CHAPTER II: THE PRACTICE OF AUDITING TANGIBLE FIXED ASSETS IN FINANCIAL STATEMENTS AUDITS PERFORMED BY ERNST & YOUNG VIETNAM COMPANY LIMITED .... The current status of auditing tangible
The necessity of the topic
In today's competitive landscape, understanding financial statements is more crucial than ever, especially in light of the US-China trade war and the COVID-19 pandemic These global challenges have heightened the urgency for financial statement audits, not just for businesses in Vietnam but worldwide, as companies seek guidance to navigate through these crises Consequently, auditing has evolved into a specialized field, serving as a vital resource for anyone involved in business.
The audit report serves to provide an objective assessment of the accuracy and fairness of an enterprise's financial statements, reflecting the true business results in key areas This transparency aids users in making informed decisions, ultimately preventing potential economic losses for both individuals and the broader Vietnamese economy.
Tangible fixed assets are crucial for understanding a business's production capacity, scientific development, and economic status These physical assets play a vital role in the sustainable and long-term growth of a company Although transactions involving tangible fixed assets are infrequent, they involve significant investments and financial risks Consequently, fixed assets represent a substantial portion of a company's financial statements, and even minor violations can have a widespread impact on the entire entity.
Understanding the significance of tangible fixed assets is crucial for the financial growth of a business With over three months of internship experience at Ernst & Young Vietnam Company Limited, I have gained valuable insights into their impact on a company's development prospects.
For my graduation thesis, I have chosen to focus on "Enhancing the Audit of Tangible Fixed Assets in Financial Statement Audits Conducted by Ernst & Young Vietnam Company Limited."
Literature review
As we entered a new decade in 2019, economists anticipated significant economic development; however, the Covid-19 pandemic delivered an unforeseen setback, adversely affecting both public health and economic potential Experts in Vietnam predict a three-year recovery period for the economy to regain its pre-pandemic growth momentum, while the global economy may face an even longer recovery In this challenging landscape, auditing firms play a crucial role in fostering global investment and sustainable economic growth by ensuring the accuracy of financial statements Auditors evaluate and correct financial data based on material aspects, enabling stakeholders to make informed financial decisions One critical indicator affected by the current economic climate is "Tangible fixed assets." Typically stable, these assets may be pledged, disposed of, or mortgaged by companies to sustain operations during tough times, potentially jeopardizing the going concern principle and negatively impacting the broader economy and accounting information users.
The significance of tangible fixed assets has led to extensive domestic and international research aimed at enhancing the auditing process for these assets A study conducted in 2017 by Klychova G., Zakirova A., Mukhamedzyanov K., and their colleagues focused on developing an audit system for fixed asset operations to boost business performance Utilizing a systematic approach along with replication, deductive, and comparative methods, the authors gathered audit evidence and documents to analyze the impact of fixed assets on enterprise operations They highlighted that employing analytical procedures can improve the quality of audit evidence collected However, the study noted that the application of these procedures remained theoretical, with EY Vietnam only implementing them at a preliminary level for fixed asset audits This research underscores the critical role of analytical procedures in auditing fixed assets.
In her 2019 thesis, Ms Dang Thi Giang examined the enhancement of fixed asset audits within financial statement audits at An Viet – Hai Phong Auditing Services Company Limited Utilizing both theoretical and practical research methods, she outlined comprehensive procedures for auditing fixed assets, specifically for Tien Phong Packing Corporation The study identified the strengths and weaknesses in the fixed asset auditing process and proposed several improvement measures, including advancing auditor qualifications through ACCA and ICAEW courses, refining audit sample selection methods, and applying analytical procedures Her recommendations were well-aligned with the company's needs at the time, contributing significantly to the overall fixed asset auditing process in the financial statement audits.
In Vietnam, various studies focus on enhancing the auditing process for fixed assets in financial statements Notably, Ms Du Mai Phuong's thesis, “Improving the Audit of Fixed Assets Operations in the Audit of Financial Statements at UHY Auditing and Consulting Services Company Limited,” stands out as particularly influential This thesis is relevant to me as it examines a client in the media sector, similar to JKL Company Limited Through her in-depth research conducted in 2012, I gained valuable insights into the media industry's development and JKL's specific context, enabling me to propose tailored improvements for auditing fixed assets as designed by EY.
I also have found a research thesis were written in 2021 by Mr Nguyen Khanh Duy Anh on the related to the topic that I have choosen which are the thesis:
This thesis explores the distinctions between auditing fixed assets under VAS and IFRS, enhancing my understanding of the accurate recording of fixed assets in light of recent accounting standard updates This knowledge contributes to a more precise analysis in my research.
In 2013, Ms Pham Thi Thu Ha conducted a pioneering research study on the audit of fixed assets, which significantly influenced my thesis Her work, titled "The Current Status of the Audit of Fixed Assets and Measures to Improve the Audit Process for Financial Statements, Specifically at An Phat Auditing and Consulting Company Limited," was groundbreaking at both Hai Phong University of Tourism and her company Unlike Ms Dang Thi Giang's thesis, Ha's research provided comprehensive recommendations for enhancing the financial statement audit process, with a particular emphasis on fixed assets The study is noted for its thorough theoretical and practical insights, offering reasonable recommendations within the business context However, there remains a need for innovative ideas to further advance the auditing process for fixed assets.
In summary, prior research has identified both the strengths and weaknesses of the host company, highlighting factors that influence the quality of fixed asset audits Additionally, it has proposed strategies to enhance audit efficiency However, the ongoing Covid-19 pandemic has adversely affected the potential for economic development, presenting new challenges for the auditing process.
I have observed that the audit processes at Ernst & Young Vietnam Company Limited are currently lacking efficiency I aim to explore this topic in greater depth to enhance my understanding and apply these insights in my future role at the company.
The objectives of the study
With a structure of three separate but complementary chapters:
Firstly, the thesis gives readers a basic understanding of the process of auditing fixed assets in financial statements audit
This article provides a practical analysis of the auditing of tangible fixed assets in financial statement audits conducted by Ernst & Young Vietnam Company Limited, focusing on a specific client to highlight the limitations of the auditing process.
Based on my practical experience gained during internships at two companies, I will provide recommendations to enhance the auditing of tangible fixed assets in financial statement audits conducted by Ernst & Young Vietnam Company Limited.
Research object and scope
This thesis focuses on the auditing of tangible fixed assets within financial statement audits conducted by Ernst & Young Vietnam Company Limited The study specifically examines the auditing practices of tangible fixed assets at JKL Company Limited, covering the period from December 31, 2014, to 2021, at the Hanoi branch of Ernst & Young.
Research questions
The thesis is built on two main questions:
- What is the practice of auditing tangible fixed assets of Ernst & Young Vietnam Company Limited?
- What are the solutions to improve auditing tangible fixed assets of Ernst & Young Vietnam Company Limited?
Research methodologies
Practical research methods encompass scientific observation, which involves directly observing the auditing process of fixed asset items conducted by Ernst & Young Vietnam Company Limited, and analytical methods that utilize existing theses and prior research to derive valuable conclusions.
Theoretical research methods encompass both theoretical analysis and synthesis, focusing on the collection of primary and secondary data related to the auditing of tangible fixed assets within financial statement audits This includes a specific examination of practices employed by Ernst & Young Vietnam Company Limited, highlighting key elements such as auditing standards and auditors' working papers.
- Field study: Directly conducting audit of fixed assets at JKL Company Limited.
Overall structure of the graduation thesis
The structure of the thesis includes essential elements such as the declaration, acknowledgments, table of contents, list of abbreviations, tables, introduction, conclusion, list of references, and appendix, along with three main chapters that form the core of the document.
Chapter I: The theories of auditing tangible fixed assets in financial statement audits performed by independent auditors
Chapter II: The practice of auditing tangible fixed assets in financial statement audits performed by Ernst & Young Vietnam Company Limited
Chapter III: Recommendations to improving auditing tangible fixed assets in financial statement audits performed by Ernst & Young Vietnam Company Limited
I would like to express my heartfelt gratitude to the management team at Ernst & Young Vietnam Company Limited, as well as the auditors, for their invaluable support and data during my internship Additionally, I extend my sincere appreciation to the leaders of the Banking Academy, particularly Asso Prof Dr Le Thi Thu Ha, for their guidance and encouragement, which were instrumental in the successful completion of my thesis.
THE THEORIES OF AUDITING TANGIBLE FIXED ASSETS
Characteristics of tangible fixed assets that affect financial statement
The global economic market functions like a miniature world, where each business is akin to a living entity requiring fixed assets as its vital foundation Observers often assess a business's "health" through its fixed assets, yet even the strongest organizations can face challenges, and skilled individuals may err To gain an objective understanding of a business's "body" and develop an effective treatment plan, it is essential to comprehend the nature, common pitfalls, and auditing processes related to fixed assets in financial statement accounting.
1.1.1 Characteristics of tangible fixed assets
Fixed assets are defined as significant resources utilized in production and business operations, distinct from current assets In economic terms, they refer to all valuable assets owned by an enterprise that have a useful life exceeding one year or one complete business cycle, particularly when that cycle spans a year or more.
In Circular 45 issued on 25 April 2013 divided fixed assets into two main groups including tangible fixed assets and intangible fixed assets:
Tangible fixed assets are physical items or systems made up of interconnected parts that fulfill specific functions To qualify as tangible fixed assets, they must meet three criteria: they are expected to generate future economic benefits, have a useful life of at least one year, and possess an original cost of 30,000,000 VND or more.
Intangible fixed assets are non-physical assets that organizations invest in, either through creation costs or operational processes To qualify as intangible fixed assets, these must meet three criteria: the expectation of future economic benefits, a useful life of at least one year, and an original cost of 30 million VND or more.
Fixed assets play a crucial role in the production and operational activities of a business, undergoing depreciation over time, which is reflected in business expenses Unlike regular employees, the condition of fixed assets remains stable unless they are dismantled, damaged, or upgraded One of the key challenges for businesses is accurately assessing the value of fixed assets and differentiating between financial and operating leases Therefore, it is essential for companies to employ accountants who possess expertise in fixed asset management and are well-versed in relevant regulatory guidelines.
1.1.2 Accounting for tangible fixed assets
Fixed assets are categorized into tangible and intangible assets, as outlined in section 1.1.1 The Ministry of Finance has provided specific guidelines in Circular 200/2014 to assist corporate accountants in recognizing these fixed assets effectively.
1.1.2.1 Record original costs of tangible fixed assets
Tangible fixed assets in an ordinary enterprise can arise from various sources, including new purchases, construction investments, assignments or transfers, gifts, promotions, untracked excess inventory, and other sources Circular 45/2013 from the Ministry of Finance provides specific guidelines for recording the historical costs of these assets This article will focus on the two most prevalent cases in enterprises: the formation of tangible fixed assets through new purchases and construction investments.
The original costs of tangible fixed assets formed by purchase
Formula to determine the original costs:
The original costs of tangible fixed assets due to new purchases
Invoice Value – Trade discounts or sales off or penalties (if any)
Costs of transportation , loading and unloading, costs of repairing, renovating, upgrading, installing and testing - Recalls of products and scrap due to trial run
Taxes (excluding refundable taxes); fees and charges in accordance with the law on fees and charges
Trade discounts, sales off, or penalties are deducted from the invoice value when applicable Additionally, reasonable expenses directly related to the purchase of tangible fixed assets incurred by agencies, organizations, or enterprises up to the point of asset handover must be considered If general expenses apply to multiple fixed assets, these should be allocated to each asset based on suitable criteria such as quantity or invoice value.
The original costs of tangible fixed assets formed from capital construction investment
The original costs of tangible fixed assets resulting from construction investment are determined by the final settlement value approved by a competent authority, as per construction investment laws If a property has been put into use but the settlement is still pending approval, the responsible agency or organization must record the project entry for tangible fixed assets from the date the Acceptance Certificate is issued In such cases, the original costs documented in the accounting records will be based on estimated values, which are prioritized according to specific criteria.
- Value determined according to acceptance certificate;
The approved project cost must be adjusted in the accounting records once a competent agency or individual finalizes the settlement This adjustment includes redefining the remaining value and accumulated depreciation of fixed assets in compliance with regulations If the project encompasses various items and assets without separate estimates for each, the tangible fixed assets' values should be allocated based on the approved finalization estimates for each item This allocation should be recorded in the accounting books according to relevant criteria such as construction area, quantity, and the detailed estimated value of each asset.
1.1.2.2 Accounts system for tangible fixed assets
According to Circular 200/2014, tangible fixed assets have account number
The 211 account includes six sub-accounts (2111-2115, 2118) that cover various categories of tangible fixed assets: Building and Architectural models; Equipment and machinery; Transportation and transmission instruments; Management tools and instruments; Long-term trees, working animals, and livestock; and Other fixed assets In a typical business financial year, fluctuations in the balance of tangible fixed assets are more common than those in intangible assets However, due to the significant value of fixed assets and their impact on a company's overall financial health, their balance tends to remain relatively stable Changes in tangible fixed assets can primarily be categorized into two types: increases and decreases during the reporting period.
The accounting entries for asset increases, much like their sources, are categorized into distinct types, each requiring a specific accounting scheme This article will outline the accounting diagrams for two common forms of asset increase: those resulting from new purchases and those arising from the completion of capital construction.
Increases due to new purchases
Diagram 1.1 Accounting for increases of tangible fixed assets due to new purchases
Source: Thien Ung Accounting Circular 200 Ministry of Finance Increases due to completion of capital construction
Diagram 1.2 Accounting for increases of tangible fixed assets completed by capital constructions Source: Thien Ung Accounting Circular 200 Ministry of Finance b Reductions of tangible fixed assets
Circular 200/2014 outlines various scenarios for the reduction of tangible fixed assets, including disposals, sales, conversions into tools and instruments, capital contributions, and other reduction cases These annual reductions are typically planned in advance by enterprise accountants, considering both the timing and reasons for the asset reductions This thesis will focus on the accounting processes related to the most common scenario: reductions of tangible fixed assets due to disposals and sales within a business period.
Diagram 1.3 Accounting for reductions of tangible fixed assets due to disposals
Source: Thien Ung Accounting Circular 200 Ministry of Finance
1.1.2.3 Depreciation of tangible fixed assets a Concepts and features
Tangible fixed assets experience depreciation as they are utilized, leading to a decrease in both their durability and the economic benefits they provide Consequently, accurate depreciation calculations are essential in the accounting process for these assets This calculation is typically conducted annually in December, prior to the closure of the accounting books.
Depreciation refers to the systematic assessment and allocation of an asset's value as it diminishes over time due to usage For tangible fixed assets, depreciation is accounted for as a production and business expense throughout their useful life This decline in value arises from the asset's involvement in production activities, natural wear and tear, or advancements in technology.
The process of auditing fixed assets item in financial statement audits
Tangible fixed assets represent a significant portion of an enterprise's total assets, making their audit a complex and crucial task in financial statement audits due to the high value of related transactions Auditors must approach this process with caution, whether using a systems-based or risk-based methodology The auditing of tangible fixed assets typically unfolds in three key stages: Audit planning, Audit fieldwork, and Audit finalization and reporting This article will detail these stages along with the objectives and foundational principles guiding the audit of tangible fixed assets within an enterprise.
1.2.1 Objectives and bases for auditing tangible fixed assets
Tangible fixed assets represent a significant portion of a company's total asset value, varying by industry and business type These assets provide insight into the condition of the enterprise's equipment and facilities, making them a crucial focus during financial statement audits.
The high cost of acquiring tangible fixed assets and the slow capital turnover necessitate a thorough audit of these assets This audit enables auditors to evaluate the economic viability and effectiveness of investments in tangible fixed assets, ultimately guiding investment strategies and optimizing funding sources for more effective asset acquisition.
Auditing tangible fixed assets is crucial for identifying errors in calculating original costs, repair expenses, and depreciation Such inaccuracies can result in significant discrepancies in financial statements, highlighting the importance of thorough asset audits for accurate financial reporting.
The allocation of depreciation for tangible fixed assets can significantly impact an enterprise's cost and profit targets, as it may be higher or lower than the actual value Additionally, failing to differentiate between repair costs that increase the original cost of fixed assets and those included in production and business expenses can create discrepancies in fixed asset valuations and overall business production costs.
Auditing tangible fixed assets is crucial in financial statement audits, as it provides auditors with reasonable and sufficient evidence to determine if the financial statements are presented fairly and accurately This process also enables auditors to evaluate the reasonableness of the company's business investments and offers valuable insights for developing a scientifically sound and effective business plan.
Evaluating a client's internal control is crucial for determining its effectiveness, which in turn supports the assessment of control risk associated with each item and cycle.
Gathering client information is crucial for auditors as it aids in the initial assessment of control risk and facilitates the preliminary identification of significant overarching risks that may impact the entire audit process, alongside specific risks associated with individual items or cycles.
Audit work is typically conducted by team leaders or senior auditors, who possess the necessary professional judgment and client insight Based on their findings, the audit team leader identifies key issues requiring attention and develops a tailored audit plan for each client.
Researching the audit client's legal obligations typically involves brief methods such as interviews, observations, and document collection within the company The evaluation of internal controls for fixed assets often relies on interviews or questionnaires While these approaches can save audit time, they may compromise quality and lead to inconsistencies.
In the final stage of audit planning, the audit team leaders establish materiality, with the audit director serving as the ultimate reviewer Key indicators for determining materiality typically include accounting profit before tax, revenue, and total assets.
The auditor selects specific criteria to establish the appropriate level of materiality based on the audit type However, this determination often relies on the auditor's experience and subjective judgment, which can result in varying materiality conclusions among different auditors, ultimately impacting the audit outcome.
Effective audit planning for fixed assets involves identifying six common potential errors that may arise during the audit process These errors can be categorized into two main areas: transaction-related errors, including completeness, existence, recordability, and cut-off, and financial statement preparation errors, which encompass accuracy and presentation.
Effective audit planning is crucial for identifying potential misstatements, particularly in the audit cycle of fixed assets This involves verifying the accuracy of pricing and the presentation of transactions related to fixed assets, ensuring that recognition is calculated correctly to avoid confusion.
To ensure accuracy in financial reporting, it is essential to verify the existence and completeness of fixed assets, confirming that actual assets align with those recorded in the entity's books Often, fixed assets may be overvalued, raising concerns about their true existence Consequently, auditors prioritize procedures that thoroughly assess the existence of these assets.
Overview of Ernst & Young Vietnam Company Limited
Ernst & Young (EY), a leading multinational professional services firm headquartered in London, is recognized as one of the Big Four auditing firms alongside Deloitte, KPMG, and PwC Recently, EY has pivoted its focus towards consulting, enhancing its strategic consulting capabilities and competing directly with established firms like Bain, McKinsey, and BCG Through strategic acquisitions and market shifts, EY has successfully broadened its market share across various consulting sectors, including operations, strategy, human resources, financial, and technology consulting.
EY functions as a global network of independent member firms, each recognized as a separate legal entity in their respective countries With a workforce of 270,000 professionals, EY operates over 700 offices across 150 countries, delivering a wide range of services including assurance, financial audits, tax solutions, and consulting expertise.
2.1.1 The process of formation and development
EY, a global leader in professional services, originated from a series of mergers among predecessor organizations, with roots tracing back to 1849 when Harding & Pullein was established in England Frederick Whinney joined the firm that same year and rose to a senior officer position by 1859, leading to a rebranding in 1894 as Whinney Smith & Whinney.
1903, the Ernst & Ernst company was founded in Cleveland by Alwin C Ernst and his brother Theodore and in 1906, Arthur Young & Co was founded by Arthur Young in Chicago
In 1979, Ernst & Ernst joined with Whinney Smith & Whinney to form Ernst
In the same year, Arthur Young's European offices merged with several major European companies, forming a member company of Arthur Young International, which was part of Whinney, the fourth largest accounting firm globally at that time.
In 1989, Ernst & Whinney merged with Arthur Young, forming Ernst & Young (EY) and marking a significant milestone in the accounting industry That same year, EY established its first representative office in Vietnam, paving the way for its expansion in the region On November 3, 1992, Ernst & Young Vietnam Company was officially founded under investment license No 448/GP from the Ministry of Planning and Investment, becoming the first consulting and auditing organization with 100% foreign investment in Vietnam In 2013, the company rebranded to EY, updating its logo from black and white to a distinctive yellow-gray design.
2.1.2 Functions, duties and business lines
The range of services provided by EY is diverse and highly competitive:
Financial and risk advisory services (Advisory)
Transfer pricing consulting services, transactions (Transactions)
Other special services: special services for Japanese businesses, family businesses… (Specialty Services)
In addition, Ernst & Young Vietnam Company Limited is a member of the Asia-Pacific region, Southeast Asia sub-region (ASEAN) of EY Global Within the
The EY Global ASEAN Sub-Region Governing Department serves as the primary decision-making body, overseeing the implementation of governance strategies that encompass quality control, risk management, and market development Its key responsibilities include ensuring the achievement of developmental goals and fostering high-quality human resources for local companies.
EY Vietnam establishes its reputation and success in the market by delivering high-quality professional audit services with a commitment to independence and objectivity The firm maintains a professional skepticism and adheres strictly to the ethical standards set by the Ministry of Finance Furthermore, EY has developed and implemented comprehensive global audit quality control policies that align with the International Standards on Quality Control (ISQC1) established by the International Auditing and Assurance Standards Board (IAASB), as well as the Vietnam Standard Quality Control (VSQC1), ensuring they meet specific business needs.
Each year, EY conducts its Global Audit Quality Review (Global AQR) program to assess the effectiveness of its audit quality control in relation to the economic conditions of the host country The findings are analyzed and evaluated internally, serving as a foundation for ongoing enhancements in audit quality, aligned with the highest professional standards.
2.1.3 The management structure of the company
At EY Vietnam, the management structure is organized into departments that share equal powers, rights, and responsibilities Employees, regardless of their service branch, experience career progression through a defined hierarchy, as illustrated in the accompanying diagram.
Diagram 2.1 Main auditor ranks at Ernst & Young Vietnam Company Limited
Source: Ernst & Young Vietnam Co., Ltd
- Staff: Audit/ consultant assistant group
- Senior: Auditor/ consultant team leader
- Manager: Audit/consultant team management person
- Senior Manager: Higher rank Audit/consultant management person
- Partner: Audit/consultant Director or Deputy Director
The career advancement pathway at Ernst & Young Vietnam Co., Ltd provides employees with a sense of security and clarity regarding their professional growth opportunities Below is a comprehensive overview of the various departments within the company.
The council members serve as the highest authority within the company, responsible for determining its strategic direction, investment strategies, and project initiatives They evaluate the annual financial statements and formulate plans to address any losses, while also establishing the company's management structure.
Control board: has the task of controlling the entire operation of the company to detect errors and weaknesses in the organization's structure and operation
Diagram 2.2 Management structure of Ernst & Young Vietnam
Source: Ernst & Young Vietnam Co., Ltd
This includes the General Director, the Deputy General Director and the Director of the Branch
The General Director is responsible for developing long-term business strategies, overseeing training and recruitment programs, and has the authority to make key operational decisions This role encompasses full responsibility for all company activities, ensuring compliance with legal obligations and accountability to the Council members regarding the company's performance.
The Deputy General Director assists the General Director in managing the division and executing delegated tasks, holding accountability for these responsibilities Each Deputy is assigned a specific service segment, focusing on maintaining and developing the business within their area Additionally, they oversee client relations to ensure the achievement of revenue growth targets established by the General Director for each period.
The Deputy Director also has the right to representative for the General Director in dealing with clients and stakeholders and responsible for that
The human resource structure has evolved, with the Deputy Director's job allocation also experiencing changes Responsibilities are increasingly distributed among more individuals to maintain high-quality work standards.
The Branch Director plays a crucial role in supporting the General Director by managing and coordinating branch activities to align with overall development goals Acting as the representative of the General Director, the Branch Director fosters relationships with clients, local agencies, and other stakeholders Additionally, they are responsible for regularly reporting to the General Director on branch-related issues, providing updates as needed, whether periodically or in response to specific requests from leadership.
The current status of auditing tangible fixed assets in financial statement
The primary goal of an equity audit at EY is to gather adequate and relevant evidence to verify the accuracy and fairness of asset valuations in financial statements Additionally, we incorporate information and documentation to support decision-making during the audit of related items and cycles EY has established specific procedures for auditing fixed assets, detailed in Appendix 1, to meet these objectives effectively.
EY Vietnam adheres to the current regulations of the host country, ensuring compliance with relevant legal documents such as accounting standards for tangible and intangible fixed assets, as well as financial lease fixed assets This includes following Circulars 200/2014, 45/2013, and 45/2018, which govern the management, usage, and depreciation of fixed assets for enterprises receiving state investment Additionally, EY takes into account the client's internal rules regarding the acquisition, management, disposal, and sale of fixed assets.
2.2.1 Auditing tangible fixed assets in financial statement audits performed by Ernst & Young Vietnam Company Limited
Vietnamese Auditing Standard 300 emphasizes the necessity for auditors to develop a comprehensive audit plan to facilitate an effective and timely audit process This standard outlines three primary stages of audit planning: strategic planning, overall audit plan, and audit program At EY, these stages are translated into specific tasks that ensure a systematic approach to auditing.
During the audit period, EY auditors will gather detailed insights into the client's operations, accounting systems, and internal controls This comprehensive understanding will help identify potential risks and determine the focus areas for the audit Specifically, for fixed assets, the auditors will concentrate on collecting relevant information to ensure a thorough evaluation.
To effectively understand a client's legal obligations, it is essential to gather pertinent information, including the rules and regulations, contracts, and minutes from the Board of Directors and Management Council meetings Additionally, reviewing legal documents such as capital contribution minutes and related documentation involving fixed assets and capital handover is crucial for comprehensive compliance and governance assessment.
EY assesses the overall economic conditions of the host country and delves into the specific economic potential of the client's industry This includes an examination of critical business aspects such as organizational structure, production processes, and capital allocation By gathering this information, auditors can evaluate the proportion of fixed assets within the client's total assets, ultimately determining the materiality of fixed assets' impact on the financial statements.
Vietnamese Auditing Standard 520 mandates that auditors conduct analytical procedures during the planning phase and while reviewing the reasonableness of financial statements At EY, the audit team leader and manager analyze collected client data to formulate the audit plan In the fixed assets section, these procedures provide auditors with a comprehensive understanding and highlight significant changes in the enterprise's accounting and financial policies for the year EY auditors favor specific analytical procedures to enhance their audit effectiveness.
Trend analysis, utilizing the horizontal analysis technique, involves comparing the current period's original costs with those of the previous period, as well as assessing accumulated depreciation and residual value This method also includes evaluating the total depreciation costs of fixed assets Should any abnormal fluctuations arise, auditors will investigate the underlying causes Additionally, if fluctuations remain unclear, EY will engage in client interviews to uncover reasonable explanations for these discrepancies.
Ratio analysis, specifically the vertical analysis technique, involves the auditor evaluating various financial ratios to assess a company's performance Key comparisons include analyzing the depreciation costs of fixed assets against their total value over two consecutive periods, examining the relationship between the total cost of sales (SCL) and fixed assets, and reviewing SCL trends compared to previous years Additionally, metrics such as return on assets (ROA) and the turnover ratio of fixed assets are essential for a comprehensive financial evaluation.
The auditor's primary role is to evaluate the accuracy and fairness of financial statements, focusing on all material aspects Consequently, assessing materiality and risk is crucial, serving as the foundation for the entire audit process.
Diagram 2.4 Materiality assessment and distribution of materiality estimates
Source: Ernst & Young Vietnam Co., Ltd
The auditors at EY begin by determining a preliminary estimate of materiality, using a percentage of benchmark indicators from Table 2.1 for the entire financial statements They subsequently allocate this initial estimate of materiality to each item within the financial statements This process allows the auditors to evaluate the actual level of error associated with the assets and compare it to the acceptable error threshold, enabling them to draw informed conclusions about the identified assets.
At EY, overall MTL are determined by the following ratio:
Table 2.1 EY Materiality Assessment Table
Source: Ernst & Young Vietnam Co., Ltd
When performing MTL determination, the auditor must perform the following work steps:
Distribute the initial estimate of item materiality
Evalua tion phase of results
Estimation of the combined error
Compare the combined error estimate with the original estimate or revise the original estimate for materiality
Step 1: Identify the criteria to be used to estimate materiality
Auditors gather essential information from various sources regarding clients and their needs to assess the overall financial statements of a business When most stakeholders rely on accounting data, the auditor establishes suitable criteria for evaluating these statements During interim audits, auditors may utilize estimates for the entire fiscal year, drawing from previous estimates and actual data available up to the midpoint of the audit period.
Step 2: Determine performance materiality (PM)
PM represents our initial assessment of what we consider significant for users of the financial statements and our preliminary estimate of materiality in evaluating whether the financial statements are materially misstated Additionally, PM guides us in shaping the overall scope of our audit procedures.
Determining PM requires the exercise of professional judgement Although influenced by many factors, it is driven by the:
Users of financial statements, including owners, major lenders, bondholders, and tax authorities, have distinct perspectives and expectations that are shaped by their understanding of the client and the operational environment These stakeholders analyze financial reports to assess the entity's performance, risk, and compliance, which ultimately influences their decision-making processes Recognizing these varying viewpoints is crucial for tailoring financial communications and ensuring transparency in reporting.
Choosing the right measurement basis is a matter of professional judgment, influenced by our perception of which financial statement measures—such as earnings, assets, equity, revenue, and expenses—are most significant to the users of those statements.
- Appropriate percentage to apply to the measurement basis
Step 3: Determine the tolerable error (TE)
RECOMMENDATIONS TO IMPROVE THE PRACTICE
Future development orientation of Ernst & Young Vietnam Company Limited
EY continues to dominate the auditing sector in Vietnam, maintaining its position as the top revenue-generating firm With its brand slogan, "Building a better working world," EY fosters a dynamic and efficient work environment that effectively addresses client needs.
EY has established a strong brand recognition in the auditing sector, ensuring that their name is synonymous with quality in this field The company prioritizes the human element, dedicating resources to train skilled and professional auditors adept at client relations Annually, EY organizes training programs for its staff, focusing on familiar audit certifications As of June 2019, EY Vietnam boasts 79 licensed auditors from the Ministry of Finance, with this number steadily growing.
EY prioritizes the human element while dedicatedly supporting clients across all dimensions In the near future, EY aims to expand its focus beyond familiar Japanese clients to include international clients Vietnam's resilient response to the Covid-19 pandemic has garnered global admiration, enhancing its appeal to foreign investors and driving up the demand for auditing services This presents both opportunities and challenges for EY Vietnam as it strives to establish itself as a leader in the auditing sector.
The fixed asset audit process designed by EY is essential for the integrity of financial statement audits, despite some limitations Its advantages foster confidence among users of the audited financial statements Consequently, the urgency to complete the audit process for fixed assets is heightened and should be grounded in the actual needs of society.
As Vietnam's economy continues to recover and develop post-2019, the demand for financial and accounting information is growing significantly Financial decisions now require heightened caution to mitigate risks, leading to a notable increase in the need for financial statement audits Key indicators such as Profit and Total Assets are of particular interest to stakeholders, as enterprises with stable assets are viewed as attractive investment opportunities for sustainable growth However, the landscape of independent auditing firms in Vietnam is limited, with most trust concentrated in audits performed by the Big Four, highlighting the urgent need for improving audit quality across the sector.
Despite EY's leading position in business audit revenue in recent years, the company must remain vigilant as audit quality among the Big Four can fluctuate Other independent auditing firms are also enhancing their talent pools, establishing their presence in the industry To sustain its competitive edge, EY needs to focus on improving employee capabilities and training high-quality auditors Additionally, it is crucial for the company to address its shortcomings by refining audit procedures for all components of financial statements.
To achieve sustainable growth, EY must prioritize not only internal business factors but also the quality of client service High-quality audits alone are insufficient if strong client relationships are not maintained, as this can lead to losing existing clients Learning from other Big Four firms, particularly Deloitte, which consistently emphasizes client-centric approaches, could greatly benefit EY Vietnam in enhancing its client relationships.
Principles and requirements for improving auditing tangible fixed assets in
The requirements of solutions improving auditing tangible fixed assets at EY
- In line with the current requirements and management level of EY and taking into account developments in the current context,
- In line with the characteristics of EY's business activities;
- Easy to understand, easy to implement and easy to master; and
- Ensure the balance between benefits and costs for audit activities
Principles of improving auditing tangible fixed assets at EY
- In accordance with the provisions of law related to the field of auditing in Vietnam;
- Paying attention to the effectiveness, efficiency and economics of audit activities;
- Ensure completeness, comprehensiveness and synchronization; and
- Carrying theoretical meaning and ensuring practical applicability in audit work.
Solution to improve auditing tangible fixed assets in financial statement
Clients audited by EY predominantly consist of large-scale manufacturing enterprises, where fixed assets are crucial for business operations and growth These assets not only signify production capacity but also reflect the integration of advanced technology, leading to reduced production costs and increased revenue Consequently, fixed assets serve as a vital productive force within the enterprise Accurate information on fixed assets enables users of accounting data to gauge investment trends and future industry development In an economic recovery phase, business managers often seek to enhance financial statements to attract investment capital.
Completing audit procedures, especially financial audits, is more critical than ever, as it directly impacts EY's reputation and standing in the auditing industry Ensuring excellence in these processes will reinforce EY's leadership in the field.
Based on the characteristics of each different client, the methods of describing internal control are different Currently, the three main descriptions are:
This report offers a comprehensive overview of the organization, design, and activities of internal control within the client's unit While the textual presentation provides detailed information, the lack of visual elements makes it challenging for readers to grasp the overall structure of the internal control system effectively.
The "Yes" and "No" multiple-choice question format offers significant advantages, including ease of use for respondents and straightforward comprehension for readers However, this method lacks flexibility, as it adheres strictly to a predetermined template.
A flowchart serves as a visual representation of an accounting information system, illustrating control activities associated with clients through standardized symbols While this method may offer significant internal benefits compared to other approaches, it necessitates that the designer possesses a comprehensive understanding and expertise in the field.
Proposal content and implementation roadmap
At EY Vietnam, the favored methods for audits are the narrative and questionnaire due to their efficiency and time-saving nature However, audits utilizing flowcharts offer superior insights into internal controls To enhance audit effectiveness, the company should adopt a combination of all three methods tailored to each client's specific needs.
-Narrative method: To avoid elusiveness, information must be presented in a fixed format, for example, according to the elements that make up internal control
Combining this method with two others proves more effective when a client's internal control is overly complex Furthermore, this report should be utilized exclusively by businesses with extensive operations, allowing auditors to effectively summarize the primary objectives of the client's internal control system.
The questionnaire method is essential for tailoring assessments to specific client groups, such as Japanese or Chinese businesses, and varies across sectors like production, trade, and information technology To ensure effectiveness, auditors must develop a detailed questionnaire system that aligns with the unique characteristics of each business type By implementing a standardized set of criteria for client classification, firms like EY can enhance the value of their questionnaires, leading to improved evaluations of clients' internal control systems.
The flowchart method, while challenging, is essential for auditors at EY, requiring annual training sessions to ensure proficiency among employees Mastery of this method enables auditors to gain a comprehensive understanding of clients' business activities and document circulation processes In situations where a unit's internal controls are advanced and complex, auditors should integrate various methods to effectively present the collected information.
Proposal content and implementation roadmap
Evaluating internal controls provides auditors with a comprehensive understanding of the business, enabling them to reduce risks and prevent material misstatements To enhance audit quality, EY should integrate various procedures, including interviewing fixed asset accountants and conducting observations of fixed assets.
Before engaging in control procedures, auditors must grasp the document circulation process related to fixed assets and the entity's regulations and policies This understanding enables them to assess the reasonableness of fixed asset management and the accuracy of information gathered during investigations and interviews with involved personnel Leveraging their extensive auditing experience, auditors can identify the client's strengths and weaknesses effectively.
To evaluate internal control, auditors must first define the objectives of the client's internal control system based on existing control procedures Subsequently, they conduct tests by selecting a "trace" sample of these procedures or by re-implementing them to verify their effectiveness in the client's operational environment Typically, auditors focus on verifying signatures for the approval of documents related to fixed assets.
Evaluating the effectiveness of internal control operations at a client is crucial for enhancing audit efficiency When control procedures are implemented effectively, they significantly reduce the required sample size and scope of control, thereby improving the audit department's performance However, this evaluation should only be conducted if the auditor's initial assessment of the client's internal control is deemed reliable.
For small audited units lacking effective internal controls, auditors should conduct extensive basic testing to reduce both costs and time, as assessing internal controls may not yield effective results.
3.3.2.1 Improving the application of analytical procedures
Vietnamese Standards on Auditing No 520 emphasizes the importance of the analysis process during audits to mitigate detection risks related to assertions Auditors are required to conduct a detailed examination to identify suitable audit procedures for specific objectives, assessing the effectiveness of each method Implementing analytical procedures at all three stages of the audit enhances overall efficiency, particularly in the allocation of depreciation expenses.
Proposal content and implementation roadmap