FACULTY OF ACCOUNTING AND AUDITING BACHELOR THESIS THE PROCESS OF EVALUATING THE INTERNAL CONTROL SYSTEM IN AUDITING FINANCIAL STATEMENTS BY KPMG VIETNAM CO., LTD Instructor: MA... T
The necessity of the research
To ensure accurate financial reporting and meet user needs, auditors perform a multi-step assessment using various technical methods A crucial aspect of this process is evaluating the internal control system, which enables auditors to propose suitable audit procedures As Vietnamese businesses diversify across different sectors, effectively assessing internal controls helps auditors identify risks, thereby reducing audit time, minimizing costs, and enhancing efficiency by streamlining extensive testing procedures Consequently, examining the internal control system evaluation process in financial statement audits is a critical and timely issue that warrants focused attention.
Recognizing the importance of the internal control system through internship period at KPMG, the author chose the topic:
"The process of evaluating the internal control system in financial statement audit by KPMG Vietnam Co., Ltd." as the graduation thesis.
Research objectives
- Describe and illustrate the internal control system evaluation process by KPMG Vietnam Co., Ltd at client A and client B
- Analyze the strength and weaknesses of the internal system evaluation by KPMG.
Research method
- Collect related data through textbooks, internet and electronic archives of the company, compare with the practical application
- Combine data collection from customers' books and interviewing the audit team
- Read and analyse current accounting standards, auditing standards, working papers and other related documents.
Objective and the scope of the research
- Objective: The internal inspection system in auditing financial statements at KPMG.
- Scope: The internal control system during the time providing services of Financial Statement assurance for client A & client B.
Structure of the research
The internship report will be developed in four parts, including:
- Introduction chapter: The necessity of the topic, research objectives, research methods, objective and scope, and structure of the research.
INTRODUCTION OF KPMG VIETNAM CO., LTD
KPMG Vietnam Co., Ltd
KPMG Vietnam is a leading member of the Big Four firms, offering comprehensive audit, consulting, and financial services globally and within Vietnam The company operates four offices strategically located in Hanoi, Ho Chi Minh City, Da Nang, and Phnom Penh, Cambodia.
Ha Noi Ho Chi Minh Da Nang Phnom Penh
74 Bach Dang Street, Hai Chau Ward, Hai Chau District
History of the company
KPMG has been operating in Vietnam since 1994, with offices in Hanoi, Ho Chi Minh City, and Da Nang, which was established on December 17, 2015 With over 1,700 specialists, KPMG is now one of the largest professional service providers in the country The firm serves clients that represent 20% of the world's largest economic groups, including prominent names such as Massan, HSBC, Citibank, Honda, Pepsi, Mercedes Benz, Prudential, LG, Samsung, Nestle, and Vinamilk.
KPMG Vietnam considers its employees as the most valuable and unique asset of the company With a diverse workforce drawn from various disciplines, the team is unified by shared values, fostering an environment conducive to learning and growth This diversity not only enhances KPMG's capabilities but also contributes to its innovative ideas and extensive value proposition.
Organizational structure and services provided
Chart 1 Organizational structure of KPMG
- Dispute Resolution and Controversy Services
Branches function in Ho Chi Minh Office
The General Director is responsible for overseeing all company operations in Vietnam, directly managing the Ho Chi Minh City office and indirectly supervising the Hanoi office through the Deputy General Director Additionally, the General Director plays a key role in developing business strategies and diversifying the range of services offered.
♦ Professional departments: KPMG Vietnam's current services are provided by three main professional departments: Auditing Department, Consulting Department, and Tax Department
The Administration Department encompasses finance, accounting, and information technology, overseeing the company's financial management, employee payroll, document handling, and safety measures It is responsible for updating financial regulations, creating detailed revenue and expenditure plans, and collaborating with other departments to address financial challenges Additionally, the Informatics Department ensures the smooth and secure operation of the company's information network by providing necessary hardware and software.
The Audit Department is structured into two divisions: one focuses on the banking sector while the other oversees various industries, including commerce, services, and projects KPMG excels in auditing within the banking sector, commanding an impressive 80 percent market share among foreign banks operating in Vietnam.
The Consulting Department offers comprehensive financial, business, and human resource consulting services aimed at identifying ideal candidates for various positions This includes specialized corporate governance consulting, support in enhancing information technology for management practices, and strategies to elevate employee management standards within organizations.
♦ Tax Department: operates independently to provide tax and legal consulting services
THE PROCESS OF EVALUATING THE INTERNAL CONTROL
Audit procedures for Financial Statement at KPMG
KPMG performed the audit following its Audit Manual, which serves as the essential audit support software for KPMG employees globally The KAM system provides rigorous guidelines for delivering financial statement audit services Key features of this software include comprehensive instructions and support for professional staff during the audit process.
• Meet applicable national and international standards: KPMG always provides high-quality audit services that are risk-based and in accordance with international auditing standards
• Highlight the significance of basic testing procedures, as well as effective risk assessment and internal control activities
• Utilize a multi-faceted approach with professionals with relevant industry experience with sufficient knowledge, skills and experience to deliver the service
• Provides the foundation for a unified audit approach across all KPMG services and strengthens global collaboration
KPMG's audit consists of 5 basic steps
Chart 2 Steps of an audit at KPMG
Planning is the first stage of an audit at KPMG, and it governs the quality of all services provided
Evaluation of the internal control system
End of audit Work after ending
Perform risk identification and detection procedures
Determine the planned audit approach
Financial statement identification of related risks
• Determine the timing of the audit and assign the performers
• Other presentation on financial statements
Assess the potential risks of mistakes
Chart 3 Process of audit planning at KPMG
KPMG's planning process aims to thoroughly understand the industry and business environment, alongside the company's accounting policies and financial performance This involves evaluating the design and effectiveness of controls relevant to the audit, assessing risks of material misstatement in financial statements, including potential fraud and errors Additionally, KPMG focuses on developing a comprehensive audit strategy tailored to address these identified risks and create specific strategies for critical accounts.
2.1.2 Evaluation of the internal control system
The control assessment, as outlined by KPMG, aims to evaluate the continuous and effective operation of a customer's internal control system The auditor assesses the risk of significant misstatement (RoSM) for each audit objective, categorizing it as high, medium, or low, and establishes the foundational audit trials to be executed This process includes auditing the design and implementation of control procedures at the entity-wide level and ensuring a thorough understanding of accounting and reporting practices for each objective Additionally, it involves identifying key risk areas where transaction processing may fail and evaluating the effectiveness of the customer's fraud prevention controls.
To address the main risk points of potential material misstatements, nine selected control procedures should be implemented To enhance your understanding of accounting processes, conduct a sequential check test by tracing a transaction through each relevant accounting activity and control procedure Additionally, evaluate the effectiveness of these selected control procedures to ensure their reliability in mitigating risks.
KPMG designs and tests controls in a scientific manner
Chart 4 Testing procedure at KPMG
In conclusion, the auditor finalized the audit by completing all necessary procedures, thoroughly assessing the financial statements, and issuing an audit opinion Additionally, auditors create detailed audit reports and management letters for clients.
Assess the sufficiency and appropriateness of the audit evidence obtained
Use analytical procedures to confirm estimates of overall balances;
Verification of single transactions such as invoices;
Directly reconfirm balances and related information with third parties such as banks;
Check the existence and actual status of assets;
Verify the objectivity of hypotheses, quality of data, and calculations for critical accounting estimates;
Conclusion for important accounting issues;
Checking financial statements against related accounting documents
Chart 5 Process of the end of audit at KPMG
Audit reports are generated in compliance with both Vietnamese and internationally recognized audit standards KPMG's audit opinion is derived from a thorough examination of the final financial statements and a comprehensive review of all relevant audit evidence, ensuring adherence to the applicable auditing standards.
The audit process concludes when the auditor issues the audit report; however, if subsequent events arise that require adjustments to the client company's financial statements, the auditor must review their reports to assess the need for any modifications KPMG Company follows Vietnamese Auditing Standard No 560, which addresses "Events arising after the closing date of the accounting book." This step is vital for maintaining the quality of the issued audit report.
KAM's technical tools are designed to enhance the audit process through user-friendly techniques that ensure consistent implementation and ongoing quality improvement Additionally, KPMG utilizes advanced audit support tools, including Computer Assisted Audit Techniques (CAATs) and Monetary Unit Sampling (MUS), to leverage automation and elevate the quality of financial statement audits.
Review the entire financial statements, including:
• The final procedure for the attention points
• Auditing assessments related to risks
Changes in planned audit strategy and procedures
Issues related to the independence and ethics of the auditor
• Evaluate the adequacy and appropriaten ess of audit evidence
KPMG Vietnam ensures compliance with its global audit process by systematically storing audit records in a library and on the internal computer network These records are organized chronologically, facilitating easy access for employees when different audit teams conduct audits for the same client This efficient archiving system enhances collaboration and improves the overall audit process.
Research has established a strong correlation between internal control systems and enterprise performance, with key performance indicators such as profit, revenue, liquidity, ROI, and ROA serving as metrics for evaluation Deficiencies in internal controls can adversely affect business outcomes, stemming from issues like inadequate operational risk prevention, insufficient risk analysis, lack of appropriate information, and problems with organizational delegation.
COSO 2013 report includes the following five components:
1 The control environment is a collection of standards, processes, and structures that serve as the foundation for implementing internal control throughout an organization All internal control activities are established, directed, and supervised by the Board of Directors and senior management At various levels of the organization, a Manager performs the aforementioned steps According to the COSO 2013 Report, there are five control environment principles, which include:
- Commitment to honesty and ethical values;
- Establish a structure of authority and responsibility;
- Use qualified staff and have policies in place to develop human resources;
- Request individuals to report and accept responsibility
2 Risk assessment Every organization faces risks, both internal and external to the organization Risk is defined as the likelihood that an event will occur and have an impact on goal achievement Risk assessment is an iterative process for identifying and assessing risks that prevent an entity from meeting its objectives Goal setting must be linked to different levels of the organization as a prerequisite for risk assessment Risk assessment necessitates that the manager consider the organization's external and internal environmental impacts that make internal control activities less effective Risk assessment is guided by four principles, which are as follows:
- Identify and analyze significant changes
3 Control activity is defined as an action taken by the manager through policies and procedures to ensure that risks are minimized in order to achieve the goal Control is exercised at all organizational levels, at all times in the business process, and in the technological environment
According to COSO 2013 Report, there are 3 principles related to control activities, including:
- Control activities are established on an appropriate selection basis;
- Establish general controls and use information technology to control operations;
- Strictly implementing policies, procedures and regulations
4 Information and communication Managers must gather quality relevant information from both inside and outside the organization in order to fulfill their internal control responsibility and assist other components of the internal control system in meeting the set objectives Communication is a continuous process of providing, sharing, and receiving necessary information Internal communication must be smooth top-down and bottom-up, allowing all employees to understand senior
To fulfill requirements and expectations, it is essential to gather additional information from external sources The COSO 2013 Report identifies three key principles concerning an organization's information and communication processes.
- Collect or create appropriate, timely quality information on your own;
- Require timely and internal communication with the appropriate audience;
- Communication beyond the scope of necessary information
The process of evaluating the internal control system in auditing Financial
Evaluating a client's internal control system is essential for every audit, facilitating all phases from planning to workload reduction A comprehensive assessment enhances the reliability of audit evidence and minimizes costs, leading to improved audit opinions At KPMG Vietnam, the internal control evaluation process adheres to globally defined procedures based on international and Vietnamese standards, with flexibility to adjust steps for specific circumstances Typically conducted mid-audit and updated after the fiscal year-end, these evaluations occur after the client has received their financial statements.
Effective planning and evaluation of the internal control system are crucial for auditors, as these processes yield valuable insights during the audit This information not only enhances the overall audit but also supports the auditor in justifying the audit evidence collected Key data that auditors must gather includes
- Changes in macroeconomic policies of the government, the business sector, market fluctuations are examples of external activities that have the potential to impact customer business activities
Auditors need to gather information on internal customer activities that may impact the financial statements, including changes in the board of directors and key personnel like the chief accountant and financial director Additionally, they should consider new investment initiatives and shifts in the company's business strategy to accurately assess the client's operations Identifying these elements is crucial for a comprehensive understanding of the client's business environment.
There are 3 main methods including collecting, document inspecting, interviewing and observing:
The auditor will compile a list of essential documents to request from the company's Board of Directors and Chief Accountant, including Corporate Information, the Board of Directors Statement, Balance Sheet, Statement of Income, Statement of Cash Flows, and Notes to the Financial Statements Among these, the financial statement, accompanied by management's explanations and their affirmation of its accuracy and fairness, stands out as the most critical document in the auditing process.
♦ Interview: At the audit's request, the Board of Directors will introduce the company's business operations, the formation and development process, financial statement explanations, information business policy, accounting policy
The auditor gathers insights by observing collected documents and daily business operations of clients, which helps in understanding and acquiring further information about the internal control systems in place.
Auditors utilize a combination of methods when working with new clients, including reviewing general audit records, interviewing the Board of Directors, and updating client information For annual clients, this comprehensive approach ensures a thorough understanding of the client's operations and compliance requirements.
When the auditor obtains the initial information about the customer, he or she uses that information to assess the internal control system for each constituent element
2.2.2 Identify and evaluate the accounting system
An effective accounting system is a crucial component of an internal control system, providing essential data for auditors during financial statement audits By minimizing control risks, a robust accounting system lessens the need for extensive detailed inspections by auditors, thereby streamlining the auditing process At KPMG, auditors prioritize these key aspects in their evaluations.
The auditor will assess the company's accounting policy by reviewing collected documents to ensure compliance with Vietnamese accounting standards, international accounting standards (if applicable), and relevant Vietnamese laws.
Auditors evaluate the effectiveness of current accounting systems and methods, including those sanctioned by the Ministry of Finance, to ensure they align with the unique characteristics of the business and meet customer management needs.
Auditors assess the accounting records and voucher system to ensure that the processes of recording, preparing, utilizing, and preserving financial data are complete, timely, and accurately formatted This examination is crucial for the preparation of financial statements and other reports.
● Accounting apparatus and human resources: KPMG auditors determine whether the accounting apparatus is organized in accordance with accounting policies as well as the business's accounting characteristics
KPMG auditors frequently use three methods to review about the customer's accounting system: document collection, observation, and interviews
Auditors frequently review annual clients based on information gathered from previous years, then update for changes this year
2.2.3 Identify and evaluate the control environment
The control environment is essential for establishing a robust internal control system KPMG auditors must thoroughly evaluate each component of the control environment for new clients, determining if these elements are adequately met and assessing their overall effectiveness.
◊ The internal control system's organizational structure, as well as the assignment of duties and responsibilities:
◊ Management viewpoint, management style, and commitment to quality and efficiency
◊ Regulations and standards on customer self-esteem and ethical values
◊ Contribution of those assigned, responsible for management
◊ People policy and its implementation
To assess the effectiveness of the internal control system, auditors engage with the client's Board of Directors and gather essential documentation related to control procedures, including decisions, regulations, and organizational structure They conduct interviews with various stakeholders, such as members of the Board, accounting, human resources, and administrative departments, to gather comprehensive insights Additionally, auditors may observe company activities and review relevant documents to enhance their understanding This thorough evaluation allows auditors to analyze the performance of the internal control system and assess the attitudes and actions of responsible individuals, ultimately confirming the reliability of the control framework.
Auditors typically find that the internal control systems of long-standing clients remain relatively stable, allowing them to efficiently update the general audit file with any necessary changes While auditors can follow similar procedures for these clients as they would for new ones, the overall workload is generally lighter due to the familiarity with the client's established processes.
KPMG auditors often integrate control procedures into their assessment of the control environment and accounting systems This inquiry step emphasizes key principles such as segregation of duties, proper authorization, and plurality To gather necessary information, auditors utilize methods including documentation collection, interviews, and direct observations.
After identifying the internal control system, the auditor forms a preliminary assessment of its overall effectiveness and evaluates control risks If deemed unreliable, the auditor minimizes the extent of control tests; conversely, if the internal control system is assessed as reliable, the auditor also limits the volume of control tests.
The internal control systems at Company A
2.3.1 The business lines of the company
Company Limited A is a business that specializes in commerce and services The following are the main areas of activity:
♦ Consulting, installation of school equipment
We specialize in the purchase and sale of a wide range of educational and office equipment, including computer hardware, peripheral devices, software, telecommunications gear, and audio-visual tools Our inventory also features essential resources such as reference books, laboratory instruments, and educational toys designed for preschools and kindergartens Additionally, we offer school maps, chemical tools, and various departmental equipment tailored for both students and teachers.
♦ Repair of computer, telecommunications, educational, and electronic equipment, as well as office equipment
♦ Purchasing and selling medical equipment and machines - Road freight transport
2.3.2 Organizational structure, management apparatus of the Company
The Company has developed a streamlined and efficient organizational structure tailored to its business characteristics, with each department and division serving a distinct purpose.
Company A operates as a functional online advisory, where each department provides specialized insights to the director This structure enables informed management decisions that align with the unique characteristics, responsibilities, and needs of each department.
♦ Deputy Director: Assists the Director in managing the Company's activities
The Sales Department plays a crucial role in advising the Construction Director and organizing the execution of business plans to foster the Company's growth This department actively inspects and promotes the search for both input and output markets, while also developing comprehensive plans for equipment and supply purchases Additionally, it manages production and consumption strategies, ensuring accurate inventory reporting to maintain a steady supply of goods that meet market demand, ultimately enhancing the Company's reputation with customers.
The Accounting Department plays a crucial role in delivering essential data and economic insights related to all business activities It is responsible for organizing, recording, and reporting all financial transactions in strict adherence to current accounting regulations Additionally, the department synthesizes data to produce timely financial statements, ensuring compliance with established standards Regular monitoring and evaluation of the company's financial health support informed decision-making for management and the Director.
The Technical Department is responsible for ensuring the quality of purchased products and materials, overseeing the operation of the company's machinery and equipment They examine and repair customer products that are under warranty or have sustained damage during this period Additionally, they offer repair services for equipment and machinery upon customer request, primarily focusing on the sale and purchase of computer equipment.
♦ Warehouse department: Manages the company's goods and products
Table 1 Labor of the Company in 2018-2019
The company's workforce is aligned with its registered business lines, ensuring a balanced gender structure and appropriate training levels As illustrated in Table 1, the labor composition by gender and education level has shown notable changes over the past two years In 2019, the employee count rose from 17 to 20, marking a 17.65% increase compared to 2018, driven by the company's expansion into new geographical areas and business sectors The workforce's high quality is evident, with over 60% holding university degrees Additionally, the company employs more men than women, reflecting the nature of its operations in installing and repairing school equipment.
2.3.3.2 The financial situation over the past 2 years 2018-2019
Table 2 The Company's assets and capital resources over the 2 years 2018-2019
Table 2 indicates that current assets constitute a substantial 89% of the Company's total assets, reflecting its core business in commerce Over the past two years, the asset situation has remained relatively stable However, in 2019, total assets decreased by VND 437,742,987, or 4.68% from 2018, primarily due to significant declines in cash, cash equivalents, and inventories This reduction in current assets was mainly driven by decreased inventories and other current assets Despite this, the Company's capital resources increased by VND 874,698,089, marking a 20.11% rise in liabilities, largely attributed to short-term debt Notably, equity experienced a sharp decline of 72.17% in 2019 compared to 2018 Overall, while the Company's financial position has shown considerable fluctuations, it has consistently maintained liquidity, with current assets exceeding current liabilities.
2.3.3.3 The business results over the past 2 years 2018-2019
Table 3 Business results of the Company over the past 2 years 2018-2019
Revenue from sales of goods and provision of services 26.342.589.734 28.925.873.245 (2.583.283.511) (8,93)
Net revenue 26.342.589.734 28.910.517.207 (2.567.927.473) (8,88) Cost of sales 22.956.794.245 24.956.794.245 (2.000.000.000) (8,01) Gross profit 3.385.795.489 3.953.722.962 (567.927.473) (14,36)
In 2019, the company's revenue from goods sold and services decreased by VND 2,583,283,511, or 8.93% compared to 2018, leading to a net revenue decline of VND 2,567,927,473, an 8.88% drop Although the cost of goods sold also decreased, it was not enough to offset the decline in net revenue, resulting in a gross profit reduction of VND 567,927,473, or 14.36% Financial and operating costs decreased as well; however, the decrease in gross profit was more significant, compounded by a drop in financial income, which led to a pre-tax profit reduction of VND 58,464,510, a 49.12% decrease Consequently, profit after tax fell by VND 46,771,608, also reflecting a 49.12% decline This profit decline was attributed to increased competition in the market, which diverted some customers and forced the company to offer greater discounts, further impacting profitability.
2.3.4 Organize the accounting apparatus at the Company
2.3.4.1 Organize the accounting apparatus in the enterprise
The accounting department of limited company A consists of 3 people: One chief accountant and two accountants
The Chief Accountant plays a crucial role in overseeing the company's accounting operations and is responsible for managing its financial health This position involves providing the Director with insights into the company's assets, capital sources, financial status, efficiency, and overall performance Additionally, the Chief Accountant is tasked with preparing regular financial reports, including quarterly and annual business results, as well as handling salary payments and social insurance.
• The first accountant: Specializing in the import and export of goods, inventory management, and the management of input and output invoices
• The second accountant: Specializing in money collection and spending; keeping track of customer and supplier debt
2.3.4.2 Accounting policies applied at the Company
♦ Accounting period: Starts on January 1 and ends on December 31 of the calendar year
Applied accounting regime: Accounting for small and medium enterprises according to Circular No 133/2016/TT-BTC, 26 August 2016 of the Ministry of Finance
- Principle of inventory recognition: Historical cost principle
- Ending inventory value calculation method: Avarage cost
- Inventory accounting method: Pepertual Inventory
- The depreciation method of fixed assets in use: The straight-line method
- Organize the voucher regime: All arising economic operations must make accounting vouchers as a basis for the recording of accounting books The documents used by the Company include:
• Documents about goods: receipt note, delivery note, delivery record
• Documents in currency: Receipt note, payment note, request for advance payment
• Documents about assets: Record of delivery and receipt of fixed assets, table of depreciation of fixed assets
• Proof of wage and labor: timesheet, salary payment sheet, social insurance payment slip
- Applied accounting method: Machine accounting, general diary form (Enterprise uses Vietnam Accounting software version 10.5)
Each day, the accountant identifies the Debit and Credit accounts to enter data into the accounting software, utilizing pre-designed forms and vouchers based on the summary sheet of accounting vouchers.
The computer automatically converts the imported information into general books and detailed books to track each object, according to accounting software programming
At the end of each month, quarter, and year, accounting accounts are closed, and financial statements are generated After printing these statements, it is essential to check and compare the data between the accounting books and the financial statements to ensure accuracy and consistency.
2.3.5 Evaluate the internal control of Company A
The control environment of a company is primarily established by its leadership, yet it has been observed that executives often overlook the importance of effective control measures This neglect can result in significant fraud and errors, creating confusion about the initiation and implementation of control processes Additionally, employee collusion can undermine control procedures, making them ineffective The high costs associated with restructuring the company further complicate the situation, highlighting the challenges of improving the control environment.
Company A features a compact organizational structure where departments juggle multiple responsibilities, leading to ambiguity in their functions and powers For instance, the cashier is also tasked with managing customer debts, highlighting the overlap in roles The absence of formal documents outlining business processes and departmental functions has resulted in reliance on verbal agreements, fostering a culture where employees push for accountability among themselves This inadequate organizational framework and unclear authorization methods contribute to a subpar control environment.
The limited budget for recruiting, training, and compensating employees restricts their qualifications and experience Additionally, the absence of well-defined operating procedures and regulations leads to confusion regarding roles and responsibilities Without written guidelines on ethical values and honesty, and the lack of appropriate sanctions, employees may feel encouraged to act unethically This lack of clear instructions can result in risky behavior among subordinate staff.
Company A has a small workforce and limited capital resources As a result, with this type of business, the four main barriers to development are usually access to
COMMENTS FOR THE PROCESS AND EXPERIENCED AFTER
Comments of the process
The internal control system evaluation process is conducted using KAM software, which facilitates both an overview of the assessment process and the analysis of annual and new customers Auditors tailor their audit programs based on each customer's specific characteristics, leveraging gathered information and their professional judgment to optimize the relationship between audit outcomes and costs This approach ensures that best practices are followed throughout the evaluation process.
♦ Firstly, the foundation for assessing the scientific internal control system
The audit process is meticulously structured into defined steps, aligning with the global KPMG network's KAM model This consistency allows for a thorough evaluation of the internal control system, enabling auditors to effectively conduct their assessments.
At KPMG Vietnam, the audit process is conducted by seasoned auditors in collaboration with management, ensuring clarity in the assignment of responsibilities based on each auditor's expertise The internal audit system undergoes a thorough assessment, guided by experienced managers and auditors Following the initial evaluation, the audit team leader formulates a comprehensive audit plan, which serves as a foundation for audit assistants to create specific audit programs tailored to their assigned tasks.
The working paper outlines the comprehensive process of assessing internal control systems, facilitating auditors in reviewing and evaluating the work conducted This documentation not only streamlines the audit process but also establishes a solid foundation for effective oversight.
39 audits by higher-level auditors Information is better stored, examined, and monitored with such paper-based workflow implementation
♦ Secondly, the pre-audit work is done thoughtfully and proactively
In the initial stage of the auditing process, auditors typically reach out to clients, although clients often initiate contact with auditing firms when an audit is necessary After reviewing the audit acceptance, the company's Board of Directors and the audit department chief meet with the client to assess and manage audit risks To enhance audit efficiency and expand their customer network, KPMG proactively sends sales letters to clients as part of their audit appointment strategy This flexible approach caters to clients with diverse characteristics and strengthens relationships with KPMG, ultimately leading to a specialized and swift service that maximizes value for customers.
♦ Thirdly, the usefulness of information collected during the evaluation of internal control systems
The auditor's assessment of internal control systems provides crucial insights for tailoring the audit program for specific activities, particularly in conducting control and basic tests Utilizing annual client information enhances this process, allowing the auditor to efficiently adapt previously designed audit programs by integrating new data from the current year.
Auditors assess the potential for fraud and errors within a client's internal control system, which informs their comments in the Management Letter This feedback enables clients to recognize limitations in their control procedures and work towards establishing a more effective internal control system By implementing the auditor's recommendations, clients can facilitate smoother audits in subsequent years.
♦ Fourthly, risk assessment is carried out very carefully
The risk assessment process evaluates the likelihood of material misstatements in financial statements, item balances, and operational types This determination relies on analyzing potential risks and the associated control risks.
Clients vary in size and operational fields, leading to minor differences in risk assessment, particularly in identifying risks associated with specific items and operations The audit risk assessment process is tailored to the unique nature of each client's operations, with project audits emphasizing revenue and expenditure In contrast, banking and manufacturing audits tend to be more complex due to the need for comprehensive risk assessments across numerous items, including the entire financial report Audits in banking primarily focus on loans and deposits, while those in manufacturing, trade, and service sectors concentrate on expenses and revenue.
KPMG Vietnam has developed and implemented a fairly effective client internal control system assessment process However, this process still cannot avoid certain limitations
♦ Firstly, the collection of information about the customer's internal control system and detailed description is not specific
KPMG's internal control system documentation lacks specificity, presenting information in lengthy reports instead of clear flow charts This approach results in cumbersome working papers that auditors struggle to navigate, leading to repeated questions during the implementation phase and ultimately causing customer dissatisfaction This inefficiency negatively impacts overall audit performance, highlighting the need for more streamlined and effective communication of internal control assessments.
- The company uses general questionnaires and reports for all customers
Utilizing report or questionnaire methods is typically suitable for evaluating client control systems through straightforward procedures that are easy to verify However, relying solely on these questionnaires makes it challenging for auditors to deliver a thorough assessment of the internal control system Consequently, the evidence collected for evaluation is documented as a reference within the questionnaire and stored in the relevant subsections.
- Unreasonable allocation of time and manpower for each audit
Due to time constraints during audits and limited human resources, updating information for new audits often proves incomplete and impractical, particularly since the evaluation of internal control systems relies heavily on findings from prior audits for many annual clients.
- Shortage of human resources due to occupational characteristics
KPMG Vietnam and many other auditing firms are facing significant challenges due to a shortage of experienced manpower, as high resignation rates lead to a constant influx of newcomers This situation results in a lack of seasoned auditors, driving up annual training costs and increasing the workload and pressure on audit assistants, ultimately compromising the quality of their work Consequently, the intense work environment has led to the resignation of numerous new auditors shortly after the audit season concludes.
♦ Secondly, the control risk assessment is still subjective
KPMG's control risk assessment currently relies on qualitative criteria without clear quantification, leading audit managers to frequently classify control risks as high or medium This conservative approach necessitates the performance of additional tests during audits to ensure professional prudence.
- The company has not applied objective risk assessment software and quantitative methods in assessment
The risk assessment process is hindered by the absence of objective risk assessment tools and quantitative methods, leading to reliance solely on the audit manager's judgment, which is often influenced by personal opinions As a result of their prior experiences with potential risks, auditors tend to categorize risks as low for annual clients.
In the case of new customers, the control risk is evaluated at a higher level.
Leaning experience
My nearly two-month internship at KPMG has been one of the most significant learning experiences of my life, providing me with invaluable knowledge and skills for my future career The training I received enhanced my multitasking abilities and boosted my confidence, broadening my career opportunities I had the chance to engage with various aspects of the company, including dormant and active entities, legal matters, and accounting practices Additionally, the supportive work environment at KPMG contributed to a positive atmosphere, making it easier to thrive and reducing stress levels.
I really appreciates the opportunities that been given to her as a part of KPMG
Working in dynamic and efficient environments allows me to express myself and acquire new skills Beyond theoretical knowledge, my hands-on experience at the company has provided me with a deeper understanding of the financial report preparation process and the evaluation of internal control systems in practice.
Although I have conducted research and interviewed the audit team, I am not directly involved in the audit process My limited experience in this field has presented numerous challenges while compiling this report, and I appreciate the readers' understanding as I navigate these complexities.
EVALUATION OF INTERNAL CONTROL SYSTEM Customer
Company A (“the Company”) is a limited liability company incorporated in Vietnam
The company was founded with investment license No 2558/GP, granted by the Ministry of Planning and Investment, which remains valid for 41 years from its issuance date.
Registered Office Dong Anh District
Board of Director Mr A Director
Mr D Deputy Director (until 30 September 2018)
Growth in sales and reputation across all markets
Focus on training to improve staff capacity Increase quality control
♦ Consulting, installation of school equipment
We specialize in the purchase and sale of a wide range of educational and office equipment, including computer hardware, software, telecommunications devices, audiovisual tools, and reference materials Our offerings extend to preschool and kindergarten supplies, such as toys and boards, as well as school maps, chemical instruments, and laboratory equipment tailored for students and teachers.
♦ Repair of computer, telecommunications, educational, and electronic equipment, as well as office equipment
♦ Purchasing and selling medical equipment and machines - Road freight transport
As at 31 December 2019, the Company had 20 employees (1/1/2018: 17 employees)
EVALUATION OF INTERNAL CONTROL SYSTEM Customer
The General Director oversees the company's key policies, strategies, and overall direction, holding the authority to make significant decisions including signing economic and labor contracts, as well as publishing financial statements Management and supervision responsibilities are delegated to various functional departments, such as production and administrative teams, ensuring efficient operation across the organization.
Maintain and disseminate ethical values
Company management enforces strict policies for effective communication with subordinate employees, highlighting the significance of reaching organizational goals Information is shared through various channels, including formal internal emails and informal face-to-face discussions Employees are encouraged to reach out to management via the internal email system whenever issues arise.
Ethical values are essential within the company, and any violations of rules and regulations will result in disciplinary action Each employee's performance is closely monitored by their department head and evaluated annually to inform decisions regarding salary adjustments, bonuses, and promotions.
Activities are to be in accordance with the company's policy and plan; any noncompliance is reported to department heads, directors and management
Fostering an optimal working environment is essential for companies, as it motivates employees to actively participate in team efforts, enhances their access to skill development opportunities, and ensures they receive recognition for their contributions.
Administrative Department hành chính Sales
The financial statements have been prepared in accordance with Vietnamese Accounting
Standards, the Vietnamese Accounting System for enterprises and the relevant statutory requirements applicable to financial reporting
Financial statements, with the exception of the cash flow statement, are created using the accrual basis and the historical cost concept In contrast, the cash flow statement is generated using the indirect method.
The Company’s accounting currency is VND, which is also the currency used for financial statement presentation purpose
The annual accounting period of the Company is from 1 January to 31 December
Transactions in currencies other than USD during the year have been translated into VND at rates approximating actual rates of exchange ruling at the transaction dates
All foreign exchange differences are recorded in the statement of income
Cash includes cash balances and call deposits, while cash equivalents are short-term, highly liquid investments easily convertible to cash These investments carry minimal risk of value fluctuations and are primarily held to meet short-term cash obligations, rather than for investment purposes.
Trade and other receivables are stated at cost less allowance for doubtful debts
Inventories are valued at the lower of cost or net realizable value, with cost calculated using a weighted average method This cost encompasses all expenses associated with preparing the inventories for their current condition.
EVALUATION OF INTERNAL CONTROL SYSTEM Customer
The cost of finished goods and work in progress encompasses raw materials, direct labor, and relevant manufacturing overheads Net realizable value refers to the estimated selling price of inventory items after deducting costs related to completion and selling expenses.
The Company applies the perpetual method of accounting for inventories
Tangible fixed assets are recorded at their cost minus accumulated depreciation, which includes the purchase price, import duties, non-refundable taxes, and any direct costs necessary to prepare the asset for use Costs incurred after the asset is operational, such as repairs and maintenance, are expensed in the year they occur However, if it can be demonstrated that certain expenditures enhance the future economic benefits of the asset beyond its original performance standards, those costs may be capitalized as part of the asset's value.
Depreciation for tangible fixed assets is calculated using the straight-line method over their estimated useful lives For plant and machinery, the useful life ranges from 2.5 to 5 years, while office equipment is estimated to last between 3 to 5 years.