UNIVERSITY OF ECONOMICS AND LAW FACULTY OF ACCOUNTING AND AUDITING GRADUATION THESIS Topic: AUDIT EVIDENCE AND PROCEDURES FOR COLLECTING AUDIT EVIDENCE IN THE PERFORMANCE OF FINANCIAL
Research reason
The audit activity in our country has rapidly evolved to meet the demands of a changing economy influenced by market mechanisms and international integration This evolution has fostered trust in auditing among stakeholders concerned with financial conditions and accounting records, which is essential for the growth of auditing as a distinct profession The relevance of audit reports hinges on the evidence collected by auditors, making the process of gathering and evaluating audit evidence crucial Audit sampling is a prevalent method for selecting test items to obtain this evidence, with each organization employing unique strategies, advantages, and limitations Ultimately, the effectiveness of gathering audit evidence, particularly through sampling, significantly affects the overall quality and efficacy of the audit.
Collecting sufficient and pertinent audit evidence enables independent auditors to accurately assess financial statements, leading to high-quality outcomes and successful auditing practices.
The writer has selected the topic "Methods to Collect Audit Evidence" for their graduation thesis, emphasizing its importance to enhance understanding for both themselves and readers.
Research objectives
Learn the fundamentals of audit evidence, including principles, requirements, classifications, and audit evidence collection methods
Learn the practical application of methods of collecting audit evidence at the auditing firm Grant Thornton Vietnam
Demonstrating the approach of gathering audit evidence used in several operations during an audit at ABC Company, a Grant Thornton customer
Comment on the audit evidence collection procedures at the company and make recommendations.
Research methodologies
Documentation and standards pertaining to audit evidence gathering and sample techniques:
Practical experience includes actually engaging in an audit of some of the intern's activities and gathering data from work records
Engaging with your colleagues can provide valuable insights into audit evidence, while also seeking direct guidance from your lecturer on relevant questions can enhance your thesis research.
Object and scope of research
Due to the limited scope of research, this article focuses on specific aspects of audit evidence collection methods, acknowledging that it cannot encompass all relevant techniques The writer presents insights based on their knowledge regarding both the theoretical framework and practical application of these methods at Grant Thornton.
INTRODUCTION ABOUT GRANT THORNTON (VIETNAM)
General information about Grant Thornton (Vietnam) Limited
Figure 1: Logo Grant Thornton (Vietnam)
Source: https://www.grantthornton.com.vn/
The Company’s name was accepted: Grant Thornton (Vietnam) Limited
Type of business: Limited Liability Company with two members or more
Email: Grant.Thornton@vn.gt.com
Website: https://www.grantthornton.com.vn/
Head office of Grant Thornton (Vietnam) Limited
Address: 18th floor, Hoa Binh International Tower, 106 Hoang Quoc Viet, Nghia Ward Do, Cau Giay District, Hanoi City
Legal representative: Mr Nguyen Chi Trung - General Director
Ms Nguyen Thi Vinh Ha - Deputy General Director
Branch office of Grant Thornton (Vietnam) Limited
Address: 14 th floor, Pearl Plaza Building, 561A Dien Bien Phu, Ward 25, District Binh Thanh, Ho Chi Minh City
Legal representative: Mr Nguy Quoc Tuan - Deputy General Director
History and development about Grant Thornton (Vietnam) Limited
Founded in 1993, Grant Thornton Vietnam began as a joint venture with Concetti and later became a fully foreign-invested company in 1997 The establishment of a branch in Ho Chi Minh City marked its expansion as an independent member of Grant Thornton International.
Grant Thornton International accepted Grant Thornton Vietnam as a full member in
1998 In 1999, the firm changed its name to Grant Thornton (Vietnam) Limited
In 2007, Grant Thornton Vietnam was recognized as an independent auditing firm for listed enterprises
Another year has come to an end, and 2014 has been a watershed moment Grant Thornton Vietnam Ltd and Nexia ACPA Auditing & Consulting Co Ltd ("ACPA") officially merged on July 1, 2014
Services of Grant Thornton (Vietnam) Limited
Audit and assurance services encompass a variety of essential offerings, including statutory audits, IFRS services, and comprehensive reviews of financial statements and information Our expertise extends to acting as reporting accountants and compiling financial data, ensuring accuracy and compliance We also specialize in cross-border audits and US GAAP audits, as well as conducting agreed-upon procedures to meet specific client needs.
Our comprehensive tax services encompass a wide range of offerings, including licensing services, international tax planning, and expatriate tax planning We provide expert tax advisory and compliance services, conduct thorough tax health checks, and assist with transfer pricing and tax due diligence Additionally, we specialize in customs and international trade, support M&A transactions, and help businesses choose optimal locations in industrial zones Our team also offers tax audit support to ensure your business remains compliant and well-prepared.
- Advisory Services: business risk services, transaction advisory services, valuation, business consulting services
Business Process Solutions encompass a range of services designed to enhance financial management and compliance These include comprehensive accounting services, tax compliance through outsourcing, and secondments or loan staff services Additionally, we offer the compilation of both financial and non-financial information, along with thorough reviews and improvements of accounting systems Our expertise extends to the initial setup of accounting and tax systems, as well as management accounting and analysis, ensuring businesses operate efficiently and in accordance with regulations.
- DigiTech Innovation: technology consulting and solutions, digital advisory
- International Corporate Structuring Services: offshore company establishment service and private trust advisory
Grant Thornton (Vietnam) Limited developed six basic principles, known as CLEAR values, in addition to a distinct worldwide culture
Collaboration: ask for help, give help – we work well together
Leadership: have courage and inspire others – we challenge each other to be the best we can be
Excellence: find a better way every time – we never get complacent
Agility: think broadly, act quickly – we thrive in change
Respect: listen and understand, be forthright – we create honest relationships
Responsibility: use influence wisely – we own our actions
Diversity at Grant Thornton (Vietnam) Limited enables the company to effectively respond to the demands of a fast-evolving world The organization is committed to inclusivity and does not discriminate against individuals based on ethnicity, race, religion, gender, sexual orientation, gender reassignment, pregnancy, maternity, marital status, age, or disability.
Growing Together in the community: Growing Together in the community is Grant
Thornton is dedicated to community engagement, guided by six core principles that emphasize the significant impact individuals can make through active participation The inspiring employees of Grant Thornton contribute to their local communities worldwide, offering innovative, generous, and resourceful services that foster positive change.
Organizational structure of Grant Thornton (Vietnam) Limited
Grant Thornton Vietnam operates its main office in Hanoi, complemented by a branch in Ho Chi Minh City Each department carries out its own responsibilities while collaborating closely to enhance operational efficiency This streamlined structure, aligned with the company's management standards, fosters a professional and effective working environment.
Share Owner: Mr Kenneth Atkinson
The Branch Director oversees all operations within the branches, ensuring effective management and coordination Mr Nguyen Chi Trung serves as the Director of the Hanoi branch, while Mr Nguyen Quoc Tuan holds the position of Deputy Director at the Ho Chi Minh City branch.
Departments: audit and assurance, tax advisory, outsourcing, Digitech, and management (including supporting and IT)
Figure 2: Organizational structure of Grant Thornton (Vietnam) Limited
Horizon methodology and some technological applications at Grant Thornton (Vietnam) Limited in the audit procedures
The company has developed an innovative method to enhance its understanding of organizational operations and customer risks, utilizing the Windows operating system and key software products like GT Explorer and Audit Care for internal control evaluation Managed by the Chief Auditor, this approach involves auditors at every stage of the audit process and is adaptable to various audit sizes and procedures tailored to individual client needs Importantly, this method adheres to corporate policies and professional standards set by the International Federation of Accountants (IFAC).
Partner/Director Senior Manager Manager Assistant Manager Senior Associate Intern
Figure 3: Organizational structure of Audit and Assurance Internee
Voyager is a comprehensive software solution that facilitates complete audit procedures directly on the computer, enabling seamless connectivity among auditors It tailors its auditing processes to align with the specific characteristics and risks associated with each client type.
- TBEAM: assists auditors in automatically creating digital balance sheets arising from customer's data, creating a steering chart, making audit adjustments, and creating a unified working paper, connected with Voyager software
IDEA, a widely-used data query software licensed by Grant Thornton, empowers auditors to enhance their efficiency by saving time and conducting thorough analyses This tool reduces the dependence on IT specialists and bolsters the stability of auditing procedures Key functionalities of IDEA include data extraction, table creation, sorting, data aggregation, file comparison, field statistics, sampling, calculations, and the ability to output information from other programs, enabling auditors to select accounts for review and effectively store information.
THEORETICAL BASIS ON AUDIT EVIDENCE AND
Some basis of audit evidence
2.1.1 The concept of audit evidence
Under Vietnamese Auditing Standards VSA 500, audit evidence encompasses all documents and information gathered by auditors during the audit process This evidence is crucial for auditors to draw conclusions and formulate their opinions It includes materials found in accounting records and books, such as financial statements and various related documents.
As a result, audit evidence is the foundation for confirming the audit report, and the process of gathering audit evidence is the heart of the audit implementation stage
Different types of evidence have different reliability Reliability can depend on origin, form, and case-by-case The following methods of classification can be used:
2.1.2.1 Classification based on the audit evidence source
Third-party evidence, provided to auditors upon request, includes confirmation letters for receivables from customers, bank deposit balances, and obligations to sellers, as well as other information requiring external validation, such as court documents This type of evidence, gathered directly by the auditor, is considered the most reliable form of proof in the auditing process.
The outside prepares the audit evidence, which is then kept at the audit unit For instance, minutes of the handover of fixed assets, supplier bills, and so forth
Evidence gathered by the client unit, disseminated to the public, and stored by a third party An example of a client unit's sales invoice
The client unit compiled various forms of evidence, including time sheets, salary payment records, detail books, and summary books This type of documentation is widely used due to its cost-effectiveness and efficiency in providing proof of origin.
2.1.2.2 Classification based on the type of audit evidence
Physical evidence (inventory or seeing an inventory, as well as the auditor's direct knowledge of the client entity, such as stocktaking or viewing the operating system of internal control
Accounting documents, including books, vouchers, and auditor's computations, are provided by the client unit to the auditor for the audit process The reliability of this evidence is significantly influenced by the effectiveness of internal controls.
Evidence collected from interviews, such as data from the client unit's employee interview questionnaire, is generally considered less reliable than other forms of evidence This is due to its dependence on the honesty of the respondents and their knowledge level, which can significantly impact the accuracy of the information provided.
Audit evidence plays a crucial role in enabling auditors to assess the reasonableness of financial statements, thereby significantly impacting the quality of the audit report According to VSA 500, section (6), "Audit Evidence" (2012), auditors must develop and implement tailored methods to gather sufficient audit evidence This highlights that an effective audit report must fulfill two key criteria: completeness and appropriateness, which relate to the quantity and quality of the audit evidence These criteria are interrelated and essential for a reliable audit outcome.
The quantity of audit evidence required for an auditor to form an opinion is referred to as sufficient adequacy, which encompasses the size of the sample and the timing of the audit processes An auditor's professional judgment regarding the adequacy of this evidence is influenced by various factors.
Materiality: The higher the materiality of the things, the more audit evidence is required; conversely, the lower the materiality of the items, the more audit evidence is required
To effectively manage risk in auditing, it is essential to increase the amount of audit evidence in areas with high inherent or control risk, thereby minimizing detection risk This approach aims to reduce overall audit risk to an acceptable level, following the formula AR = IR x CR x DR, where AR represents audit risk, IR indicates inherent risk, CR signifies control risk, and DR stands for detection risk.
When faced with untrustworthy or conflicting evidence, auditors must seek additional evidence to strengthen their findings before moving forward It's important to recognize that, given the inherent limitations of an audit, auditors can only obtain compelling evidence rather than absolute certainty.
The significance of audit evidence hinges on its reliability, which auditors assess through various factors.
Reliable audit evidence from a client entity is less susceptible to falsification, while independent audit evidence reduces the likelihood of manipulation even further.
Physical evidence and those immediately accessed by the auditor, according to the auditor, have the highest dependability, followed by documentary evidence and documentary evidence
Internal control system: If the internal control system is well-designed and run, the evidence gathered from it will be more reliable
The reliability of audit evidence increases when it is corroborated by diverse sources and formats, all confirming the same fact Additionally, the relevance of this evidence hinges on its alignment with the auditor's statement under review, as highly credible evidence that contradicts the assertion may not be beneficial to the audit process.
2.1.4 Methods of collecting audit evidence
Auditors utilize various methods to gather audit evidence, each yielding different types of evidence with unique levels of reliability These methods come with their own advantages and disadvantages, prompting auditors to select the most appropriate strategies for evidence collection based on their professional judgment in each situation.
The process of examining and comparing recorded papers and tangible assets with one another, between books and reality, between rules and implementation, and so on, and includes two types:
The auditor will collect tangible evidence of the client's inventory, including goods, fixed assets, and cash, as this method provides the most reliable proof However, there are certain drawbacks associated with this approach.
An inventory of fixed assets serves to confirm their existence but does not clarify any associated rights or obligations, as these assets may be leased to customers or already mortgaged.
Similarly, an inventory of a fixed asset serves solely as proof of the item's existence, not as a foundation for "appraisal" or "rights and duties."
Method of selecting test elements
Auditing is the process by which auditors gather sufficient and acceptable evidence to form conclusions on financial statements Due to time and resource constraints, auditors cannot examine every transaction or balance component; doing so would be inefficient and impractical Conversely, focusing on too few transactions increases the risk of missing critical evidence Therefore, auditors must strategically identify which transactions and items to review before commencing the audit This strategic selection is crucial for ensuring that the auditor collects adequate evidence throughout the audit process.
Select the entire group (100 percent test)
The selection of unique elements
Auditors have the flexibility to employ one or a combination of three procedures based on the specific scenario at hand The selection of the appropriate approach is determined by the risk assessment and the overall effectiveness of the audit.
The auditor may elect to analyze all of the parts that make up an account balance or a transaction in some situations Under particular, in the following situations:
The overall contains few elements, but each piece has a high value
Inherent risk and control risk are significant, and other approaches cannot give adequate acceptable proof
As the calculation processes are performed by the computerized system making the
The client unit has signs of litigation or dispute
Customers may sometimes ask auditors to examine every item in a population to ensure a specific objective is achieved For instance, a parent company often requests a comprehensive audit of its subsidiary to gain a clearer understanding of the subsidiary's performance.
Auditors leverage their understanding of a client's business position and an initial assessment of inherent and control risks to identify specific areas requiring audit focus Notably, elements with substantial values are more likely to contain errors, making them critical points of examination during the audit process.
The auditor can review a big percentage of the overall value of a balance or a transaction by analyzing these parts, which have a value of a specific amount or more
The auditor selects relevant elements for information collection based on the specific objectives, considering factors such as the company's circumstances, the nature of transactions, and the effectiveness of the internal control system.
Auditors rely heavily on their judgment when selecting items for review, which means that the findings from this method cannot accurately predict the overall population If significant misstatements exist among the remaining items, the auditor's conclusions may be flawed To mitigate this risk, additional audit procedures must be performed on the rest of the population Typically, auditors categorize the population into two segments: one that involves a comprehensive evaluation of all items meeting or exceeding the materiality threshold, and another that involves sampling a select few items for testing The final conclusions about the entire population are drawn from the results obtained from both segments.
Audit sampling involves applying audit procedures to a subset of items, rather than examining the entire population, allowing each element an opportunity to be selected According to VSA 530 "Audit Sampling," this method enables auditors to draw conclusions about the overall population by evaluating specific characteristics of the chosen items To ensure that the sample accurately reflects the population, auditors must carefully select items that are representative There are two primary types of sampling used in this process.
* Statistical sampling is a sampling technique that must meet two criterias:
The elements in the sample are chosen at random
To analyze sample results, including the calculation of sampling risk, use statistical theory
* Non-statistical sampling is a sampling technique that does not meet one or both of the statistical sampling method's requirements.
AUDIT EVIDENCE AND METHODS OF COLLECTING EVIDENCE
Audit evidence and methods of collecting evidence from the perspective of Grant
Auditing is the systematic process of gathering and analyzing evidence related to financial statement claims to assess their validity against established criteria The primary objective of the audit team is to collect sufficient, relevant, and reliable information that serves as a solid basis for forming an opinion on the financial statements of the company being audited.
The steps in the audit process are as follows:
To determine the assertion for business cycles and items, use risk assessment techniques
Determine and carry out processes to gather enough suitable audit evidence to substantiate the aforementioned allegations
Examine the evidence for its adequacy and relevance
Determine if the evidence gathered is extremely trustworthy
To assess the validity of the allegation, it is essential to evaluate whether the gathered evidence supports it This evidence, known as "audit evidence," encompasses information collected during both the audit preparation and execution phases, along with data from the client's quality control assessment procedures.
To acquire audit evidence, the audit teams employ one or more types of audit techniques
These methods are classified as follows in the GT Vietnam manual:
Audit processes, including various combinations, are essential for assessing risk, testing controls, and performing substantive audits These processes are collectively referred to as "Audit Evidence Collection Procedures."
Assess the audit evidence for relevance, completeness, and appropriateness:
The relevance and reliability of audit evidence are crucial for achieving audit objectives, as evidence must not only be pertinent but also credible to ensure its validity.
The term "adequate" signifies the necessary amount of audit evidence that the engagement team must collect to achieve reasonable assurance about the accuracy and fairness of the financial statements Consequently, the team is not required to obtain additional evidence beyond what is essential for attaining this level of certainty.
"Relevance" is a measure of evaluating the quality of audit evidence (i.e., its relevance and reliability in supporting the assertions of the financial statements and detecting misstatement)
To ensure the appropriateness, completeness, and relevance of audit evidence, the engagement team must maintain a professional skepticism throughout the audit process This involves critically evaluating the client's books and supporting data, rather than accepting documents and interpretations at face value The team should consistently reflect on key questions to guide their audit procedures and validate the reliability of the evidence gathered.
- Do you need any supporting papers (invoices, contracts, etc.) to check the balance and transactions?
- Do you need any additional persuasive and relevant audit evidence?
- Are the resulting transactions appropriate for the client unit's business line?
- Are the conditions of the transaction reasonable?
The reliability of audit evidence depends on the circumstances in which it was obtained
Table 1: Correlational assumptions regarding the reliability of audit evidence More reliable evidence Less reliable evidence
Evidence is collected directly through procedures such as investigation, examination
Evidence is collected indirectly through interviews
Collected from outside, sources independent of the client unit
Obtained from investigation of original documents
Collected from investigation of copy tables and taxes
Documents are collected in an effective control environment
Document was collected in a poorly controlled environment
In light of the challenges mentioned and the distinct circumstances, auditors must focus on specific audit objectives when collecting evidence The engagement team should take into account various factors while implementing the overall audit methodology and choosing appropriate audit procedures.
Risks of substantial misrepresentation in financial statements, including risk assessment methods; projected productivity and audit effectiveness
The nature and materiality of the item is examined as to the source and reliability of the available evidence
The goal of the audit must be achieved
Determining the specific nature, timing, and extent of actions to be taken within an entity relies on the professional judgment of the engagement team and is assessed individually for each case.
3.1.5 Conclusions derived from audit evidence
Consistent conclusions from diverse sources are essential in auditing When audit evidence from one source contradicts information from others, the auditor must investigate further to clarify discrepancies, as the reliability of each source may be uncertain Therefore, it is crucial that evidence collected from multiple audit sources and associated documents aligns cohesively.
The reliability of evidence from corporate management is crucial, as it can be affected by their motivations, purposes, and knowledge Beyond the risk of intentional falsification, management often aims to protect the integrity of the data from their accounting systems Therefore, documentation provided by management or their employees should be supported by additional evidence to ensure accuracy and trustworthiness.
Auditors must evaluate audit evidence to determine if it is sufficient, relevant, reliable, and adequate to support their conclusions The emphasis should be on being convincing rather than merely believable For instance, when reviewing a customer's year-end accounts receivable balance, comparing invoices with purchase orders and shipping documents can strengthen the reliability of the evidence obtained.
When there is significant uncertainty regarding audit evidence, the engagement team must refrain from issuing an opinion on the financial statements until sufficient, reliable, and relevant audit evidence is gathered to resolve the doubts Alternatively, the client may be asked to revise the report, or the engagement team may need to issue a disapproval opinion in accordance with professional standards.
3.1.6 Techniques for gathering audit evidence
There are four sorts of processes that are often used to gather audit evidence in Horizon:
Risk assessment methods, which are used to detect substantial risks that might cause the financial statements to be materially misrepresented
Walkthroughs, which are meant to show that internal controls are in place
Controls must be tested to ensure that the system's internal control functions as intended
Substantive testing, which establishes the legality and accuracy of financial statement balances and related transactions
This section outlines the processes for obtaining audit evidence, emphasizing that the engagement team typically selects methods based on the quality and cost-effectiveness of the evidence rather than using all available techniques The procedures detailed here form the foundation for the audit processes utilized in Voyager software, which includes a general classification of various audit procedures.
Auditors perform tests by executing control processes that were previously part of the client's internal control system Horizon conducts regular testing to evaluate the effectiveness of this internal control system.
Physical inspection methods are usually carried out in cycles:
During a cash item audit, the GT audit team typically does not engage in inventory processes or participate in the client's physical inventory on the balance sheet date.
The customer unit's cash item is deemed inconsequential or risk-free (customer units typically do not maintain excessive cash reserves, only enough to cover cash payment demands)
Time difference between when a cash inventory can be made and when it can't:
Sampling method at Grant Thornton Vietnam
During the preparation phase, the audit team develops a focused audit program while establishing materiality thresholds, including PM for overall financial statements, TE for individual financial account items, and Deminimus for specific business incidents These materiality metrics guide the audit team in selecting areas for investigation and recommending adjustment entries to address discrepancies in the financial statements.
Materiality in financial accounts is generally assessed as a percentage of total revenue, total assets, or profit The audit team's expertise and professional judgment play a crucial role in deciding which metric—revenue, total assets, profit, or others—to use for evaluating performance materiality (PM) The selection of the audit team is influenced by the client's type, size, operational context, and the risk level identified by the auditor.
The highest figure at which the auditor feels the financial statements can be incorrect without impacting the user's choice is referred to as PM
The goal of the PM determination is to keep audit risk to a minimum while still meeting audit goals
Item Materiality (TE: Tolerate Error) refers to the misstatement of a specific item that underpins the creation of targeted audit procedures to identify inaccuracies GT employs a top-down strategy to allocate Tolerate Errors, utilizing a common rate of 60 percent.
TE, or Tolerable Error, enables auditors to apply Performance Materiality (PM) to individual account balances It is designed to ensure that the likelihood of the total detected or undetected differences across all items exceeding the PM remains low.
Identify the basic tests to be performed
Identify important items to check
Ensure that potential material misstatements are reviewed
The Deminimus level refers to the threshold below which auditors are not required to report misstatements found during an audit, either individually or in total This level is determined as a percentage of the Planning Materiality (PM), with a standard rate of 2% commonly applied in Generally Accepted Auditing Standards (GAAS).
Demimus has the following definition: The Deminimus level chosen is the point at which any revisions to the audited financial statements would be inconsequential and needless
When transactions exceed the De Minimus threshold, the audit team is required to evaluate and suggest corrective entries to align with TE and PM standards, ensuring that this information is documented in the audit file These corrective entries are known as Adjustment Journal Entries (AJEs) as per GT guidelines.
The audit team is permitted to disregard transactions with a deviation value below the De Minimis level, eliminating the need for adjustment requests or documentation in the audit file These transactions are known as Passed Adjustment Journal Entries (PAJEs) as per GT guidelines.
Compare VSA 500 and ISA 500
The International Standards on Auditing (ISA) provide essential guidelines for conducting financial audits, published by the International Federation of Accountants through the International Auditing and Assurance Standards Board (IASB) In Vietnam, the Ministry of Finance has established the Vietnam Auditing Standard (VSA), and as of October 2007, the country has implemented 37 auditing standards alongside professional ethics standards for accounting and auditing.
The "Audit Evidence" standards, ISA 500 and VSA 500, both prescribe:
Principles and procedures for obtaining the amount and quality of audit evidence while auditing financial statements
Procedures for getting audit evidence of this type
The ISA and VSA share similar definitions, scope, and evidence-gathering procedures, with a notable distinction in the definition of relevant audit evidence as outlined in ISA 500 and VSA 500.
According to ISA, relevance is a measure of the quality of evidence that seeks relevance to a particular assertion and its relevance to a particular assertion and its reliability")
According to VSA, “relevance is the standard that demonstrates the quality and reliability of audit evidence”
The VSA does not specifically address the relevance of audit evidence concerning a particular assertion when determining its appropriateness However, the author believes this is a minor issue, as it is inherently understood that evidence must be relevant and informative to support any assertion For instance, to validate the “rights and obligations” related to a tangible fixed asset, an auditor should conduct document examinations, such as obtaining certificates of title or purchase contracts, rather than merely assuming ownership without physical verification of the asset.
PUTTING EVIDENCE - GATHERING METHODS INTO PRACTICE
Introduction about ABC company
4.1.1 Characteristics of the company's activities
ABC One Member Limited Liability Company, established on June 6, 2007, operates as a subsidiary of Joint Stock Company D The company received its business license, numbered 4104054xxx, from the Department of Planning and Investment of Ho Chi Minh City on January 1, 2007.
The company specializes in commercial advertising, media, telecommunications, event planning, and film production, while also engaging in the buying and selling of both local and international television programming As of December 31, the workforce consists of 39 employees.
The financial year The company's fiscal year finishes on December 31
Currency and foreign currency conversion The Company's financial statements are prepared in Vietnamese Dong, rounded to the nearest thousand VND
Transactions conducted in a currency different from the reporting currency are converted at the current exchange rate at the time of the transaction At the balance sheet date, monetary assets and liabilities in foreign currencies are translated using the prevailing exchange rates Any foreign exchange gains or losses, along with costs related to these transactions, are recognized in the income statement during the period they arise.
Basis for preparing financial statements
The financial statements have been prepared in accordance with Vietnamese accounting standards and the Vietnamese Accounting system, as well as relevant legal regulations from the Ministry However, these standards may differ from the National Financial Reporting Standards and generally accepted accounting principles in the reader's country.
Accounting system and form of bookkeeping
The Company uses the general journal method to record arising economic transactions
Cash and cash equivalents include bank deposits, cash on hand, and highly liquid assets such as financial market instruments and bank deposits with maturities of three months or less.
Inventories are valued using the lower of cost and net realizable value, where production costs—including raw materials, direct labor, and general expenses—are estimated based on nominal pricing The net realizable value is calculated by subtracting projected cost of goods sold from sales revenue Any excess of cost over net realizable value is recognized as a provision for value degradation.
The cost of tangible fixed assets, after accounting for accumulated depreciation, represents their net value Depreciation for these fixed assets is calculated using the straight-line method, based on the expected useful life of the assets, applying specific annual rates.
Office equipment accounts for 20% to 50% of the total
Modes of transportation and transmission gear 14.3% to 16.7% of the total
Liabilities are recognized when a company has a present obligation, either legal or constructive, arising from a past event that is expected to result in an outflow of economic benefits This recognition occurs when the obligation must be settled, and the amount can be reliably estimated.
Tools and supplies are recorded at cost and amortized throughout the asset class useful life of two to three years
Borrowing expenses, such as interest and related charges, are recognized in the income statement when incurred, except for borrowing costs associated with fixed assets acquired during construction and installation, which are capitalized as part of the asset's cost.
The investment cost of Parent Company, Joint Stock Company D, is essential for determining the owner's invested capital, which includes undistributed profits from both the previous and current years, as reflected in the financial statements.
Revenue from sales is recognized in the income statement when the significant risks and rewards of ownership have passed to the buyer
Revenue from service rendering is recognized in the income statement based on the completion rate of those services as of the reporting date However, revenue recognition is withheld if there are uncertainties regarding collectibility, a realistic evaluation of sale expenses, or the likelihood of sales returns.
On a pro rata basis, deposit interest income is reported in the income statement
An operating lease is characterized by the lessor retaining most of the rights and risks associated with asset ownership The costs associated with operating leases are reflected in the income statement of the current period.
Current corporate tax obligations include tax obligations - with tax authorities relating to the current and prior reporting periods that remain unpaid at the end of the reporting period
The current income tax due is calculated based on the taxable profit for the year, utilizing the applicable tax rates and regulations during the reporting period Any variations in current tax liabilities or assets are reflected in the income statement as an income tax expense.
Assets and deferred tax liabilities are assessed based on the effective tax rates applicable at the balance sheet date, considering any existing restrictions Most variations in these assets and obligations are reflected in the income statement as tax expenses However, only those changes that affect the value of an asset or deferred tax liability are recognized directly in equity.
Deferred income tax payable is fully recognized, while deferred tax assets are acknowledged only when it is likely that future taxable profits will be available to offset deductible temporary differences.
Setting up PM, TE and Deminimus for D company
Materiality (PM: Plan Materiality) applied to the full financial statements is 1.4 billion, according to the audit program set by the audit team
The audit team's assessment of the maximum allowable deviation, known as PM, ensures that the financial statements remain free from significant misstatements If the total acceptance deviations (PAJEs) surpass 1.4 billion, the audit team must recommend necessary changes to reduce the total deviations to below this threshold.
The amount of material misstatement (TE: Tolerate Error) is determined as follows:
To ensure accuracy and minimize significant errors in financial reporting, the audit team must adjust entries until the total deviations fall below 840 million, calculated as 60% of 1.4 billion This proactive approach is essential when overall deviations for any item exceed this threshold, safeguarding the integrity of the financial data.
The minimum population for the audit is set at 1.4 billion, which translates to a de minimis threshold of 28 million dollars This means that any deviations below this amount can be disregarded by the audit team, eliminating the need for adjustment entries or documentation in the audit file.
Procedures for collecting evidence at ABC One Member Company
Due to time limitations, the author examines only a select number of business cycles while conducting essential tests, utilizing simulated data derived from a client of Grant Thornton.
The GT audit team did not perform a cash fund re-inventory, as the audit period occurred after the year-end, and the cash item was deemed inconsequential and of minimal value.
Figure 6: Cash at the fund
To ensure the legality of cash inventory minutes, collect and compare the data with the books, including full signatures from all audit participants This process will verify cash availability as of the balance sheet date Further details are provided in the accompanying table.
Reconcile the right data in the detailed book and the cash account ledger
Matching the figures in the financial statements ô proves that the cash item in the fund was correctly recorded in the Company's documentation
Reconciling the books' correct balances with the audit minutes' actual counts => establishes the presence of cash balances at the balance sheet date
The work GT team did:
Collect a list of bank accounts that were opened, closed, or maintained in the previous fiscal year
Bank deposits Account number Type of account
The person who signed the approval to open an account
VIETCOMBANK HCM 053100259XXXX VND Mr Nguyen Van A
MB BANK 057111042XXXX VND Mr Nguyen Van A
⇒ Provide evidence of adequacy of cash balances at the year-end date
Summarize the total details of the bank deposits and for the total figures as well as the financial statements of the Company
At the balance sheet date, it is essential to collect and compare the accurate figures from the subsidiary books of each bank with the corresponding figures recorded in the Company's books to ensure consistency and accuracy in financial reporting.
The data from the bank's sub-book is matched in the reconciliation
Because the disparities between book-based and bank-revenue figures are small below the De Minimis level, the audit team overlooks them and does not recommend modifying entries
Matching with figures on financial statements
Provide evidence of the existence, accuracy, rights and obligations of the bank account balances recorded on December 31, 2021
To ensure accurate period recording of bank transactions, the GT audit team analyzed money transfer activities between the Company, its branches, and related parties They conducted a comparison of these transactions from the general ledger against bank sub-numbers for a two-day period before and after the end of the fiscal period.
There is no money transfer transaction between the Company and its branch and related parties
This year, the total cash account balance rose by VND 978,698,000, reflecting a 37.54% increase compared to the previous year This significant change may indicate a shift in the Company's business policy or could suggest a potential error in the year-end cash balance.
The GT audit team conducted an interview with the company's chief accountant, who clarified that the company received payments based on contract milestones As a result, by the end of this year, the company has more contracts pending payment compared to the previous year, leading to an increase in bank deposits.
The audit team observed unusual fluctuations in VND demand deposits at VCB and MB Upon inquiry, the Company's chief accountant explained that an increase in customer transactions through the VCB bank account this year, compared to last year, led to higher deposit balances at VCB and a corresponding decrease at MB.
The GT audit team will manage the distribution and oversight of bank deposit balance confirmation letters to all banks where the Company holds accounts The responses received from these banks are summarized in the table below.
Figure 10: Reconcile balance per confirmation and per book
The bank deposit account's book balance aligns with the information on the confirmation letter, serving as evidence of the existence, rights, and obligations of the Company This ensures accurate recording of the bank deposit balance as reflected on the balance sheet date.
4.3.1.5 General conclusion of the GT audit team on the cash item at D Company
The results of the foregoing procedures provide evidence of a true and fair presentation of the D’s cash balance as at December 31, 2021
Table 3: Illustration for collecting audit evidence for cash
D is a company providing advertising and event organization services, so only selling and administrative expenses incurred are collected in accounts 641 and 642
Figure 11: Expenses incurred at the company
(1) Refer to the file Salary expenses
Details in the working paper Short-term and long-term prepaid expenses, tools and fixed assets
Figure 12: Short-term and long-term prepaid expense Explanation:
Gasoline and other car expenses: including gas, car wash fees, tolls for 2 company cars, car insurance
Business and reception expenses: including airfare, hotel, restaurant for General Director Nguyen Van A and staff
Applying decorations, newspapers, magazines: including drinking water, flowers, books, magazines
Bank fees: including fees for banking transactions
Other expenses: including holiday party expenses, gifts, training costs
Cost of renting a house and parking a car: 1,419,219 VND
2.552.998 The section "Analysis of data reasonableness" below examines professional service charges, as well as rental and parking prices
The audit team identified significant discrepancies in the cost analysis, focusing on categories with variances exceeding 28 million and a percent difference greater than 10%, as per the established de minimis limit The outcomes were derived from thorough calculations, interviews, and analytical procedures.
In 2009, the company's expenses for impact and reception significantly decreased due to the acquisition of new customers located in Ho Chi Minh City, which minimized costs associated with air tickets and hotel accommodations for the CEO and operational staff.
In 2008, the company invested heavily in office decoration following its establishment in the latter half of 2007 By 2009, the firm experienced stability, and costs were further reduced through a long-term leasing agreement.
The amount spent on "other costs" increased by 197,405 million The audit team went through the records, looked into the company's performance, and determined where those costs came from
• Holiday expenses: 138,608 million, which include corporate anniversary parties, staff birthdays, mid-autumn festival, 8/3, 20/11
• Total gift cost: $75,608 million, including customer presents and works
• Meeting costs 41,237 million dollars in ideas
• Cleaning costs totaled 21,181 million VND
• Remaining expenses: 83,910 million, which includes fax fees, charitable activities, and photo printing, among other things
The audit team noted a substantial increase in Other costs compared to last year, driven by significantly higher Holiday, Gift, and Meeting expenses.
Examine the data for accuracy
The audit team evaluated the accuracy of recurring costs by calculating outcomes and comparing them to the company's statistics to determine their reasonableness.
Remarks on practical evidence collection methods at Grant Thornton Vietnam
The company utilizes Voyager working software in conjunction with IDEA sample selection software to enhance audit efficiency This integrated system automatically formulates evidence collection procedures based on the audit team's responses regarding the client unit It also recommends suitable sample ranges tailored to various business types, including manufacturing, services, banking, and insurance, aligning with the assessed importance and risk levels for each business cycle.
The audit team will streamline the planning process to minimize time and effort while ensuring the collection of sufficient evidence to avoid revenue loss This approach prevents the gathering of excessive evidence that could lead to an over-audit situation.
GT International focuses on developing software that guarantees audits comply with both Vietnamese auditing standards and international best practices The company's commitment to excellence ensures that its audit services are of globally recognized high quality.
In GT manuals, auditors are urged to maintain professional skepticism throughout the audit evidence collection process to identify financial statement issues and fraud promptly Consequently, the gathering of audit evidence is prioritized, with auditors dedicating substantial effort to this task For instance, GT strictly requires that confirmation letters be sent directly to the audit team, using faxed letters solely for updating the team on new information.
GT consistently updates its auditors on new legislation and regulations, both domestically and internationally Furthermore, the company organizes regular training courses to ensure that its employees are equipped with the most current information.
In addition to the benefits listed above, the corporate software is designed by Grant Thornton International However, there are certain drawbacks, such as:
Due to the global nature of the program, applying uniform methods across different countries and regions can be inappropriate or redundant, as each area has unique characteristics and business customs This leads to time-consuming and confusing processes for the audit team, who may inadvertently rely on outdated routines from previous audits Such reliance can result in inadequate evidence collection for new or changing clients throughout the year, ultimately compromising the accuracy of the audit.
The audit team's effectiveness in gathering evidence is significantly hindered by the reluctance of some clients to cooperate, as they often refuse to provide necessary documents and exhibit negative attitudes Consequently, the audit team struggles to obtain sufficient acceptable evidence, which impairs their ability to form a reliable opinion on the reasonableness of the financial statements.
The practice of sending confirmation letters is common; however, the process of collecting these letters remains time-consuming, often taking 2 to 3 weeks This extended timeframe not only raises the costs associated with the audit but also delays the issuance of the audit report.
The effectiveness of the "documentation" method relies heavily on the strength of internal control systems and the reliability of management In Vietnam, many companies either lack efficient internal controls or have ineffective systems in place Consequently, audit teams often misuse these documents to make quick judgments, aiming to reduce costs, which ultimately poses risks to stakeholders.
Suggestions
A collaborative attitude from the customer service provider is essential for an effective audit Auditors must establish prior agreements with the customer regarding the necessary information and the expected cooperation to prevent potential non-cooperation that could lead to audit failure If these agreements are not reached, Grant Thornton should consider declining the contract to mitigate the risk of an unsuccessful audit.
The "document check" method is time-consuming during audits, requiring the audit team to possess a deep understanding of the internal control system and the integrity of the Customer Service Management Board If the documents from Customer Service are deemed unreliable, the audit team must implement additional procedures to avoid wasting time and making incorrect judgments Furthermore, to form a valid opinion, the audit team must also collect external, independently sourced materials.
While the "Send confirmation letter" technique is highly accurate, it can delay the audit process Therefore, when issuing self-certifications to reputable third parties like banks, tax offices, international firms, and major Vietnamese companies, the audit team should exercise caution In situations where confirmation is not essential, alternative methods such as analytical procedures and recalculations can be employed by the audit team.
The writer has shared initial insights on the process of gathering audit evidence at Grant Thornton Vietnam, acknowledging that their limited knowledge and practical experience may lead to some unavoidable shortcomings in their observations.