FACULTY OF ACCOUNTING AND AUDITING _______________ THESIS AUDIT PROCEDURES FOR INVENTORY BY KPMG AT NITTO DENKO LIMITED COMPANY LECTURER : Ms... UNIVERSITY OF ECONOMICS AND LAW FACUL
INTRODUCTION TO KPMG VIETNAM LIMITED COMPANY
Company Profile
1.1.1 History of establishment and development of KPMG
KPMG International, a legal entity established under Swiss law, comprises a network of affiliated member firms The formation and evolution of KPMG Global have been significantly influenced by four key individuals who left a lasting impact on the organization.
Figure 1.1: The process of development of KPMG
The KPMG network was formed in 1987 when Peat Marwick International and
Klynveld Main Goerdeler merge along with their respective member firms The company's headquarters are located in Amstelveen, Netherlands KPMG has more than
236,000 employees worldwide and provides career services in 145 countries and territories Recently, KPMG has three main service channels: Audit & Assurance, Tax
The KPMG network's organizational structure fosters consistent service quality and cohesion among member firms globally, aligning with KPMG's core values KPMG International plays a crucial role in establishing and enforcing uniform policies and service standards across all member firms, safeguarding and enhancing the KPMG brand image.
Each member firm may have more than one legal entity Unless the parties agree otherwise, each party is legally obligated to fulfill its responsibilities and obligations
KPMG has quickly established itself as one of the leading auditing firms in the world, in the field of audit, tax and advisory services
With more than 236,000 employees in member firms in 145 countries, KPMG has always maintained its position among the world's leading auditing firms
KPMG has consistently demonstrated its expertise in risk management, earning a top two ranking in the Consultancy Rankings 2009 by OpRisk & Compliance In 2011, the firm was recognized as the 2nd best outsourcing advisor globally, highlighting its extensive experience and comprehensive approach KPMG was also ranked 13th in Consulting Magazine's Best Firms to Work For in 2016 and placed 29th in Fortune's list of the best companies to work for in 2017 That same year, KPMG was recognized as one of the 22 leading companies in the United Kingdom, alongside notable firms like PNG and Deloitte.
In 2021, KPMG achieved a global revenue of $32.13 billion, reflecting a 10% increase from $29.22 billion in the previous year The EMA region demonstrated the highest growth rate at 13%, with notable increases in Vietnam and Cambodia compared to 2020.
Figure 1.2: Total revenue in 2021 and 2020 and revenue by regions in 2021
Figure 1.3: KPMG's revenue in key services
Audit Tax and Legal services Advisory
AuditTax and Legal servicesAdvisory
KPMG Vietnam Co., Ltd, a part of the KPMG International network, offers professional services to prominent multinational and domestic companies Established in Vietnam and Cambodia in 1994, it operates as a wholly foreign-owned enterprise and is acknowledged by the Ministry of Finance.
Planning and Investment and VACPA as the leading audit firm in Vietnam in terms of revenue, number of clients and number of qualified accountants
KPMG has established itself as a significant force in the market economy, demonstrating robust stock market growth in recent years As a leading firm in professional services, KPMG employs over 1,700 professionals and plays an active role in advancing accounting and auditing practices in Vietnam.
KPMG has been honored with the Golden Dragon award for its significant positive impact on society The company is committed to paying substantial taxes, generating employment opportunities, and actively promoting its responsibility towards the community.
Besides, KPMG has obtained recent remarkable achievements such as being voted as one of the "Best Places to Work" by Anphabe and Nielsen in the 2017 survey
Company’s name KPMG Limited Company
Address 46th Floor, Keangnam Hanoi Landmark Tower, 72 Building,
Plot E6, Pham Hung Street, Cau Giay New Urban Area
Email dpp-vn@kpmg.com.vn
Type of business Sole Member Company Limited
Legal representative Mr Warrick Antony Cleine - Chairman and CEO
Table 1.1: Information about KPMG Vietnam
Branch of KPMG Vietnam in HCMC
Branch’s name KPMG Limited Branch
Address 10th Floor, Sunwah Tower, No 115, Nguyen Hue Street,
Email dpp-vn@kpmg.com.vn
Legal representative Mr Warrick Antony Cleine - Chairman and CEO
Table 1.2: Branch of KPMG in HCMC, Vietnam
Branch of KPMG Vietnam in Da Nang
Branch’s name KPMG Limited Branch in Da Nang
Address Unit D3, 5th Floor, Indochina Riverside Tower, No 74, Bach
Dang Street, Hai Chau 1 Ward, Hai Chau District
Email dpp-vn@kpmg.com.vn
Legal representative Mr Warrick Antony Cleine - Chairman and CEO
Table 1.3: Branch of KPMG in Da Nang, Vietnam
KPMG is dedicated to delivering exceptional services while promoting an inclusive environment and fostering collaboration with integrity Our commitment to open and honest communication cultivates trust and positively impacts the community As a result, KPMG Vietnam has established core values that reflect our identity and mission.
Integrity – We do what is right
“Integrity means we are honest fair and consistent in our words, actions and decisions – both inside and outside work” (KPMG Vietnam, 2021)
Excellence – We never stop learning and improving
“Excellence means relentlessly delivering quality work to the highest professional standards.” (KPMG Vietnam, 2021)
Courage – We think and act boldly
“Courage is about being open to new ideas and being honest about the limits of our own knowledge and experience.” (KPMG Vietnam, 2021)
Together – We respect each other and find strength in our differences
“We do our best work when we do it together: in teams, across teams, and by working with others outside our organization.” (KPMG Vietnam, 2021)
For better – We do what matters
“For better means taking a long-term view, even in our day-to-day choices, because we want to build a stronger KPMG for future.” (KPMG Vietnam, 2021)
Organizational structure of KPMG Vietnam Co, Ltd
The following figure shows the organizational structure of KPMG Vietnam Co, Ltd
Audit Tax & Legal Advisory Support Recruitment
Figure 1.4: General organizational structure of KPMG in Vietnam
During fieldwork, a team typically consists of one partner, one manager, one senior, and one to two associates or interns, selected randomly by Ms Huynh Anh Thu If an audit is underway, the assigned staff will remain with that group until the audit concludes Once the team is allocated, Ms Huynh Anh Thu inputs the information into KPMG's SAP Online Application, allowing staff members to easily access their assigned tasks and team members through the system.
Figure 1.5: Organizational structure of Audit and Assurance Department
The senior is responsible for delegating tasks to assistants and inmates, ensuring efficient workflow Prior to fieldwork, the senior distributes assignments and reviews the previous year's PBC and working papers with the staff.
Interns are typically tasked with handling various financial documents, including cash and cash equivalents, receivables and payables, fixed assets, revenue, financial income and expenses, other assets, equity, and operating expenses Additionally, they are responsible for preparing physical documentation for each engagement.
Operational objectives and services provided
KPMG complies with ISAs, as well as VSA, in accordance with Vietnamese laws and regulations including independence, objectivity, integrity, protecting the interests
AA AA AA AA AA
KPMG employees prioritize professional ethics, service quality, and the company's reputation, ensuring the protection of customer secrets and their own interests.
KPMG Vietnam conducts all audit activities in accordance with the internal regulations of the KPMG Global System (KAM), which is designed to incorporate the latest auditing standards and guidelines KAM emphasizes detailed test procedures, risk assessment, and controls testing while enhancing global coordination Additionally, it supports the implementation of eAudit and provides comprehensive guidance to ensure audit quality and objectives are met KPMG publishes and updates KAM annually to keep its employees informed with the most current knowledge in the field.
Figure 1.6: The purpose of KPMG
• Clients – We stimulate trust and confidence in business
The dedicated professionals at KPMG are expertly trained and committed to achieving impactful results They recognize the significance of their work and its influence on the global landscape.
• People – We are a people business
KPMG is dedicated to fostering trust in capital markets and bolstering economic growth, ultimately driving progress and prosperity within the communities we serve.
• Society – We have a responsibility to build a sustainable future
KPMG is confident that, individually and collectively, they seek to make a positive impact on society, our communities, and the wider world
KPMG has a set of values that all members of the firm are expected to live by
We seek the facts and provide insight
We are open and honest in our communication
We are committed to our communities
Above all, we act with integrity
Regulatory Audit Audit data & analytics
Market Entry Services Tax Tools & Resources
Corporate Tax Services Digital Tax Calendar 2022
Market Entry and Business Set-up Intellectual Property
Influence topic
KPMG Vietnam Co., Ltd., a leading firm in the Big Four auditing companies, offers a professional and welcoming work environment that encourages interns to engage directly with client audits Interns receive valuable support and guidance from experienced staff, allowing them to gain in-depth knowledge of actual audit procedures and explore their research topics more thoroughly.
GENERAL INFORMATION ABOUT NITTO DENKO VIETNAM
Company profile
2.1.1 History of establishment and development of Nitto Denko
Company’s name NITTO DENKO VIETNAM LIMITED COMPANY
Investment License No 018/GPDC1-KCN-VS
018/GPDC2-KCN-VS 018/GPDC3-KCN-VS 018/GPDC4-KCN-VS 018/GCNDC5/46/3
The company's investment license and registration certificate have undergone multiple amendments, with the latest update being Investment Registration Certificate No 21 11539366, issued on December 9, 2020 These documents, provided by the Management Board of Vietnam-Singapore Industrial Park, are valid for 50 years from the date of the initial investment licenses.
The Company's enterprise registration certificate, most recently updated under No 3700309367 on January 20, 2021, has undergone several amendments These updates were issued by the Planning and Investment Department of Binh Duong Province.
Legal representative Mr Yoshifumi Toru General Director
Members’ Council Mr Yoshifumi Toru
Registered Office No 6, VSIP Street 3
Vietnam Singapore Industrial Park Binh Hoa Ward, Thuan An City, Binh Duong Province
Type of business Limited Liability Company
Table 2.1: Information about Nitto Denko Vietnam
Nitto Denko Vietnam Co., Ltd., established in 1998, is a 100% foreign-owned Export Processing Enterprise located in Binh Duong Province With an initial capital of 150 billion, the company specializes in manufacturing electronic components for the automotive, motorcycle, aviation, and maritime industries, under the leadership of Japanese General Director Mr Yoshifumi Toru.
The company specializes in the production of electronic components, utilizing advanced technology lines imported from Japan Most raw materials are sourced internationally, and manufacturing is tailored to meet the specific orders of domestic and foreign automotive and motorcycle manufacturers Notably, Sumitomo contributes to 70% of the company's total sales.
Nitto Denko Vietnam has solidified its status as a leading manufacturer of electronic components, employing over 2,000 individuals Recognized as a top 100 Global Innovator by Clarivate Analytics since 2016, the company excels in patent and intellectual property Notably, in April 2019, Nitto Denko Vietnam achieved the 46th position in the “Environment Award” Excellent Award for its organic solvent-free double-coated adhesive tape.
Organizational structure of Nitto Denko Vietnam Co, Ltd
Nitto Denko Vietnam Co., Ltd operates under a direct management model characterized by top-down decentralization, facilitating effective communication from management to employees The company is organized into four key departments, with a focus on Information and Communication, ensuring a cohesive structure that supports collaboration and efficiency across the organization.
Technology, Marketing and Human Resources, and Manufacturing and Production
Engineering, under the direct supervision and direction of the Board of Directors
This management structure enables departments to clearly define their roles, responsibilities, and authorities, fostering flexibility in management As a result, it enhances the company's internal control activities, leading to more efficient operations and a smoother business process.
Figure 2.1: Organizational structure of Nitto Denko Vietnam Co, Ltd
The Board of Directors, led by Mr Yoshifumi Toru, plays a crucial role in business management by overseeing departmental operations, addressing issues as they arise, and ensuring effective corporate governance Their responsibilities include strategic management tasks such as formulating strategies, developing plans, providing clear directives to meet objectives, and guiding the construction and execution of business plans.
Marketing Department conducts brand and product building and development activities to help companies succeed and create a competitive position in the market
The marketing department serves as a vital link between the company and the external market, effectively connecting products with consumers Its primary role is to promote the company's offerings through diverse and widely recognized channels, ensuring that products reach customers in the most impactful ways.
The operations department plays a crucial role in a company by supplying the board with essential information and documentation It oversees the production process in the workshop and ensures that customer contracts are fulfilled effectively.
Tohoku Plant Shiga Plant correct on time, with the right quality and consistency in running the business in a systematic and organized manner
Information and Communication Technology Department is responsible for directing the information and data integrity of the organisation and its departments including all Information Technology functions of Nitto Denko Vietnam.
Operational objectives
At Nitto Group, our mission is to enhance customer value through innovative ideas that support daily life globally We view social change as a chance to inspire and create new wonders, working collaboratively with our customers to generate fresh value.
Organization of accounting work in Nitto Denko Vietnam Co, Ltd
Figure 2.2: Accounting department structure of Nitto Denko Vietnam Co, Ltd
The Chief Accountant is legally accountable to both the law and the General Manager for the company's financial decisions, including organization, governance, cash flow monitoring, financial planning, risk management, record keeping, and reporting Additionally, the Chief Accountant oversees and supports the accounting staff in their responsibilities while ensuring the effective management and strict adherence to the financial accounting reporting system, ultimately determining the company's business results and ensuring the accuracy of these financial reports.
Tax Accountant: Responsible for the chief accountant, preparing monthly and quarterly tax reports and paying taxes to the company Preparation of annual accounts,
Warehouse Accountant year-end tax reports, corporate income tax (CIT) and personal income tax (PIT) reports, direct cooperation with the tax authorities in case of problems
A Payments Accountant plays a crucial role under the supervision of the chief accountant, managing receipts and payments while ensuring accurate monitoring and accounting of all transactions This position involves overseeing economic and financial activities related to cash flow management for both internal and external company payments.
A Warehouse Accountant, reporting to the chief accountant, is tasked with essential warehouse functions including tracking inventory, managing the import and export of goods, and preparing invoices and related documentation Additionally, they are responsible for reconciling invoices with data and monitoring the quantity of stored items to ensure accurate inventory control.
The Company's Consolidated Financial Statements are prepared in compliance with the Vietnamese Company Accounting System and the Vietnamese Accounting Standards established by the Ministry of Finance, and are presented in Vietnamese Dong.
- Accounting period year: Every year from 1/1 to the year-ended 31/12
- Method of calculating VAT using the deduction method
- The method of accounting for inventories corresponds to the method of regular declaration
- The method of recording Fixed assets is using the historical cost method and amortized on a straight-line basis
- Currency used in the accounting records: Vietnam Dong (VND), United States Dollar (US)
- Form of the accounting book: General Journal.
AUDIT PROCEDURES FOR INVENTORY BY KPMG AT NITTO
Determining the materiality level
According to VSA 320, material information significantly influences economic decisions derived from financial statements when there is a lack of accurate information Auditors assess materiality based on the significance and nature of the information or misstatements in specific circumstances It is essential to understand that materiality serves as a threshold rather than dictating the content of necessary information Both qualitative and quantitative aspects must be taken into account when evaluating the materiality of information.
When planning an audit, the established level of materiality does not always signify the threshold below which misstatements are considered non-material, either individually or collectively There are instances where a misstatement may be deemed material, despite its value falling below the set materiality level.
KPMG's methodology highlights that materiality plays a crucial role in evaluating the risks of material misstatement, whether stemming from fraud or error It influences the design and outcomes of audit procedures, the identification of misstatements, the sufficiency of audit evidence, and ultimately the type of opinion issued Materiality is categorized into three distinct levels.
The value influencing decision-making in a company's operations typically ranges from 0.5% to 3% of total sales, 3% to 10% of pre-tax profit, or net worth Any value exceeding these thresholds may significantly impact users' economic judgments According to KAM 38.1020, auditors must identify the key indicators that affect the financial decisions of stakeholders such as owners, investors, banks, financial institutions, and the government At Nito Denko Co., Ltd., the baseline measures for economic decision-making include total sales, pre-tax operating income, net assets, and net liabilities.
To minimize the likelihood of errors, a value threshold is established to ensure that the unadjusted and undetected material misstatement remains below a specified materiality level, typically set at 75% of the overall materiality for the financial statements population.
The Acceptable Margin of Tolerable Precision Threshold (AMPT) represents a value beneath which errors can be disregarded, as their cumulative effect is unlikely to significantly influence the financial statements Generally, this threshold is defined as 3-5% of the overall materiality level.
Under KAM 38.020, auditors must establish materiality criteria by identifying the financial statement users and understanding the factors that impact their decision-making, taking into account the timing and the client's operational context.
Nitto Denko Co., Ltd identifies investors, banks, and related agencies as the main users of financial statements (FSs) Consequently, auditors assess materiality by considering total revenue, profit before tax (PBT), and net assets.
Nitto Denko Vietnam Co., Ltd is a manufacturing company with 15 years of experience in the general industry, demonstrating steady sales growth The company's primary objective is to enhance its sales to expand its market presence and solidify its position within the industry While the production line serves as the company's main asset, there is a lack of focus on its development and upgrades Furthermore, assessing pre-tax profit indicates a significantly lower materiality level compared to previous years, with a minimal threshold of 27 million, resulting in a lighter workload for auditors Given the company's limited material risks, auditors determine materiality based on total revenues, establishing the materiality threshold at VND 3,666,361,820.
PM level is VND 2,749,771,365 and the AMPT is VND 183,318,091.
Determining the importance of elements
A material account, as defined by KAM 10.1305, is one that has the potential to include misstatements that could significantly affect the overall financial statements, either individually or in conjunction with other accounts.
To assess the significance of assertions and related disclosures, auditors analyze both qualitative and quantitative risk factors Key considerations include the intent of management, the volume of transactions, the complexity of accounting practices, and the reliance on estimates.
For Nitto Denko Vietnam., the inventory cycle is one where the related accounts are the key accounts At the same time, the auditor also identifies the relevant assertions: C -
Completeness; E – Existence; A – Accuracy; V – Valuation; O – Obligations and Right;
P – Presentation and Disclosure The auditor obtained the following table
Table 3.2: Identify key accounts of the inventory auditing process
Assessing risks and designing the audit implementation plan
+ Performing audit procedures for important items including reconciliation, recalculation, trend analysis
+ Interviewing clients about unusual changes in expenses
+ Performing a reassessment if those items should be recognized in COGS or general expenses
+ Carrying out annual audit procedures for inventory purchases
+ Send confirmation letters to large balances, major suppliers of the client company
+ Select a business template to check payment documents and invoices after the date of separation of the year
+ Revalue the difference at the balance sheet date
+ Implementing substantive controls and procedures for this item
+ Checking the effective operation of the inventory control system in the period: witness the inventory, check the purchase transaction
+ Observing the inventory and running the sample MUS, perform the actual inventory, compare it with the inventory list provided by the customer at the day of the inventory
+ Performing an import and export reconciliation of the amount of inventory at the BS date and compare it to the amount in the GL
+ Performing inventory purchase price check
+ Checking unit cost costs for FGs and WIG
+ Performing an annuity separation test
+ Checking for slow-moving goods, NRV of inventory to make provision in time + Interviewing customers about changes in purchase price, if any.
Assessing the internal control system
Studying the companies' accounting practices and how they manage their inventory When learning the client's internal control system, auditors must focus on:
Processing and evaluating procedures for WIG
Organizing and managing stocks on quantity, quality and type of stocks
Organizing production and report to workshop departments
To understand the purchasing operation, KPMG inquired the client and performed the testing procedures TOC include walk-through tests, purchase tests, and inventory demonstrations
Based on the current stock levels and production orders from clients, the employees of the Production department create a purchase requisition with the approval of the department head
The Purchasing department receives the purchase requisition, where designated employees can place orders according to its details Each order requires the Director's signature for approval before it can be finalized.
Upon completion, the approved purchase order is emailed or faxed to the supplier
For materials lacking a stable supply source, suppliers are required to submit a pricing report The purchasing department will evaluate the quotations to choose the most suitable supplier and place an order Once the order is confirmed, the supplier issues a sales confirmation to the company.
Orders are tracked in the system by the Purchasing department by order number sequence and specific supplier for easy tracking of order fulfillment progress
From sending the order and confirmation from the supplier to receiving the goods, it usually takes 1 to 3 weeks for goods bought domestically and 1 to 1.5 months for imported goods
Warehouse keepers, purchasing accountants, and production workers verify the quality and quantity of received goods by comparing the packing slip, invoice, purchase order, and actual quantities If these documents align, they issue a receipt signed by all relevant parties, including accountants and production representatives, and send a copy to the supplier In cases of discrepancies, an immediate investigation is conducted to identify the cause Additionally, the Purchasing department retains a copy of the receipt to update the system accordingly.
Reconciliation of differences, recording in accounts
All purchasing documents, including invoices and receipts, are processed by an accounting employee who reconciles the data between orders, invoices, and receipts Any discrepancies must be investigated and rectified Subsequently, another employee records the transactions in the company's accounting system.
For goods imported from abroad
The import price for Nitto Denko Vietnam Co., Ltd is primarily based on CIF (Cost, Insurance, and Freight) terms, which include shipping and insurance costs within the contract price Upon delivery, a third party assesses the quality of the goods; if they meet the specified requirements, the production department employees, warehouse keeper, and accountant proceed to enter the goods into the warehouse, similar to domestic purchases Accountants utilize customs declarations, bills of lading, invoices, and packing slips to accurately record transactions in the accounting system.
To verify that control activities are executed as intended, it is crucial to perform them consistently within processes and ensure that records align with organizational practices A walk-through test, which combines investigation, observation, testing, and re-implementation of controls, allows auditors to gather essential information to evaluate the design and implementation of control procedures Specifically, KPMG conducted a survey for Nitto Denko Vietnam Co., Ltd to understand the purchasing process, selecting a random transaction to review relevant documents and confirm that purchasing operations adhered to company policies and maintained adequate controls.
Figure 2.5: Specific working paper of step-by-step inspection procedure
Consequence: The purchasing control of Nitto Denko Vietnam is complete and effective
Checking out the purchasing process - 3 ways match
The purchasing process for new clients remains largely unchanged from previous years, allowing for easy verification of order approvals, invoices, warehouse receipts, and delivery notes It is essential to compare purchase orders with warehouse slips to ensure accuracy and efficiency in the procurement process.
To accurately assess the received goods quantity, it is essential to identify the type of goods involved Comparing invoices and purchase orders helps establish the unit prices of the goods received Additionally, a reconciliation process should be in place between contracts, invoices, and inventory receipts before recording transactions in the general ledger, ensuring the book value remains accurate.
Clients conduct regular inventories by reviewing their 25 most recent purchases of the year and comparing them with relevant documents The auditor verifies the approval of purchase orders and goods receipts, ensuring consistency between purchase orders, invoices, and warehouse receipts regarding quantity, type, and unit price.
Nitto Denko Vietnam Co., Ltd is a long-standing client, prompting the auditor to assess the purchase transaction by reviewing the effectiveness of the internal control system based on findings from the previous year's audit and any changes observed during the current audit period.
The purchasing process, the control system, the person responsible for the work at each stage remains the same
No new inventory items have been generated, prompting the auditor to rely on evidence from the previous audit, leading to the initial conclusion that "the internal audit system is operating effectively." By executing audit procedures, the auditor gains a deeper understanding and accurate evaluation of the client's internal control system.
KPMG performs an observation procedure on the balance sheet date to assess the availability and adequacy of inventories This process allows the auditor to evaluate the effectiveness of the company's merchandise management system.
KPMG conducts inventory assessments quarterly using the physical counting method, due to the limited variety of inventory types within the company.
The company operates four key production departments—Assembly, Molding, Molded Plastics, and FG—within its manufacturing area, where inventory is organized in labeled rows on shelves Monthly inventory checks are conducted by the accounting and warehouse teams, while camera systems are employed to monitor and manage inventory and manufacturing processes To prevent backlogs of obsolete and unused goods, these items are stored separately and managed according to a Management Board disposal plan, ensuring alignment with market demands.
In preparation for the inventory, the auditor must carry out spot checks At KPMG, there are 3 main sampling methods:
Before examining the entire population, it is important to determine the effectiveness of this sampling method and it should only be used on low volume samples
When selecting samples based on a specified threshold, only those with values exceeding it are included, ensuring complete and correct assertions for the chosen samples However, this method does not guarantee the same level of assurance for the remaining samples, making it crucial to apply this approach with caution in scenarios involving highly classified inventories.
Applying the sampling method according to the system software KPMG MUS and KSP
Applying to samples with a large number of samples of similar risk, value and type In principle, using these two methods, assertion E and A are guaranteed
Performing substantive test
To ensure comprehensive audit objectives, the auditor at Nitto Denko Vietnam compares the current year's inventory balance, provisions, and structure with the previous year's data to identify trends and root causes This comparison aids in assessing judgment and accuracy by evaluating the proportion of inventories to total current assets, analyzing fluctuations, and examining goods throughput time Additionally, the auditor reviews the cost structure, including raw materials, labor, and general production costs, against the prior year to determine the reasonableness of any changes This thorough analysis enables a better understanding of the company's inventory management capabilities and the necessity for provisions.
Co, Ltd., the auditor performs analytical procedures used in conjunction with detailed analytical procedures
• Make an inventory leadsheet – Ref 3.1.200.20.0010
To facilitate tracking and summarizing the review process and division of labor among members, first in conducting review procedures
The audit team leader generates the General Ledger (GL) from the Balance Sheet (BS) provided by the client The auditor then extracts the balance for the main account, such as inventory, and uses the resulting BS to determine the balances for sub-accounts, creating a detailed schedule for each specific program or promotional part KPMG conducted an audit of the financial statements for Nitto Denko Vietnam Co., Ltd for the period ending December 31, 2015, and the auditor confirmed agreement with the opening balances of these financial statements.
The auditor utilizes this year's balance sheet to gather data for the general ledger and inventory analysis, particularly focusing on stock levels The tax chart reflects the index of days in circulation annually, aiding in the assessment of inventory provisions Interviews with customers reveal an 18% increase in inventories, amounting to approximately 5.4 billion, primarily driven by a 31% rise in materials, totaling around 5.8 billion Notably, Nitto Denko Vietnam Co., Ltd has altered its accounting method for 20 key materials, shifting from direct expense entries to goods accounts, which accounts for the significant surge in commodities observed at year-end.
In the inventory management worksheet, the accountant also plots the COGS and calculates inventory turnover to perform general analysis procedures
In the past year, Nitto Denko Vietnam Co., Ltd experienced an increase in raw material turnover from 48 to 61 days, attributed to changes in material registration processes Additionally, the turnover of finished products rose from 17 to 27 days due to a decrease in the quantity of goods purchased for production, leading to reduced revenue and unfulfilled customer orders Consequently, the cost of goods sold decreased compared to the previous year To validate the detailed data presented in the financial plan, auditors conducted thorough procedures, particularly referencing working paper 3.1.200.20.0030 They confirmed that the company purchased inventories valued at VND 132,240,274,866 during the year, using MUS software to sample and review invoices, bills of lading, contracts, receipts, and ledgers to ensure proper transaction recording in accordance with contractual terms.
• Checking for annuity of purchases - Ref 3.1.20.20.0100
To guarantee the completeness and accuracy of inventory targets, purchases must be recognized in the appropriate accounting period and classified as an entity asset only upon verification of ownership Additionally, auditors perform an annual divisibility test to uphold these standards.
The auditor conducts a recording interview to establish the timing of the inventory recording, which helps identify potential risks for the client.
During the liquidation period, which is defined by the auditor based on the company's inventory purchasing characteristics, sample purchases were conducted both before and after the balance sheet date Businesses must verify receipts, invoices, and detailed records for goods acquired from domestic suppliers, while also examining bills of lading, bills of sale, invoices, customs declarations, and warehouse receipts for imported goods from foreign suppliers.
At Nitto Denko Vietnam, domestically purchased goods are delivered to the company’s warehouse, with receipt confirmation from both the supplier and the warehouse department Following this, a receipt is sent to the accounting department and recorded in the system the next day, leading auditors to perceive minimal risk and select only a sample of purchase transactions within a four-day window around year-end For foreign imports, orders are approved prior to dispatch, and suppliers send draft documents, including the bill of lading and invoice, by fax during loading If no adjustments are needed, the official documents are sent afterward The typical transit time from loading to domestic port arrival is about 20 days, which helps auditors determine sample selection periods Auditors also reference international commercial contracts (Incoterms) to clarify rights and obligations related to purchases Vietnamese companies often import under designation C (port of destination), shifting shipping responsibilities to the seller while reducing the buyer's risk Accountants use the goods' arrival time for accounting purposes, leading to the identification of four purchase transactions, totaling 320,905,506, that required adjustments for the accounting period.
(see more in the appendix)
Consequence: After adjustment, purchase transactions were recorded in a reasonable and timely manner
• Checking unit purchase price of materials – Ref 3.1.200.20.0060
This working paper aims to confirm that the raw materials' purchase price is justified when compared to the price established during the audit, with no significant fluctuations observed throughout the year.
To ensure the accuracy (A) of the inventory
To conduct this procedure, the examiner gathers essential documents including the material inventory table, purchase invoice, shipping cost invoice, and invoices for any related expenses, along with the inventory list.
Unit purchase price = purchase price + costs of a ready-to-use goods (transportation, installation)
Estimated purchase price of each item purchased in the period = Total remaining value closing balance / closing inventory
During the interim audit, the auditor calculated the estimated purchase price of raw materials and later compared these estimates at year-end Any variance exceeding 5% of the total raw material value (1,244,833,167) necessitates an explanation The working paper indicates that no differences between the two estimated prices at the two points in time exceeded the 5% threshold (See more in the appendix)
The auditor engaged in discussions with clients and discovered significant changes in the purchase price and account balance of materials and goods in transit since the interim audit Consequently, the auditor advises against any further procedures for this area, emphasizing the importance of accurately and fairly recording the purchase price of material units.
• Preparation of a cost assessment order – Ref 3.1.200.20.0030
The procedure aims to verify the completeness, existence, and accuracy of the Cost of Goods Sold (COGS) The auditor recalculates COGS by analyzing the production inventory accounts, labor costs, and manufacturing overhead for the year, then compares the recalculated figure with the company's recorded COGS Any significant discrepancies must be investigated and explained For Nitto Denko Vietnam Co., Ltd., the auditor prepares a steering chart that includes this year's capital sales cost of VND 172,936,552,903 and compares it to the previous year's cost of VND 175,738,552,636, as well as estimates from the interim audit to identify any variances.
Next, the auditor proceeds to create a flow of expenses from the ledger
• Cost of production materials during the period = O/B + New purchases during the period – Export for general production – C/B
In which new purchase has been proven at working paper 3.1.200.20.0010
• Direct labor and manufacturing overhead will be audited at 3.1.200.20.0040
• Cost of work in progress for the period = O/B + Turnover to finished goods – C/B
• Cost of finished goods for the period = O/B – C/B
• Provision for inventory during the period = O/B – C/B
The cost of goods sold (COGS) encompasses various components, including the cost of raw materials used in production, direct labor expenses, and manufacturing overhead Additionally, it accounts for the costs associated with work-in-progress (WIP) and finished goods (FG) during the period, along with provisions for inventories and any tax refunds applicable for the year at Nitto Denko Vietnam.
Co, Ltd is refunded the amount of import tax, customers set off directly to COGS)
After performing the recalculation, KPMG calculates the COGS in the period as VND
172,936,552,903 This number matches the number recorded by the client (see more in the appendix)
Consequence: COGS is presented honestly and reasonably
To guarantee the completeness, existence, and accuracy of shared production cost accounts, the auditor develops a general production cost directive tailored to each small account based on its specific nature This includes categories such as wages, fuel, production tools, depreciation, outsourced services, and other cash-related general production costs Additionally, the auditor monitors year-over-year fluctuations and compares them with interim audit estimates For further details, please refer to the appendix.
Compared with previous years, it is found that FOH costs decreased slightly by 12% or 4.4 billion VND
COMMENTS AND RECOMMENDATIONS
Benefits
KPMG has effectively established comprehensive procedures for auditing inventory items, which include evaluating the internal control system, conducting substantive testing, and applying analytical procedures For clients with unique business models, the team of directors, managers, and seniors employs alternative methods to enhance the efficiency of the review process.
In the initial steps of the audit process, KPMG's expertise is leveraged to assess specific resources like gold, oil, and diamonds, which require specialized knowledge beyond the auditor's typical scope The audit program, meticulously crafted by seasoned auditors with the support of Key Audit Matters (KAM), ensures highly effective procedures for inventory items These procedures are independently executed for each assertion to guarantee the reliability of collected evidence, while remaining interconnected to identify potential issues and inherent risks of error and fraud During the inventory observation process, auditors gather critical information on obsolete, slow-moving, and damaged goods, as well as import and export activities at year-end, aiding in the evaluation of precautionary measures and shutdown procedures Overall, the author believes that these steps are comprehensive and well-suited for the inventory audit process.
In steps 3 and 4, the audit software MUS and KSP facilitate the verification of relevant claims through a systematic approach By selecting samples for the purchasing process, FOH enhances the objectivity of test results and minimizes risks associated with subjective examiner judgments.
In step 5, auditors perform a substantive test to verify that all inventory claims are accurate This involves selecting a sample from the inventory list and reassessing it against the purchase invoice and the quantities observed during the audit By comparing these findings with the client's recorded data, auditors can identify discrepancies and request adjustments if the differences are substantial.
Limitations and recommendations
In step 3, auditors face limitations when assessing inventory characteristics without expert assistance, as the diversity of stock types can complicate evaluations They often rely on the client's technical assessment department to identify work in progress and finished goods, which may be beyond their expertise Consequently, even with strict supervision, fraud can still occur during inventory observation due to the relative nature of these tests It is crucial for auditors to carefully determine the nature of each inventory type during the observation process While some products may seem straightforward, such as motorcycles, auditors may struggle to confirm whether a product qualifies as finished goods Therefore, seeking support from external experts is essential for accurate inventory assessment.
In assessing clients' internal control systems, KPMG currently lacks a comprehensive questionnaire tailored to each client, relying instead on a general inventory guide This limitation can hinder auditors, particularly those with less experience, in accurately understanding the client's operations, which may negatively impact risk assessment and audit procedures To enhance audit quality and adapt to evolving standards, KPMG must refine its approach to evaluating clients' internal controls It is recommended that senior auditors design targeted questions to gain deeper insights into the internal control systems, leveraging their direct experience with clients and their extensive auditing backgrounds across various industries to identify and address critical issues effectively.
In step 5, auditors face significant challenges when clients utilize basic accounting systems without accounting software, as this limits data collection and comparison capabilities For instance, if detailed tracking data for each commodity type is required for cut-off procedures, auditors may only have access to printed reports instead of exportable Excel files This situation complicates sample selection, particularly when using MUS software, which necessitates soft files for data sourcing To navigate these obstacles, it is essential to incorporate analytical procedures into substantive reviews, aiding auditors in risk identification and sample selection Recognizing the importance of analytical techniques can provide valuable insights into the company's overall balance sheet and transaction nature, while detailed data checks focus solely on individual items.
During my internship at KPMG Vietnam Co., Ltd., I gained valuable insights into the organizational structure and operational processes of an audit firm I had the opportunity to participate directly in financial statement audits, perform essential tasks, and acquire knowledge and experience from my colleagues, effectively applying the skills I learned in a practical setting.
The author gained practical insights into the inventory audit process at KPMG Vietnam Co., Ltd by participating in audits of client companies and comparing these experiences with theoretical knowledge acquired in school and practices from other large firms This article provides an overview of the audit process, illustrated with an example from a typical client, and includes personal comments and evaluations of the audit methodology From the perspective of an intern, the research objectives have been successfully met, reflecting a solid understanding of the standard theories learned.
Despite having limited qualifications and practical experience, the article benefits from valuable guidance and suggestions provided by teachers and KPMG teams, addressing its shortcomings and enhancing its overall quality.
The writer expresses heartfelt gratitude to Ms Nguyen Thi Thu Thuy, Ms Nguyen Thanh Thuy Ngoc, and the KPMG Vietnam teams for their invaluable support and guidance during the previous internship, which greatly contributed to the successful completion of the graduation thesis.
Thank you very much and best regards
Bộ Tài Chính (2014) Thông tư 200/2014/TT-BTC - Hướng dẫn chế độ kế toán doanh nghiệp NXB Tài chính, Hà Nội.
Bộ Tài Chính (n.d.) Hệ thống Chuẩn mực kế toán Việt Nam NXB Tài chính, Hà
Bộ Tài Chính (n.d.) Hệ thống Chuẩn mực kiểm toán Việt Nam NXB Tài chính, Hà
Đại học Kinh tế TP.HCM, Bộ môn Kế toán Kiểm toán (2007), đã xuất bản cuốn sách "Kiểm toán" qua NXB Lao động - Xã hội Năm 2008, Đại học Quốc Gia TP.HCM, cũng thuộc Bộ môn Kế toán Kiểm toán, phát hành cuốn "Thực hành kiểm toán".
NXB Đại học Quốc Gia TP HCM, TP HCM
KPMG International - KPMG Global (2021) KPMG Retrieved from https://home.kpmg/xx/en/home.html
KPMG International (2017) KPMG Audit Manual (KAM) Retrieved from KPMG
International: https://home.kpmg/xx/en/home.html
KPMG Vietnam offers extensive experience in tax inspection support and dispute resolution across various industries Their alumni program fosters valuable business connections among former employees, while their internship recruitment program provides students with practical work experiences to assess the suitability of KPMG's work environment For further inquiries or to explore consulting partnerships, potential clients can easily reach out to KPMG Vietnam.
Table 3.4: Checking the annuity of purchase transactions
Table 3.5: Checking the purchase price of raw materials
Table 3.10: Net Realizable Value (excerpt) ccc
Table 3.15: Assessment of exchange rate differences for trade payables
Table 3.11: Checking for slow-moving goods