledge and experience to record the account for the entity Some requirements for the recording process include:

- Having sufficient and in-depth knowledge about recording fixed assets and tools and equipment or tangible and intangible fixed assets to record the account correctly

- Be able to differentiate between types of cost that should be recorded in addition to the fixed assets (upgrade, ) and those in cost of goods sold in the period (maintenance)

- When recording, the accountant should be careful with the cost center and purpose for which the assets are used to appropriately book in the correct account (627, 632, 641, 642, )

- For the fixed assets that are out of useful life but still in use should not be further depreciated but be followed in a distinct table

- After upgrading the assets, the accountant should write up the value as well as adjust the estimated useful life to fit the current accounting standard

- After fixed assets have been disposed of or sold, the accountant should record gain/loss from disposal

1.1.3 Common misstatements related to fixed assets

- Risks related to historical cost: The historical cost of fixed assets can be misrepresented in reality In case of an increase (or decrease) of fixed assets, the historical cost recorded in the book is usually higher (or lower) than the actual cost

- Risks related to depreciation: Errors in depreciation calculation and allocation may occur due to inconsistencies between the unit's depreciation method and current regulations, as well as mismatches with the method of economic benefit recovery for each fixed asset

mistakenly be categorized as upgrades, and vice versa This can fail to accurately record cost increases for fixed assets in cases of upgrades, as repair costs are recorded instead

1.1.4 Internal control over fixed assets

The arising fixed asset transactions are considered to be important and have an impact on the operation and business performance, so these enterprises require a tight control process The basic work steps that must be taken to handle transactions on fixed assets include:

 Confirming investment needs and making investment decisions for fixed assets;

 Organizing the receipt of fixed assets;

 Organizing the management and preservation of fixed assets in terms of kind and value;

 Processing and recording payments for purchases and investments in

fixed assets;

 Reviewing and handling transactions of liquidation and sale of fixed assets and long-term investments, etc

Table 1.1 Internal control of the operation of fixed assets

Objectives Contents, forms, and procedures of control

There are sufficient documents related to the operation: proposals for purchase transactions, sale and liquidation contracts; delivery records, purchase invoices, documents

related to transportation, installation, test runs, etc;

All vouchers must be legal, valid, and guaranteed not to be erased, modified, and subject to internal control;

The relevant documents must be numbered and managed in the detailed book

to fixed assets from detailed accounting books to general accounting books;

An internal audit policy for the above contents

Data must be calculated fully and accurately;

Checking the calculation results, and comparing the aggregated data from the detailed books with the general books

1.2 The process of audit of fixed assets in auditing financial statement

1.2.1 Objectives and assertions for auditing fixed asset items

The primary aims of auditing fixed assets encompass gathering pertinent evidence to affirm the accuracy of the pertinent financial data disclosed in the financial statements, including costs, depreciation, expenses, and profits, among others Simultaneously, it aims to furnish pertinent information and documentation to serve as reference assertions during the execution of 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

 Classification: All fixed asset transactions in the period are properly classified according to the provisions of relevant accounting standards and regimes and specific regulations of the enterprise These transactions are accounted for in the correct order and accounting method

 Presentation: Transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements 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:

 Existence: All fixed assets presented by the enterprise in the financial statements must actually exist at the reporting time The data on the report must match the actual inventory data of the enterprise

 Rights and obligations: All reported fixed assets must be owned by the enterprise, for financial lease fixed assets must be under the long-term control of the enterprise on the assertions of the signed lease contract

 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 arising documents related to the process of transportation, installation, and repair of fixed assets, relevant payment documents such as payment slips, debt notices, minutes of liquidation and sale of fixed assets, etc;

 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;

 Relevant financial statements;

 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

No 03, 04

1.2.2 Planning the audit

The commencement of an audit occurs upon the engagement of an audit firm and an auditor with a client, formalized through the signing of an audit contract Before this, the auditor must assess the feasibility of undertaking an audit for the client In the case of recurring annual clients, the auditor conducts procedures to determine whether to renew the audit contract or not

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

This marks the initial phase of audit planning The auditor must assess potential risks associated with the engagement to make an informed decision regarding the acceptance of the client and contract This evaluation process entails several considerations:

- Assess acceptability of the audit: The auditor meticulously evaluates potential clients or the continuation of contracts with existing clients to ensure the profitability and reputation of both the audit firm and the auditors Factors such as professional competency, independence, and the integrity of leadership are taken into account

- Determining the purpose of the audit for the client: This step aids the auditor

in understanding the intended use of the client's financial statements by both the client and other stakeholders, thereby defining the scope of work and the level of assurance required for the audit opinion For new clients, interviews with management may be conducted, while past audit experiences can inform decisions regarding existing clients

1.2.2.2 Selecting the audit team and preparing the audit engagement

When considering risks and accepting clients, an audit contract is signed by both parties The audit contract serves as a legal basis outlining the agreed objectives, the scope of the audit, the rights, and responsibilities of each party, the form of audit reporting, the implementation timeline, and terms regarding fees and dispute resolution The audit firm selects auditors with the competency, experience, and knowledge, along with audit assistants, to form the audit team The audit team must commit to the independence of auditors before proceeding with further audit steps

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:

 Collection and examination of pertinent documents about the client's business operations, including the company's articles of incorporation, business license, significant contracts or agreements, internal regulations and policies, legal documentation, regulatory frameworks, etc

 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

1.2.2.4 Performing preliminary analysis procedures

Performing preliminary analytical procedures is essential for assessing the overall activities of clients These procedures are initiated upon receipt of the official audit report by the auditor and aim to evaluate risks and identify potential errors in the financial statements

The methods employed in these procedures include comparing balances from the previous year, calculating ratios and proportions for comparison with previous year indicators, and analyzing the trend of account balances These indicators provide the auditor with an initial insight into the financial position of the client company

- Higher ratios indicating the company's ability to pay reflect a better financial situation and lower risk of financial credit violations A longer payment ratio suggests better payment ability, shedding light on the company's revenue, expenses, and loan repayment suitability for its activities Understanding the financial situation of borrowing entities is crucial

- 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

In addition to these ratios, auditors evaluate business growth through development indices and the rate of retained earnings for reinvestment Assessing customer development involves factors like market expansion capability and effective management

By analyzing these ratios, auditors can forecast the future financial situation through the documents collected during auditing

1.2.2.5 Internal control and risk assessment

The information collected about the client not only helps the auditor to make an initial assessment of the audit risk but also can help the auditors to identify preliminary risks that may affect the entire audit and the risks identified for each specific item

This work is often implemented by audit team leaders, as this requires high professional judgment and understanding of the client Based on the results, the audit team leader draws up the issues that need attention and forms a detailed audit plan suitable for each client However, the evaluation of the internal control system for the fixed asset item is usually done through interviews or the use of questionnaires This saves audit time but its quality is not high and sometimes inconsistent

Risk assessment involves identifying and evaluating various aspects of an entity

to guide audit procedures aimed at substantiating amounts reported in financial statements This process enables auditors to pinpoint areas needing attention and determine the appropriate audit approach and scope

The risk assessment process includes several key steps:

 Understanding the business and its environment: Auditors gain insights into the company's operations, objectives, strategies, and industry dynamics

 Identifying significant accounts and disclosures: Auditors pinpoint accounts and disclosures crucial to the financial statements, where there's a higher risk

of material misstatement

 Assessing inherent risk: Auditors evaluate the risk of material misstatement

in significant accounts and disclosures without considering internal controls

 Assessing control risk: Auditors evaluate the risk that material misstatements could occur and go undetected or unprevented by the entity's internal controls

 Determining overall audit risk: Auditors gauge the overall risk of failing to detect material misstatements in significant accounts and disclosures

 Developing the audit plan: Based on the risk assessment, auditors craft the audit plan, outlining the approach, procedures, and scope

Overall, through risk assessment procedures, auditors gain insights into the entity and its environment, including controls, to identify and assess risks of material misstatement at the financial statement and relevant assertion levels This aids in designing further audit procedures

Step 1: Select criteria for determining materiality

Step 2: Determine the percentage of materiality

Step 3: Calculate the overall materiality level (PM)

Table 1.2 Table of Estimated Materiality Thresholds

PM = 5% - 10% Profit before tax

Applicable to companies with stable business results

PM = 0.5% - 3% Revenue

Applicable to companies with growing revenue but unstable profits, with

significant accumulated losses (newly established businesses)

PM = 2% Total assets or Equity

Applicable to companies with unstable revenue and profit before tax, or

manufacturing businesses

Step 4: Materiality level ranging from 50% to 75% of PM

Step 5: The threshold for tolerable error is 0% to 4% of the materiality level achieved

Materiality refers to the threshold at which any absence or inaccuracy in financial statements is deemed to affect the decisions made by users The auditor's assessment of materiality relies on their professional judgment and is influenced by their understanding of the financial information requirements of the financial statement users Information is considered material if its exclusion or misstatement could impact the economic decisions of users relying on the financial statements Since auditors are tasked with assessing whether financial statements contain material misstatements, they are obligated to notify the client upon discovering such errors, enabling corrective action If the client declines to rectify the errors, the auditor must issue a qualified or adverse opinion, contingent on the significance of the misstatement These determinations rely on auditors' comprehensive comprehension

of materiality principles

1.2.2.7 Regarding detailed audit planning for fixed assets

There are currently six potential errors that are always identified as likely to occur in any audit These are the potential errors related to transactions (completeness, occurrence, classification, and cut-off) and errors related to the preparation of financial statements (accuracy and presentation) Detailed audit planning is always associated with detecting the above potential misstatements Specifically, with the audit cycle of fixed assets, checking the correctness of prices and the presentation of transactions related to fixed assets ensures that the recognition

is calculated correctly

Checking the existence and completeness to ensure that there is no difference between the actual fixed assets and the information in the books In general, the detailed audit plan for the fixed asset item of the audit firms is suitable for the audit objectives When performing an audit, the auditors will flexibly apply suitable procedures, at the same time, the auditor may also perform alternative audit procedures if the original procedures in the audit program are not feasible

1.2.3 Implementing the audit

1.2.3.1 Implementation of internal control assessment and control testing

As per Vietnamese Standards on Auditing No 500, "Control testing: (inspection

of control system)" refers to the examination conducted to gather audit evidence regarding the effectiveness and efficient operation of the accounting system and the internal control system Tests of control are conducted under the assumption that the internal controls are dependable, thereby allowing a reduction in the extent of substantive procedures During this stage, tests of control are executed in alignment with the audit objectives Specifically concerning the fixed assets account, tests of control are conducted as outlined below:

Table 1.3: Test of control

Objectives Major internal controls Common tests of control

1 Existence - The company has the right to

use and control the assets recorded in accounting books;

there is a clear division between assets management, accounting department, and maintenance department

- Existence of purchase request, approval of request, purchase contract, handover minutes of fixed assets put into use, and fixed assets cards

- Observing the company’s fixed assets and investigating the difference between fixed assets management and maintenance department

- Investigate the transfer of documents and signs of internal controls

- Investigate signs of cancellations

2 Completeness Each fixed asset will be

recorded in one file from being purchased until being disposed

of The recording and calculation of historical costs are based on valid documents

- Investigate the completeness of documents relating to fixed assets

- Combining physical observation and document testing, legal records of assets ownership

4 Authorization Approvals of increase,

decrease, or depreciation entries are segregated between levels of management

- Interview responsible personnel, and investigate signs of approval

5 Accuracy All documents relating to the

purchase, and disposal of fixed assets are collected and accounted for correctly The booking of entries into detailed listing and fixed assets ledger

is correct and examined thoroughly

- Investigate the signs of internal controls

- Recalculating several documents of fixed assets transactions

6 Cut-off - The recognitions and changes

in fixed assets must be recorded timely when transactions occur to ensure the quality of financial information

- Investigate the completeness and timeliness

- Interviewing responsible staff to investigate the policies

of classifying fixed assets of the company

- There are detailed procedures

on the record of fixed assets transactions from detailed listing to general ledgers

- Investigate the accounting systems and the classification

of accounting books

Source: Financial Auditing Textbook –National Economic University

1.2.3.2 Implementation of analytical procedures

Analytical procedures are conducted to assess the appropriateness of the structure of fixed assets within the total assets of the enterprise, as well as the fluctuations between years to identify significant areas of concern This stage of work requires expertise and understanding of the business specifics by the auditors When applied effectively, analytical procedures can reduce the detailed examination tasks required Depending on the type of business and its field of operation, auditors utilize horizontal analysis techniques, comparing fixed asset values (historical cost, accumulated depreciation, carrying amount) across different periods to identify any unusual fluctuations Additionally, they employ vertical analysis methods, such as comparing the rate of return on total fixed assets or historical cost over total assets between periods During these comparisons, auditors must identify and explain the impact of natural fluctuations on fixed assets and raise concerns about potential errors

The selection of an appropriate analytical model is crucial during this phase due

to the plethora of models available for assessing the accuracy of fixed asset information Depending on the nature of the business, the most suitable model is chosen For instance, in the absence of reliable data for a new client, auditors should opt for an estimation model based on the client's business plan, fixed asset procurement plan for the year, and changes in the entity's figures Audit firms should refine models to incorporate detailed data and develop smaller models to enhance audit precision

Analytical techniques based on industry averages are seldom employed when analyzing fixed assets However, in the first year of the audit, auditors may utilize industry averages for comparison Deviations in the ratio of fixed assets to total assets from the industry average should be scrutinized unless justified by reasonable

explanations, as they may signify overstated or understated fixed assets due to potential incentives In such cases, auditors design audit procedures to verify these hypotheses

When analyzing fluctuations related to fixed assets, auditors need to understand and exclude the effects of rational causes, and natural factors leading to changes in indicators compared to previous periods such as changes in the business environment, business conditions, industry fluctuations, pressure, impact of depreciation policies, etc From there, they assess and anticipate the likelihood of misstatements with fixed assets and guide detailed examination tasks for transactions and key information balances

In certain instances, auditors may solely seek explanations for discrepancies within the accounting department, neglecting other departments Upon receiving explanations, auditors may accept them without further verification, assuming the differences have been adequately explained

1.2.3.3 Implementation of test of details

a Physical inventory counts and reconcile the inventory count minute with the accounting books

The auditor witnesses the physical inventory count of year-end fixed assets and either selects samples or verifies all fixed assets of the client to ensure the existence

of the fixed asset database In cases where participation in the inventory count on the year-end date is not possible, the auditor may conduct asset observations on the audit date, prepare an inspection report, and reconcile to determine the actual fixed assets

as of the financial statement date For fixed assets held by third parties, auditors typically send confirmation letters

b Test of details for fixed assets balance

Opening balance: The review of fixed assets opening balance is performed

depending on whether the auditing entity is a first-year client

- If the prior year's audit is carried out by the same audit company performing the current-year audit, and the opening balance is determined to be correct, additional audit procedures are not necessary Otherwise, the auditor will have to consider last-

year financial statements, especially matters that relate to fixed assets accounts If the financial statements are reliable, additional audit procedures are again not necessary

- If the auditing entity is a first-year client, the auditor cannot rely on last-year audit results, or the audit opinion is not unqualified, the auditor will have to consider additional procedures such as: examining documents relating to fixed assets opening balance, selecting certain fixed assets through sampling to check their existence, examining the entity fixed assets count results, examining the mortgage status of the fixed assets, especially ownership documents used for mortgageprocess

Closing balance: Based on the opening balance, increase, and decrease fixed

assets recorded in a year, the auditor will evaluate the fixed assets count results of the company

c Tests of details for the increase in fixed assets

Fixed asset increases can occur due to purchases, additions from fundamental construction investments, and increases from financial leasing Auditors examine documents such as quotations, contracts, contract terminations, asset transfer records, bills of lading for imported assets, asset inventory reports, and approved investment plans for assets to understand the reasons for the differences For assets acquired through financial leasing, auditors check whether the recognition of the asset's cost complies with standards and leasing guidelines, whether the allocation of financial leasing costs is appropriate for the accounting period, and whether the depreciation

of the leased asset aligns with the client's depreciation policy or the lease term For assets formed from fundamental construction investment processes, auditors may request a list of ongoing construction projects and inspect a sample of these projects

by reviewing records and documents such as approved investment plans, and collection and recording of construction costs per project They list completed construction projects and note increases in fixed assets during the period, reviewing the approved settlement values of completed projects by relevant authorities Auditors select a sample of projects, cross-reference settlements with collected construction costs, and verify the handling of any discrepancies

d Tests of details for the decrease in fixed assets

The auditor verifies the depreciation provision for each fixed asset, reviews documents related to disposal and sales, and recalculates the income and expenses associated with these disposal and sales transactions

e Test of details for the depreciation of fixed assets

The auditor performs the following procedures:

- Review the company's methodology for estimating useful life and depreciation, along with the classification of fixed assets Assess how depreciation expenses are allocated across departments and based on asset usage, examine any changes in depreciation schedules and their impact on accumulated depreciation, analyze profits or losses from disposals of fixed assets in the previous year, evaluate lease terms for finance-lease fixed assets, and ensure consistency with the previous year's practices

- Verify that all assets are being depreciated correctly and that fully depreciated assets are properly distinguished from those still in use

- Confirm whether the allocation of depreciation expenses aligns with the assets' locations and departments

f Verify the accuracy of the accounting period

The auditor collects a detailed list of fixed assets at the end of the period, examining their condition to confirm that these assets meet the criteria for recognition

in the financial year Then, they review the transactions from the beginning of the year to determine if any fixed assets were recorded in the financial year but were instead recorded in the following year by the entity

1.2.4 Completing the audit

1.2.4.1 Synthesize and process audit findings and post-audit issues and data

This phase involves consolidating audit findings into statistical summaries for each audited object or aspect Throughout the audit process, auditors document their work in WPs Upon completion of the audit, all auditors within the audit team gather their respective WPs The auditor responsible for the fixed assets section not only

reviews their work but also compares it with other relevant sections or parts to identify any errors in fixed assets

Summary of adjusting entries: Upon identifying significant misstatements, the auditor collaborates with the client to propose necessary adjustments These adjustments are then documented in a comprehensive record known as the Minutes

of the Final Audit Meeting – Agenda

1.2.4.2 Analyzing financial statements

The auditor reviews the financial statements following VSA 520 requirements, which involve conducting analytical procedures The aim is to design and execute procedures near the end of the audit to form an overall conclusion on the consistency

of the financial statements with the auditor’s understanding of the entity The analytical procedures performed at this stage are similar to those during the planning stage, including ratio analysis and comparisons with prior period financial statements The goal is to confirm expected trends and identify any unusual transactions or balances that may pose a risk of misstatement

1.2.4.3 Evaluating going concern

The auditor remains vigilant throughout the audit for evidence of events or conditions that may raise doubts about the entity’s ability to continue as a going concern This evaluation occurs near the end of the audit, considering all evidence obtained and reviewing the final financial statements

1.2.4.4 Reviewing the draft audit report and management letter

Ensuring the completeness and accuracy of information in the audit report and management letter

1.2.4.5 Reviewing subsequent events

Performing audit procedures to identify events occurring between the financial statement date and the auditor’s report that require adjustment or disclosure This includes reviewing internal records, management meeting minutes, and discussing subsequent events with management

1.2.4.6 Quality control of auditing

Following VAS 220, audit firms establish and maintain quality control systems for auditing activities, ensuring compliance with ethical requirements Audit teams

conduct appropriate quality control procedures, including ensuring team competence, proper planning, supervision, review, and documentation

1.2.4.7 Issuing the audit report and management letter

The audit report, issued after completing the audit process, contains statements

on the accuracy, completeness, and reliability of the financial statements Additionally, the audit firm may provide a management letter to the client, approved

by the audit committee, offering further explanations and information

This process ensures the completeness, accuracy, and reliability of financial statement information while adhering to auditing standards and legal regulations

CONCLUSION OF CHAPTER 1

Chapter 1 of the Graduate thesis comprises two main sections focusing on the theoretical framework of fixed asset audit procedures within financial statement audits The initial section provided an overview of fixed assets in financial statement audits, including definitions, characteristics, and the nature of accounting for fixed assets Additionally, common risks associated with fixed assets and their internal controls were addressed

The subsequent section outlined the auditing process for fixed assets based on objectives and assertions This encompassed audit procedures aligned with the planning, implementation, and completion stages of an audit