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THEORETICAL BASIS ON THE APPLICATION OF
Overview of the materiality
1.1.1 The formation of material concepts in the field of accounting and auditing
Auditing has a long history, primarily focused on verifying the accuracy of financial statements During the Middle Ages, audit activities were largely governed by state and internal auditors The 18th century saw the expansion of auditing alongside the rise of the stock market and joint-stock companies, leading to a separation between enterprise ownership and resource management This shift created a need for independent audits to monitor managers and employees, thereby reducing fraud, as noted in the Auditing textbook from the University of Economics Ho Chi Minh City By the late 19th and early 20th centuries, the consolidation of large companies in Britain transformed the role of auditors, emphasizing their responsibility to serve not just the owners but also shareholders and society, ensuring that financial statements are free from significant errors.
A significant shift in the definition of audit materiality occurred in the early 1900s when UK financial statements transitioned from the phrase "true and correct" to "true and fair." In 1954, the AICPA Audit Committee published "Generally Accepted Auditing Standards, Their Meaning and Scope," highlighting the auditor's responsibility to assess material misstatements and maintain their opinion on crucial information For instance, a company with a supplier payable involving few but high-value transactions faces a greater risk of material misstatement compared to numerous low-value transactions Despite this understanding, the principles and guidelines for applying material concepts in auditing still lack substantial advancement.
In 1957, the concept of materiality began to receive attention, the American Accounting Association issued a view on the matter of materiality as follows: "An item is
Material information is defined as any data that could significantly impact an informed investor's decision-making process According to the English Institute in 1968, a matter is considered material if the absence, misrepresentation, or omission of such information could lead to a distortion of facts for the users of the publication.
In October 1987, the IAPC released the IAG 25 International Auditing Guidelines
"Material and Audit Risk" In July 1994, this guidance was revised and reissued as ISA
Materiality plays a crucial role in the planning and execution of an audit, as outlined in the guidelines of 320 It is not solely the auditor's responsibility; rather, it is an essential procedure integrated throughout the entire audit process From the planning phase to the implementation and completion stages, audit materiality is extensively applied by audit firms, ensuring a thorough and effective audit of financial statements.
In accounting, "materiality" is a key principle that emphasizes the importance of focusing on significant financial matters This principle guides accountants in determining the relevance and content of economic events, ensuring that only those factors that substantially impact financial statements are considered, while less significant details are disregarded.
According to Vietnamese Accounting Standard VSA No 01, information is deemed critical when its absence or inaccuracy can distort financial statements, potentially impacting the economic decisions of financial statement users Therefore, the materiality of information should be assessed through both quantitative and qualitative dimensions.
Materiality is a fundamental accounting principle that requires accountants to gather, process, and disclose sufficient information that is significant in nature This principle allows for items with similar economic characteristics to be grouped together in financial statements, regardless of their size However, even items of minimal value must be presented separately if they possess distinct and important economic content.
According to Vietnamese Accounting Standards (VSA 320), materiality refers to the significance of information, such as accounting figures, in financial statements Information is considered material if its omission or inaccuracy could influence the economic decisions of financial statement users, such as investors.
When considering the purchase of shares in a publicly traded company, investors prioritize the pre-tax profit target outlined in the business report This key metric significantly influences their investment decisions, and any inaccuracies in this area can adversely impact their choices.
Materiality is classified as follows: Overall materiality of the financial statements, performance materiality and the threshold for insignificant error
Overall materiality in financial statements refers to the threshold set by auditors that reflects the significance of information likely to influence user decisions This level of materiality serves as the foundation for auditors to assert that the financial statements present a "true and fair" view in all material respects.
Performance materiality refers to the value levels set by auditors that are lower than the overall materiality of financial statements This is done to minimize the risk of misstatements, ensuring that the aggregate impact of any unadjusted and undetected errors remains below the overall materiality threshold In certain instances, performance materiality may also apply to specific groups of transactions, account balances, or notes disclosures within the financial statements.
The threshold of insignificant error is a crucial concept in auditing, as it helps auditors identify and disregard minor misstatements that, although individually small, could collectively impact the financial statements materially Errors falling below this threshold do not require aggregation for communication with the entity or for forming the audit opinion While primarily applied during the audit's performance phase, this threshold is established concurrently with the determination of materiality.
1.1.4 The need to establish materiality in the audit of financial statements
In financial statement audits, auditors face time and cost constraints that prevent them from examining every document and transaction, making it challenging to identify all instances of concealment or fraud Therefore, determining materiality is crucial for enhancing the effectiveness and efficiency of the audit process Materiality serves as a key criterion for auditors to evaluate collected evidence and form their opinions on the financial statements It defines the maximum permissible limit for misstatements, guiding auditors in developing an appropriate audit strategy, planning their approach, allocating resources effectively, and focusing on critical areas to minimize audit costs while avoiding significant errors.
Requirements of Vietnamese Standards on Auditing on the establishment and
Materiality is a critical concept that plays a significant role in every phase of a financial statement audit Numerous accounting standards provide guidance on the application of materiality, ensuring its relevance during each audit period.
Vietnamese Accounting Standard VSA 320 outlines the concept of materiality, detailing the responsibilities of auditors and audit firms in its application during financial statement audits It provides guidance on determining both overall materiality and performance materiality, as well as the conditions under which materiality may need to be adjusted throughout the audit process Auditors are required to estimate acceptable misstatements to ensure that financial statements are devoid of material misstatements, with overall materiality typically expressed as a percentage of assets, sales, or profits.
Performance materiality involves a nuanced determination that goes beyond simple calculations, relying heavily on the auditor's professional judgment This judgment is informed by the auditor's understanding of the entity, which is continuously updated through risk assessment procedures, as well as the nature and extent of misstatements identified in previous audits.
During the audit, the auditor must continually assess misstatements and may need to revise materiality levels for the financial statements and performance materiality as new circumstances arise This could occur if the entity decides to sell its core business, acquires new information, or conducts additional audit procedures that enhance the auditor's understanding of the entity's operations For instance, if the actual business results significantly differ from those used to establish the materiality level at the end of the period, the auditor is required to adjust the materiality accordingly.
VSA 330 outlines the auditor's responsibilities in addressing risks of material misstatement during the audit process Auditors must identify and evaluate these risks while obtaining sufficient appropriate audit evidence through tailored audit procedures This involves assessing the nature, timing, and extent of risks and establishing materiality levels during the planning phase Audit procedures encompass both tests of controls and substantive tests, with materiality playing a crucial role in substantive tests, particularly in identifying significant transactions and selecting samples for detailed examination of financial statement items.
During a thorough examination, auditors may identify misstatements resulting from error or fraud, guided by VSA 450 to assess the significance of these findings This includes summarizing detected misstatements and evaluating whether revisions to the overall audit strategy and plan are necessary, particularly in light of uncorrected misstatements Auditors are required to aggregate all identified errors, excluding trivial ones, and must consider the implications of these misstatements If the nature and context of the errors suggest the possibility of additional misstatements, or if the total of identified misstatements approaches materiality thresholds set by ISA, auditors must adjust their audit approach accordingly.
320 If the auditor's request, the board of directors audited an examination and corrected the detected misstatement, the auditor should perform additional audit procedures to
Auditors must assess whether uncorrected misstatements are material, either individually or in aggregate, by considering their size, nature, and overall impact on the financial statements This involves discussions with the Board of Directors regarding unadjusted errors from both the current and prior periods If management asserts that these errors are not material, a written explanation is necessary According to VSA 700, auditors must evaluate the significance of these misstatements when forming their opinions on the financial statements, ensuring that sufficient disclosures are provided for users to understand the implications of material transactions Additionally, auditors must gather evidence to determine if the financial statements are free from material misstatement Under VSA 705, if the financial statements contain material misstatements or if adequate audit evidence cannot be obtained, the auditor is required to issue a non-unqualified opinion.
The relationship between audit risk and materiality
Audit risk refers to the possibility that an auditor or audit firm may incorrectly assess financial statements that have significant misstatements This risk is composed of three components: inherent risk, control risk, and detection risk.
1.3.2 Relationship between audit risk and materiality
During the planning phase of an audit, the auditor must assess various factors that could lead to significant misstatements in the financial statements Evaluating materiality concerning account balances and key transaction types is crucial for the auditor's selection process.
9 appropriate audit procedures and combining those audit procedures together reduce audit risk to an acceptable level
In an audit, there is an inverse relationship between materiality and audit risk: as the materiality level increases, audit risk decreases, and vice versa Auditors must carefully consider this relationship when deciding on the nature, timing, and extent of audit procedures For example, if an auditor sets a low acceptable materiality level during planning, audit risk will rise To mitigate this, the auditor can either enhance control risk assessments by performing additional tests of controls or adjust detection risk by altering the nature, timing, and extent of due diligence procedures.
Basis and method for establishing materiality
Materiality in auditing is a relative concept, meaning that a misstatement may be significant for one business while being inconsequential for another.
Establishing a universal monetary value for initial materiality estimates is not feasible for all audited clients Consequently, auditors typically calculate materiality as a percentage of specific items within the financial statements.
1.4.1 Overall materiality of financial statements
Materiality is influenced by the nature of the enterprise, its financial activity status, and the information user's objectives As outlined in the VACPA (2016) sample audit program, auditors typically rely on specific financial criteria to assess materiality.
Materiality assigned to each item is the maximum error level of that item When allocating materiality to each item, the auditor bases on his or her company's allocation
When conducting an audit, it is essential to consider the auditor's experience, the nature of the item being audited, and evaluations of inherent and control risks, along with the appropriate allocation of time and costs As outlined in the VACPA (2016) sample audit program, the materiality assigned to each item typically falls between 50% and 75% of the overall materiality determined in the audit process.
Applying materiality in the audit of financial statements
1.5.1 Applying materiality in planning phase
During the audit planning stage, auditors establish materiality levels after understanding the client and signing the audit contract According to VSA 320, if certain transactions, account balances, or disclosures have errors below the overall materiality of the financial statements but could still influence users' economic decisions, auditors must determine specific materiality levels for each class This assessment guides the design of appropriate audit procedures.
Establishing materiality levels is crucial for auditors as it guides the determination of risk assessment procedures, helps identify and assess risks of material misstatement, and informs the nature and extent of further audit procedures When materiality is deemed low, auditors must collect more evidence, leading to an increase in the number of test elements in substantive tests to mitigate audit risk to an acceptable level.
VACPA's 2016 sample audit program guides the determination of materiality in the audit planning stage, including 7 steps as follows:
Step 1: Identify the benchmark used to estimate materiality and explain the reasons for selection
Commonly selected matching criteria can be profit before tax, net sales, gross profit, total cost, total equity and net assets
The choice of metrics is primarily driven by the information needs of financial data users, including investors, banks, the public, and government agencies Additionally, various factors influence the selection of these criteria.
➢ Elements of financial statements (e.g., assets, liabilities, capital, revenues, expenses) and performance measures in accordance with general financial reporting requirements (e.g., financial position, results of operations, cash flow)
➢ Items on the financial statements that users tend to be interested in
➢ Characteristics of business activities and industry characteristics of the audited entity
➢ The entity's equity structure and how it raises funds
➢ Relative changeability of identified criteria: Normally, auditors should choose criteria that are relatively stable over the years
PBTCO, Total Revenues and Net Assets are the metrics that influence the users of the financial statements
Clients typically include publicly traded companies or established manufacturing firms with a consistent operational scale, characterized by minimal bad debts and low risk levels The objective is to sustain steady profitability In this context, the audit team can consider the overall industry as a reliable source of income, using Profit Before Tax as the standard benchmark for evaluation.
The Company operates as a profit-oriented entity with a low-profit margin, making the general scenario from MBT particularly relevant for the Group Total revenue serves as the benchmark for low-profit organizations, highlighting the importance of monitoring the violation of profit before tax (PBT) over the years.
An information technology company focused on developing new software products and related services is currently prioritizing software development, leading to significant capitalized costs and operating expenses without substantial revenue Consequently, users of financial statements typically pay closer attention to total assets, net assets/equity, and total expenses, while profit before tax and company operations hold less importance at this stage of the business lifecycle With a minimal profit margin, the company's financial performance reflects its growth-oriented strategy.
The business has maintained a stable sales markup of 4-5% over the years, allowing the audit team to establish that net sales serve as a reliable benchmark for performance evaluation.
The company is positioned in the lubricant oil manufacturing and processing industry, which presents significant growth opportunities in Vietnam Given the favorable economic and environmental conditions, the company is currently in a developmental stage of its lifecycle Consequently, users of financial statements primarily focus on key metrics such as profit before tax (PBT), total assets, and net assets.
A focuses on producing and processing lubricant oil for transportation vehicles, offering jetty lease services and related ancillary services, as well as leasing warehouses, chemical tanks, and auxiliary tank equipment Currently, the company is in the pre-operating phase, resulting in no revenue and a loss position.
Total assets serve as a key benchmark for start-up entities, which often have not generated significant revenues or profits Consequently, total assets are deemed the most suitable presumed benchmark for evaluating these businesses.
Step 2: Record the selected criteria value
Criterion value is typically determined using pre-audit data pertinent to the audit period for which the firm must provide an opinion For mid-term audits that support year-end assessments, auditors may utilize the best estimates for the entire year based on available estimates and actual data up to the midpoint of the audit period The chosen criterion value will be documented in the audit file, specifically in working paper A710 as per VACPA guidelines.
Step 3: Select the appropriate ratio to estimate the overall materiality and explain why
The ratios recorded in this sample are suggested ratios that are commonly applied by international auditing practice in Vietnam:
The audit firm may use these ratios or may set forth other criteria and ratios depending on each firm's policy and in accordance with applicable auditing standards
Auditors must exercise professional judgment to determine the appropriate percentage for the selected criterion, as this decision influences the extent of audit work required, particularly the number of samples to be examined The choice between a high or low percentage is based on the auditor's evaluation of the risks of material misstatement Additionally, it is essential to document the rationale for the chosen ratio in the working papers to justify the overall materiality of the financial statements.
Step 4: Determine overall materiality with the formula: Overall materiality = Criterion value x Percentage
In specific situations involving the auditee, if certain groups of transactions, account balances, or disclosures are individually misstated but collectively could influence the economic decisions of financial statement users, the auditor must assess the materiality levels relevant to each group of transactions and account balances, as well as any explanatory information.
When establishing a distinct materiality level for each category of transactions, account balances, or disclosures, auditors must not only rely on professional judgment but also take into account several key factors.
The laws and regulations that govern the preparation and presentation of financial statements can significantly influence user expectations concerning the disclosure and amounts of specific items, such as transactions with related parties and board member remuneration.
INTRODUCTION OF KPMG VIETNAM CO., LTD
KPMG Vietnam Co., Ltd
KPMG Vietnam, part of one of the world's leading firms in audit, consulting, and financial services, operates extensively in Vietnam and Cambodia With four strategically located offices in Hanoi, Ho Chi Minh City, Da Nang, and Phnom Penh, KPMG Vietnam & Cambodia is well-equipped to serve its clients across the region.
Ha Noi Ho Chi Minh Da Nang Phnom Penh
Level 10, Sun Wah Tower 115 Nguyen Hue Street, District 1
74 Bach Dang Street, Hai Chau Ward, Hai Chau District
History of the company
KPMG appeared in Vietnam in 1994 with 3 offices in Hanoi, Ho Chi Minh City, and
Established on December 17, 2015, KPMG Da Nang has rapidly grown to become one of Vietnam's largest professional service providers, employing over 1,700 specialists Notably, KPMG serves clients that represent 20% of the world's largest economic groups.
In Vietnam, such names as Massan, HSBC, City Bank, Honda, Pepsi, Mercedes Benz, Prudential, LG, Samsung, Nestle, Vinamilk and many other famous corporations
At KPMG Vietnam, the company recognizes that its greatest asset is its people, who bring diverse expertise from various fields and share a common set of values This collaborative environment fosters continuous learning and growth, enhancing KPMG's innovative capabilities and broadening its impact in the industry.
Organizational structure and services provided
2.3.1.1 Chart 1 The organizational structure of KPMG
- Dispute Resolution and Controversy Services
Branches function in Ho Chi Minh Office
The Board of Directors, comprising the General Director and Deputy Directors, plays a crucial role in company governance The General Director serves as the official representative of the company, bearing legal responsibility for all its activities Meanwhile, the Deputy Directors oversee specific departments, assisting the General Director in developing and implementing the company's plans and policies.
All members of the Company's Board of Directors are Partners Surname is responsible for evaluating audit risk, determining the signing of audit contracts, conducting the final review of audit records, and is authorized to sign and issue both the Audit Report and Management Letter to clients.
The company is structured into various divisions, each responsible for distinct tasks Every department features a hierarchical management structure that includes the following levels: Partner, Director, Senior Manager, Manager, Assistant Manager, Senior, and Audit Assistant.
Business division: There are 3 main departments: Auditing Department, Consulting Department, and Tax Department
The Audit Department is divided into four departments in charge of different audit areas:
- Auditing Department I: An audit department specialized in the field of forecasting projects and non-governmental organizations
- Auditing Department II and IV: two specialized departments in the field of auditing manufacturing enterprises
- Auditing Department III: the department in charge of auditing financial institutions
The audit department at KPMG, while maintaining a clear division of responsibilities, fosters a collaborative environment where team members support one another both professionally and personally This teamwork significantly enhances the quality of their audit work, leading to highly regarded results.
The consulting department offers a range of services including financial consulting, business consulting, copyright services, market penetration strategies, restructuring, and legal support for mergers and acquisitions These services are designed to enhance management skills and improve the professional quality of businesses.
Tax Department operates independently, providing tax and legal consulting services
The Administration Department is responsible for the financial and accounting management of the company, overseeing bookkeeping, managing official documents, and developing financial regulations and detailed revenue and expenditure plans It actively collaborates with various departments to address revenue and expenditure issues while optimizing costs Meanwhile, the IT Department ensures the efficient and secure operation of the company's information network by providing computer support, software security, and hardware repairs.
The Human Resources Department is responsible for recruiting and training personnel while collaborating with the Retain department to organize staff into small groups tailored to the specific needs of audit contracts Overall, the structure of each team is designed to effectively allocate human resources.
25 an audit team leader (Senior), 2-3 audit assistants (Audit Assistant 1, Audit Assistant 2), and interns.
Audit methodology and tools
KPMG's audit methodology, known as the KPMG Audit Manual (KAM), integrates International Standards on Auditing (ISAs) requirements and guidelines, significantly enhancing audit quality at KPMG Vietnam Key components of KAM include the Global Risk Management Manual and International Standards Reports Manual, alongside International Auditing Practice Statements (IAPAs) that offer practical guidance for auditors By adhering to KAM's comprehensive framework, KPMG auditors ensure consistent audit procedures worldwide, aligning with KPMG's international policies Continuous annual updates to KAM equip auditors with the latest knowledge, reinforcing the commitment to high-quality audits.
KPMG is in the process of adopting the KPMG Audit Implementation Guidelines (KAEG) to enhance the audit system for companies, ensuring high-quality and attentive audit services By leveraging a deep understanding of business processes and compliance with Vietnamese Accounting Standards (VAS) and International Financial Reporting Standards (IFRS), KAEG equips auditors with the necessary knowledge and information to uphold audit quality.
KPMG has selected IDEA as its global data analysis tool, enabling users to efficiently read, display, analyze, manipulate, sample, and extract data from diverse sources, ranging from mainframes to PCs, including files generated from printed reports Notably, IDEA supports importing various file types and conducting in-depth data analyses, such as comprehensive statistics, profiles, and summaries Users can also perform exception tests to identify unusual items using both simple and complex criteria, as well as carry out calculations and tests for missing or duplicate entries.
KPMG leverages advanced technology in its audit processes through the eAudit and KCW applications, which facilitate the storage of working papers and offer customizable electronic workflows This innovation enhances flexibility in managing the company’s audit contracts.
APPLICATION OF MATERIALITY IN FINANCIAL STATEMENT
Applying materiality in the audit of financial statements performed by KPMG
According to KAM, before making a detailed audit plan, the auditor will develop an overall audit strategy by determining:
- Accounts and other material disclosures, and related audit objectives
The auditor will delve into specific elements of the established master plan, utilizing professional judgment to assess potential material misstatements during the planning phase These judgments serve as the foundation for the audit process.
➢ Content, schedule, and scope of risk assessment procedures
➢ Identify and assess the risks of material misstatement in the financial statements
➢ The nature, timing, and extent of further additional audit procedures
➢ The steps in determining materiality during this period include
➢ Determine overall materiality for financial statements
➢ Determine a lower level of materiality for items and special notes
➢ Determine the error threshold to consider (AMPT)
3.1.1.1 Determination of materiality for the financial statements as a whole
Select the appropriate basis for establishing materiality
The criteria selected as the basis for benchmarking depends on the nature and field of operation of the audited units
Below is a guide to selecting criteria to establish overall materiality for the following areas:
Industry Presumed benchmark Other metrics Notes
Total revenues, total assets, net assets
The presumed likely key considerations for the users of the financial statements of profit focused entities are PBTCO, total revenues and net assets
Total revenues, total assets, net assets
Banks typically exhibit substantial total assets and liabilities compared to PBTCO Although PBTCO serves as the primary benchmark, total assets are also a critical metric due to their significance and prominence in the banking sector, making them a focal point for users.
Total revenues, net assets, total assets
Insurers typically exhibit substantial total assets and liabilities in relation to profit before tax and capital obligations (PBTCO) Although PBTCO serves as a key benchmark, total assets also emerge as a significant metric, as stakeholders often prioritize it due to its magnitude and relevance to the business.
Total revenue, total assets, net assets
Total assets is likely to be an important other metric, as users likely focus on it given its size and importance to the business
Entities that trade mainly for capital gain, e.g Property investment
Total assets Net assets, profit before tax
Users primarily focus on asset value, as profits are generated through the appreciation of underlying assets, making total assets the key benchmark for evaluation.
Total revenue, net assets, profit before tax
Total assets is likely to be the benchmark, as users likely primarily focus on it given its size and importance to the business
Startup entities not predominantly focused on asset development/capital expenditure
As start-up entities have not yet earned significant revenues or profits, total expenses is the presumed benchmark
Newly established company mainly focuses on asset/capital development expenses
Total assets Total expenses, net assets
Since the companies are newly established, have not yet generated much revenue and profit, the appropriate indicator is total assets
The business is still operating but at a low profit or at a loss, profit before tax is no longer useful as an indicator
Profit before tax, Net assets
Using profit before tax as a benchmark can often result in negative or low figures, rendering it ineffective for assessing materiality; therefore, total revenue can serve as a viable alternative for evaluation.
In some companies where profits are consistently low (for example, food retailers), pre-tax profit would be an appropriate indicator
Total distributed profit and other income
Under a predetermined profit plan, retirees receive payouts based on the financial stability of these plans and the effectiveness of their management and investment strategies The primary goal of reporting on these plans is to regularly deliver insights into their financial resources and activities, aiding in the evaluation of the long-term relationship between the plan's resources and its overall performance.
Total assets will be an indicator of interest to users of financial statements because it is the total amount of members that will eventually be paid
Non-profit organizations and public sector organizations with custody of assets,
Total assets Total expenses, net assets
ISA 320 highlights that state agencies responsible for supervising public assets can use total assets as a key indicator of interest This approach is particularly relevant for organizations that hold custody of assets while facing certain limitations.
Government agencies face challenges with asset maintenance costs and low revenue, particularly in local authority-managed courts The financial burden associated with court maintenance falls primarily on the community.
Non-profits and public sector organizations that generate revenue and/or bear costs, but are not profit- focused, e.g museums, universities
Total revenue or total cost
Total revenue or expenses, Operational costs Net assets
Non-profits and public organizations typically maintain strict control over their costs, operating on a balanced budget with minimal or no profits Consequently, total revenue and expenses serve as key indicators for these entities, as stakeholders are primarily interested in understanding how the organization allocates and utilizes the funds it receives.
Auditors need to take a close look at these organizations, determining if these entities are profit-focused; even if these are tax- exempt businesses, if they are concentrated
If you focus on profit, a suitable target might be profit before tax
Table 3.1 Guidelines for selecting indicators to establish overall materiality for sectors
If there is a change in the criteria selected as the basis for calculating the benchmark used for the previous period, the auditor must explain this
Determine the value of the selected indicator
The value of the selected indicators is the base level taken directly from the records in the company' s accounting books, not reassessment
Appropriate financial data to be used in determining the value of the selected indicator include:
- Business results and financial position of previous years
- Plan or forecast current year's business results and financial situation
- Business results and accumulated financial position up to this year
However, in some cases, auditors need:
- Estimated value of the indicators
When estimating item amounts, key financial data includes the current financial position, prior year's operational results, and the financial status at the reporting date Planned and forecasted funds for the current year are adjusted to reflect any material changes, such as company acquisitions or significant shifts in the business's financial environment.
KPMG typically conducts its planning prior to the end of the fiscal year, which means that auditors cannot rely on the complete financial data for the entire period to assess the value of selected criteria Instead, they utilize the most recent financial information available, such as the Profit Before Tax from Continuing Operations (PBTCO) for the first nine months of the year, to estimate the total 12-month figure.
Usually, PBTCO is often chosen as a benchmark In the event of unusual fluctuations in profitability, the auditor will use the standardized PBTCO ratio Ways to standardize benchmarks:
✓ Adjustment: special items, unusual occurrences (decrease in value of goodwill, income or loss from bad debts, profit/loss from liquidation)
✓ Calculate the average value: When the benchmark varies a lot from year to year
Illustration at clients A and B, and applied accounting methods
A Vietnam-based limited liability company, A Company, operates with two or more members and focuses on the manufacturing and exporting of aquatic goods, primarily shrimp Additionally, the company engages in importing aquatic commodities for export processing, lending machinery and equipment, and trading activities.
Company A was established to manufacture products, which are then sold to the market by its parent company, Company X As a result, Company A's primary consumers are the related companies within the X group.
A has the following ownership structure: Company X (95% parent company, equivalent to VND 95,000,000,000) and Mr Q (5%, equivalent to VND 5,000,000,000)
Fiscal year: starting 1/1/2020 and ending 31/12/2020
Applicable accounting book form: General journal
Applicable accounting policies: Vietnamese Accounting Standards – VAS, Vietnamese Accounting System and other relevant current regulations
Set the measures for materiality
Company A is a stable, privately-held entity engaged in commercial activities To assess its performance, stakeholders typically focus on key financial metrics such as profit and revenue, which are essential for evaluating the company's overall success.
- Profit before tax (other metrics)
B One Member Limited Company is a single-member limited liability company established in Vietnam, specializing in the production of nutritional additives for animal feeds and veterinary medicines The company also offers consulting services in the feeding industry and engages in the trade of materials for animal feeds.
Before 2011, the company is the member of X Group In 2012, the Y Group purchased the company B, which purchased the company and has become the member of Y
However, no significant changes in policy, business environment was made
The Company has sales to 3rd parties and inter-Company The biggest customer of B is
Y The Company has a fiscal year starting from January 1, 2020 and ending on December
31, 2020 The Company uses the currency as Vietnam Dong (VND)
The Company applies “Vietnamese Accounting Standards”, “Circular No
200/2014/TT-BTC” and other circulars guiding the implementation of “Accounting
Standards of the Ministry of Finance” in preparing and submitting present financial statements
The audited entity has a good business status, with debt accounting for a modest share of total assets and revenue and profit growth
Set the measures for materiality
COMMENTS AND RECOMMENDATIONS
Comments
4.1.1 Comments on the process of auditing financial statements at KPMG Co., Ltd 4.1.1.1 Advantages
KPMG meticulously evaluates risks when accepting audit contracts, ensuring that their clients are typically substantial organizations with robust internal control systems The firm fosters efficient communication of concerns, contributing to a continuous improvement in audit quality This enhancement is supported by a stringent review process involving multiple levels, from audit assistants to managers, culminating in assessments by ownership, review teams, and the quality control department As a result, KPMG is increasingly trusted by a growing client base.
KPMG has developed the KAM on a global scale to enhance uniformity in audit practices This standard program aims to improve auditors' compliance, thereby regulating audit quality more effectively and facilitating the international mobility of KPMG employees.
KPMG's audit team is highly professional, with most members holding esteemed practice certifications and possessing extensive experience They uphold integrity and maintain professional judgment throughout the audit process KPMG Vietnam is dedicated to enhancing employee expertise by funding study costs for certifications like ACCA and CPA, alongside offering various online training courses Additionally, all employees are required to participate in monthly rigorous online competence assessments to ensure continuous professional development.
The increasing demand for audits has compelled KPMG to compete with other firms on audit fees, leading to the omission of certain audit procedures to manage costs while maintaining quality Additionally, auditors typically spend only 1 to 4 weeks on-site at client firms, particularly during the peak financial reporting season from September to March, requiring them to work continuously to meet deadlines.
High client volumes hinder the ability to thoroughly study and update recent information on each customer before commencing work Additionally, after extended periods at the client's firm, audit assistants must seek assistance from senior auditors to address challenges, often requiring further communication with the client for additional evidence This process can negatively impact audit quality and prove inconvenient and time-consuming for both the audit team and the client.
KPMG's global audit program, grounded in International Auditing Standards (ISA), can pose challenges for auditors in Vietnam due to its misalignment with local business characteristics Consequently, when reviewing financial accounts for Vietnamese enterprises, auditors must integrate both Vietnamese Standards on Auditing (VSA) and Key Audit Matters (KAM) principles to ensure compliance and relevance.
KPMG experiences significant employee turnover at the end of peak periods due to high work pressure and better job opportunities elsewhere, necessitating annual recruitment of new staff This ongoing cycle leads to time-consuming and costly training processes Additionally, the allocation of auditors to clients is primarily budget-driven rather than job-specific, often resulting in insufficient staffing for complex tasks Consequently, auditors are compelled to work overtime, which adversely impacts their health and can lead to delays in the audit process.
4.1.2 Comments on determining and applying materiality in the audit of financial statements at KPMG Co., Ltd
KPMG utilizes various approaches to determine materiality based on the specific object, client needs, and auditor capabilities By analyzing the actual processes of materiality assessment in companies A and B, one can uncover strengths and weaknesses, leading to effective solutions for improvement.
KPMG has utilized materiality for targeted clients and chosen specific benchmarks to provide financial statement users with insights into the business's condition and the associated risks that are of interest to investors.
KPMG regularly conducts email surveys and requires auditors of all levels to participate, with knowledge primarily derived from KAM As a result, most KPMG auditors are well-versed in the core principles of KPMG and understand the application of materiality in the audit process.
✓ KPMG's auditors usually follow the provisions of VSA 320, ISA 320, and ISA
450, as well as KAM's standards on how to apply materiality and undertake tests based on materiality To examine identified misstatements, audit accordingly and based on materiality
KPMG evaluates materiality by analyzing an entity's financial statements, aiming to determine a suitable materiality threshold that considers the collective needs of users.
✓ KPMG's auditors have analyzed, evaluated, and given appropriate materiality for each type of business, then specific components will be considered and compared with materiality
At KPMG, the process of establishing materiality during the planning phase mainly focuses on large clients, often neglecting smaller operations Consequently, auditors may overlook or inadequately assess these smaller clients, leading to evaluations of omitted bias that rely more on personal judgment than on a standardized materiality comparison.
Auditors assess materiality levels to determine the impact of identified misstatements, focusing on the misstatement's value rather than its nature Misstatements can arise from errors or fraudulent activities, highlighting the importance of understanding their origin.
Relying solely on the proportional method of determining materiality limits an auditor's ability to be proactive in various unique situations Therefore, it is essential for auditors to employ additional appropriate methods to effectively address these specific cases.
KPMG faces challenges in establishing materiality for new clients who have not undergone prior audits Auditors invest time understanding the clients' processes, revenue streams, and associated risks, which influences their judgment in assessing materiality.
63 the selection of benchmarks and materiality will occasionally differ, resulting in an audit's ineffectiveness
Recommendations
KPMG Vietnam should integrate global and Vietnamese accounting standards to enhance the support provided to auditors during client audits in Vietnam By adapting terminology to align with local standards, auditors will be able to better understand and communicate effectively with client organizations.
During peak season, audit assistants at KPMG face significant challenges and pressure when gathering information from clients To address these issues, KPMG should establish a specialized research department This department would focus on researching and acquiring in-depth knowledge of the audit process for each client, ultimately enabling KPMG to provide valuable guidelines and support throughout the audit process for all clients.
KPMG should enhance its personnel incentive policies by implementing salary increases and bonuses during peak seasons to motivate employees effectively Additionally, organizing post-peak vacations can alleviate stress, boost job satisfaction, and improve employee retention within the company.
After three months of interning at KPMG Vietnam Co., Ltd., the writer gained invaluable insights and practical experiences that contrasted sharply with theoretical knowledge acquired in school The foundational concepts taught by professors facilitated the writer's ability to quickly adapt to the real-world working environment The thesis primarily examines the role of materiality in financial statement audits, focusing on the planning, execution, and conclusion phases The writer actively participated in the planning and execution stages, which, although only a small part of the overall audit process, provided a clear understanding of how to establish and apply materiality, particularly in the context of sampling and detailed on-site testing.
The study demonstrates that materiality is effectively applied in the audit of financial statements at KPMG Vietnam Co., Ltd., aligning with KPMG's global audit program and Vietnamese examination standards The author provides recommendations aimed at enhancing the effectiveness of materiality usage in audits, acknowledging the limitations of knowledge and the challenges posed by time, experience, and qualifications The writer seeks constructive feedback from peers and professors to improve this thesis further.
Working paper A710 according to VACPA's form –Establishing
Ngày kết thúc kỳ kế toán:
Nội dung: XÁC ĐỊNH MỨC TRỌNG YẾU (KẾ HOẠCH – THỰC TẾ)
Người thực hiện Người soát xét 1 Người soát xét 2
Mức trọng yếu (kế hoạch - thực tế) được xác định và phê duyệt theo chính sách của DNKiT, nhằm thông báo cho nhóm kiểm toán về mức trọng yếu kế hoạch trước khi tiến hành kiểm toán tại khách hàng Đồng thời, nhóm kiểm toán cũng có trách nhiệm xác định lại mức trọng yếu thực tế trong giai đoạn kết thúc kiểm toán để đánh giá tính đầy đủ của các công việc và thủ tục kiểm toán đã thực hiện.
B XÁC ĐỊNH MỨC TRỌNG YẾU
Nội dung Kế hoạch Thực tế
Tiêu chí được sử dụng để ước tính mức trọng yếu
[Đánh dấu vào ô lựa chọn]
LN trước thuế Doanh thu thuần Tổng chi phí Vốn chủ sở hữu Tổng tài sản Khác
LN trước thuế Doanh thu thuần Tổng chi phí Vốn chủ sở hữu Tổng tài sản Khác
Nguồn số liệu để xác định mức trọng yếu
[Đánh dấu vào ô lựa chọn]
BCTC trước kiểm toán BCTC năm trước
Kế hoạch SXKD Ước tính
BCTC đã điều chỉnh sau kiểm toán
Lý do lựa chọn tiêu chí này
Giá trị tiêu chí được lựa chọn (a) Điều chỉnh ảnh hưởng của các biến động bất thường (b)
Giá trị tiêu chí được lựa chọn sau điều chỉnh (c)=(a)-(b)
Tỷ lệ sử dụng để ước tính mức trọng yếu
[Đánh dấu vào ô lựa chọn và ghi cụ thể tỷ lệ % lựa chọn trong ngoặc vuông]
[0,5%-3%] Doanh thu thuần [0,5%-3%] Tổng chi phí [1%-5%] Vốn chủ sở hữu [1%-2%] Tổng tài sản [ ] Khác
[0,5%-3%] Tổng chi phí [1%-5%] Vốn chủ sở hữu [1%-2%] Tổng tài sản [ ] Khác
Lý do lựa chọn tỷ lệ này
Mức trọng yếu tổng thể (e)=(c)*(d)
Tỷ lệ sử dụng để ước tính mức trọng yếu thực hiện (f)
Mức trọng yếu thực hiện (1) (g)=(e)*(f)
Tỷ lệ sử dụng để ước tính ngưỡng sai sót không đáng kể (h)
Lý do lựa chọn tỷ lệ này
Ngưỡng sai sót không đáng kể/ sai sót có thể bỏ qua
Mức trọng yếu thực hiện do KTV xác định nhằm giảm thiểu ảnh hưởng của các sai sót không được điều chỉnh và phát hiện, đảm bảo rằng các sai sót này không vượt quá mức trọng yếu đối với báo cáo tài chính tổng thể Điều này giúp hạ thấp mức độ chấp nhận được của các sai sót cho các giao dịch, số dư tài khoản hoặc thông tin thuyết minh Áp dụng mức trọng yếu thấp hơn cho các khoản mục cụ thể là cần thiết để đảm bảo tính chính xác và độ tin cậy của báo cáo tài chính.
Có áp dụng mức trọng yếu thấp hơn cho các nhóm giao dịch, số dư TK hay thông tin thuyết minh trọng yếu không?
Theo quy định của CMKiT số 320, nếu có sai sót trong các nhóm giao dịch, số dư tài khoản hoặc thông tin thuyết minh (gọi là “khoản mục”) dưới mức trọng yếu đối với tổng thể báo cáo tài chính nhưng có khả năng ảnh hưởng đến quyết định kinh tế của người sử dụng, kiểm toán viên cần xác định mức trọng yếu hoặc các mức trọng yếu cho từng khoản mục này (áp dụng mẫu A720).
Ghi chú về lý do thay đổi mức trọng yếu trong quá trình kiểm toán
Theo quy định của CMKiT số 320, kiểm toán viên (KTV) phải điều chỉnh mức trọng yếu nếu có thông tin mới trong quá trình kiểm toán có thể làm thay đổi mức đã xác định trước KTV cần ghi rõ lý do cho sự thay đổi này, và việc điều chỉnh phải được phê duyệt bởi thành viên Ban Giám Đốc phụ trách cuộc kiểm toán.
Nếu mức trọng yếu tổng thể được áp dụng thấp hơn mức đã xác định trước, KTV cần xem xét việc điều chỉnh mức trọng yếu và đánh giá lại nội dung, lịch trình cũng như phạm vi của các thủ tục kiểm toán tiếp theo để đảm bảo tính phù hợp.
Căn cứ vào bảng trên, KTV chọn ra mức trọng yếu để áp dụng khi thực hiện kiểm toán
Nội dung Năm nay Năm trước (2)
Mức trọng yếu tổng thể
Mức trọng yếu thực hiện
Ngưỡng sai sót không đáng kể/sai sót có thể bỏ qua
Giải thích nguyên nhân chênh lệch lớn về mức trọng yếu của năm nay so với năm trước (nếu có)
Nếu mức trọng yếu tổng thể và mức trọng yếu thực hiện năm nay thấp hơn so với năm trước, kiểm toán viên cần đánh giá khả năng tồn tại sai sót trọng yếu trong số dư đầu năm.
Lưu ý: (1) Các tỷ lệ (%) này là ví dụ Các DNKiT tự xác định theo chính sách của DNKiT và xét đoán của KTV