ACKNOWLEDGEMENT After three years of studying at Banking Academy, I have suggested the topic: “IMPROVING AUDIT PROCEDURES OF INVENTORY IN AN AUDIT OF FINANCIAL STATEMENTS AT HSK VIETNAM
The necessity of the topic
An external audit has become an intensive activitiy, a specialize science in the operation process of an economy While internal auditors will examine issues related to company business practices and risks, while external auditors examine the financial records and issue an opinion regarding the financial statements of the company Moreover, there aren't any concerns over repercussions for the external auditor if the organization is unhappy with their report This absence of bias is hugely important for reinforcing the credibility of a company’s financial statements and financial health
The credibility that an external audit covers are particularly important to small entities, start-up companies, as well as companies that are not transparent and are working to improve their reputation and restore confidence in their customers, shareholders and the public Specially, inventory valuation affects the profitability of a company and its potential value, as presented in its financial statements If a business misvalues its inventory, it will have a big impact on both its balance sheet, income statement, and cash flow statement
External audit provides transparent and reliable source for users to make important decisions in investing, cooperating, lending, Not bound by any rules, the independent auditor is flexible with each enterprise and protected by the state through standards such as the Vietnamese Accounting Standards provides and explains business information
Depending on the purpose, information users are interested in different issues Each items in the financial statements have their functions and positions, but their importance influences each other So does inventory As an item in the assets section of the balance sheet, it accounts for most of the short-term assets of a manufacturing enterprise or a commercial enterprise Inventories contain both potential and detection risks Not only diverse, multi-category, stored in many warehouses and affected by the time to devaluation, but inventory is also an item prone to fraud intentionally or unintentionally The spillover of inventory can be the strongest among the items because it affects not only the balance sheet but also the rest of the
FSs such as revenue, cost of sales, cash flow in and out on the statement of cash flows, so it is always considered the most material item and the most difficult to audit performed with experienced and qualified auditors
Having acknowledged the importance of inventory to a business’s financial health, the author has chosen the topic: “IMPROVING AUDIT PROCEDURES OF INVENTORY IN AN AUDIT OF FSS AT HSK VIETNAM COMPANY LIMITED” for my graduation thesis, to evaluate the process and provide her recommendations to improve the audit procedures of inventory at HSK Vietnam Company Limited.
Literature review
The inventory audit procedure is a very important issue that needs to be thoroughly explored However, the domestic and foreign researches mostly focus on the whole content of inventory item audit, inventory management, or measures to improve the internal control of the inventory Here are some case studies:
The first study “Improving asset measurement and audit quality with drone- enabled inventory audit procedures” by Christ, M.H et al (2021) focuses on auditors' increasing use of technology to boost audit quality The author assesses three dimensions of audit quality—efficiency, effectiveness, and quality of documentation The article shows that auditors can perform inventory counts with these technologies way more efficiently than they will with manual techniques, decreasing count time Their results suggest that technology-enabled inventory audits can improve audit quality and further regulatory guidance on using such technologies would enhance adoption
Besides, there are several graduation theses on the audit of specific accounts in an audit of FSs At the Banking Academy of Vietnam, there were some graduation theses on inventory topics, especially “Improving audit process of inventory in the audit of financial statement performed by Vinaudit Co., Ltd” by Luong, N.T.M
(2021) Based on the performance of Vinaudit, the study recommends some improvements to the whole inventory cycle audit The next research is “Internal control process for inventory at Sang Tao Viet Co., Ltd” by Tien, LT (2021) This article focused on the process of evaluating the internal control system for inventory items After that, the author provided some suggestions and solutions to enhance this process's quality The above studies revolve around specific item audit issues in the audit of FSs by comparing these audits with a theoretical framework to find out recommendations for improving the audit procedures
In conclusion, there was previous research about assurance quality at some independent audit companies and the audit procedures inventory However, there were not any studies focusing on improving audit procedures of inventory Therefore, in this graduation thesis , the author wants to assess the audit procedures at HSK based on the comparison between audit methodology and theoretical framework; thus, points out some recommendations to improve the audit of inventory in an audit of FSs at HSK.
Study Objective
The thesis focuses on researching the current audit procedures of inventory in an audit of FSs at HSK Vietnam Specific objects of the thesis include:
Firstly, the thesis explores theoretical backgrounds on audit procedures of inventory in FSs audit
Secondly, the situation of inventory auditing performed by HSKV and analyses the current audit procedures of inventory at HSK Vietnam
Based on the analyzed results, the thesis suggests and provides several recommendations for improvements in the audit procedures of inventory in the FS audit at HSK Vietnam.
Scope of the study
The subject of the thesis includes audit procedures of inventory in an audit of FSs at HSK Vietnam
The scope of the content thesis is audit procedures of inventory
The scope of the thesis regarding space is at HSK Vietnam Company Limited The scope of the thesis regarding time is the data in the thesis is extracted in the period from 1 st January 2019 to 31 st December 2021.
Research methodology
The thesis employs the following research methods:
+ The thesis collects secondary data including data in the curriculum, other research, magazines, and other working documents at HSK Vietnam Company Limited; primary data is collected through observation, interviews, and practical situations
+ The thesis uses summarization, reasoning, and comparison method regarding audit procedures of inventory in an audit of FSs.
Structure of the thesis
Excluding introduction, conclusion, and references, the thesis includes three chapters:
Chapter 1: Theoretical backgrounds on audit procedures of inventory in an audit of FSs
Chapter 2: Practice of audit procedures of inventory items in FSs audit at
Chapter 3: Recommendations for improvement of audit procedures of inventory in an audit of FSs at HSK Vietnam Company Limited.
Theoretical backgrounds on audit procedures of inventory in an
Overview of inventory and accounting for inventory
1.1.1 Definitions, characteristics, and effects of inventory on financial statements
Inventories are defined as assets that enterprises keep for production or consumption (Xuan, L.T., 2015)
Accounting to VAS 02 - Inventories is issued under Decision No 149/2001/QD -BTC:
“Inventories: are assets which are: a/ Held for sale in the normal production and business period b/ In the ongoing process of production and business c/ Raw materials, materials, tools, and instruments for use in the process of production and business or provision of services
- Goods purchased for sale: goods in stock, purchased goods being transported en route, goods sent for sale, goods sent for processing;
- Finished products in stock and finished products sent for sale;
- Unfinished products: uncompleted products and completed products not yet going through the procedures for being put into stores of finished products;
- Raw materials, materials, tools, and instruments in stock, sent for processing, and already purchased but being transported en route;
Net realizable value means the estimated selling price of inventories in a normal production and business period minus (-) the estimated cost for completing the products and the estimated cost needed for their consumption
Current price means a sum of money payable for the purchase of a similar kind of inventory on the date the accounting balance sheet is made.”
In short, inventories are the current assets of the business, expressed in their physical state Inventory is the link between the production and sale of products It can be purchased from outside or self-manufactured to serve the production and business process
Inventories are determined differently depending on business lines, for manufacturing enterprises, inventories are raw materials, tools, finished goods waiting for consumption, work-in-progress etc., and with a commercial enterprise, inventory is mainly goods bought and sold However, inventory still has the following characteristics:
Firstly, inventories are in the current assets of the business, often accounting for a large proportion The effective management and use of inventory have a certain influence on the production and business results of the enterprise
Secondly, inventories in the enterprise are composed of many different sources, with the cost of constituting the original cost being different Determining correctly and adequately constituting costs and managing those costs will contribute to the accounting and reasonable calculation of the original cost of inventories, creating a basis for calculating the profit of the enterprise Each business will choose different methods of determining inventory prices as well as different stocking models that are suitable for the situation of the business Therefore, it requires the unification of methods between financial periods and years
Thirdly, inventory participates in all business processes of the enterprise with high-frequency transactions Inventories always change in physical form and convert into other types of short-term assets such as finished goods, work in progress, or raw material Inventories in an enterprise include many types, quality, designs, and designs with different characteristics, requiring different storage and preservation conditions, with natural or artificial conditions that are not identical to those of the enterprise manage Therefore, it is easy to cause damage or loss of commercial value due to obsolescence or obsolescence The work of inventory, preservation, management, and use encounters many difficulties and challenges, with great costs
Finally, determining the quality, condition, and value of inventory is always complicated, because the calculation and evaluation of inventory are governed by accounting principles (original cost, materiality, consistency) etc) and there are different pricing methods In addition, there are inventory items that are difficult to classify and value that are highly subjective, which can sometimes lead to significant errors, such as works of art, paintings, antiques, ceramics, electronic components, precious metals, etc
1.1.1.3 Impacts of inventory on financial statements
On the balance sheet (BS): The inventory item is in section A “Current assets and short-term investments” Reflects the total value of inventory owned by the business, circulating in the ordinary course of business, reflecting a provision for impairment in inventory value at the announcement time after deducting provisions has been set aside for long-term unfinished business and production costs Presented at a lower cost and net realizable value
On the income statement (IS): It is shown on expenses cost of goods sold, followed by the indicators gross profit, profit before tax, corporate income tax, Accounting profit after tax, and basic earnings per share (for joint-stock companies) From the target of accounting profit after tax, it will affect the target of undistributed profit after tax on the balance sheet
On the statement of cash flows (SOCF): Prepared using the indirect method - Reflected in profit and loss from investment activities (Based on Account 632), Accounting profit before tax
In the notes to the financial statements (NFS): First is the policies relevant to and applicable to inventory, followed by detailed information relating to the presentation, accounting of inventories, and other details information on setting up and reversing provisions for devaluation of inventories
Inventories are an important and pervasive item on the Financial Statements
An audit of the inventory is required to evaluate the reasonableness of the FS The inventory audit process is considered complex, so it is necessary to develop a specific plan to ensure efficiency and effectiveness
According to VAS 02 – Inventory, Inventories are valued according to their original prices Where the net realizable value is lower than the original price, they must be valued according to net realizable value
The original price of inventories consists of the purchasing cost, processing cost and other directly-related costs incurred for having the inventories stored in the present place and conditions
According to Circular 48, the net realisable value of inventory determined by the enterprise is the estimated setting price of inventory in the normal business and operation period at the time of preparing annual financial statements minus (-) the estimated costs to complete and sell the inventory The enterprises can hire a valuation company to determine the value of the disposed and liquidated inventory
1.1.2.3 Method of calculating the value of inventories
According to Circular 200/2014/TT-BTC, the value of inventories shall be calculated according to one of the following methods:
The specific identification method shall apply to enterprises having a few goods items or stable and identifiable goods items
The value of each kind of inventories shall be calculated according to the average value of each similar kind of goods at the beginning of the period and the value of each kind of inventories purchased or manufactured in the period The average value may be computed either according to periods or the time when a goods lot is warehoused, depending on the enterprise's situation
- First-in, First-out method
Audit procedures of inventory in an financial statement audit at HSKV
In accordance with the overall objective of auditing financial statemen, the main objectives of auditing inventory is to assess the internal control with inventory and to verify the existence of inventory, the completeness of it, the right and obligation of entity with inventory, the accuracy of inventory figure and the presentation which entity recorded on the FS and Notes
Assertions Account balances Transaction and events
Occurrence/Existence - Recorded purchase transactions to manage the number of goods purchased
- Recorded consignment transactions to manage the movement of inventory
Inventories reflected on the balance sheet are actually existing
- Sales transactions have been recorded to represent sold inventory
Completeness All transactions of purchasing, transferring, and selling inventory that occurred during the period have been reflected in the accounting records and financial statements
“Inventories” includes all materials, tools, WIP, available at the reporting time
Right & Obligation During the period the enterprise has a right to the recorded inventory
The enterprise has a right to the inventory balance at the time of reporting
Valuation The cost of purchased materials and goods, products, work-in-progress must be determined accurately and under the provisions of the current accounting regime and principles
The inventory balance should be reflected at its true or net value under generally accepted principles
Presentation Transactions related to inventory must be properly identified and classified on the financial reporting system Transactions related to inventory must be properly identified and classified on the financial reporting system
Inventory balances must be classified and arranged in the correct position on the balance sheet Statements relating to pricing classification and inventory allocation must be appropriate
(Source: Financial Auditing Textbook – National Economic University)
Performing an inventory audit requires accurate and current data from a range of sources This could include:
- General ledger, inventory account details book, sales records
- Warehouse vouchers, transfer documents, shipping manifests
- Minutes of inventory of the enterprise and minutes of witnessing the inventory of the auditor's inventory
- Method of calculating the cost of the enterprise's inventory
Inventory tracking is vital in ensuring audits are often through with complete and accurate information
Figure 1.2: The process of organizing audit
• Understanding the entity and its environment
• Preliminary analysis and going concern assessment
• Preparation draft of the audit report and management letter
The audit firms also have to ensure several acceptance procedures: ensure professionally qualified to act, ensure existing resources adequate, obtain references, and communicate with present auditors From that, the auditor will assess the risk level of the audit engagement and conclude whether to accept the customer or not
After considering accepting the engagement, the auditors should send an engagement letter to all new clients and to existing clients to whom no letter has previously been sent as soon as a suitable opportentityy presents itself At the same time, appropriate levels of staff are required to facilitate direction, supervision and review of more junior team members’ work
1.2.2.2 Understanding the entity and its environment
ISA (UK) 315, Identifying anf Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment states that “the objective of the auditor is to identify and assess the risks of material misstatement, whether due to the fraud and error, at the financial statement and assertion levels, through understanding the entiry and its environment, including the entity’s internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement”
Audit company shouls obtain an understanding of:
+ Operating industry: knowledge of economy, the entity operation spheres, company structure, capital structure,…
+ Legal obligation and internal regulations
+ Other external factors affecting enterprises such as fluctuations in interest rates, foreign exchange rates, inflation; the general state of the economy…
Usually, the implementation of understanding about the business cycle of enterprises will be done by information gathered from previous audits, and interviewing about changes:
- Information of inventory from a business: Types of inventory, storing, production information, labor, internal rotation of inventory,…
- Applicable accounting policies: Accounting method, costing method, pricing method, accounting estimates,…
Typically, customer information needs to be collected specifically as follows: + Collect legal documents: input invoices, capital contribution minutes,… + Visiting warehouses and detecting problems that need attention: NG, out- of-date materials,…
+ Discuss with the BOM, chief accountant or accountant of inventory, and other employees in the entity about the fluctuation of the production plan in the company
+ Find out the customer's business goals and strategies, and what those goals are related to the fluctuation of inventory
+ The auditor needs to review the results of the previous year's audit and find out important information such as financial policy, errors related to the inventory item of the previous year
From the collected and researched data, the auditor describes in general the inventory cycle using the narrative or the flowchart method
1.2.2.4 Preliminary analysis and going concern risk assessment
According to Vietnamese Auditing Standard VSA 520 on Analytical Procedures, “Analytical procedures are understood as the evaluation of financial information, by analyzing the reasonable relationships between financial and non- financial data
+ Horizontal analysis: Compare information for prior periods
+ Vertical analysis: Compare the client's information with similar industrial information
+ Interview customers to find out the causes and evaluate the reasonableness of items with large and unusual fluctuations
+ Review transactions and events that cast doubt on the entity's ability to continue as a going concern assumption
1.2.2.5 Internal controls and risk assessment
According to the guidance of ISA 315, the assessment of internal control helps the auditor identify the risks of material misstatement, thereby, planning the audit and determining the nature, timing, and extent of further audit procedures
Understand internal control over inventory, including procedures, to gain a complete understanding of all control procedures the entity has established to control purchasing, storage, and handling processes in stock and shipped At the same time, the auditor also needs to understand the cost accounting system as well as the detailed accounting book system for inventory that the entity is applying To achieve this understanding, the auditor may use narrative tables, flowcharts, or questionnaires on internal control
Determining materiality is approved under audit firm's policy to notify the audit team of the planned materiality level before the audit at customers and is responsible for redefining the materiality level During the closing period, to determine whether the audit engagements and procedures have been performed adequately
The most commonly used base in auditing is net income Most commonly percentages are in the range of 5 – 10 percent
According to VSA 320 – Audit Materiality is defined as: “A level of value or levels of value determined by the auditor to be lower than that of the auditor materiality to the financial statements as a whole to reduce the likelihood of misstatement to a reasonably low level so that the aggregate effect of uncorrected and undetected misstatements does not exceed materiality for the financial statements as a whole In some cases, “performance materiality” can be understood as a level or level of value determined by the auditor to be lower than the materiality or levels of a group of transactions, account balances, or information notes on the financial statements.”
Performance Materiality = Overall Materiality x Ratio used for estimates the materiality of performance
The ratio used to estimate the performance materiality is in the range of 50%- 75%
Usually, the threshold is determined from 0 - 4% of the value of the performance materiality level, depending on the professional judgment of the auditor
After performing the series of procedures above, the auditor will document the inherent and control risks identified in other working papers, perform a risk assessment of material misstatement at the level of financial statements and basis of data, and propose measures to deal with the identified risks
Audit risk (as ISA) composed of:
- Inherent risk (IR), the risk involved in the nature of business or transaction
- Control risk (CR), the risk that a misstatement may not be prevented or detected and corrected due to weakness in the entity's internal control mechanism
- Detection risk (DR), the probability that the auditing procedures may fail to detect existence of a material error or fraud
Audit risk can be calculated as:
AR = IR × CR × DR After the assessment and classification, the auditor summarizes the risks occurring at the assertion level: For each item of assertion, there are potential or control risks that may occur Then design an appropriate audit treatment for each material item, which may include: test of controls, substantive procedures, additional substantive tests
For each specific client, the audit team leader will also design different audit plan, depending on the predefined risks as well as the characteristics of the client
During this stage, the auditor will conduct a walkthrough test Walkthrough: The auditor selects any transaction in the cycle and then repeats it from beginning to end to check whether the understanding of the cycle is appropriate or not
For inventory, tests of controls are performed in detail for each process: purchasing process; import-export process and storage process The inventory tests of controls are:
- Observe the security of the inventory and the environment in which it is held
- Apply procedures on recording the inventory and the in and out inventory movements
- Test authorization for disposal, write-offs or scrapping of inventory items
- Check whether the sequences of dispatch and Goods Received Notes (GDNs) are complete
- Check whether the inventory reconciliations have been updated
- Test controls over recording of inventory movements belonging to third parties that are held by the client
The Practice of audit procedures of inventory items in a financial
An overview of HSK Vietnam Company Limited
2.1.1 The history of HSK Vietnam Company Limited
HSK Vietnam Auditing Company Limited (HSKV) was established under the Business Registration Certificate No 0104811193 issued by the Business Registration Office - Hanoi Department of Planning and Investment on 07/07/2010 HSKV is a member of Reiwakaikeisha Tax Group (RWK) from Japan, supporting clients in business activities in Vietnam, Japan, China, Cambodia, and globally Although HSKV has only been established for 12 years, it is increasingly asserting its position among customers in the Vietnamese market Foreign-invested enterprises are the main customers of the Company In May 2018, HSKV officially became a member of the SFAI International Network of Accountants and Auditors
During more than 10 years of operation, HSKV has constantly improved and improved the quality of services provided to customers The Company's services are increasingly diversified and the quality has been highly appreciated by most of the customers It can be said that through the operation process, HSKV has contributed to disseminating the State's policies, preventing mistakes of customers, contributing to the transparency of information on financial statements, and providing reliable information reliable for State management and help businesses improve business operations HSKV's customers are customers with diverse types of businesses, ownership, and organizational structure
Development target to 2025, HSKV is in the group of 10 auditing companies with the largest revenue in the Vietnam market To achieve the above goal, HSKV is trying to further improve service quality based on a team of professional staff with high professional competence Strive to create the highest added value for customers, accompany in all customer activities, provide a high level of information assurance at a reasonable fee; Consulting for customers in perfecting business management, protecting customers' interests when operating in Vietnam The Company's core values are quality and professional staff, innovation and efficiency, friendliness, and customer service
2.1.1.2 Financial performance of HSKV in the period of 2019 - 2021
HSKV is always proactive, approaching new customers based on the quality of services that the company has provided Therefore, the number of customers of the company in recent years has continuously increased as shown in Table
Table 2.1: Number of customers in the period 2019 - 2021
(Source: Annual Internal Report of HSKV)
Therefore, the company's annual business results also increased significantly, especially in the current difficult economic period The company's business results from 2019 to 2021 are shown in Table 4.2
Table 2.2: Financial performance from 2019 to 2021
Through the above data table, we can see the positive signals of HSKV in business activities, reflected in the rapid increase year by year in the targets of revenue and profit after tax In 2021, revenue has increased by 10,522,023,631 VND, equivalent to an increase of 22.12% compared to 2019 This makes a profit after tax also increase significantly from 7.722.523.425 VND in 2019 to VND 9.848.845.541 in 2021 During this period, the revenue structure from 3 main activities: Auditing, Accounting Services, and Consulting services also fluctuated in a positive direction The company has a fairly good revenue growth rate in all 3 areas of activity, in which the audit field is still the main field of the Company, and the potential in the future will still be the main field of the company
2.1.2 The main business lines, clients, and recent business results of HSK Vietnam Company Limited
HSKV is a legal organization of RWK Corporation Japan in Vietnam operating in the fields of accounting, auditing, financial consulting and transfer pricing HSKV operates in 3 main services lines:
- Convert financial statements to IFRS/US GAAP
- General tax advice/Regular consulting services
- Advisory service on specific transactions
2 Support to set up a business in Vietnam
2.1.3 The organization structure of HSK
Currently, HSKV has its head office located in Hanoi and 2 branches in Ho Chi Minh City and Da Nang The management structure of HSKV includes:
Figure 2.1: Organization structure of HSKV
Source: Document of HR Department – HSKV
HCM City Office Danang Office
To operate effectively HSKV always attaches importance to the professional competence and experience of its staff Currently, HSKV has a staff of 73 people, including 17 auditors with CPA certificates in Vietnam and 2 auditors with a Japanese CPA certificate and 1 auditor with an Australian CPA certificate Many key personnel of HSKV has accumulated valuable experiences while working at Big4 auditing firms (in Vietnam, Australia, and Japan) With extensive experience and knowledge through its actual operations, over the years, HSKV has shared its experience of working in highly competitive and fast-growing business environments, such as commercial centers of the global economy in the Entityed States and Japan, by mobilizing its qualified foreign experts
The organizational structure of the Audit Function comprises:
2.1.4 Audit Process at HSK Vietnam Audit Company Limited
Figure 2.2: Audit process at HSKV
HSKV works on evaluating the risks and auditing the related controls and counter-measures in line with a business process-based audit plan closely coordinated with clients The results from this evaluation of the control assurance over processes form the premise for determining necessary substantive procedures HSK’s methodology helps reducing to a necessary minimum the usually time-consuming substantive procedures, without reducing the standard of audit results
In planning stage, auditors would perform several steps including: acquiring understanding about clients’ activities and accounting processes, understanding entity-level and process-level controls, determining planning materiality and preparing and presenting an audit plan
HSK Vietnam would assess the accepting client’s audit proposal and related risks If client’s proposal is accepted, HSKV will proceed to the following step in planning process and deploy necessary measures stated in its audit methodology
After accepting engagement in an audit, auditors would collect information on client’s activities and accounting processes, so as to achieve an initial understanding in client’s industry, control system, method of accounting and related risks Auditor would also gain understanding on legal processes that affect client’s activities the subsequent steps would be to see materiality and to organize an in depth audit plan with tests of control and substantive tests
The subsequent phase would be performance of audit procedures, which includes: testing entity-level and process-level controls, evaluating control deficiencies and performing substantive tests
HSK audit approach focuses on understanding the entity’s business and control issues It combines a rigorous risk assessment, diagnostic processes, and audit testing procedures
To deliver an audit that's specifically tailored to clients, HSKV customizes the resources and extent of the control and substantive procedures performed by applying the professional judgment to match the amount of risk identified for every significant account, class of transaction, or disclosure to the relevant assertions
The sample audit program is designed based on the VACPA's Model Auditing Program and the experience of the Auditor in charge (SIC), through the review of the Audit Manager (Manager in charge - MIC) and Partners
At this stage, auditors perform procedures that conclude an audit engagement: performing subsequent events review, obtaining representations, completing engagement reporting and issue audit report and management letter, summarizing audit results for the management and owners and assessing engagement audit quality.
The practice of audit procedures of inventory in a FS audit at HSK Vietnam
To seek insights into the audit procedures for inventory in an audit of FSs at HSKV Co., Ltd., the author selected the audit engagement of XYZ Joint Stock Company (“the Company) to obtain information for this thesis XYZ is a 100% foreign-owned enterprise established in Vietnam with 16 years of operation and has been a long-time customer of HSKV
Though preliminary research, the audit firm must determine whether there are any independence and other ethical issues likely to cause significant problems with the ethical code with the fundamental principles of ethical behavior The audit firms also have to ensure several acceptance procedures: ensure professionally qualified to act, ensure existing resources adequate, obtain references, and communicate with present auditors From that, the auditor assesses the engagement risk as the basis to accept the customer The results was presented on the WP No A110 – Accepting new customers or WP No A120 – Acceptance and retention of old customers and contract risk assessment
Table 2.3: Basic information about audit clients
2.First year of auditing FSs:
3 Number of years HSKV has provided audit services of FSs:
4.Name and title of primary contact person:
Mrs Doan Thi Huong – Chief Accoutant
(Source: Extracted from WP No A120: Accepting and maintaining old customers and assessing contract risks - Audit file in 2021 of XYZ Co., Ltd at HSKV)
Since company XYZ is an old customer, HSKV will consider additional changes compared to the previous year, specifically as follows:
Table 2.2: Information about XYZ Co., Ltd
(Source: Extracted from WP No A120: Accepting and maintaining old customers and assessing engagement risks - Audit file in 2021 of XYZ Co., Ltd at HSKV)
The auditor considers the matters noted from the previous audit and related information:
Business Registration Certificate / Business Registration
Contents of transactions with related parties
Transactional banks (borrowing or financing)
Sales methods (selling for cash collection, deferred payment, selling through agents, wholesalers, retailers )
Major goods, materials, and services are usually purchased
Applicable accounting standards and regimes
Official procedures/regulations on internal control
Operational regulations related to sales, purchase, production (manual/SOP)
Changes that have occurred since the previous financial year or the customer's intentions within the next 1 year
- Producing, manufacturing, processing and assembling parts, details and components Electrical and electronic products - No
(Source: Extracted from WP No A120: Accepting and maintaining old customers and assessing engagement risks - Audit file in 2021 of XYZ Co., Ltd at HSKV)
The auditor also needs to assess the independence or other ethical issues Conflict of interest problems can be significant; HSKV identifies that XYZ did not cause difficulties as competitors of the new client
Table 2.5: Review of professional competency and integrity of customer
Content Have No N/A Notes/Description
2 Integrity of the audited entity and other material matters
Does the audited report on the previous year have an unqualified opinion? v
Is there any indication of a repeat of the matter that led to such an audit opinion this year? v
Are there limitations on the audit scope leading to the qualified/disclaimer audit opinion on this year's FSs audit? v
Is there a problem in identifying the real owner of the entity? v
Is there a member of the BOM/BOD who doubts audit risk? v
7 Matters of note from the previous year's audit
8 Check information related to enterprises and leaders through the media mass media (newspapers, magazines, internet, etc.) Pay attention to adverse information related to customers.
9 What are the required services and reports and the date they were completed.
10 Describe why the company wants audited financial statements and which stakeholders need to use them.
Release the report before December 31, 2020
1 Foreign-invested companies should be subject to mandatory audit
2 The company needs to report the audit to the authorities such as Tax, Department of Planning and Investment,
3 The company needs to make an audit report for the company's annual BOD meeting
The audit report on the financial statements for the financial year ended December 31, 2020 of Party A is
Do any doubts arise in working time related to the integrity of the BOM? v
Enterprise is in a special legal area, with a sharp decrease in profits v
Is there a problem related to the serious non- compliance with the law by BOM? v
Is there great doubt about the company's ability to continue as a going concern? v
Are there any adverse issues, lawsuits, unusual disputes, or material risks related to the business's activities? v
Is there any indication that the client is involved in money laundering or criminal activities? v
Is there a problem with the client's operating or business practices that cast doubt on reputation and integrity? v
(Source: Extracted from WP No A120: Accepting an engagement - Audit file in
2021 of XYZ Co., Ltd at HSKV)
After considering accepting the engagement, the auditors should send an engagement letter to all new clients and to existing clients to whom no letter has previously been sent as soon as a suitable opportentityy presents itself At the same time, appropriate levels of staff are required to facilitate direction, supervision and review of more junior team members’ work The result was presented on the WP A210 to A290 – Accepting audit engagement
XYZ Co., Ltd is a long-term customer of HSKV with nearly 10 years of cooperation After assessing the business performance of the customer, HSKV identifies the risk level of the engagement is low After the acceptance of the audit engagement, the BOM of HSKV allocated the suitable manager-in-charge for the audit engagement and set timing for the fieldwork The decision of selecting audit manager is made under evaluation of independence, the prior audit documents and records and requirement of the client The senior-in-charge, associates and apprentices are chosen by manager-in-charge Then, the members of the audit team for company XYZ include:
Table 2.6: Audit team members at client XYZ
Member of BOM Tran Quang Minh
Practicing auditor signs audit report: Nguyen Van Quang
Audit assistant 1: Tran Thi Tuyet
Audit assistant 2: To Thi Thuy Linh
Audit assistant 3: Le Thanh Thao
Audit assistant 4: Vu Thi Thuy Linh
(Source: Extracted from WP No A260: Commitment to the independence of audit team members - 2021 audit file of XYZ Co., Ltd at HSKV)
After fully considering the relevant factors, the auditor will conclude the acceptance and retention of the audit client:
Table 2.7: Accepting an audit engagement
Conclusion: The sufficient and appropreate procedures have been performed to ensure the audit engagement is under the regulation and code of ethic
According to the knowledge of XYZ, in addition, the company is gradually complete the internal control system, HSKV identify the level of risk is Medium
Mr Tran Quang Minh - Vice president 15/8/2021
(Source: Extract from WP No A120: Accepting an audit engagement - Audit document 2021 XYZ Co., Ltd at HSKV)
After finding out the above issues, the auditor set a meetings with customers on related issues, and terms to be committed, thereby signing engagement The audit engagement is an important legal basis for establishing HSKV's rights and obligations to customers The audit engagement also stipulates the content of the work to be done, expected in terms of time and cost to conduct the audit The audit engagement is saved in index A210: "Audit engagement"
2.2.1.2 Understanding the entity and its envirionment
The auditors obtain the understanding of the entity through the basic information:
- Main business lines: XYZ is mainly manufacturing printed circuit boards and electronic components The main domestic customers are large enterprises such as Brother VN, Canon VN Customers Foreign products are mainly companies in the same group as Shintech (HK), Aiden (JP) and other traditional customers of the group such as KYOCERA DOCUMENT TECHNOLOGY COMPANY (H.K) LIMITED; TAMAGAWA HONG KONG LIMITED…
Table 2.8: Type of business organization of XYZ
- Accounting policy: The FSs are prepared in Vietnam Dong (VND), according to the historical cost basis and under Vietnamese accounting standards, accounting regime for enterprises and relevant legal regulations XYZ applies Circular 200/2014/TT-BTC from 2015 for accounting purposes Circular 53/2016/TT-BTC dated March 21, 2016 amending and supplementing a number of articles of Circular 200/2014/TT-BTC
2.2 Type of ownership and management apparatus
(5) Describe the organizational structure of the enterprise(describe verbally or graphically) (including departments, branches/representative offices/stores, member units; )
The company is run by the General Director The company is not divided into separate departments but can generalize the main divisions: Accounting Department Sales Department Marketing Department Production Department.
(1) Type of ownership:(Family company, Joint stock company, State company…If it is a listed company, from what year, on which exchange )
(2) Owning a business: (Information about shareholders and main members owning the enterprise (owning from 5% of charter capital))
The owner of the Company is Aiden JP Co., Ltd; Shintec Engineering Co.,Ltd;
Table 2.9: Understanding the accounting policies
(Source: Audit document for 2021 XYZ Co., Ltd at HSKV)
Conclusion: There is no risk of material misstatement at the FSs and assertion levels Overall, the company's operations and financial position are stable
To find out transactions related to the inventory cycle, and to prepare for the implementation (test of control, substantive tests) auditors obtain understanding about the inventory cycle as follows:
3 Understanding of applicable accounting policies
General information about applicable accounting policies includes, but is not limited to, the following:
(1) The accounting policies applied to significant transactions (revenue, inventory, cost of goods ) Accounting Estimates
Inventories are measured at the lower of cost and net realizable value The cost of inventory includes the cost of direct materials, direct labor, and manufacturing overhead, if any, to bring the inventory to its current location and condition The cost of inventories is determined using the weighted average method Net realizable value is determined at the estimated selling price less the estimated costs of completing the product and any marketing, selling, and distribution costs incurred
Provision of inventories is made in accordance with current accounting regulations Accordingly, the Company is allowed to make provision for devaluation of obsolete, damaged and inferior inventories and in case the cost of the inventories is higher than the net realizable value at the balance sheet date accountant.
(2) Types of accounting estimates (data sources, reasonableness of provisions for receivables, provision for inventory, depreciation, etc .):
- Allowance for devaluation of inventory: Allowance for devaluation of investments in subsidiaries is made according to the provisions of Circular No 228/2009/TT-BTC dated December 7, 2009 of the Ministry of Finance on “Guidelines on the setting up and using provisions for devaluation of inventories, loss of financial investments, bad debts and warranty of products, goods, construction works at the enterprise", Circular No 89/2013/TT-BTC dated June 28, 2013 of the Ministry of
Finance on amending and supplementing Circular No 228/2009/TT-BTC and current accounting regulations.
Table 2.10: Understanding the inventory cycle
(Source: Audit documents and record of XYZ Co, Ltd at HSKV)
From there, auditor collect the client’s information to describe the inventory cycle and review and design key tests as in the Apendix 1 and perform test as Apendix 2
1 Understanding of key business aspects related to inventory, cost and cost of goods
- Electronic components, phones, cars classified by customers.
- Electronic components are processed by customers.
- Work in progress are components that have not been fully assembled
- The stages of the production process depend on each customer and each order
- Workers perform production in 2 shifts/day: shift 1: 8am - 5pm; 2nd shift: 8pm – 5am
(5) Internal rotation of inventory between departments:
- There are import and export slips and signatures of relevant people.
(1) Information on inventory types (Main inventory types by materials, tools, work in progress, finished products, goods ) and characteristics and properties of each type (in terms of size, value, popularity, shelf life, seasonality, etc.):
- The components are diverse in size, so finished products and semi-finished products are also diverse However, the components depend on customer needs, characteristics.
(2) How to store and store inventory (location, characteristics of warehouses, owned or rented warehouses, consignment, etc and security measures for high-value inventory that is easy to lose) stealing – if any):
- Inventory is kept at the company's warehouse, which is regularly managed by the warehousekeeper and reported to the superior when required In addition, the company also has 24/24 security, so security measures are guaranteed
(3) Production information: production capacity of enterprises, factors affecting the ability to expand and maintain production, product production time and stages of the production process:
Assessment of the audit practice of inventory in an audit of FSs at HSK Vietnam
Company XYZ is a long-term customer of HSKV, auditor always fully updates customer information in time and prompt manner throughout a financial year The
In September 2021, the Company overstated the value of raw materials used to produce finished products (finished products sold to Nichicon (Hong Kong) when calculating the cost of two product codes ZSFLF22IB-VA and ZSFLF22IE-VA with the amount of 652,401,621 VND and 13,048,032,398 VND respectively The reason is that the Company incorrectly determined the ending inventory of raw materials used to produce the above 2 finished products The cost of the above products is recognized in excess with the corresponding amount
The company manufactures two (02) products with code ZSFLF22IB-VA and forty (40) products with code ZSFLF22IE-VA The company sold two (02) ZSFLF22IB-VA products
Accordingly, we recommend the adjusted entry:
Cr Acc 632 – Cost of goods sold 652,401,621 VND
Cr Acc.154 – Work in progress 16,373,051 VND
Cr Acc.155 – Finished products 13,048,032,398 VND
Agree with the Auditor's opinion The company adjusted in October 2021
The company has adjusted consideration to accept the customer is also carried out strictly according to the steps in the company's instructions and a questionnaire to assess the ability to accept the customer is made with the full set of criteria Issues are always discussed continuously with the BOM of the audited entity and the BOM of HSKV to be able to promptly detect problems and make adjustments Therefore, HSKV considers customers quite carefully, limiting high-risk customers, ensuring the reputation of the company
Audit team is based on an assessment of the auditor’s independence The number of auditors dispatched in an audit team is usually sufficient and appropreate to complete sucessfully The selection criteria are all based on the auditor's qualifications The audit is always supervised and reviewed by a member of the Board of Directors to control the quality of the audit
The audit engagement made by HSKV has full legal validity because it is based on VSA No 220 “Audit Quality Control”, VSA No 210 “Audit Engagement” and based on The Civil Code Law The engagement is formed on the idea of an agreement between the 2 parties to confirm the rights and obligations of every party, avoid disputes arising before, during and after the audit specifically, the audit engagement at HSKV is often made in two languages, Vietnamese and English, additionally, for purchasers who require a engagement in Japanese, the corporate has carefully prepared the engagement Carefully, closely by the secretariat, and with full and meticulous review by superiors to confirm that there are not any misunderstandings thanks to language differences
About understanding the entiry and its environment
Obtaining understanding about customers at HSKV has been disbursed for an extended time through many alternative information channels, considering many alternative aspects and aspects, from macro to micro levels and specifically within the internal environment of client reckoning on the assembly and business lines of the customer, the auditor will specialize in looking for the proper environment to urge an overall view of the full enterprise and evaluate the customer's performance XYZ Co., Ltd mainly manufactures components, therefore the auditor pays special attention to the competitive market, staple supply, key customer and technology applied in production
About understanding the accounting policies
The accounting policies of customer has reflected the activities at the entity, this has been verified during the audit implementation stage In addition, the description of the inventory cycle is also reflected in a detailed, complete and scientific manner in order to better understand the inventory managed by the enterprise and the process of using and managing them In addition, the FSs reviews conducted by HSKV also collect information about the interim plan, which reduces the work required for the year-end audit
About preliminary analysis and going concern risk assessment
The application of analytical procedures within the planning allows the auditor to get preliminary knowledge before performing other audit procedures during the fieldwork stage of the audit The preliminary analysis of the auditor is dispensed to helps the auditor to work out risks and minimize other audit procedures, which implies saving audit costs while still ensuring the standard of the audit
Analytical procedures are applied to any or all items and accounts on the record, profit-and-loss statement and horizontal analysis or reasonableness analysis is performed this enables the auditors to generalize the customer's information The auditor will reasonably select variety of reasonable items to use analytical procedures reckoning on actual conditions
About internal controls and risk assessments
HSKV evaluates internal control based on 5 factors according to VSA by using a questionnaire according to the client’ business model to give specific and detailed assessments for each factor The auditor is very interested in the written policies of the customer's internal control and the actual operation because an appropriate internal control will not cause material frauds affecting the business results as well as the FS audit
For each audit, whether large or small, the determination of materiality is also a particularly important part of the audit process At HSKV, the auditor seriously determines the materiality level based on judgment, professional experience as well as the unique characteristics of each customer and the main audience of the audit report For each group of business types of customers, the auditors provide a basis for calculating materiality M separately, suitable for each customer, bringing efficiency to the audit
At each step of calculating materiality, the auditor explains the specific reasons why the ratio was chosen and the criteria to calculate the final applicable materiality The determination of materiality will be applied throughout the audit performance in each cycle, item and sampling steps
About summary of risk assessment
This step will help the auditor to once again evaluate in general and summarize in general the above results in the scientific and technical phase, as well as a review of the whole process to see if there is any difference any omissions in the work steps that have been performed The auditor will confirm one last time the risk of material misstatement may occur, to serve as a basis for the development of an appropriate audit program
In fact, HSKV encompasses a sample audit programme MAP designed for every specific item on the FSs, this program is meant supported the sample plan issued by the association VACPA and revised so as to match the characteristics of HSKV, the program has met the standards in line with the VSA regulations this is often also the premise for specific instructions on what to try to to supported the objectives to be achieved of the audit, especially useful for inexperienced auditors The plan is meant synchronously and fully, helping the corporate to save lots of time and money Additionally, MAP is additionally the premise for the BOM to review and re-evaluate the work performed by the auditors and is evidence to prove the audit procedures performed by the signatures of the auditors Thereby, it's clear that the auditor's commitment to responsibility in performing the audit procedures so as to confirm the achievement of the objectives
Although HSKV company almost does not design tests of controls, in this work, the auditors only perform the Walkthrough-test process to check that the control process in the enterprise is correct as described, and the documents are correct or not, without assessing the effectiveness of internal control
Although having audited at the customer for several years, fully understanding the accounting regime applied at the entity, each audit, the auditor considers and interviews the accountant about the applied policies that are according to the previous year or have changes and adjustments compared to the previous year to update and boost the records, additionally as determine whether these changes have a major impact on the audit
Perform analytical procedures and test of detail
RECOMMENDATIONS AND SOLUTIONS TO IMPROVE
The necessity of improvements
Currently, the world economy is still in the recovery phase after the impact of the covid 19 pandemic, and so is Vietnam Therefore, the need to restructure the economy becomes more urgent than ever For corporations, corporations, and businesses, transparency in FSs is now of more concern and attention This is a direct and important factor that helps to confirm and highlight the role of the audit, especially the audit of FSs, in the strategy of recovering the economy Therefore, audit services are required to increase in both quality and quantity as in the previous period
Facing the requirement to improve audit quality in a difficult economy, domestic auditing firms want to gain a firm position in the increasingly competitive and growing audit market The company must focus on innovating and improving the quality of services provided in general and audit services of FSs in particular Auditing processes always need to be updated and perfected to suit reality, with new standards, regulations, and legal documents So, it is necessary
Auditing inventory items is a difficult part of to contain There are many risks, so auditing companies need to improve the audit process more to reduce risks as well as save costs, at the same time create credibility with customers, and improve competitiveness in the market.
Principles for the improvement of the audit procedures for inventory
It is necessary to improve the process and method of auditing the Inventory item in the FS audit, however, the following basic principles must be adhered to:
- Firstly, the complete solutions on the process of auditing inventory items must be consistent with international practices, auditing and accounting standards of Vietnam; must be consistent with the operating principles of the audit firm, ensuring the development of the company;
- Secondly, the perfect solutions to the process of auditing inventory items must focus on the effectiveness, efficiency, and economics of audit activities;
Recommendations and solutions to improve the audit procedures of inventory at
- Fourth, the complete solutions to the process of auditing inventory items must have both theoretical meaning and ensure applicability in audit work;
- Fifth, the complete solutions to the process of auditing inventory items must ensure completeness and comprehensiveness, and at the same time, they must also ensure simplicity, efficiency, savings, and ease of use, easy for readers to understand and especially suit the current needs of customers
3.3 Solutions to improve the audit procedures of inventory at HSKV
Because the auditor has understanding about the operating environment and customers, on the WP, the auditor should list specific potential risks to guide the audit team in the process of performing the audit and providing the emphasis on reviewing and collecting evidence to clarify risks
Whether it is a new or old customer, the auditor should still try to arrange a reasonable time to meet face-to-face with the BOM and the accountant of the customer to facilitate discussion, as well as observe the actual situation of the enterprise
About preliminary analysis and going concern risk assessment
Not only preliminary data analysis of horizontal analysis and rational analysis, but auditors should also reconcile vertical analysis to assess the proportion and influence of the item on the overall, and analyze the ratios Finance helps to analyze the development trend of enterprises, and check the financial situation of enterprises Preliminary analysis on many aspects also helps the auditor to comprehensively assess the customer's performance and orient the audit to take place in the right process
In addition, the auditor regularly reminds customers to send timely financial data to perform preliminary analysis, should not perform preliminary analysis during the audit implementation stage, then it will lose the orientation of the auditee preliminary analytical procedures
About internal controls and risk assessment
To effectively evaluate the internal control of the customer, the auditor can combine the use of the internal control report with the questionnaire system and flowchart The appliance of this method helps the auditor to possess an summary of control and to urge detailed information about each an element of control This guides the auditor to collect information and fully present the results of understanding the internal control regulation generally or an element of it Moreover, the work of formulating specific questions suitable to the characteristics of enterprises is vital for the auditor to evaluate control effectively One point to note is that the question system needs to be specific for each practice section Once the questionnaire has been developed, the auditor will rely on the information thereon and other information to comprehensively evaluate control the company should concentrate to having detailed instructions for implementers on the thanks to use symbols in flowcharts to form sure consistency in presentation and effective use for implementers
The company should present the MAP more concisely and understandably and should have more instructions and examples for how to perform the procedure Since then it will be easier for the audit leaders to choose the necessary procedures, and the auditors will also be easier to implement the MAP Thereby saving time and effort, and improving the quality of the audit
When performing sampling, the auditor should a population with alittle number of transactions but each transaction encompasses a great amount of cash, the auditor can select these transactions instead of choose a random sample On the opposite hand, some transactions with small amounts but unusual nature, at risk of errors also have to be noticed and sampled for review supported the characteristics of the item within the year and professional judgment, the auditor will select an affordable sample, helping to form the audit opinion more reliable
Specifically, for the inventory, the auditor can review a WP in previous years about the completion level of labor ongoing and recalculate the worth of them
Performing analytical procedures well can reduce the risk of assertions level as well as the number of samples for test of details So the auditor should perform this procedure thoughly in all three stages of the audit This is special meaning for auditing inventory of entity that have large proportion of inventory For XYZ, the auditor only recalculate inventory turnover without in-depth analysis or comparison to industrial data, same size companies Therefore, the auditor may not be able to identify abnormal fluctuations
To avoid pressure, HSKV should consider recruiting more personnel to ensure the time and quality of the audit In addition, improving the quality of auditor is also a necessary work for HSKV To do this, HSKV needs to continue the following tasks:
+ Training and supplementing new legal documents on accounting, auditing, and tax for auditors;
+ Actively participate in forums, on Accounting-Auditing to have the opportentityy to discuss and gain experiences between auditing firms;
+ Helping auditor have the opportentity to study and improve skills and knowledge
About keeping document on server
WP for each procedure should be presented separately to scan easily In addition, the audit manager should also regularly check the document carefully to ensure compliance with regulations and complete documents
3.4 Recommendations for improving of inventory audit at HSKV
In order to integate with the international principles and standards, Vietnamese accouting and auditing standard should be enhanced and updated regularly Moreover, audit quality should be focused on because it has significant impacts on other individuals and organizations
(b) To the Vietnam Association of Accountants àn Auditors (VAA)
VAA plays an important role in enhancing quality of a financial statement audit Members of associations should spend more time participating their workshop to update in improve technical expertise Such associations should also provide trainings to members top update their technical skills, on both Vietnamese and international topics
(c) To HSK Vietnam Audit Company Limited
HSKV should pay more attention on organizing training lessons to recruitment and post-recruitment Besides, HSKV should also encourage auditors to take benefit from training programs, as well as to take international certifications such as ACCA and ICAEW
Auditors must have a deep understanding of legal documents (circular, degree of accouting, auditing,…) It helps auditor increase the quality of the financial statement audits Auditors must strictly follow ethical standards, continously train their knowledge and responsibilitiy
3 Description of the cycle “Inventory, cost and price”
Use the narrative method or flowchart method to describe the sales cycle, receivables and cash collection of the business