Audit procedures for obtaining r naudit evidence of initial audit r nengagements at ernst & young r nvietnam limited company

Phụ lục 5b2 – PHIẾU ĐÁNH GIÁ KHÓA LUẬN TỐT NGHIỆP – GVHD – Đề tài: KIỂM TOÁN Điểm từng phần Không đạt yêu cầu Cần cải thiện Đạt yêu cầu Xuất sắc Tổng điểm Chương mở đầu Nội dung chươ

The needs of the study

In today's increasingly integrated world, Vietnam is embracing global economic integration as a key aspect of its foreign policy and international cooperation Accurate financial reporting is crucial, not only for compliance with state regulations but also for various stakeholders, including shareholders, banks, investors, and the public All these parties share a common expectation for the financial statements to be truthful and fair, highlighting the importance of transparency in corporate financial information.

Auditing activities have become an indispensable part of economic operations, fostering trust between businesses and users of financial statements Independent auditors play a crucial role in assessing the reliability of financial information, thereby promoting foreign investment and driving economic growth However, the increasing sophistication of financial reporting fraud and embezzlement necessitates auditing firms to continually enhance the quality of their financial statement audits, particularly when examining first-year financial statements and opening balances.

Auditing plays a crucial role in enhancing economic stability and transparency, necessitating the alignment of Vietnamese auditing standards with international benchmarks To address this, the Ministry of Finance issued Circular 214/2012/TT-BTC on December 6, 2012, which introduced 37 Vietnamese auditing standards These standards apply to auditing firms, branches of foreign auditing firms in Vietnam, independent certified public accountants, and all entities involved in the provision of audit services, becoming effective on January 1, 2014.

Graduation Thesis Advisor: Hoang Thi Mai Khanh, M.E

In an initial audit, the primary objectives align closely with those of a recurring audit, but with a crucial distinction: auditors must assess the current period's assets, liabilities, equity, and operating results, which rely heavily on the accuracy of the opening balances Consequently, the opening balance is pivotal in the audit of first-year financial statements, as it significantly impacts the overall audit outcome.

 The opening balance of the year is the basis for the users to compare and evaluate the fluctuations in a year of the company

 The closing balance can only be true and fair when the auditor ensures that the opening balance is free from errors that materially affect the financial statements

Auditing the opening balance during initial audit engagements can be complex and time-consuming without the right procedures for gathering audit evidence To enhance understanding of audit processes and their application at Ernst & Young, the author has chosen to focus on "Audit Procedures for Obtaining Audit Evidence in Initial Audit Engagements at Ernst & Young Vietnam Limited Company."

Objectives of the study

Based on international audit standards ISA 510, Vietnam audit standards VSA

510 together with the internship process at EY, the author presents the thesis with the following research objectives:

 Introducing Ernst & Young Viet Nam Limited Company, EY GAM audit methodology and instructions of this methodology for the audit of the initial year engagements

This article discusses the challenges associated with auditing initial year engagements, focusing on the opening balances of the fiscal year as outlined in International Standards on Auditing (ISA) 510 It also provides a comparative analysis of the similarities and differences between ISA 510 and the Vietnamese Standards on Auditing (VSA) 510, highlighting key aspects that auditors must consider to ensure compliance and accuracy in financial reporting.

 Introduction of audit procedures for obtaining audit evidence for initial year audit engagements – opening balance applied at EY Illustrated by specific cases at EY's client companies

To enhance the efficiency of audit procedures, particularly for the opening balance in the first-year financial statements, it is crucial to implement strategic comments and recommendations on the collection of audit evidence By optimizing the audit process, businesses can ensure a more accurate and reliable assessment of their financial position from the outset.

Methodology of the study

 Document collection: collect relevant data at EY Atlas in combination with the study of International Auditing Standards ISA 510 and Vietnam Auditing Standards VSA 510

The article discusses the importance of interviewing auditors involved in first-year financial statement audits to gain deeper insights into audit evidence Additionally, the author receives guidance from a direct lecturer regarding challenges encountered during the research process.

 Examine the audit files of the previous year of the first-year audit customers

 Analysis: analyzing the working efficiency of EY’s auditors to evaluate the rationales and unreasonable in the practice of using this method.

Scope and limitations of the study

 Scope: In the issues of auditing the first-year financial statements, the thesis studies on audit procedures for obtaining audit evidence for the opening balance

 Limitations: The topic only studies the problems of financial statements in the manufacturing and service sectors, not including banks and other financial institutions

THEORETICAL BASIS ABOUT INITIAL AUDIT ENGAGEMENTS –

Overview of initial audit engagements

According to International Standard on Auditing (ISA) 510, initial audit engagement is an engagement in which either:

 The financial statements for the prior period were not audited; or

 The financial statements for the prior period were audited by a predecessor audit

When performing an audit of the first-year financial statements, the auditor shall obtain sufficient appropriate audit evidence to ensure that:

 The opening balance of the year has no misstatements, which materially affected the financial statements of this year

 The year-end balance of the previous fiscal year is accurately carried forward, or reclassified where necessary

 The accounting policy has been consistently applied or the accounting policy changes have been adjusted in the financial statements and fully presented in the notes to the financial statements

According to International Accounting Standard No 8, entities must retroactively correct significant errors from previous periods in the first set of financial statements published after their discovery.

(a) retreatment of the comparative values for the previously presented period(s) in which the error occurred; or

(b) if the error occurred before the first priorly presented period, the restatement of the opening balances of assets, debts and equity for the first prior presented period

Errors in accounting information from prior periods should be corrected through reactive restatement, unless it is impossible to ascertain the specific effects for that period or the cumulative impact of the error.

According to International Standard on Auditing (ISA) 510, opening balances refer to the account balances present at the start of a new period, which are derived from the closing balances of the previous period.

The opening balance is influenced by:

 Transactions and events of prior periods

 The accounting policy applied in the previous year

The opening balance is influenced by transactions and events of prior periods

When an auditor identifies a significant risk of material misstatement in the current period's financial statements, they must consider prior period misstatements that could impact the current statements This assessment includes aggregating the effects of both historical and current likely misstatements, ensuring a comprehensive evaluation of the financial statements' accuracy.

 Example of impact of misstatements on opening balance

In the year-end audit conclusion for December 2020, the auditor assessed the findings for ABC Company, identifying that the sole uncorrected misstatements in both current and prior period accounts pertain to sales cutoff errors.

1) Understate opening balance of receivables by $50,000, and

2) Overstate closing balance of receivables by $70,000 If a $100,000 misstatement of pretax income is material, does the auditor consider that 2020's income materially misstated?

The auditor has determined that the pretax income for 2020 is significantly misstated, primarily due to a $70,000 overstatement of receivables at the closing balance and a $50,000 understatement at the opening balance This discrepancy results in a total overstatement of $120,000 in pretax income for the year Consequently, both sales and pretax income would be reduced by $120,000 in 2020.

1) revenues from the end-of-period cutoff error were correctly recorded in

2) revenues from the beginning-of-period cutoff error were correctly recorded in 2019

Misstatements in the opening balance can significantly affect the accuracy of current-period results, similar to how errors in the closing balance do If prior-period balance sheet misstatements remain uncorrected, they may influence the current-period income statement Therefore, it is essential to consider these carryover misstatements when assessing the fairness of amounts reported for the current period.

1.1.2.1 The role of the opening balance in the financial statements

Opening balances play an important role in a company's financial statements Balance sheets, income statements, cash flow statements, and financial statements footnotes always have the presence of the opening balance

The opening balance serves as a key reference point for users of financial statements, enabling them to compare it with the year-end balance to identify fluctuations in assets and capital sources This comparison aids in assessing the effectiveness of business performance for the current year, facilitating a deeper analysis of the causes behind these fluctuations Additionally, it allows for the evaluation of the business's profitability and other financial indicators, which are crucial for informed investment decisions.

When conducting a year-end balance audit, it is crucial to closely examine the opening balance, as any discrepancies can significantly impact the recognition of business results for the current period and may also cause deviations in the fiscal year's ending balance.

1.1.2.2 The solutions for impact of misstatements on opening balance

Under ISA 510, when an auditor discovers that opening balances may have misstatements that could significantly impact the financial statements of the current period, it is essential for the auditor to carry out further procedures to address these concerns.

Graduation Thesis Advisor: Hoang Thi Mai Khanh, M.E appropriate in the circumstances to determine the effect on the current period’s financial statements

If the auditor identifies misstatements in the current year's financial statements after conducting further procedures, they must communicate these findings to the relevant management and those responsible for governance, in line with ISA 450 – Evaluation of Misstatements Identified During the Audit.

 The auditor shall request management to correct those misstatements on a timely basis, unless prohibited by law or regulation;

The auditor is responsible for informing those charged with governance about uncorrected misstatements and their implications This communication must specifically identify each material uncorrected misstatement Additionally, the auditor will request the correction of these uncorrected misstatements.

1.1.3 Responsibility of the auditor and the client in the initial audit engagements 1.1.3.1 Responsibility of the auditor

In the audit of the first year, VSA 510 Auditing the first year - Opening balance required:

The auditor should review the latest financial statements and the predecessor auditor's report to gather information about the opening balance and any relevant notes.

The auditor must gather adequate and relevant audit evidence to determine if the opening balance contains any material misstatements that could impact the current year's financial statements This includes verifying whether the closing balance from the previous period has been accurately carried over to the current opening balance or adjusted as needed.

1.1.3.2 Responsibility of the audited entity

According to Article 39 of Law on Independent audit 67.2011_QH12, the responsibilities of the audited entity are as follows:

 To promptly, fully and honestly provide all information and documents necessary for the audit;

 Coordinating and creating favorable conditions for auditors to perform audits;

 To fully and promptly pay the audit fee as agreed in the contract;

When an enterprise engages an auditing firm for a contract lasting three or more consecutive years, it is essential to request a change in the practical auditors and the individual responsible for signing the audit reports.

Audit evidence

Audit evidence is crucial in shaping the auditor's opinion, as it involves the systematic collection and evaluation of information and documents throughout the audit process By implementing various audit procedures, auditors gather essential evidence that not only serves as a legal foundation for their conclusions but also instills confidence in the users of financial statements.

According to ISA 500, audit evidence encompasses all information utilized by the auditor to form conclusions, and it can be categorized into various types.

 The underlying accounting records maintained by management to support the preparation of the entity’s financial statements, and

The International Standard on Auditing (ISA) 500 outlines the definition of audit evidence in the context of financial statement audits and emphasizes the auditors' obligation to develop and execute audit procedures that gather sufficient evidence.

Graduation Thesis Advisor: Hoang Thi Mai Khanh, M.E appropriate audit evidence Audit evidence must give to the auditor a reasonable assurance that the financial statements do not contain a material misstatement

Diagram 1 Relationship of Financial Statement Assertions and the Audit evidence

The International Auditing Standard ISA 510 outlines the principles for auditing opening balances in first-year financial statements Auditors must gather sufficient and appropriate evidence to assess whether the opening balance has material misstatements that could impact the current year's financial statements The process of collecting evidence regarding the opening balance is influenced by various factors.

 Determining whether the opening balances reflect the application of appropriate accounting policies;

To ensure the accuracy of the current fiscal balance, it is essential to verify that the closing balances from the prior period have been correctly carried forward or restated, as necessary If the previous year's financial statements were audited, any adjustments to the ending balance should be examined, as these adjustments can assist auditors in evaluating the reliability of the current period's financial data.

In the public sector, legal or regulatory restrictions may limit the information accessible to a current auditor from a predecessor auditor For example, when a public sector entity, previously audited by a statutorily appointed auditor on behalf of the Auditor General, undergoes privatization, the extent of information sharing can be significantly affected.

(GAAP) Management assertions Audit objective

Audit Procedures Audit Evidence Audit report on FSs

When a newly-appointed private sector auditor seeks access to working papers or information from the statutorily appointed auditor, privacy and secrecy laws may limit this access In such cases, obtaining audit evidence through alternative methods becomes necessary If sufficient and appropriate audit evidence cannot be gathered, it will impact the auditor's opinion.

 Performing one or more of the following:

(i) Where the prior year financial statements were audited, reviewing the predecessor auditor’s working papers to obtain evidence regarding the opening balances

(ii) Evaluating whether audit procedures performed in the current period provide evidence relevant to the opening balances (iii) Performing specific audit procedures to obtain evidence about opening balances

According to ISA 500, auditors have a crucial responsibility to design and execute audit procedures tailored to the specific circumstances, ensuring the collection of sufficient and appropriate audit evidence This emphasis on audit evidence underscores the importance of thorough and effective auditing practices.

International Standards on Auditing (ISA) 500 outlines that the sufficiency of audit evidence is determined by the auditor's evaluation of the risk of material misstatement and the quality of the evidence collected.

The following are some factors that affect the auditor's judgment of the adequacy issue:

 Quality: the higher the quality, the less audit evidence may be required and vice versa

 Materiality: the more important account is, the more attention it is required to pay attention and to collect more audit evidence

 Potential risk and control risk: the amount of evidence needs to be increased in instances where there is a high level of potential or control risk

Auditors typically depend on judgmental and persuasive evidence instead of absolute certainty during the audit process This evidence is frequently gathered from a variety of sources and formats, all aimed at supporting the same assertion.

According to Diagram 2, the amount of audit evidence needed increases as the risk of material misstatement rises concerning an account balance, class of transaction, or disclosure.

Diagram 2 Relationship of Risk of Material Misstatement to Sufficiency

(Quantity) of Audit Evidence Required

Source:Lui M Puncel, "Knowledge-based audit procedures", 2009

International Standards Audit (ISA) 500 outlines the concept of appropriateness of audit evidence, emphasizing its quality in terms of relevance and reliability This quality is crucial for effectively supporting or identifying misstatements in various transactions, account balances, disclosures, and related assertions.

To evauate this matter, the auditor should consider the following factors:

 Source of audit evidence: source of evidence, the more independent it is from the entity, the more reliable it will be

 The company's internal control system: which company has effective internal control, the audit evidence will be more reliable

 Types of audit evidence: Physical evidence (inventory, inventory count witnesses) and direct knowledge of the auditor about the auditing object is considered

Graduation Thesis Advisor: Hoang Thi Mai Khanh, M.E the most reliable form of evidence Next is the documentary evidence And finally, the evidence gathered through the inquiry

A combination of evidence from diverse sources and formats that converge on the same conclusion is more persuasive than relying on a single source This multifaceted approach enhances credibility and strengthens the argument by showcasing a broader consensus on the issue at hand.

 Other factors: Competence and understanding of information providers For example, audit evidence obtained from an expert will be more convincing than evidence obtained from non-professional training

Diagram 3 illustrates that as the quality and appropriateness of audit evidence improve, the amount of required audit evidence decreases This highlights the interrelationship between the concepts of sufficiency and appropriateness in audit evidence.

Diagram 3 Relationship of Appropriateness (Quality) to Sufficiency

(Quantity) of Audit Evidence Required

Source: Lui M Puncel, "Knowledge-based audit procedures", 2009

The diagrams illustrate the complex interrelationships between the quantity of evidence needed, the risk of material misstatement, and the quality of the evidence These relationships are not linear; simply increasing the amount of lower-quality audit evidence does not adequately substitute for the absence of higher-quality evidence Consequently, auditors must exercise judgment in determining the appropriate amount of audit evidence necessary to support their opinion.

1.2.3 Audit procedures to obtain audit evidence

Risks of misstatements to the opening balance of the accounts on the financial

Cash is a crucial liquid asset listed first on the balance sheet, representing the value of a business It is categorized under short-term assets in the assets section of the balance sheet.

Common risks or cash and cash equivalents are as follows:

 Cash recorded is not real

 Potential loss of money due to poor storage and management conditions

Collusion between cashiers and accountants, or with third parties such as company employees or customers, can create opportunities for embezzlement, resulting in uncollected funds or unauthorized expenditures.

 The ability to overspend or overspend the actual value by making false vouchers, correcting vouchers to increase revenues and expenditures

 For cash in foreign currencies, there is a possibility of incorrect recording of the exchange rate for the purpose of gaining profit when the exchange rate changes

 The exchange rate difference at the end of the accounting period has not been assessed or assessed incorrectly for cash in foreign currencies

The probability of errors is generally reduced when transactions are conducted through a bank, as they maintain strict oversight Nevertheless, potential mistakes can still occur in this process.

 Depending on the acquaintance of the bank teller and corporate accountant, fraud may occur from familiar collusion

 The difference between the bank's data (bank statements, bank sub-books) and detailed books at the enterprise

 Cash transferred to the wrong address, wrong amount, wrong recipient information

 Do not transfer money on time, transfer money slowly due to using money for personal purposes

Customer receivables are a critical aspect of financial management, often prone to fraud and errors Issues such as employee embezzlement can significantly impact a company's performance, making it essential to maintain vigilance Fraudulent activities may include deceptive practices aimed at inflating revenue or manipulating receivables, which can undermine the integrity of financial reporting and business operations.

Common misstatements in the opening balance of customer receivables:

Debt reconciliation was not performed at the end of the last accounting period, leading to insufficient comparisons and discrepancies between the company's accounting records and customer receivables.

 Debt age has not been analyzed for overdue receivables

At the end of the accounting period, if no provision for doubtful debts is established or if the provision is incomplete and not compliant with current regulations, it can lead to an inaccurate representation of the net realizable value in the previous year's financial statements This oversight ultimately impacts the opening balance for the current year.

 The enterprise does not keep a detailed record of customers' receivables according to each type of customer, so it can easily lead to errors in offsetting the wrong subjects

At the end of the previous accounting period, there was no evaluation of the exchange rate differences for customer receivables in foreign currencies, which has affected the opening balance.

 Exploiting revenue and receivables through the recognition of unqualified sales operations

 Exploiting net realizable values through incomplete provisioning

 Do not declare receivable debts mortgaged for loan contracts

Inventories represent a significant portion of a business's short-term assets, especially for large-scale enterprises that manage extensive product lines across multiple locations This abundance of inventory makes it vulnerable to fraud, including embezzlement and theft, as well as risks like loss, damage, and obsolescence Certain types of inventory, such as toxic substances or farmed aquatic products, pose additional challenges during physical inspections To effectively manage inventory, organizations must establish complex documentation and internal control systems, complicating the auditing process and making it difficult for auditors to verify documents and track inventory data.

Fixed assets are great value item, often accounting for a significant proportion for a manufacturing enterprise, this item accounts for a high proportion of the total assets of the unit

Common misstatements in the opening balance of fixed assets such as:

 Recognition of incorrect historical cost, due to recognition of assets that are ineligible for recognition of fixed assets but must be included in short-term prepayments as required

 Accumulated depreciation error due to incorrect application of depreciation method, starting time of depreciation

Errors in the opening balance of fixed assets on the balance sheet can significantly impact various financial statement items, including production and business costs, administrative expenses, profit before tax, profit after tax, and retained earnings.

Liabilities are categorized into short-term and long-term based on the accounting period Short-term liabilities typically have minimal impact on the closing balance sheet due to their settlement within the same period In contrast, long-term liabilities, which hold significant value and span multiple business periods, can lead to substantial discrepancies in the closing balance if there are errors in the opening balance, affecting both the current year and future financial statements.

Common misstatements in the opening balance of a liability such as:

Debt reconciliation remains pending, leading to discrepancies between the enterprise's accounting records and its liabilities to suppliers at the conclusion of the previous accounting period.

 The enterprise does not keep a detailed record of accounts payable to the seller for each supplier, so it is easy to lead to mistakes of the wrong debt

At the end of the previous accounting period, the lack of assessment for exchange rate differences on accounts payable to foreign currency sellers directly affects the opening balance.

AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE OF

History of establishment and development of Ernst and Young Viet Nam

2.1.1 History of establishment and development

Ernst & Young (EY) is a leading global auditing and financial consulting firm, boasting over 300,000 employees and more than 700 offices across 150 countries Established in the 19th century, the company was founded by Alwin Charles Ernst and Arthur Young, solidifying its position as one of the top four firms in the industry.

 Arthur Young founded the Stuart & Young accounting firm in 1894 Twelve years later, it was split into Arthur Young & Company

 Alwin Charles Ernst and his brother Theodore Ernst set up the Ernst & Ernst accounting firm in 1903

Over nearly a century, Ernst & Ernst evolved through numerous mergers, significantly expanding its reach In 1944, the Canadian firm Clarkson Gordon & Company joined Arthur Young & Company The partnership between Ernst & Ernst and the British firm Whinney, Murray & Company in 1979 led to the creation of Ernst & Whinney This trajectory culminated in 1989 when Ernst & Whinney and Arthur Young merged globally, resulting in the establishment of Ernst & Young.

Ernst & Young has established itself as a global leader in auditing, taxation, and consulting services, emphasizing quality and professionalism As it entered the 21st century, the company focused on fostering a human-centered work environment, underpinned by a commitment to quality, teamwork, and leadership, while continuously looking towards the future.

In Vietnam, Ernst & Young has been operating since 1992 However since

In 1989, Ernst & Young established a representative office in Vietnam, becoming the first professional audit and service company with 100% foreign capital in the country The firm received its investment license No 448/GP on November 3, 1992, allowing it to operate in the fields of auditing and financial consulting.

Graduation Thesis Advisor: Hoang Thi Mai Khanh, M.E license No 448 / GPDC1 dated 23rd January 2002 by the State Committee for Investment Cooperation, now the Ministry of Planning and Investment

Nearly 29 years officially operated in Vietnam, Ernst & Young Vietnam has continuously expanded its scale When it was first established, the total number of employees of the company was only 10 people, but up to now, the company has more than 700 employees, with high professional qualifications and professional knowledge Therefore, it can be said that Ernst & Young Vietnam is increasingly asserting its huge role in providing services through recruitment and training of staff Thanks to an effective business strategy, the number of customers of the company has increased over the years, including domestic companies, joint ventures and companies with 100% foreign capital

Ernst & Young, part of the prestigious Big 4 auditing firms alongside PwC, Deloitte, and KPMG, is renowned for its commitment to "Quality In Everything We Do." The firm has established itself as a leader in enhancing the quality of professional services, including auditing, tax consulting, and finance With a vision to be the "Provider of all solutions," Ernst & Young strives to meet all customer needs with a focus on prestige and quality.

2.1.3 Main revenue activities of company

With a team of highly qualified human resources, Ernst & Young is increasingly meeting the needs of customers in all fields of activity The main types of company are:

Ernst & Young always maintains the highest technical and professional quality standards, as well as the practical issues that help customers increase business

Hoang Thi Mai Khanh, M.E., serves as the graduation thesis advisor, guiding students in their research Ernst & Young collaborates with international offices to provide a thorough analysis of the impacts of corporate groups and their affiliates operating in Vietnam.

Ernst & Young serves a diverse and extensive client base, including numerous prominent companies across various sectors such as banking, commerce, manufacturing, insurance, telecommunications, construction, oil and gas, as well as hospitality industries like restaurants and hotels.

 Enterprises with foreign investment capital, business cooperation contract;

 State agencies, domestic and international social organizations operating in Vietnam;

2.1.5 Organizational structure of the management’s philosophy

The company operates with a clearly decentralized organizational and management structure, where each department head is accountable for their department's performance and collaboration with other supportive departments The organizational structure is segmented into distinct divisions, ensuring effective management and operational efficiency.

 AABS Department : Specializing in performing audit services;

 TAX Department : Specializes in tax services;

 TAS Department : Specializing in providing business consulting services;

 ITRA Department : Specializes in testing information systems;

 Admin Department : Perform internal work in the unit;

Diagram 4 Organizational chart of an audit team

Audit assistants play a crucial role in supporting higher-level auditors by executing assigned tasks To enhance employee motivation, the audit assistant structure now consists of two tiers: Level 1 and Level 2 Level 1 audit assistants are new hires with less than one year of experience, while Level 2 audit assistants have been with the company for one to two years This streamlined approach replaces the previous three-level system, focusing on career development within the audit team.

 The person with the biggest responsibility in an audit team is Senior

Seniors are employees with at least two years of experience at the company, tasked with guiding audit assistants to ensure quality work They are responsible for reviewing and checking the outputs of junior staff and ultimately report their findings to the senior auditor's manager or senior manager.

Managers and Senior Managers are responsible for overseeing various audit sectors, including banking, manufacturing, and hospitality These professionals typically possess over five years of work experience and hold qualifications such as the ACCA certification or a practicing auditor's certificate issued by an international organization or Vietnam's Ministry of Finance.

Partners or principals are equity owners who invest capital in the company and hold full responsibility for the services provided to customers They play a crucial role in running and managing the business effectively.

Organizing work into groups allows for specific task assignments to each member, aligning their responsibilities with the predetermined audit plan This structure enhances effective monitoring by connecting team members with senior staff, ensuring adherence to principles and procedures Consequently, it empowers individuals to make necessary adjustments and informed decisions.

Audit process at Ernst and Young Viet Nam

Ernst & Young Vietnam primarily offers auditing services, utilizing the Global Audit Methodology (GAM) to ensure high-quality operations for its clients.

GAM represents the synthesis and update of the latest guidelines from leading global auditing organizations By implementing this standardized audit process, Ernst & Young ensures consistency in operational steps across all countries While the process remains flexible and adaptable to the unique conditions of each business environment, it still adheres to the overarching principles of the general audit framework, ensuring compliance with regulations while allowing for necessary adjustments.

At Ernst & Young Vietnam today, the audit process consists of 4 basic steps:

Diagram 5 Audit process at Ernst & Young Viet Nam

Following a standardized audit process enables auditors to gather sufficient and appropriate evidence for drawing conclusions about the audit subject Each step in this process is crucial for collecting information that forms the foundation for audit report preparation To ensure the quality of the audit, auditors must adhere to the established procedures Below is a detailed flow chart outlining the audit process steps utilized by Ernst & Young.

1 Audit planning and identification of audit risks

Understand the service requirements, decide the audit scope, set up an audit team

 Perform preliminary steps of the audit department

 Find out customers' business environment

 Evaluation of the internal control system

 Determine materiality for the entire financial report and for each individual item

 Identify important items and important assertions for each item

Audit planning and identification of audit risks

Strategic planning and audit risk assessment

Finish the audit and issue the audit report

2 Strategic planning and audit risk assessment

Plan group activities and discuss errors and frauds

 Identify important business types and related regulatory policies

 Understand the business process, audit procedures related to the profession

 Understand and overall assessment of financial statements

 Selection of control procedures to test

 Understand, examine and evaluate information technology systems

 Design test checks general entries and basic fraud and error detection procedures

 Preparation and archiving of audit documents

Review the results of the interim audit, decide on alternative or supplementary procedures

 Examine the accounting entries and general procedures to detect frauds and other errors

 Continuing to perform audit procedures on the basis of continuously updating customer information

 Performing the general audit procedures that have been identified in the previous period

4 Finish the audit and issue the audit report

 Prepare a summary of audit differences

 Performing SRM - Summary review memorandum

 Perform the process of making audit reports

 Review and submit reports to the senior level for review

 Prepare reports, give reports to customers

 Evaluate the level of customer satisfaction

 Evaluate the audit implementation process

Current situation of audit procedures for obtaining audit evidence of initial audit

The first-year financial statements can be classified into two scenarios: one where the previous year's statements are unaudited and another where they have been audited by a different firm, but the current auditor is dissatisfied with those results However, all examined audit documents pertain to the latter scenario, likely due to EY's client profile, which predominantly includes publicly listed companies, foreign-invested enterprises, and commercial banks These entities typically face stringent audit requirements from investors, shareholders, and regulatory bodies.

2.3.1 Audit reports of the prior year have been audited

Along with interviewing auditors who have audited the first year, the author noticed a number of issues of concern when collecting audit evidence for the opening balance as follows:

In first-year audits, contacting predecessor auditors is crucial for successor auditors to evaluate the acceptance of the audit engagement The information obtained from predecessor auditors significantly influences the successor auditor's decisions regarding the audit procedures for both the opening and closing balances A positive response from predecessor auditors instills confidence in the opening balance, indicating that there are no concerns regarding the application of accounting standards or audit procedures Conversely, any negative feedback may prompt the successor auditor to reassess the implications for the audit.

The graduation thesis advisor, Hoang Thi Mai Khanh, M.E, emphasizes the importance of the opening balance when auditors receive notifications from their predecessors regarding limitations in answering inquiries and providing necessary information, evidence, and audit records for the current year's audit.

Before reaching out to predecessor auditors, it is essential for the auditor to obtain the client's written consent This permission safeguards against the unauthorized disclosure of confidential information.

Auditors must consider the professional qualifications and reputation of predecessor auditors, as a reputable auditor or auditing firm with a clean audit report enhances confidence in the beginning balance In contrast, an unknown auditor with a qualified or adverse opinion may raise concerns for the current year's auditor.

Communication procedures with predecessor auditors have been well implemented by EY auditors Through the audit files surveyed, the majority of the communication process usually includes the following stages:

 Communication letter with predecessor auditors:

Before a successor auditor can send a communication letter to a predecessor auditor, they must obtain the client's permission If the client denies this request, the successor auditor should contemplate declining the audit engagement The communication letter will address any professional reasons that may limit the audit of the client company This correspondence allows the successor auditor to gather crucial information from the predecessor, including insights into the integrity of the management, any existing disagreements, and the reasons that may have hindered their collaboration.

In addition, in communication letter, the auditor may include a request to review the audit record of the predecessor auditors

The above contacts and exchanges will help:

 Protecting auditors from receiving appointment in the absence of all relevant information

 Ensuring the interests of predecessor auditors when seriously implementing the responsibilities of practicing auditors

When prior financial statements have been audited, examining the predecessor auditor's files is crucial to confirm that the opening balance does not materially impact the current year's financial statements Insights gained from this review can significantly influence the nature, timing, and extent of this year's audit procedures, particularly concerning the opening balance.

When reviewing the predecessor auditor's files, if the opening balance is deemed fairly represented, the auditor will rely on these findings without further procedures Conversely, if significant risks are identified that could materially impact the current year's financial statements, the auditor will conduct additional procedures for both the opening balance and any transactions occurring during the year The decision to review the audit files is influenced by several key factors, and not all audits will necessitate this additional scrutiny.

 Cooperative attitude of predecessor auditors, the fee they require when providing audit files;

 The reputation of the predecessor auditor (the audit firm), the quality of the services that the audit firm provides;

 The effectiveness of this procedure: the auditor only reviews audit files for accounts that feel unable to effectively audit the opening balance on their own

The choice to examine the predecessor auditor's audit files primarily relies on the professional judgment of the auditor leading the current audit, rather than being dictated by established standards.

Normally, partners will be the senders of correspondence and is responsible for contacting predecessor auditors before accepting audit engagement

The example of the communication letter the auditor has shown in Appendix 1

Upon sending the correspondence, the auditor will obtain responses from the predecessor auditors, all of which indicate that there are no professional reasons that would hinder the acceptance of the audit contract.

Through all audit files are surveyed, auditors at EY have done a good job communicating with predecessor auditors by many means such as letters, email, and telephone

The primary reason for the failure of predecessor auditors and the lack of cooperation from client companies often stems from requests to change the auditing firm, rather than professional disagreements This trend is positive, as it provides current auditors with increased confidence and peace of mind when taking on new audit engagements.

2.3.1.2 Review audit files of predecessor auditors

The review of audit records of predecessor auditors consists of 3 phases as follows:

Phase I: Consider reviewing audit files of predecessor auditors

After opting to utilize the predecessor auditor's review procedure and addressing this in a communication letter, the current auditor will formally request access to the previous year's audit files from the predecessor auditor Securing the client's consent is crucial, as it provides a solid foundation for collaboration with the predecessor auditors while ensuring that the review process upholds client confidentiality and adheres to professional ethical standards.

Auditors often consider which audit procedures to do on their own and consider only the prior auditor's files on accounts that the auditor considers high risks This both

Graduation Thesis Advisor: Hoang Thi Mai Khanh, M.E increases efficiency while performing work, avoids wasting time on unnecessary procedures, and saves costs when reviewing predecessor auditors' files

Auditors often enhance their review of audit files by conducting interviews with predecessor auditors to address issues pertinent to the current year's audit Key areas of focus include insights on last year's financial statements, identification of high-risk accounts that demand extensive audit attention, and any challenges related to internal controls.

Phase II: Conducting a review of the audit files of predecessor auditors

In evaluating the trustworthiness of a predecessor auditor's results, the current auditor will assess their expertise, independence, and understanding of the business's characteristics and customer accounting system through a review of audit files and interviews This evaluation is crucial for determining the extent to which the current auditor can rely on the predecessor's findings.

This article discusses a review of a predecessor auditor's financial statements, highlighting the auditor's approach of combining file reviews with interviews of the previous audit team leader The conclusion drawn is that the predecessor auditor's findings may be utilized for the opening balance.

Table 2 Review audit files of predecessor auditors

Detail: Review WPs Year end: 31/12/2020

Interview with Mr Huy, a senior auditor of Deloitte Limited who performed the audit for AVC the prior year (2019)

⸙ Learn about the company's business

⸙ Audit procedures are performed to determine risks Such as:

Graduation Thesis Advisor: Hoang Thi Mai Khanh, M.E ¤ Inventory: for obsolete items: assessment of the inventory provisioning ¤ Accounts receivable evaluation: provisions for doubtful debts

The conclusions are given by Deloitte, we collect sufficient appropriate evidence to support the audit opinion given

Conclusion: We can count on Deloitte's audit of the AVC consolidated audit report

Source: Extracted from audit files – Ernst & Young Vietnam Limited

REMARKS AND SOLUTIONS TO THE APPLICATION OF AUDIT

Remarks about audit procedures for obtaining audit evidence of initial audit

3.1.1 Compliance with International audit standards and Vietnamese auditing standards

The issues related to the first-year financial audit are clearly defined in the International Auditing Standards ISA 510 and the Vietnam Auditing Standard VSA

The objective of ISA 510 and VSA 510 is to outline the principles and procedures for determining the opening balance at the start of a fiscal year during the audit of first-year financial statements At Ernst & Young Vietnam, auditors adhere to the guidelines set forth in these standards.

Before auditing the current fiscal year, it is crucial for the auditor to assess the accuracy and reasonableness of the opening balance, as this plays a vital role in ensuring the overall quality of the audit.

The auditor focuses on evaluating the client's accounting policies, understanding the business environment, and assessing the internal control system before implementing suitable audit procedures The approach to auditing the opening balance for the year is influenced by the prior year's financial statements, whether they have been audited, are unaudited, or were audited but not deemed satisfactory by the auditor.

To obtain relevant audit evidence for the opening balance in the audited financial statements, the auditor reviews the predecessor auditor's files and communicates with them This process involves independent computational assessments and professional expertise, which are crucial for evaluating the reliability of the prior year's financial statements By examining the predecessor auditor's working papers, the auditor identifies any adjustments made to last year's financial statements and notes pertinent information for the current audit, ultimately aiding in the assessment of risks associated with the accounts in the current annual financial statements.

In the unaudited financial statements from the previous year, the auditor has enhanced the execution of additional audit procedures specifically for the fiscal year's opening balance These procedures are crucial for obtaining evidence while auditing first-year financial statements, focusing on key accounts such as cash, inventory, accounts receivable, trade payables, fixed assets, and equity The auditor has ensured compliance with the guidelines set forth in ISA 510 and VSA 510 during the collection of audit evidence.

The auditor has gathered evidence for this year's audit by reviewing the opening balances of the cash account, inventory, accounts receivable, and accounts payable, along with obtaining third-party confirmations as mandated by the International Standards on Auditing (ISA).

510 – Paragraph 9 This combination of audit procedures provides the auditor with sufficient appropriate audit evidence

The auditor has verified the accounts of tangible fixed assets and equity sources by reviewing supporting documents for the opening balance, obtaining third-party confirmation of the opening balance, and recalculating the depreciation of fixed assets in accordance with ISA 510 - paragraph 10.

3.1.2 Compliance with EY global guidelines in general and EY Vietnam in particular

Establishing regulations, principles, and guidelines within global and regional EY systems aims to enhance audit methodologies and ensure the continuous improvement of audit quality The fundamental objective of every audit is to gather sufficient and appropriate audit evidence.

The GAAIT (Global Accounting & Auditing Information Tool) toolbar offers comprehensive guidance on first-year financial audits, providing essential instructions for gathering audit evidence during initial year engagements.

First , Chapter 1 - Client and engagement acceptance and continuance :

The auditor evaluates the potential to accept new clients by considering several key factors, including the integrity of the Board of Directors, associated business risks, the audit firm's capability to conduct the audit, the independence of the audit firm from the client, and the estimated cost and duration of the audit process.

EY Vietnam adheres to the global policy of EY regarding the acceptance of new clients, utilizing the Global Acceptance and Continuance (GAC) framework A partner conducts a thorough client assessment using a standardized questionnaire, with responses automatically updated in the regional EY system Ultimately, the decision to accept a new audit client rests solely with the partner.

Chapter 2, Section 2.2 outlines essential regulations and guidelines for conducting initial audits of first-year financial statements Ernst & Young's first-year audit guidance serves to clarify and implement the principles established in ISA 510.

The auditor has conducted essential audit procedures to validate the opening balance, taking into account the client's accounting policies, the nature of the account, and the materiality of the opening balance's impact on the current year's financial statements.

EY provides detailed guidance on how to effectively communicate with predecessor auditors regarding prior year audited financial statements, ensuring compliance with professional ethical standards and legal regulations.

For financial statements from prior years that are either unaudited or audited but not satisfactory to the successor auditor, EY offers comprehensive guidance on the audit process for opening balances This includes assisting auditors in gaining a deeper understanding of their clients, familiarizing themselves with relevant accounting principles and policies, evaluating internal control systems, and obtaining specific audit evidence when required.

Effective recommendations to enhance quality of audit opening balances at EY Viet

After learning about ISA 510, the related documents, based on the assessment of the actual situation at EY, in her research capabilities, the author mentioned some specific solutions as follows:

Before finalizing the first-year audit contract, auditors must communicate their responsibilities to the client and emphasize the need for cooperation to facilitate a smooth audit process Many businesses, particularly smaller ones, often lack familiarity with the relevant circulars and standards, including ISA 510, which can hinder effective collaboration with auditors To address this, auditors should establish clear agreements with clients regarding these requirements, potentially formalizing them in the audit engagement This proactive approach is crucial for enhancing the efficiency of audit procedures For instance, during the inventory account review, relying solely on year-end counts from the previous year may not provide sufficient evidence of the accuracy of opening balance inventories To mitigate this issue, auditors should consider having clients sign the audit contract as early as possible or conduct an inventory count prior to contract signing, especially when rollback procedures are deemed essential.

To ensure a high-quality and effective audit, it is crucial for first-year auditors to fully understand the importance of this issue and to communicate its significance to clients The audit firm should conduct regular training sessions to equip auditors with the specific guidance needed to successfully implement this solution.

To enhance the efficiency of opening balance audits for fiscal years, it is crucial to increase the test of controls, particularly for first-year clients involved in joint ventures with foreign companies or those with 100% foreign capital These clients typically possess robust internal control systems, which can significantly streamline the audit process.

Under the guidance of Graduation Thesis Advisor Hoang Thi Mai Khanh, M.E, auditors are advised to implement multiple tests of controls to reduce the extent of substantive procedures for fiscal year balances For clients with a weak internal control assessment, particularly during the first year of auditing, it is crucial for auditors to evaluate the necessary audit workload to ensure the reliability of the opening balance for the year.

In the inventory test of detail section, it is crucial for auditors to assess inventory valuation during year-end balance audits To enhance this process, the auditor should employ specific evidence collection techniques, starting with the determination of the original cost and net realizable value of the inventory.

To determine the original cost of inventory as of December 31, 2020, auditors will verify the unit price calculations by examining relevant documents, including sales contracts, supplier invoices, and payment vouchers This process ensures that the unit prices for raw materials, goods, and tools purchased externally are appropriate and accurate Additionally, auditors will review the cost accounting system to confirm the reasonableness of cost aggregation and allocation for finished products and work in progress.

Net realizable value (NRV) is calculated by taking the unit price from the final sale invoice and subtracting the estimated selling costs associated with finished goods, raw materials, tools, or supplies.

Once the original cost and net realizable value of inventory are established, the auditor compares these figures to confirm that the inventory is valued at the lower of the two If the net realizable value significantly falls below the original cost, the auditor will recommend a journal entry adjustment to accurately reflect the inventory at its net realizable value.

To enhance the quality of first-year audits, audit firms must prioritize research and compliance with relevant regulations This includes developing detailed guidance on audit procedures, particularly focusing on the significance of opening balances By doing so, firms can improve their audit services and ensure more accurate financial assessments.

Graduation Thesis Advisor: Hoang Thi Mai Khanh, M.E truthfulness and reasonableness of the information and data on the financial statements

At the same time, the review and comparison of regulations in GAM to conform to legal regulations and standards is also a matter of concern

In the current economic landscape, adhering to legal regulations is crucial, making the auditor's opinion essential for businesses, investors, and stakeholders The integrity of independent audits is critical for fostering trust in financial reporting and ensuring transparent disclosure of financial information among investors, shareholders, and policymakers.

Ernst & Young Limited Company has established a strong market presence through its highly qualified team, delivering consistently high-quality products and services that are trusted by clients and government agencies alike With a commitment to client satisfaction and exceptional performance, EY auditors have built lasting and sustainable relationships over the years Looking ahead, EY is poised to expand its influence in the auditing market in Vietnam.

The author hopes that her proposals will contribute a part to the construction and development of EY Vietnam

During my internship at EY, I faced time constraints that limited both my ability to gather information and my hands-on experience in auditing Consequently, I focused on the topic of "Audit Procedures for Obtaining Audit Evidence in Initial Audit Engagements at Ernst & Young."

Young Vietnam Limited Company” has unavoidable shortcomings, the author hope to receive valuable comments from teachers and auditors of EY company

 Putri, E., & Tobing, R (2019, October 01) Auditor switching and initial Audit

Procedures: A case study Retrieved March 27, 2021, from https://www.atlantis- press.com/proceedings/aprish-18/125918985

 INTERNATIONAL STANDARD ON AUDITING 510 INITIAL AUDIT ENGAGEMENTS—OPENING BALANCES (2009, December 15) Retrieved from https://www.ifac.org/system/files/downloads/a025-2010-iaasb-handbook- isa-510.pdf

 ISA 500, “Audit Evidence”, http://web.ifac.org/clarity-center/isa-500

 Ifac.org 2009 ISA 450 - EVALUATION OF MISSTATEMENTS IDENTIFIED

DURING THE AUDIT Retrieved from

 H., & A (may 1979) The initial audit engagement The Initial Audit Engagement, The CPA Journal (pre-1986)(Vol 49, Iss 000005)

 Arel, B., Brody, R and Pany, K., 2006 Findings on the Effects of Audit Firm

Rotation on the Audit Process Advances in Accounting, 22, pp.1-27

 Lucia, P and Lavinia, 2017 Possibilities To Correct Accounting Errors In The

Context Of Complying With The Opening Balance Sheet Intangibility Priciple

 IASB, International Financial Reporting Standards, part A and B, CECCAR Publishing House, Bucharest, 2015

 Zuca, S., 2015 Audit Evidence – Necessity to Qualify a Pertinent Opinion

Procedia Economics and Finance, 20, pp.700-704

 Chuẩn mực Kiểm toán Số 510: Kiểm toán năm đầu tiên - Số dư đầu kỳ (n.d.)

Retrieved from https://ktkt.uel.edu.vn/chuan-muc-kiem-toan-viet-nam- vsa/chuan-muc-kiem-toan-so-510

Appenxdix 1 Communication with predecessor auditors

29 Le Duan Street, District 1, HCM City

We have been informed by the management of THV (Vietnam) Co., Ltd that they have extended an invitation for our appointment as auditors for the year ending 31 December 2020 Additionally, we understand that you have been authorized to discuss the company's affairs with us, facilitating our audit process.

Before accepting the appointment as auditors, we kindly request confirmation of any relevant matters that may affect our decision regarding this role, particularly those that could influence our acceptance as auditors for the Company.

We kindly request your guidance on whether we can access your audit files for the financial year ending December 31, 2019 If access is not granted, we would appreciate the opportunity to discuss any significant audit-related issues with you.

Partner Ernest Yoong Chin Kang