CHAPTER 1: THEORETICAL BASIC OF INVENTORY 1.1 Key areas of fraud risk when auditing inventory: The major risks of Inventory balances in the financial statements being misstated are due t
The necessity of the thesis
Inventory management and auditing are crucial for the sustainability and growth of manufacturing companies and the broader economy, significantly influencing financial statement audit outcomes Given the associated risks, it is essential to focus on inventory audits to enhance audit quality and ensure accurate audit opinions Recognizing the importance of non-current asset presentation, this thesis will explore the "Audit Procedure for Inventory by PwC at ABC Joint Stock Company."
Thesis objectives
Describe and analyse inventory audit procedures performed by PWC at ABC Joint Stock Company
Analyzing and assessing for the audit procedure for inventory at PwC Vietnam.
Thesis method
Apply the knowledge learned in university
Collect related data through textbooks, current accounting/auditing standards and internet
Collect information from audit client audited in PwC’s data
Consult auditors in charge and instructors.
Subject and the scope of the thesis
Subject: the process of auditing inventory performed by PWC
Scope: Data and information obtained from the audit file of client ABC for the year ended 31/12/2022 by PwC.
Structure of the thesis
The report will be included 4 chapters:
Overview chapter: The necessity of the thesis, thesis objectives, report method, subject and the scope of the report
Chapter 1: Theoretical basic of inventory
Chapter 2: Introduction to PwC Vietnam
Chapter 3: The audit procedure for inventory
Limit of the thesis
For confidentiality, the subject's name in the report has been changed and for illustrative purposes only
No job is without challenges, and that includes writing this report and the internship
Some limitations made creating this report a bit difficult
There was not enough time to cover all the patterns
For reasons of confidentiality, much information has not been disclosed
Inability to observe the application of the laws and procedures followed during the examination
Commented [MK3]: đổi thành chapter 2 Commented [J74R3]: Done ạ Commented [MK5]: Viêt đầy đủ tên chương Commented [J76R5]: Done a
THEORETICAL BASIC OF INVENTORY
Key areas of fraud risk when auditing inventory
The major risks of Inventory balances in the financial statements being misstated are due to:
Inventory that actually belongs to third parties being included in the financial statements
Inventory that does not exist being included in the financial statements E – Existence
Not all inventory that exists being included in the financial statements C – Completeness
Inventory being included in the financial statements at full value when it is obsolete or damaged V – Valuation
Accurate inventory valuation is crucial for financial statements, as miscalculations or using costs that exceed the net realizable value can lead to significant discrepancies Ensuring that inventory is reported at the correct value helps maintain the integrity of financial reporting and provides a true reflection of a company's financial health.
Inventory which has actually been sold is included in the financial statements CO – Cut off
Audit Assertions for Inventory
Existence Actual inventory balances exist as of the reporting date, in accordance with the financial statements
Completeness All inventory transactions that were carried out during the accounting period are included in the inventory reported on the balance sheet
The organization actually controls all of the inventory listed on the financial accounts as of the reporting date
Valuation Inventory balances accurately depict a product’s economic worth
The notes to the financial accounts adequately reveal inventory and classify it correctly.
Audit procedures for Inventory
Existence or occurrence assertions are used in inventory audits to determine if the inventory listed on the balance sheet genuinely exists and whether inventory transactions actually occurred
Test existence in physical inventory observation count
Observe the client’s annual inventory counting methods
Choose a few samples from the inventory summary record
To ensure that the inventory on hand matches the record, measure the actual inventory
Choosing a sample of additions of inventory during the year
Vouching them to the supporting documents such as Goods Received Notes (GRNs), Goods Delivery notes (GDNs) or supplier notes b Completeness
The completeness assertion in inventory audits ensures that all inventory purchases and sales are accurately recorded, and that all inventory is reflected in the year-end balance sheet A significant risk in inventory management is the potential for unrecorded merchandise purchases, which can occur due to intentional fraud or unintentional errors, leading to an undervaluation of inventory.
Pick up a sample of inventory received notes (or good received notes) and
Follow up with a detailed inventory listing
The general ledger and detail inventory listing were reconciled
Test of completeness in inventory count procedure
Observe the year ended inventory counting procedures of the client company
Select a sample of items that counted in the client’s store or warehouse
Follow up the counted items with detailed inventory listing c Rights and obligations
Completeness assertion checks if all the inventory listed on the balance sheet actually belongs to the business during the inventory audit
Ensure that any third-party inventory is verified and appropriately segregated from other goods during the inventory count, and confirm that it is not included in the balance sheet.
To confirm that the inventory truly belongs to the company, check the purchase invoice or purchase agreement d Valuation
The valuation assertion evaluates the correctness of the stock quantities in the client's account and the suitability of the client's method for determining the costs associated with different products for inventory valuation.
Inventory valuation is determined by the lower of cost or net realizable value, a crucial guideline for accurate financial reporting Auditors must ensure that clients adhere to this principle to prevent potential misrepresentation in financial statements.
In this scenario, overstatement is likely, as clients sometimes assess value based on the total cost of inventory, including outdated items, which typically have a net realizable value lower than their cost.
When evaluating inventory, it is crucial to consider the client's overhead allocation, particularly during the assessment of final products and work-in-progress in the manufacturing process.
Assess to determine if the client’s technique of inventory value is suitable
Recalculate the client’s inventory valuation
Ask the relevant staff, such as the manufacturing and warehousing staff, if there is any outdated inventory present
Ensure that the outdated inventory is clearly marked and kept apart from other stock
Ensure that the market value (if any) has been applied to the cost of the outdated inventory value e Summary
The existence and valuation of inventory are critical concerns that demand careful consideration Overstating inventory at the end of an accounting period can lead to an understated cost of goods sold, thereby inflating net profit This issue is particularly problematic as companies frequently tie management incentives to net profit figures.
Audit of Inventory and relating to Warehousing cycle
The audit of the inventory and warehousing cycle can be divided into five activities within the cycle:
1 Acquire and record raw materials, labor, and overhead
2 Internally transfer assets and costs
3 Ship goods and record revenue and costs
The auditor begins by understanding the internal controls related to procurement, payment, and payroll processes They then conduct tests to evaluate these controls and perform substantive transaction tests in both the procurement/payment cycle and the payroll/personnel cycle These tests ensure that acquisition transactions are accurately reported and that the controls affecting raw material procurement and production costs are functioning effectively Additionally, auditors must verify that expenses are accurately recorded in the payroll and personnel cycle, especially when direct labor represents a significant portion of the produced inventory.
Table 1.1: Functions in the Inventory and Warehousing Cycle
The fourth and fifth tasks outlined in Table 1.1, which involve processing raw materials and storing finished goods, fall under internal inventory transfers Clients maintain distinct cost accounting records for these operations, separate from other cycles, and these records are evaluated during the inventory and warehousing cycle audit.
Ship Goods and Record Revenue and
The final function outlined in Table 1.1 involves tracking shipments and their associated costs Auditing the sales and collection cycle encompasses procedures that ensure the accuracy of credits to inventory documented in perpetual inventory master files, allowing auditors to understand and evaluate internal controls related to the recording of shipments within that cycle.
Auditors must verify the existence and accurate counting of reported inventory by observing the client's physical inventory count, which serves as essential evidence for confirming inventory presence The failure of auditors to detect Phar-Mor's deception underscores the critical importance of physically inspecting inventory, particularly when it holds significant relevance to financial statements.
To determine if a client has effectively utilized an inventory technique that adheres to accounting standards and aligns with previous years, it is essential to verify the costs used for inventory valuation Price tests serve as audit procedures to validate these expenses Additionally, auditors must perform inventory compilation checks to ensure the accuracy of physical counts, the correct extension of inventory quantities and prices, and that the total inventory aligns with the general ledger balance.
Table 1.2: Acquire and Record raw materials, Labor, and Overhead
Audit of Cost Accounting
Cost accounting controls encompass the procedures that influence physical inventory and the tracking of costs from the initial request for raw materials to the completion of the manufactured product and its subsequent transfer to storage These controls can be effectively categorized into two primary groups.
1 Physical controls over raw materials, work-in-process, and finished goods inventory
2 Controls over the related costs
To protect against theft and misuse, businesses implement physical controls over their assets by restricting access to storage areas for raw materials, work-in-progress, and finished goods Managers often assign specific individuals to oversee inventory custody, ensuring its safety To further prevent misuse, authorized prenumbered documents are utilized to manage inventory movement, with copies sent directly to accounting to maintain separation of duties An example of such documentation is an authorized materials request used to obtain raw materials from the storeroom.
Another helpful cost accounting control is perpetual inventory master files kept by people who do not have access to or custody of the assets
They offer a record of the inventory that is currently on hand, which is utilized to start production or buy more supplies or products
They offer a history of raw material consumption and finished goods sales that may be checked for outmoded or sluggishly moving commodities
When there are discrepancies between actual counts and the numbers depicted on the everlasting listings, they offer a record to identify who is to blame
In order to help management with pricing completed items, controlling expenses, and costing inventories, appropriate internal controls that combine production and accounting data are crucial
Understanding internal controls within the cost accounting system is crucial for auditing inventory, as it involves evaluating planned control risks and defining the testing scope Auditors must design tests for both controls and substantive transactions to achieve audit objectives related to inventory costs Key components of cost accounting that auditors focus on include cost measurement, allocation, reporting, and analysis.
2 Documents and records for transferring inventory
Physical controls over raw materials, work-in-progress, and finished goods are primarily assessed through inspections by auditors They evaluate the security of raw material storage, checking for locks and the presence of inventory custodians to deter theft Auditors also inquire about the custodians' responsibilities regarding inventory oversight If they find that physical controls are inadequate, making inventory counting difficult, they should enhance monitoring of physical inventory tests to ensure accurate counts are achieved.
When transferring inventory, auditors prioritize documented transfers, ensuring the accuracy of quantities, descriptions, and dates of all recorded movements Accurate documentation of real transfers is essential for compliance Utilizing standardized bar codes enhances traceability, allowing customers to easily track product flow through manufacturing processes with laser bar-code scanners and advanced technologies.
Before auditing inventory transfers, auditors must understand the client's internal procedures for documenting these transfers A solid grasp of internal controls enables auditors to effectively perform tests of controls or substantive testing by reviewing documents to ensure that the flow of items from raw material storage to production meets accuracy goals For example, they may track raw material requests, verify proper approvals, and compare quantities, descriptions, and dates against perpetual inventory master files to confirm effective controls and accurate recording When controls are automated, some testing can be conducted electronically Additionally, auditors can ensure that all finished products were delivered to storage by comparing production records with perpetual inventory master files.
The reliability of perpetual inventory master files significantly affects the timing and extent of an auditor's physical inventory inspection When these records are accurate, auditors can conduct physical inventory checks before the balance sheet date, potentially saving both the client and auditor time and money through cycle counts or interim physical inventories conducted throughout the year Additionally, if the client maintains precise perpetual inventory records and the auditor assesses the control risk related to physical inventory observation as low, the auditor can reduce the frequency of physical inventory count assessments.
Auditors verify perpetual inventory records by evaluating supporting documentation for changes and deletions in inventory quantities within the master files They examine inventory activities, including the addition of raw materials, reductions for production use, and adjustments for finished goods as they are manufactured or sold Once auditors assess the adequacy of inventory internal controls and the related control risk, evaluating the accuracy of the perpetual inventory master files becomes straightforward While reductions in finished goods are tested during the sales and collection cycle, raw material purchases are verified within the acquisition and payment cycle.
Many businesses maintain electronic records of traditional documents, linking the perpetual inventory system to various accounting cycles To reduce control risk, auditors can assess computer controls, which not only minimizes the need for substantive testing but also enhances overall audit efficiency.
Accurate unit cost records are essential for fairly reporting inventories of raw materials, work-in-process, and finished goods This accuracy relies on precise cost information for direct labor, manufacturing overhead, and raw materials To maintain correct cost data, it is crucial to integrate customers' cost accounting records with production and other accounting records.
Before assessing inventory cost data, auditors must thoroughly understand the internal controls within the cost accounting system This process can be time-consuming due to the complex interplay of expenses with accounting records across three additional cycles: acquisition and payment, payroll and personnel, and sales and collection.
The verification of internal cost accounting records mirrors the approaches used in auditing purchase, payroll, and sales transactions, contingent upon auditors' understanding of the internal controls affecting these records To enhance audit efficiency and minimize redundant testing, auditors typically incorporate cost accounting records into their examinations of acquisition, payroll, and sales transactions During acquisition audits, it is essential for auditors to track the units and unit costs of raw materials against the perpetual inventory master files and reconcile these with the total costs in the accounting records In payroll audits, auditors should directly reference the payroll summary and link it to job cost records, especially when clients maintain payroll cost data for multiple jobs.
Management's assumptions regarding overhead allocations can significantly impact inventory unit costs and valuation fairness, making it challenging for auditors to evaluate the reasonableness of manufacturing overhead costs assigned to work-in-process Auditors must determine if these overhead allocations are reasonable, consistent, and compliant with accounting standards.
Management typically allocates overhead by calculating the overhead rate based on the total actual manufacturing overhead costs divided by the total actual direct labor costs Auditors can easily assess the appropriateness of this rate since they review direct labor within the payroll and personnel cycle, as well as total production overhead during purchase and payment cycle tests However, if manufacturing overhead is allocated based on machine hours, auditors must verify the client's machine records to ensure the accuracy of the reported machine hours.
Due to the significant differences in internal controls over cost accounting data across various businesses, specific control tests are not detailed in this article Auditors should assess their understanding of the cost accounting records and determine the extent to which these records can reduce the necessity for substantive tests, thereby allowing them to design appropriate testing procedures.
Physical Observation of Inventory
1.6.1 Analytical procedures for the Inventory:
Table 1.4: Analytical Procedures for the Inventory and Warehousing Cycle
Auditors often conduct tours of a client's inventory facilities, which encompass areas such as receiving, storage, manufacturing, planning, and record-keeping, to assess the inventory management process It is essential for a knowledgeable supervisor, well-versed in production and any changes to internal controls and procedures from the prior year, to guide this tour.
Auditors evaluate client business risk to see if such risks raise the potential of major misstatements in inventory while learning how the client's company and industry affect inventory
The auditor assesses performance materiality and inherent risk related to inventory, which is critical for manufacturing, wholesale, and retail businesses, after analyzing client business risk Typically, auditors find that companies with significant inventory levels face a high inherent risk.
When inventory is kept in several locations, the costing process is complicated, and there is a high risk of inventory obsolescence, auditors are frequently more concerned about misstatements
Auditors primarily focus on internal controls related to permanent records, physical controls, inventory counts, and the compilation and pricing of inventory when assessing control risk The nature and scope of these controls can vary significantly from one company to another.
Auditors must ensure the reliability of a client's inventory counting procedures and verify the accuracy of the client's assertions regarding the quantities and physical condition of their stock, as mandated by auditing standards.
To meet the requirement, auditors must:
Be present at the time the client counts their inventory for determining year end balances
Observe the client’s counting procedures
Make inquiries of client personnel about their counting procedures
Make their own independent tests of the physical count
Understanding the roles in physical inventory counts is essential for auditing compliance The client is responsible for establishing procedures for accurate physical inventory counts, executing the counts, and maintaining documentation Meanwhile, auditors are tasked with evaluating the client's methods, conducting test counts, and determining the adequacy of the physical inventory.
When inventory is stored in a public warehouse or managed by external caretakers, a physical audit may not be required In such cases, auditors can verify inventory with the custodian It is essential for auditors to take additional steps, such as examining the custodian's inventory procedures, obtaining a report on the custodian's control measures from an independent accountant, and, if possible, observing the physical count of the inventory, especially if the goods held by the custodian represent a significant portion of current or total assets.
Customers must conduct regular physical inventory counts, though not exclusively on an annual basis, regardless of their inventory record-keeping methods These counts can take place at the balance sheet date, at intermediate points, or periodically throughout the year However, the latter two approaches are only appropriate when there are adequate controls over the perpetual inventory master files.
Effective controls over a client's physical inventory count include clear client instructions, supervision by designated company staff, independent verification of counts by other personnel, reconciliation of physical counts with perpetual inventory records, and proper management of count sheets or tags used for recording inventory.
Auditors need to understand the client's physical inventory count controls before conducting the inventory count This understanding is crucial for evaluating the effectiveness of the client's operations and allows auditors to offer proactive recommendations If the client's inventory count controls are inadequate, auditors will require additional time to verify the accuracy of the physical count.
The accuracy of perpetual inventory master files is crucial for auditors to decide whether a physical inventory count can occur before year-end During this interim count, auditors review the inventory and assess transactions recorded in perpetual inventory from the count date to year-end, approving the process only if internal controls are effective If the perpetual records are accurate and the necessary controls are functioning properly, clients may not need to count every inventory item at year-end.
Determining the appropriate sample size for inventory counts can be challenging for auditors, as they prioritize monitoring client processes over selecting specific items for testing To simplify this process, auditors may consider using the number of hours spent on physical observation as a more effective measure of sample size, rather than focusing solely on the quantity of inventory items counted.
Selection of Items Auditors should take care while watching a client count inventory to:
Watch the counting of the most important items and a representative sample of typical inventory items
Ask about any potential broken or outdated things
Discuss with management the rationale behind any substantial exclusions
The audit objectives related to balance testing also apply to physical observation tests, providing a consistent framework Before discussing these goals, it's essential to consider key aspects of the client's inventory management system.
Ensuring that the physical inventory count aligns with the client's instructions is vital in the inventory observation process To achieve this effectively, the auditor must be present during the entire physical count.
The auditor must either speak with the supervisor to address the issue or change the physical observation protocols if the client's staff are not following the inventory guidelines.
INTRODUCTION TO PWC VIETNAM
Introduction to PwC Vietnam
PwC Vietnam has been operating since 1994, with offices in Hanoi and Ho Chi Minh City Boasting a team of over 1,000 local and expatriate professionals, PwC combines extensive industry knowledge with a diverse skill set to effectively tackle critical issues for clients across various business sectors.
Ho Chi Minh Office Ha Noi Office Address 29 Le Duan Street, Ben Nghe
Ho Chi Minh City, Vietnam
16th Floor, Keangnam Hanoi Landmark Tower, Lot E6, Cau Giay Urban Area, Me Tri Commune, Nam Tu Liem District, Hanoi, Vietnam
Table 1: Information about PwC Vietnam
History and development of PwC Global:
The predecessor of PwC Global was founded in 1984 under the name William Cooper After 7 name changes, this business operates mainly in the business field with the name Cooper Brothers
In 1998, the tax audit industry experienced a historic merger involving the major firms Price, Holyland, and Waterhouse, leading to the formation of PriceWaterHouseCoopers, commonly known as PwC This strategic consolidation aimed to enhance the growth of their commercial operations.
History of development of PwC Vietnam:
PwC Vietnam, a limited liability company operating under Vietnamese law, is part of a global network of PwC firms spanning 157 countries and employing over 276,000 professionals This network specializes in delivering audit services, tax and legal advice, as well as high-quality financial and management consulting Each member firm within the PwC network functions as an independent legal entity, accountable for its own operations.
In 1994, PwC appeared in Vietnam On May 30 2017, PricewaterhouseCoopers Vietnam Co., Ltd was changed to PwC (Vietnam) Co., Ltd
PwC is dedicated to fostering trust in society and addressing significant challenges by leveraging a network of technology-driven innovators Their commitment spans from strategic planning to execution, enhancing the transparency, trust, and integrity of business practices To fulfill this mission, PwC upholds five core values, with integrity being paramount, guiding their efforts to provide impactful support to clients.
Speak up for what is right, especially when it feels difficult
Expect and deliver the highest quality outcomes
Make decisions and act as if personal reputations were at stake o Make a difference:
Stay informed and ask questions about the future of the world we live in Create impact with colleagues, clients and society through actions
Respond with agility to the everchanging environment in which operating o Care:
Make the effort to understand every individual and what matters to them Recognize the value that each person contributes
Support others to grow and work in the ways that bring out their best o Work together:
Collaborate and share relationships, ideas and knowledge beyond boundaries Seek and integrate a diverse range of perspectives, people and ideas
Give and ask for feedback to improve ourselves and others o Reimagine the possible:
Dare to challenge the status quo and try new things
Innovate, test and learn from failure
Have an open mind to the possibilities in every idea
Some services of PwC Vietnam:
Organizational Structure of PwC Vietnam
PwC Co., Ltd has developed a well-defined organizational chart that clearly delineates its functional departments, ensuring effective operations At the top of this structure is the General Director, who oversees the company's strategic direction For a visual representation, please refer to the image below.
Table 2:Organizational Structure of PwC Vietnam
Table 3: Organizational structure of Assurance Department
An audit team typically consists of 1-2 Seniors and 2-3 staff members, including randomly selected Interns and Associates Interns, who join during various phases of the audit process, are assigned specific tasks, primarily focusing on working papers related to cash, accounts receivable, accounts payable, operating expenses, and equity Additionally, they may assist Seniors in verifying accounting documents, organizing backups, and ensuring that financial statements are free from basic arithmetic errors.
Associates will work closely with audit clientsaudit clients, namely accountants, chief accountants, departments such as sales, purchasing, warehouse, human resources to carry out audit procedures
Seniors will lead an audit team comprising Interns and Staff, ensuring comprehensive coverage of all financial statement components They are responsible for guiding and reviewing the work of their team members while reporting directly to the Manager or Senior Manager Additionally, they must clearly explain the audit procedures conducted and collaborate with clients to guarantee that the audit is executed thoroughly and correctly.
This section offers tax guidance to audit clients, helping them establish an efficient tax system while ensuring compliance with current legal regulations Additionally, it provides support to other departments on tax-related issues, including tax counseling and assessment.
Like the other departments in the organization, the Legal department advises audit clients on Labor law, Investment legislation, Securities law, and other regulations and laws
Perform staff recruiting, assessment, event organization, and timekeeping in the firm
The accounting department is responsible for documenting financial transactions and translating them into financial statements to evaluate profit and loss during a specific operational period Additionally, it manages revenue and expense planning while collaborating with other departments to execute the company's overall strategic plan.
Interns will be in charge of low risky operations such as cash, bank deposits, operating expenses, receivables from audit clients, payables to sellers, equity…
Audit methodology of PwC
Driving quality and consistency through a risk-based approach Aura, our global ERP system, makes sure work gets done one way - the right way - globally and locally
It is used by over 100,000 auditors worldwide, on every PwC audit Aura ensures our teams take a consistent, focused and efficient approach to audit risk
James Chalmers, the Global Assurance Leader at PwC United Kingdom, is responsible for reviewing the latest audit methodology aligned with International Standards on Auditing (ISA), International Accounting Standards (IAS), and International Financial Reporting Standards (IFRS) within the global PwC framework.
As organizations face increasing regulatory complexity, PwC's auditors are enhancing their services to build trust and transparency With the evolving needs of businesses and stakeholders, digital transformation and rapidly changing technologies are significantly impacting business functions and performance.
At the core of our business is a commitment to quality, enabling auditors to leverage advanced technology to meet the dynamic needs of businesses and their stakeholders By adopting a comprehensive approach, auditors collaborate with clients to ensure transparency in both financial and non-financial reporting.
Auditors collaborate with clients to identify risks, enhance business operations, and provide essential guidance for informed decision-making Leveraging a global network of resources and a dedicated community of problem solvers, auditors are committed to helping clients safeguard and improve all facets of their business, including personnel, performance, systems, strategy, and overall resilience.
There are 4 applications that PwC’s auditors use for audit procedures:
Aura, our global ERP system, makes sure work gets done one way - the right way
- globally and locally It is used by over 100,000 auditors worldwide, on every PwC audit Aura ensures our teams take a consistent, focused and efficient approach to audit risk
Halo is transforming the auditing landscape by leveraging advanced data auditing technology to analyze vast amounts of critical business data This innovative approach enhances risk assessment and testing processes while providing deep insights by examining entire data populations With Halo, organizations can unlock valuable information and improve their overall audit effectiveness.
Connect, our global coordination tool, enables rapid, efficient, and secure information sharing throughout the audit process It standardizes and automates real-time communication between your teams and ours, available 24/7, regardless of your location.
Extracts large volumes of data with limited impact on your systems
Returns standard data formats allowing automated transformation ready for analysis by our applications
Eliminates the need for repeated, manual intervention through the data extraction process
Encrypts and compresses the data during the extraction and transfer
Provides end-to-end protection of your data.
General introduction to Accounting Standard “Inventories”
Accounting standards are regulations and guidelines on accounting principles and methods that form the basis for accounting records and financial statements
The Standard "Inventories" was established to define and direct the principles and methods of inventory accounting, ensuring that financial accounts accurately and reasonably represent inventory values for the preparation of financial statements.
International Accounting Standard No 2 (IAS 2) on "Inventories" was established in 1975 In response to international standards and local conditions, Vietnam's Ministry of Finance issued its own Accounting Standard on "Inventories" (VAS 02) on December 31, 2001.
Comparing International Accounting Standard IAS 2 and Vietnam Accounting Standard VAS 02
This article compares VAS 02 and IAS 2 by examining key aspects such as the definition of inventory, inventory cost, inventory objectives, net realizable value and impairment, provisions, cost methods, accounting methods, and their calculation and presentation.
Table 2.1 : The similarities and differences of IAS 02 and VAS 02
- Goods for sale such as: Goods purchased by an agent for sale or land and other property held for sale
- Finished goods in stock or work in progress
- Raw materials, materials, tools and supplies in stock for production, business or service provision
VAS does not refer to the case where inventories including land and other assets are held for sale (according to IAS 2.10 and VAS 02.3)
- Cost of inventory includes: purchasing, processing and other directly attributable costs incurred to bring the inventory to an effective location and condition (IAS 2.10 and
The total cost of acquiring inventory encompasses various factors, including the purchase price, non-refundable taxes, transportation costs, handling fees, and storage expenses incurred during the acquisition process Additionally, any trade discounts and rebates associated with substandard goods are subtracted from the overall purchasing costs.
Inventory processing costs encompass expenses directly associated with the production of manufactured goods, including direct labor, fixed manufacturing overhead, and variable manufacturing overhead These costs arise during the conversion of raw materials into finished products.
- Other expenses: According to IAS
2, in some cases borrowing costs are included in the value of inventory according to the provisions of IAS
When acquiring inventory through deferred payment, any amount exceeding the normal debt terms will be classified as a financial expense during the deferred payment period, in accordance with VAS regulations.
- Allocation of variable costs to finished goods: According to IAS 2, amortization of machinery is allocated to realizable value (which is approximate) According to VAS
02, amortization of machinery is allocated according to the actual product
Fixed production overheads are indirect costs that remain constant regardless of the volume of products manufactured These include expenses such as depreciation, maintenance of factory machinery and equipment, and administrative fees associated with production facilities.
Variable manufacturing overhead refers to indirect production costs that typically fluctuate in direct correlation with the quantity of output produced These costs include expenses such as raw materials, indirect materials, and indirect labor.
- Finished goods in stock or work in progress
- Raw materials, materials, tools and supplies in stock for the production process
According to IAS 2, inventories of agricultural products, minerals, and those held by commercial brokers are excluded from its scope, as outlined in IAS 41 In contrast, VAS 02 does not provide specific regulations that are deemed inapplicable to these inventories.
Net realizable value and impairment
According to IAS and VAS guidelines, the net realizable value of inventories is assessed based on their cost This value represents the estimated selling price of inventories within the production or business context.
Where the net realizable value is lower (or higher) than the original:
Under IAS 2, inventories are measured at net realizable value, which is calculated by taking the estimated selling price during the production period and subtracting the estimated costs to complete and sell the products This estimate should be grounded in reliable evidence available at the time of assessment, ensuring an accurate reflection of the inventory's potential value.
When the net realizable value of inventories falls below their original cost, it is essential to create a provision for inventory devaluation This provision reflects the difference between the cost of the inventories and their net realizable value, ensuring accurate financial reporting and compliance with accounting standards.
According to IAS, provisions primarily pertain to inventories intended for sale, while inventories designated for production are recognized only when the market demand for finished products declines For finished goods, the provision is calculated as the difference between their realizable value and book value In contrast, for production inventories, the provision is determined by the difference between replacement cost and book price.
According to VAS, the value of all materials, products, and goods in stock is determined by the difference between their book price and the buying or selling price, ensuring that the business avoids incurring losses.
Cost method According to IAS 2 and VAS 02, the methods of inventory valuation are as follows: First-in, first-out (FIFO),
The last-in, first-out (LIFO) method is now no longer used under IAS 02 But still used under VAS 02.13
IAS do not book provision for
- The accounting policies used in the valuation of inventories, including the inventory valuation method
- The original cost of the total inventory and the original cost of each type of inventory are classified in accordance with the business
- Provision for devaluation of inventory
- Reversal value of provision for devaluation of inventory
- Circumstances or events leading to the making or reversal of provision for devaluation of inventories
- Carrying value of inventory (Original cost – provision for devaluation of inventory) used as collateral or security for payables
Regulations for enterprises applying LIFO method (last in, first out):
- According to IAS: no longer applicable
Financial statements must accurately depict the difference between the inventory value shown on the balance sheet and the ending inventory calculated using FIFO, LIFO methods, or the current price on the financial statement date Additionally, the cost of inventory on the balance sheet is categorized by function.
PwC is responsible for providing an opinion on financial statements based on their audit, which is conducted in accordance with both Vietnam Accounting Standards and International Accounting Standards The application of these standards ensures that there is no difference in the audit engagement process performed by PwC’s auditors when expressing their opinions on the financial statements of this client.
THE AUDIT PROCEDURE FOR INVENTORY OF ABC COMPANY BY PWC CO., LTD VIETNAM
Financial statements audit procedure at PwC Vietnam
Overall, the audit procedure can be summarized stages: Planning; Risk assessment; Audit Strategy and plan; Gathering evidence, Finalisation
Table 1:Financial statements audit procedure at PwC Vietnam
Initial planning activities for an audit involve the formal acceptance of the client by the audit firm, ensuring compliance with independence requirements, assembling the audit team, and conducting necessary procedures to establish the nature, timing, and extent of audit activities This foundational step is crucial for conducting an effective audit.
Auditors leverage their expertise in business and industry dynamics to assess risks that may result in material misstatements in financial statements These risks often involve significant judgment and necessitate the auditor's extensive knowledge and experience, particularly in large and complex engagements A thorough understanding of the business and associated risks is typically acquired through various means.
Senior auditors must possess extensive knowledge gained from their years in an audit firm, which includes a deep understanding of the industry and the broader environment in which their clients operate This awareness extends to competitors, audit clients, and relevant suppliers, ensuring that auditors can provide comprehensive insights and assessments.
After assessing the risk of material misstatement in financial statements, the auditor formulates a comprehensive strategy and detailed plan to mitigate these risks This plan encompasses the design of approaches for various financial statement items, decisions on whether to depend on the company's internal controls, the creation of a timetable, and the allocation of tasks among audit team members Throughout the audit process, the strategy and plan are regularly re-evaluated and adjusted in response to new information regarding the business and its environment.
Auditors exercise skepticism and judgment while gathering and assessing evidence, which involves testing the company's internal controls, tracing financial statement amounts to supporting documents, and obtaining third-party confirmations This process includes documenting management representations and the assumptions used in preparing financial statements Additionally, independence confirmations can be sought for certain documents, such as cash balances.
In the finalization phase, auditors apply their professional judgment to reach an overall conclusion derived from the tests conducted, the evidence gathered, and the comprehensive work performed This conclusion serves as the foundation for their reporting.
Auditors maintain ongoing communication with both management and governance throughout the audit process, engaging at various levels, including operational and executive By applying professional skepticism and judgment, they critically evaluate management's assertions related to the financial statements' numbers and disclosures.
As businesses have become more complex and labor costs have increased, automated systems and procedures have gained prevalence Effective companies implement their own systems and controls to enhance operational efficiency, safeguard assets, and ensure accurate reporting of transactions and financial statements Auditors assess the effectiveness of these controls to mitigate the risk of material misstatements, adjusting their testing approach accordingly If auditors find that the controls are effective and consistently operational throughout the year, they may increase the level of substantive testing.
Effective controls that have been tested throughout the year can reduce the amount of substantive audit evidence needed to form an opinion However, regardless of the reliability of these controls, some level of substantive audit evidence will always be necessary.
Audit procedures for inventory at PwC Vietnam
3.2.1 Key areas of fraud risk when auditing inventory:
The major risks of the inventory balances in the financial statements being misstated are due to:
Inventory that actually belongs to third parties being included in the financial statements
Inventory that does not exist being included in the financial statements E – Existence
Not all inventory that exists being included in the financial statements C – Completeness
Inventory being included in the financial statements at full value when it is obsolete or damaged V – Valuation
Accurate inventory valuation is crucial for financial statements, as miscalculations or reliance on costs that exceed net realizable value can lead to significant discrepancies Ensuring that inventory is reported at the correct value helps maintain the integrity of financial reporting and provides a true reflection of a company's financial health.
Inventory which has actually been sold is included in the financial statements CO – Cut off
Table 2: Key areas of fraud risk when auditing inventory:
Auditors, aware of potential risks, implement initial configurations during audits to minimize errors and risks, ensuring their opinions on the enterprise's financial statements are neutral, realistic, and reasonable.
3.2.2 Illustrating Audit procedures for inventory at PwC Vietnam:
Commented [MK7]: Đây là một phần trong theoretical basic
Viết lại đầy đủ phần cơ sở lý thuyết
Commented [MK9]: Mô tả theo quy trình chung của PWC Từ
Planning đến Risk assessment -> Audit strategy and paln -> gather evidence -> conclusion
Commented [J710R9]: Em đã chỉnh sửa lại ạ
Table 3: Planning – scoping and strategy
The goals of conducting a physical inventory observation are to verify the existence of the inventory, ensure that the inventory counting methods are effective for obtaining precise counts, and confirm that the inventory is in a usable and salable condition for regular business operations, meaning it should not be damaged or obsolete.
This checklist is organized to cover three main stages of a physical inventory observation:
1 Initial Procedures - includes evaluation of inventory count instructions and initial inquiries of those in charge of the count;
2 Execution- test counts results tables with corresponding specific questions, and
3 Overall Conclusions - documention of conclusions reached regarding the effectiveness of the entity's inventory count procedures and Entity's assertions about the quantities and physical condition of the inventories
The automated checklist is designed to assist with both annual physical inventory observations and cycle counts, streamlining the documentation process through the 'Scoping' tab This feature automatically generates relevant worksheets for recording attendance at the count, which must be completed by PwC Count Attendee(s) and submitted to the Engagement team for review Questions that are not applicable should be marked as "N/A" with an explanatory note, while "Yes" responses may require additional clarification Conversely, "No" answers necessitate a thorough evaluation of the identified issues and proper documentation of the resolutions agreed upon with entity management or representatives and the Engagement Manager.
Once a count type is selected, a General Information tab will automatically populate, providing documentation for entity-specific count instructions and key contacts from both the entity and PwC PwC Count attendees are generally required to join a meeting or call with the engagement team to ensure a shared understanding and proper documentation of count observation instructions, as well as to evaluate the inventory count procedures.
This checklist should be prepared by the PwC representative (i.e., count attendees) responsible for a location or department count and be completed before leaving the inventory location
Before conducting a physical inventory observation, ensure you complete the "Making it Count" self-study or its equivalent for your territory, and review PwC Audit 6023.3 regarding physical inventory observation procedures.
PwC Audit Guide - 6023.3 - Physical Inventory Observation
PwC Audit 6023.3 outlines the standard method for completeness testing during Cycle Counts, which involves selecting SKUs on an accept/reject basis from the floor and tracing the SKU item number to the perpetual inventory listing, rather than focusing on quantity It is essential to conduct completeness testing at each cycle count observation, taking into account various factors such as the timing of the counts, any changes in the cycle counting system, the assessed risk of material misstatement, the effectiveness of related controls, and the consistency of inventory types The corresponding tabs that appear when this count type is selected are specifically designed for documenting this completeness testing process.
Does entity management issue written inventory count instructions to their count teams?
If written instructions are not provided, it is essential to ask the person in charge of the count relevant questions to address all other inquiries effectively.
'Evaluation of Count instructions' section
Due to low volume and simple nature of items, there was no count instruction; warehouse staff and accountant are farmiliar with the stock count methods
Do the inventory count instructions adequately cover the entity's plans for arranging and segregating inventory, including precautions taken to clear work-in-progress to cutoff points?
The count plan lacks formal written instructions, with various inventory types managed by distinct warehouse staff across separate locations The inventory consists solely of raw materials and tools, with no work-in-progress (WIP) items included.
Do the inventory count instructions adequately cover instructions for use of inventory tags or count sheets including their distribution, collection, and control ?
The verbal instruction before the count explained how code, distribution and unit of each item was written down in count sheets
The inventory count instructions must comprehensively outline the procedures for accurately recording item descriptions and determining quantities This includes specifying methods such as counting, weighing, assessing the state of work-in-progress (WIP), or employing other measurement techniques to ensure precise inventory management.
The article emphasizes the clarity and precision of item descriptions regarding quantities, weights, and codes It outlines that for raw materials like gas and oil, verbal instructions provide guidance on measuring quantities using rulers and ratio measurement summaries Additionally, it notes that tools are easy to inventory, requiring no special measurement methods.
Do the inventory count instructions adequately cover instructions for identifying obsolete, damaged, overstock, special order and slow- moving items?
Verbal count instructions mention assessment of damaged tools by Physical appearance Damaged tools are segregated in different areas
Do the inventory count instructions contain procedures on control of receiving and shipping during inventory taking period and, if production is not shut down, procedures for handling inventory movements?
All movements of inventory were suspended during the count
Do the inventory count instructions adequately cover plans for determining quantities at outside locations?
Do the inventory count instructions adequately cover instructions to determine that contents of packaged items counted match description of inventory as per the count sheet?
Randomly checked and ensured that contents of packed items match their description on count sheet and count tags
Do the inventory count instructions adequately cover instructions for inventory items to be recounted by persons other than those making the original counts?
Simple inventory, 1 time count Count members perform recount together if any difference noted
Ensure that the inventory count instructions comprehensively address the review process, the comparison of count results with the entity's inventory records, the investigation of discrepancies, and the approval of inventory counts by department heads or supervisory personnel.
Count result was reviewed and compared with accountant - Ms Chien's record Any difference would be verified and explained by both accountant and warehouse staffs
Have inventory items been arranged in an orderly manner (e.g., properly packed and binned) prior to the inventory count to facilitate the counting ?
Inventory items were arranged in order, same type of items were arranged in the same area
Have inventory items been segregated by types and/or special categories
To ensure accurate physical inventory counts, it is essential to appropriately include or exclude various categories of goods, such as scrap, obsolete items, overstock, special orders, slow-moving and damaged goods, consigned inventory, goods in transit to customers, and items billed but not yet shipped Additionally, it is crucial to account for goods received that have not yet been billed.
Inventory items were arranged in order, same type of items were arranged in the same area Damaged tools are segregated in different areas in the warehouse
Have obsolete, special order, damaged, over stock or slow moving items been designated on the tags/count sheets ?
Items that are obsolete were separated to a different area of the warehouse Some tools which are used also kept
Effective inventory management requires robust procedures to accurately count all inventory, excluding items owned by third parties on the entity's premises, while ensuring that no inventory is counted multiple times.
All inventory are properly arranged and segregated on shelves and racks The count team go through each shelf orderly to cover all inventory items
Have the entity's inventory count personnel been briefed on inventory count procedures, i.e inventory count instructions provisions?
Ms Chien provides a brief overview of the counting procedure before it begins, ensuring that all count members are well-acquainted with the consistent process that has remained unchanged over the years.
Are inventory count personnel adequately supervised?
Inventory count personnel was supervised by Accountant (Ms Chien)
Have inventory count personnel been assigned to count items for which they are normally not responsible?
Count team members (including accountant and warehouse staff) were responsible for those items, thus are familiar with the inventory
Are inventory count personnel familiar with the inventory?
Count team members (including accountant and warehouse staff) were responsible for those items, thus are familiar with the inventory
Have inventory count personnel been instructed as to how cut-off information is to be accumulated (e.g., receipts/shipment documentation for before and after the count)?
All movements of inventory were suspended during the count
Has production been suspended during the count process ?
There was no production in the warehouse
Have shipping and receiving operations been
All movements of inventory were suspended during the count suspended during the count process?
Have items in the shipping and receiving area(s) been properly segregated between items to be included in period-end inventory and those that are not?
All movements of inventory were suspended during the count
Have procedures been implemented to account for inter-site receiving and shipping during the inventory period where entity has more than one inventory location?
All movements of inventory were suspended during the count
Are all quantities to be determined by actual physical counts ?
The count team counted all items by physical count
Have inventory count personnel been instructed to perform "blind" counts
(i.e., counting items without prior reference to the "expected" quantities)?
COMMENTARY AND RECOMENDATION
General commentary on PwC’s audit procedure
PwC Vietnam, as part of the global PwC network, adheres to international standards and regulations, ensuring that its audit quality surpasses not only local requirements but also aligns with global benchmarks In contrast, domestic auditing firms must develop their own standards, which may not consistently meet these international criteria.
PwC leverages its unique audit policies, procedures, and methods, developed by a team of highly qualified professionals, to implement a comprehensive and detailed audit program This meticulous approach to auditing stands in contrast to many domestic auditing firms, which often struggle due to the lack of specific guidelines from the Ministry of Finance.
The global network of PwC facilitates a highly respected training program and peer review process among its members, ensuring consistent audit quality across all regions This uniformity in standards provides PwC with a competitive edge that domestic companies cannot match.
All staff at PwC undergo a rigorous recruitment process that emphasizes professional qualifications and proficiency in languages such as English and Chinese The company's development strategy prioritizes employee growth, providing optimal conditions for skill enhancement PwC regularly offers training courses for new hires and supports employees in pursuing ACCA and CPA certifications, ensuring they possess the expertise and knowledge necessary to deliver exceptional value to clients.
In an audit, responsibility is clearly defined; the audit assistant performs audits on operational components, while the auditor reviews their work to quickly identify any deficiencies or necessary adjustments.
Before the year-end audit, PwC conducts a crucial mid-year audit in September, known as the interim audit This process allows auditors to gain a deeper understanding of the enterprise and its control systems, ultimately providing them with a comprehensive view of their audit clients Consequently, this knowledge enables auditors to select the most accurate basis for determining materiality in the final audit.
The increasing number of audit clients, coupled with an unstable workforce, particularly a shortage of experienced staff, is creating significant challenges in the audit industry Many skilled auditors are transitioning to less demanding professions, resulting in heightened time constraints and work pressure This situation ultimately impacts the quality of audits and the professional judgment of auditors.
The review of audit files and working papers, typically conducted by senior associates and subsequently examined by higher-level professionals such as managers and partners, often occurs after the completion of the client's audit due to excessive workloads This delayed review process can result in the assignment of an audit team to address any issues that arise, leading to significant time and financial waste while negatively impacting the client's operations Consequently, the complexity of this process may lead to the oversight of critical issues that require resolution according to established procedures, ultimately compromising the quality of the audit.
Before the client of audit at the end of the company's financial year
The interim audit is crucial for the year-end audit process; however, audit assistants often underestimate its significance, and principal auditors may not conduct thorough reviews Additionally, poor personnel arrangements result in different teams handling the interim and year-end audits This disconnect can create challenges during the final audit, especially if interim staff are unavailable, leading to difficulties for final audit personnel and causing clients to duplicate efforts in providing necessary documents.
Commentary on PwC’s Inventory audit procedure
The inventory section of an audit presents significant challenges, necessitating the involvement of highly experienced auditors These professionals possess extensive knowledge and skills to effectively conduct inventory tests Additionally, senior auditors play a crucial role by providing timely support and guidance to audit assistants throughout the process.
PwC has built a fairly complete inventory audit process as well as a complete other audit process This process is built in accordance with the provisions of Vietnam Accounting Standard
No 02- Inventories, International Accounting Standard No 02-Inventories
Inventory management is crucial as it is vulnerable to fraud, embezzlement, and theft Due to these risks, audit assistants undergo extensive training to ensure the integrity and accuracy of inventory assessments.
Inventory plays a crucial role in financial statements, often requiring significant time investment from auditors However, due to time constraints and the need to complete all audit steps, many procedures related to inventory can become ineffective.
Inventories across various industries possess unique characteristics, making it challenging to implement an appropriate audit process tailored to each enterprise The effectiveness of audits heavily relies on the auditor's experience and understanding of specific business sectors Consequently, inexperienced auditors may apply standardized testing methods that do not align with the audit firm's professional standards, resulting in inefficient analyses that fail to meet audit objectives.
Auditors typically prioritize substantive procedures over control testing, leading to a necessary increase in the volume of substantive testing performed This omission of control testing results in a more time-consuming implementation process for auditors.
General recommendation on PwC’s audit procedure
PwC is facing challenges due to excessive workloads on auditors and associates, leading to increased pressure and inefficiencies during the audit season This high-stress environment often results in auditors seeking opportunities in other professions To address this issue, it is essential to implement training and coaching for employees while also focusing on retaining experienced staff and attracting new talent Additionally, a more rational allocation of personnel is crucial to enhance audit efficiency, such as assigning team members who participated in interim audits or previous year audits to continue their work at year-end.
Recommendation on PwC’s Inventory audit procedure
During the inventory audit at ABC, despite the main auditor's dedicated assistance and thorough adherence to the process steps, the writer suggests incorporating additional recommendations for improvement.
PwC should develop tailored inventory audit processes for various business types, including manufacturing, trading, construction, and services By identifying and eliminating unnecessary procedures specific to each sector, the inventory audit programs can be optimized This approach will help minimize errors, particularly for inexperienced auditors, by ensuring that they follow procedures that are appropriate for each type of enterprise.
PwC should develop specific guidelines for businesses with unique processes, particularly in the construction sector, focusing on revenue determination based on completion progress These guidelines must detail methods for assessing progress, recognizing revenue and costs, and verifying the completeness and appropriateness of these processes, while also considering expert opinions.
When selecting test samples, it's crucial to ensure that the chosen samples represent 80% of the total balance However, due to time constraints, auditors may only conduct preliminary examinations on a few samples and apply those findings to the rest To enhance accuracy, it is recommended that auditors check all selected samples, as even small balances can accumulate to a significant total.