Nghiên cứu kiểm toán tài sản cố định trong kiểm toán báo cáo tài chính RESEARCH ON AUDITING OF FIXED ASSETS IN FINANCIAL AUDIT

Chapter I: Theoretical framework on audit of fixed assets in financial audits Chapter II: Practice of audit of fixed assets in financial audits conducted by Vietnamese audit firms Chapter III: Assessment and recommendations to improve audit of fixed assets in financial audits conducted by Vietnamese audit firms CHAPTER I: THEORETICAL FRAMEWORK ON AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS 1.1. Features of fixed assets 1.1.1. Nature and content of fixed asset  Definition Fixed assets are assets that have large value and can be used for a long time. Fixed assets are material and technical base of the enterprise. Fixed asset is the specialized production materials in the manufacturing; it has big value and can be used on many producing cycles. Fixed asset play an important role in creating possibilities for sustainable development, increase labor productivity, thereby reducing expenditures, lower cost products and services. Therefore, identifying an asset is recorded as fixed assets or not significantly affects the results of business activities report of enterprises.  Type of fixed assets Fixed assets are classified in several ways. Based on these criteria, certain fixed assets can be divided into several groups to manage fixed assets efficiently. According to the uses of fixed assets, fixed assets can be divided into four types: Fixed assets used in producing : Administrative fixed assets; Fixed assets welfare; Fixed assets pending. This classification provides the user with sufficient background information on the Fixed Asset structure, thereby allocating accurately the depreciation used by the user and taking measures for dealing with Fixed Assets. the reason. This is the basis for the auditors assessment of the depreciation cost. According to formation, fixed assets are divided into four categories Fixed assets that the State provided its capital; Fixed assets are constructed and procured with loans; Fixed assets are constructed and procured by selfsupplemented capital sources; Fixed assets joint ventures, affiliate with other companies. According to the classification above, managers can determine exactly the sources of capital formation and recovery in the fixed assets and at the same time take measures to mobilize and efficiently use capital for fixed assets According to ownership, fixed assets are divided into two types: Fixed assets under the ownership of the enterprise; Fixed assets outsourced. This classification helps users distinguish the rights and obligations of the enterprise in managing fixed assets, as well as a basis to examine the rights and obligations of the enterprise for fixed assets is presented on balance sheet accounting.

TABLE OF CONTENT

LIST OF TABLE, DIAGRAM AND FORM

INTRODUCTION 1

CHAPTER I: THEORETICAL FRAMEWORK ON AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS 3

1.1 Features of fixed assets 3

1.1.1 Nature and content of fixed asset 3

1.1.2 Accounting for fixed asset 6

1.1.3 Potential errors and frauds 8

1.1.4 Key internal controls of fixed assets 10

1.2 Audit objectives in auditing fixed assets 13

1.3 Sequence in auditing fixed assets in financial audits 14

1.3.1 Audit planning 14

1.3.2 Audit implementation 21

1.3.3 Completing the audit 33

1.3.4 Announcement of audit report 35

CHAPTER II: PRACTICE OF AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY VIETNAMESE AUDIT FIRMS 36

2.1 Audit planning: 37

2.1 Audit implementation 38

2.2 Completing the audit 38

CHAPTER III: ASSESSMENT AND RECOMMENDATIONS TO IMPROVE AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS CONDUCTED BY VIETNAMESE AUDIT FIRMS 39

3.1 Assessments 39

3.1.1 Strengths 39

3.1.2 Weaknesses 40

3.2 Recommendations for improving the audit of fixed assets 42

3.3 Conditions for applying the recommendations 43

CONCLUSION 45

LIST OF TABLE AND DIAGRAM Diagram 1.1: Process of accounting fixed asset 6

Diagram 1.2 Assessment of the materiality of the item of fixed assets 19

Table 1.1 Tests of Control 22

Table 1.2: Examine increase of fixed assets 26

Along with the development of the economy, the independent audit hasbeen formed and developed in Vietnam for more than twenty years; it hasbecome the inevitable demand for business activities and contributed intoincreasing quality of companies’ management

Independent auditors have participated actively in the examination,evaluation and certification of the reliability of the financial information,significantly contributed to the operational restructuring, innovation, equitizedenterprises and attracting foreign investment, creating favorable conditionsfor economic development Independent auditor has confirmed the importantrole in the economy

On the financial statements, fixed assets are a high value item and oftencontain fraud or error That is the reason why companies can reflect the value

of fixed assets more or less than actual value for many different purposes,such as: In order to increase the total value of assets, increased revenue, or todemonstrate the ability to expand production, future potential of the business Therefore, the accountants also often rationalize business results byaccounting additional depreciation expenses, expenses for overhaul of fixedassets, in order to increase the cost of capital; thereby reducing the net profitfor the tax evasion purpose or accountants’ benefits

Moreover, auditors have to face a big risk for fixed assets, because: Inmany cases, the auditor might do not understand the nature of the technology

of fixed assets so auditor cannot determine the net value of fixed assets.Meanwhile quality and value of fixed assets not only affect the situation offinancial in fiscal year but also affect the producing, consumption and recordrevenue of following fiscal year

Therefore, in financial statements, auditing of fixed assets is a difficultjob, take a lot of time, effort and very important Being aware of the

importance of auditing of fixed assets, I choose: “Research on auditing of

fixed assets in financial audit” as research topic My research is divided into

CHAPTER I: THEORETICAL FRAMEWORK ON AUDIT OF FIXED ASSETS IN FINANCIAL AUDITS

1.1.1 Nature and content of fixed asset

Definition

Fixed assets are assets that have large value and can be used for a longtime Fixed assets are material and technical base of the enterprise Fixedasset is the specialized production materials in the manufacturing; it has bigvalue and can be used on many producing cycles

Fixed asset play an important role in creating possibilities for sustainabledevelopment, increase labor productivity, thereby reducing expenditures,lower cost products and services Therefore, identifying an asset is recorded

as fixed assets or not significantly affects the results of business activitiesreport of enterprises

Type of fixed assets

Fixed assets are classified in several ways Based on these criteria,certain fixed assets can be divided into several groups to manage fixed assetsefficiently

According to the uses of fixed assets, fixed assets can be divided into

four types:

- Fixed assets used in producing :

- Administrative fixed assets;

- Fixed assets welfare;

- Fixed assets pending

This classification provides the user with sufficient backgroundinformation on the Fixed Asset structure, thereby allocating accurately thedepreciation used by the user and taking measures for dealing with FixedAssets the reason This is the basis for the auditor's assessment of thedepreciation cost

According to formation, fixed assets are divided into four categories

- Fixed assets that the State provided its capital;

- Fixed assets are constructed and procured with loans;

- Fixed assets are constructed and procured by self-supplemented

capital sources;

- Fixed assets joint ventures, affiliate with other companies

According to the classification above, managers can determine exactly the sources of capital formation and recovery in the fixed assets and at the same time take measures to mobilize and efficiently use capital for fixed assets

According to ownership, fixed assets are divided into two types:

- Fixed assets under the ownership of the enterprise;

- Fixed assets outsourced

This classification helps users distinguish the rights and obligations of the enterprise in managing fixed assets, as well as a basis to examine the rights and obligations of the enterprise for fixed assets is presented on balancesheet accounting

Fixed assets that are under the ownership of enterprise and classified by material form and nature of investment assets are classifications are the

current classification that commonly used in the accounting and management

of fixed assets According to this classification, fixed assets are allocated into

3 types : tangible, intangible and leasing fixed assets This is also the

classifications used to present items of fixed assets on the balance sheet

Tangible fixed assets

According to the Vietnam Accounting Standards No 03- "Tangible fixed

assets”: To able to record as tangible fixed assets , assets have to satisfy allfour criteria:

- Certain to gain profits from the usage of assets in future

- The cost of assets must be resolute reliably

- Using period must be estimated in a year

- Follow value standards under current regulations

Intangible fixed assets

According to Vietnam Accounting Standard No 04: Assets regarded asintangible fixed assets must satisfy the definition of intangible assets(intangible assets are assets that have no physical forms but verify the valueand are owned, used, produced, provided services or leased by the companythat suit with recording intangible assets criteria)

There are four criteria for intangible fixed assets:

- Certain to gain profits from the usage of such asset in future

- The cost of assets must be resolute reliably

- Using period must be estimated in a year

- Follow value standards under current regulations

Leasing fixed assets

They are the fixed assets that the company has rented for a long time and

is empowered by the lessor to manage and use most of the time of the fixedassets The rental income is sufficient for the lessor to cover the cost of theproperty plus the return on that investment

Each type of fixed asset is detailed in groups according tomsystem,characteristics, and nature and there are regulations on different bracketsand depreciation rates Company register for each level of depreciation offixed assets and apply specific uniformly throughout the accounting year Thefirst thing to do when auditing a fixed asset is that the auditor must checkwhether the conditions for recognizing the fixed assets shown in the balance

Construction, procurement, or sale fixed assets Council consignment and liquidation fixed assets Accounting fixed assets

Decision to increase or decrease fixed assets Document for increasing or decreasing fixed assets Set up (cancel) the recording of fixed assets

sheet are appropriate

1.1.2 Accounting for fixed asset

Accounting document and accounting bookmsystem for fixed assets

Documents used in the accounting of fixed assets include:

 Contract for purchase of fixed assets

 Sales invoices, delivery bills of the seller

 Minutes of handing over fixed assets

 Minutes of liquidation of fixed assets

 Minutes of pre-acceptance test of completed repairing volume

 Minutes of fixed assets re-evaluation

 Minutes of inventory of fixed assets

 Minutes of liquidation, settlement of asset

 Worksheet and depreciation of fixed assets

Diagram 1.1: Process of accounting fixed asset

Accounting book for fixed assets

In order to keep track of all fixed asset information, enterprises usually

use themsystem of accounting book such as:

- Fixed asset tag

- Detailing book of fixed asset following to each used part and type of

fixed asset to be tracked

- General ledger for accounts 211, 212, 213, 214

Accountingmsystem for accounts

Fixed assets are classified into different groups using different accountsand sub-accounts

Account 211 Tangible fixed assets

2111 Building & architectonic model

2112 Equipment & machine

2113 Transportation & transmit instrument

2114 Instruments & tools for management

2115 Long term trees, working & killed animals

2118 Other fixed assets

Account 212 Fixed assets of finance leasing

Account 213 Intangible fixed assets

2131 Land using right

2132 Establishment & productive right

2133 Patents & creations

2134 Trademark

2135 Software

2136 License & concession license

2138 Other intangible fixed assets

Account 214 Depreciation of fixed assets

2141Tangible fixed assets depreciation

2142 Financial leasing fixed assets depreciation

2143 Intangible fixed assets depreciation

2147 Investment real estate depreciation

Accounting for fixed assets and depreciation of fixed assets:

Accountants based on the corresponding accountmsystem and thefluctuation of fixed assets

1.1.3 Potential errors and frauds

Potential errors

- Errors happened due to forget to record an accounting transaction Forexample, company purchases a fixed asset with a development fund or ainvestment fund, but accountant only record the increasing of the fixed assetslike purchase by a depreciation fund or a business capital but not includetransferring capital Enterprise bought a technologically advanced equipmentthat consist of a part of machinery, a part of transferring technology Theaccountant should have record the increase in tangible fixed assets for themachinery part and record the increase in intangible fixed assets of the value

of the technology, form….;

- Wrong accounting, for example in case it is supposed to record inDebit or Credit for this account but accountant record to another account thatnot suitable for the transaction During auditing fixed assets, the auditors mustpay attention to the case of fixing fixed assets When the enterprise performsminor repairs of fixed assets, the repairing expenses should be accounted intothe production and business expenses in the period, which are recorded asDebit accounts of general production costs, sale expenses, managementexpenses: but the accountants record it to Debit side of the fixed asset accountwhich increases value on the accounting balance sheet of fixed assets

- Errors happen in book entry and transfer This is a usual error ofaccountants that auditor should concern The wrong amount may be wronglyrecorded in the voucher Accountant can also make a mistake in transferringthe accounting data from journal to the ledger;

- Errors due to duplication This error may due to multiple records of atransaction For example, company uses the general accounting journal toaccount for producing entries in the accounting period When there is a fixedasset liquidation, the accountant record both on receivable journal and generaljournal the total amount of money collected in the liquidation process

- Errors due to accountant’s poor skills that lead to wrong recording of

arising transactions in accounting books or when there are new regimes butaccountant have not yet fully grasped the contents or have not fullyunderstood the operations, thus leading to errors in the accounting process

Potential frauds

- Making fake documents, changing vouchers, fixing documents, hidinginformation to embezzle or embezzle public funds In the field of auditing offixed assets, fraud of this type is usually faking vouchers, overstate fixedassets’ price, repairing documents, making false documents related to the cost

of purchasing to increase the fixed asset price for embezzlement of publicfunds Recording the cost of repairing fixed assets higher than the actual cost

so that, when account it into expenses, it will increase the cost to appropriatethe difference from the actual cost

- Deliberately hide the documentation, omitting the results of thebusiness to earn more benefit for enterprise or individual For example, theaccountant deliberately omits revenue from liquidation, sale of fixed assets toreduce corporate income tax payable to the State

- Recording of untrue transactions This case usually occurs Forexample, accountant deliberately recording untrue transactions related topurchasing fixed assets for embezzlement of public funds Companies canrecord transactions connected to intangible fixed assets – This is hard item toevaluate and check

- Appling the wrong rule of the Government, such as, a companyreceiving fixed assets of another company that is also dependent on the sameorganization:

Expenses which associated to the transferring of fixed assets would beaccounted into period, but enterprise deliberately record increasing of thefixed asset’s price Fixed asset was bought and has been waiting forinstallation, not yet put into use, but the enterprise recorded it in the increase

of the fixed asset price

1.1.4 Key internal controls of fixed assets

Management of the quantity and quality of fixed assets

- About quantity: management department guarantee adequate supply

of power, satisfy the requirements of business and production of enterprises

- About quality: the maintenance has to avoid damage or loss of detailparts that reduce the certain value of fixed assets

To properly implement this issue, each company needs to set up a fixedasset maintenance policy and use it appropriately, in line with its operatingcharacteristics At the same time, for effective use of fixed assets, financialand mechanical norms should be formulated for each kind and group of fixedassets by company This helps company to plan and take measures to repair,upgrade and invest new fixed assets to serve timely production and businessactivities in enterprises

Value management

Determination of the original cost and residual value of the fixed assetsthat invested, purchased, transferred and depreciated The following here arethe principles for determination the original cost of fixed assets:

For tangible fixed assets: The original price is determined in each case

as follows:

- Original price of purchased tangible fixed assets (including newpurchasing) is purchasing price (except for commercial discounts, discounts)+ taxes (excluding refundable tax) + expenses directly related to put the assetinto operational status such as area preparation, transportation costs orexpenses for installation, commissioning (excluding (-) recoveries of productsand scraps from trial installation) + expert costs and other related expenses

- Original price of tangible fixed assets classified as basic investment inthe form of contract delivery: Original price (both self-employed andoutsourced) is the last cost of the investment project, other associatedexpenses and registering fee (if there is any)

- Tangible fixed assets with deferred payment: original price is theamount paid at the date of acquisition The difference between the deferredpayment price and the immediately paid purchase price will be accounted intoexpenses according to the payment period, less the difference being included

in the original cost of tangible fixed assets (capitalized) as prescribed in theaccounting standard "Borrowing costs"

- Tangible fixed assets that are self-made or self-constructed: Originalprice is the actual cost of fixed asset that the company construct or built bythemselves plus (+) installation and commissioning costs Any internalinterest and unreasonable expenses (such as wasted materials or other laborused in excess of normal norms during construction or homemade process)are excluded in the original price

- Tangible fixed assets are bought in formula of exchanging: Theoriginal price of a tangible fixed asset bought in formula of exchanging withanother tangible fixed asset or other assets are measured at the fair value oftangible fixed asset established, the value of assets to be exchanged, afterchanging the amount paid or recovered

- The original price of tangible fixed assets that bought in the formula

of exchanging with a similar fixed asset, or might be formed by the sales inexchanging for the ownership of a similar property In both cases there are nolosses or gains that recorded during the exchanging The original price of thefixed asset will be accounted as the residual value of the fixed asset to beexchanged

- Fixed asset that was donated from other sources: The original cost isrecorded at the original reasonable value plus (+) related expenses

For intangible fixed assets:

The original cost of an intangible fixed asset is determined as follows:

- Land use rights: original cost is the amount of expenses that arerelated to the use of land, including expenses for land using rights,

compensation for area clearance, ground clearance, registration fee (if there isany) does not include expenses for construction of works on the ground.

- Issuance right: The original price is all the actual expenses theenterprise has spent to have the right to issue

- Copyrights and Patents: Original costs are the actual costs of obtaining

- Other intangible fixed assets: Cost here is actual costs incurred toacquire these fixed assets

The original cost of a fixed asset will only be changed below:

- Re-evaluate fixed assets’ value under the decision on inventorying andrevaluation property of the State

- Upgrade of fixed assets

- Dismantling one or more parts of a fixed asset

- The costs incurred after the initial recognition satisfy the conditionsfor recording the increasing of the original cost of fixed assets

When changing the original cost of a fixed asset, the company mustrecord clearly stating the changing or re-determination of the original costindex, the residual value, the accumulated depreciation book and the laggingcalculated according to current regulations

For financial leases:

Original cost is fair value (if the current value of the minimum lease

payments is less than the fair value, the original cost of the minimum leasepayments is the current value of the minimum lease payments.

The difference between the fixed asset lease payable and the originalcost of that fixed asset will be accounted into business expenses in accordancewith the term of the financial leasing contract

1.2.Audit objectives in auditing fixed assets

According to standard No 200 of Vietnam audit standards "The goal ofauditing the financial statements is to enable auditors and auditing firm toexpress an opinion confirmed that the financial statements have been prepared

on the basis of standards and the current accounting standards (or accepted),comply with relevant laws and reflect honest and reasonable or not

Fixed asset is an item on the financial statements, so the audit objective

of fixed asset is also following the above provisions However, fixed assetshave particular characteristics as compared to other assets because fixedassets are often less frequent, the amount of each purchase, investment forfixed assets are usually large and fixed assets are kept and tracked in theaccounting books for a long time Therefore, the focus of fixed asset audits isthe process of investing, procuring and reducing fixed assets in the periodrather than the balance on the account transferred from the previous year.The objectives of the asset audit are as follows:

- Internal control over fixed assets is adequate

- All fixed assets are evaluated in accordance with current standards

- Fixed assets have been recorded including the balance of the previousyear are real and the increase or decrease in fixed asset depreciation duringthe year is reasonable

- Presentation and declaration of fixed assets: The fixed assets must bepresented in the original cost, the residual value and the accumulateddepreciation - including the disclosure of depreciation method

1.3 Sequence in auditing fixed assets in financial audits

1.3.1 Audit planning

1.3.1.1 Initial audit planning

According to Vietnamese auditing standard no 300: "Strategic plansmust be prepared for large audits in terms of scale, complexity, wide area orannual financial statements audit" This work is usually developed by theprincipal auditor to develop and produce an initial plan for the auditedentities, to guide the detailed planning and the preparation of the auditprogram

1.3.1.2 Understanding the entity’s business and its environment

- Auditors need to collect information to obtain a full understanding ofthe customer, auditor need to understand customer’saccountingmsystem ,potential problems and internal controlmsystem

 Firstly: auditor should collect information about the customer's legalobligations For the process of auditing fixed assets, it is necessary to gatherpapers such as transcripts of capital contribution, handover of capital, anddocuments related to the fixed assets contribution of capital

 Secondly: understanding customer's business situation According tothe VAS No 310 (Vietnamese Standards on Auditing ) "Understanding thebusiness situation", "In order to perform the audit of financial statements,auditors must have necessary knowledge, business This is to assess andanalyze the events, operations and practices of the units audited, which,according to the auditor, has a material effect on the financial statements, theinspection of the Auditor or to the Audit Report " Knowledge includes ageneral understanding of the economy, business activity of the company andin-depth understanding of the specific aspects of a structural organizationsuch as production line, organizationalmsystem, capitalmsystem

 Activities and results of clients: this will support the auditor knowdoes the customer has a lot of fixed assets, and do the fixed asset has an effect

on the their financial statements

 Business environment and factors outside manufacturing businessimpact on customers such as socio-economic, legal

 Customer’s objectives and business strategy: this will indicate in thefuture whether the company has invested in the buying or liquidation of fixedassets

1.3.1.3 Preliminary analytical procedures

- Applying analytical procedures in all auditing periods

- Analytical procedures, as defined by Vietnam Standard for Auditing

No 520, "are the analysis of important data, information, and rates,thereby identifying trends in volatility and find relationships thatconflict with other relevant information or have a large discrepancywith the expected value

- At this stage, after obtaining baseline information and information onthe legal obligations of the client, the auditor conducts the analyticalprocedures The processes used by the auditor include the following 2 types:

 Horizontal Analysis: For fixed asset items, auditors compare previousyear's data with this year, which shows abnormal fluctuations and determinesthe cause Simultaneously, customer data can be compared with industry data

by auditors

 Vertical analysis: This is based on the comparison of the relativeratios of accounts and accounts on the financial statement For fixed assets,accountants may compute an amount of ratios such as self-employment rate,investment rate

1.3.1.4 Understanding internal control and assess control risks

- The internal controlmsystem of the customer and the control riskassessment help the auditor design the appropriate auditing procedures for theasset item, assessing the volume and the complexity of the fixed asset Then,auditor estimates the volume and complexity Practical Standards for Auditing

No 2 states: "Auditors must have sufficient knowledge of the accounting

system and internal controlmsystem of the customer to plan and develop aneffective approach Auditors must use professional judgment to assess theaudit risk and determine auditing procedures to reduce these risks to anacceptable level”

- If the internal controlmsystem is more effective, the control risk will besmaller and vice versa If the risk of control is higher, the internalcontrolmsystem is weaker The auditor examines internal controlsystem in two main features

- The auditor conducts the examination of the internal controlmsystem ofthe client in the below forms:

 Interview the company staff

 Visiting the actual fixed assets

 Checking book vouchers related to fixed assets

 Receipt of a written confirmation from a third party

 Observe the internal control procedures

 Redo the procedures

- After performing the above tasks, the auditor assesses the designcontrol tests and the control risk:

 Determining the types of errors and fraud that occur in the item offixed assets

 Evaluate the internal controlmsystem in detecting and avoiding fraudand errors

 If the auditor considers that the control risk can be lowered to a lowerlevel because the control risk is low, the auditor will verify the requiredcontrol On the other hand, if the stage of control risk is high, the auditor willnot need to carry out control checks but must conduct a basic audit at areasonable level

- For fixed assets, the auditor ought to inform the fully information aboutinternal controlmsystem The internal controlmsystem must be

effective and be reflected in the safeguard and controlling of good fixedassets When auditing the internal controlmsystem, auditors shouldconcern about the following questions:

 The company planed and budgeted for the purchasing of fixed assets?

 The business often be compared between the general book anddetailing book?

 Periodic inventory and reconciliation with accounting books?

 The differences between the actual price reviewed and approved andthe cost estimate?

 Shall the company set up sale councils comprising members andliquidation according to regulations when they are selling or liquidating fixedassets?

 Is there a policy to differentiate among the cost incurred after openingacknowledgment of the historical cost of a fixed asset and the valuablelifetime of the asset or the cost of production in the period?

 The method of depreciation is correct, appropriate or not?

1.3.1.5 Assessment of audit materiality and audit risks

Assessment of audit materiality

- According to Vietnam Auditing Standard No 320: "Materiality is theconcept of size and scale of errors (including omissions) of financialinformation either individually or group In a particular context, if based onthis information for judgment, it is impossible to correct or to draw falsestatements

- FASB 2 has the following conceptual validity (Avil A Arens, p 175):

"The magnitude of omissions or misstatements of accounting information due

to surrounding circumstances, the ability to make a person's judgment based

on that information may be altered or influenced by the omission ormisconduct”

- According to Auditing Standard No 320 of the Audit, it is stated

"Materiality is the term, which refers to the importance of information (apiece of accounting data) in the financial report." That means that

"information is essential if the omission or misstatement of information couldaffect the economic decisions of users of financial statements "

- Thereby the responsibility of the auditor is to determine whether thefinancial statements may contain material misstatement or not, and then makeappropriate recommendations

- Determining the initial level of significance, the auditors shall carryout the opening approximation of the materiality (based on the ratio of profitnorms, turnover and total assets ) for the whole financial statement Thenthe initial estimate of the materiality of the items in the financial statements isallocated The audit firms often built the materiality level for each item in thefinancial statements

Diagram 1.2 Assessment of the materiality of the item of fixed assets

Assessment of risk audit

- According to Vietnam Audit Standard No 400, risk assessment andinternal control: “Audit Risk (AR) is the risk that auditors and audit firmsmake inappropriate comments when the audited financial statements have

1 Initial estimate of materiality for fixed asset items

2 Allocation the initial estimate of the materiality of the asset

3 Estimation of total errors in fixed assets

4 Estimate the combined error

5

Compare the estimated error of the estimate to the original estimate or revise the initial estimate of the significance

- In the case of fixed assets, errors that may occur are often related toinherent errors, as follows:

 Risks that associated to the historical cost: The historical of a fixedasset may be revealed in the actual deviance In the situation of anincreasing in fixed assets, the price is often higher than the actual price

In the situation of a decreasing in fixed assets, the former cost is lowerthan the actual price

 Risk that associated to depreciation of fixed asset: The calculation andallocation depreciation of fixed asset can be wrong It is possible thatthe method of depreciation of customers is inconsistent with currentregulations and does not conform to the method of recovering theeconomic benefits of each fixed asset

 Risks that associated to upgrading and repairing fixed assets: It canguide to errors when not keep tracking the increasing in the originalcost of fixed assets for the situation of upgrading fixed assets andaccounting them into fixed asset repair expenses of the company whenmany fixed asset repairs It is misunderstood as upgrading fixed assetsand vice versa

 Risks about leasing assets: Many fixed asset lease activities are not

classified as leases.

- Above are the potential errors that may occur on portions of the fixedassets When assessing risks, the auditor primarily approaches the detection ofinherent errors and minimizes the risk From these tasks will help the auditor

to design and implement necessary audit methods to collect sufficient auditevidence

1.3.1.6 Designing audit program

- After performing the above tasks, the auditors shall have to formulate

a specific audit program for the audit

- The Auditing Program is a detailed plan of the audit work, the time ofcompletion and the division of labor between the auditors and the expectedinformation to be collected

- According to Vietnamese Auditing Standards No 300 "Auditors andAuditing Companies must prepare the Audit Program, which defines thecontent, schedule and scope of the Audit procedures necessary to implementthe Audit Plan”

1.3.2 Audit implementation

1.3.2.1 Performing tests of control

- Control testing is performed only after learning the internalcontrolhsystem and is considered to be in effect Control trials wereconducted to collect audit evidence about the design and operation of theinternal controlksystem Vietnamese Standards on Auditing No 500stipulates: “Test of control is a test to gather audit evidence on the appropriatedesign and effective operation of the accounting system and internalcontrolksystem."

- For fixed asset audit, test of control is performed as below:

Table 1.1 Tests of Control

The internal control process The common test of control

1 Existence -Fixed assets that noted in the

paperwork presently used bythe manager, independence ofthe asset managing department

of this part from the keeping section

book The faithfulness of letterrequesting the purchase,approved letter of approval,buying contract and minutes ofthe usable fixed assets and thefixed asset cards

-The vouchers of liquidationshall be irrecoverable, avoidingthe re-usage

- Observing the fixed assetsand considering the separationbetween the management andrecording functions

-Checking vouchers of internalcontrol

-Checking for the signs ofcancellation

2

Completeness

-Each asset has a set of minutes,which is noted from thepurchase of the fixed asset tothe company till the sale,liquidation of fixed assets Therecording, the historical costprice of the asset is created onthe legal documents mentionedabove

-Checking the fullness ofdocuments associated to fixedassets

3.Rights and Assets under the ownership of -Combination of physical