Enhancing audit quality of Loans and advance to customers in small and medium commercial joint stock banks at Ernst $ Young Vietnam

auditing next year only need to collect new contracts that take effect after the previous audit) and make a summary, include all information as follows: Creditor[r]

VIETNAM NATIONAL UNIVERSITY, HANOI INTERNATIONAL SCHOOL

GRADUATION PROJECT

ENHANCING AUDIT QUALITY OF LOANS AND ADVANCE TO CUSTOMERS IN SMALL AND MEDIUM COMMERCIAL JOINT STOCK BANKS

AT ERNST & YOUNG VIETNAM

Tran Dieu Hong Anh

VIETNAM NATIONAL UNIVERSITY, HANOI INTERNATIONAL SCHOOL

GRADUATION PROJECT

ENHANCING AUDIT QUALITY OF LOANS AND ADVANCE TO CUSTOMERS IN SMALL AND MEDIUM COMMERCIAL JOINT STOCK BANKS

AT ERNST & YOUNG VIETNAM

SUPERVISOR: MA Ngo Tri Trung STUDENT: Tran Dieu Hong Anh

STUDENT ID: 16071146 COHORT: AC2016B

MAJOR: Accounting, Analyzing and Auditing

LETTER OF DECLARATION

I hereby declare that the Graduation Project “Enhancing audit quality of loans and advance to customers in small and medium commercial joint stock banks at Ernst & Young Vietnam” is the results of my own research and has never been published in any work of others During the implementation process of this project, I have seriously taken research ethics; all findings of this projects are results of my own research and surveys; all references in this project are clearly cited according to regulations

I take full responsibility for the fidelity of the number and data and other contents of my graduation project

Hanoi, 25th May 2020 Student

ACKNOWLEDGEMENT

First and foremost, I would like to express my sincere gratitude to my supervisor, MA Ngo Tri Trung, for providing invaluable guidance throughout this thesis His vision, sincerity and motivation have deeply inspired me He has taught me the methodology to complete my research and to present the works as clearly as possible It was a great privilege and honor to work and study under his guidance I have been extremely lucky to have a supervisor who cared so much about my work, and who responded to my questions and queries so promptly I would also like to thank him for his time and dedication during the discussion I had with him on research work and thesis preparation

Completing this work would have been more difficult were it not for the support provided by all my lecturers at International School - Vietnam National University I have had chance to apply my knowledge in university into practice Through my internship, I realized that I have taken many useful classes in accounting and audit to help my audit work

I am extremely grateful to Ernst & Young Vietnam Limited Company for giving me the opportunity to take the internship at the company During the internship, I have acquired many practical skills and experiences, which help me to take further step in my career path I also thank to my seniors and staff at EY in Hanoi office for always supporting and giving me precious advices

Due to the limited time and lack of practical expertises, it is difficult to avoid limitations and some inevitable mistakes in the thesis I look forward to receiving the comments and the instructions from the lecturers to improve and complete the shortcomings

ABSTRACT

This research investigates about the audit procedures of loans and advance to customers section in financial audit at Ernst & Young Vietnam for commercial banks Loans and advance is the survival unit of the bank, if this section does not properly work the bank itself may become bankrupt Based on audit procedures, exploring about the strengths and limitations of the process The research was conducted using qualitative approach It began with observational and descriptive method to obtain procedures performed by EY Vietnam, according to EY GAM In order to acquire in-depth knowledge about the points that auditors should focus on when auditing loans and advance for commercial banks, the research used questionnaire designed for respondents, who are staff and seniors working at EY Audit procedures were conducted at EY consist of phases: Scope and Strategy phase, Execution phase and Conclusion phase Finally, even there are some limitations, the process of auditing loans and advance to customers is standard and effective This research also gives advices for further research and can be considered as the reference for the study and research purpose

Table of Contents

CHAPTER 1: INTRODUCTION 10

1.1 The necessity of thesis 10

1.2 Research objectives 11

1.3 Research method 11

1.4 Research framework and structure 12

CHAPTER 2: LITERATURE REVIEW 13

2.1 Overview about audit financial statements 13

2.2 Overview about loans and advance to customers in small and medium commercial banks conducted by audit firms 15

2.2.1 Feature of loans and advance to customers on financial statements 15

2.2.2 Accounting for loans and advance to customers 17

2.2.3 Common misstatements related to loans and advance to customers 23

2.3 Audit assertions of conducting an audit on loans and advance to customers 25

2.3.1 Audit assertions for conducting an audit on loans and advance to customers in small and medium commercial banks 25

2.3.2 Audit assertions for presentation and disclosure for loans and advance to customers in small and medium commercial banks 26

2.4 Audit of loans and advance to customers within an audit process at E&Y 26

2.4.1 Scope and Strategy phase 27

2.4.2 Execution phase 33

2.4.3 Conclusion phase 39

CHAPTER 3: METHODOLOGY 42

3.1 Methodology 42

3.2Source of data 42

3.3 Data and data collection: 43

3.3.1 Observational and descriptive method 43

3.3.2 Questionnaire 44

CHAPTER 4: FINDINGS AND DISCUSSION 46

4.1 Findings for the Scope and Strategy phase of the audit 47

4.2 Findings regarding the execution phase of the audit 60

4.2.1 Test of controls 60

4.2.2 Analytical procedures 68

4.2.3 Confirmation letter for loans and advance to customers 70

4.2.4 Test of details 71

4.2.5 Loan review - Provision 74

4.3 Findings related to the conclusion phase of the audit 78

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 84

5.1.1 Strength of an audit of loans and advance to customers at EY Vietnam 84

5.1.2 Limitations of auditing loans and advance to customers at EY Vietnam 85

5.2 Recommendations to improve the audit quality of loans and advance to customers of commercial banks at EY Vietnam 88

5.2.1 Enhancing the accuracy of analytical procedures 88

5.2.2 Providing short-term training course to improve professional competence 88

5.2.3 Improving the collection of audit evidence 89

5.2.4 Establishing audit team specializing in specific type of businesses 91

5.3 Limitation 92

5.4 Conclusion 92

REFERENCES 94

ABBREVIATIONS

Abbreviation Meaning

BOD Board of Directors

BOM Board of management

BS Balance sheet

CIC Credit information center

CB Closing balance

EY Ernst & Young Vietnam

EY GAM EY Global audit methodology

FS Financial statement

FX Foreign exchange

GL General ledger

ITDM IT dependent mannual

ITGC IT general control

ITRA IT risk assessment

JE Journal entry

OB Opening balance

PL Profit and loss

PM Planning materiality

ROMM Risk of material misstatement

SAD Summary of audit differences

SAP Substantive analytical procedures

SBV State Bank of Vietnam

SCOT Significant class of transactions

STOT Substantive test of transactions

TB Trial balance

TE Tolerable error

TOC Test of control

TOD Test of details

VAS Vietnam Accounting Standards

VND Vietnam Dong

VSA Vietnam Standards of Auditing

LIST OF TABLE

Table Audit assertions of loans and advance to customers 25

Table 2 Audit assertions of interest income 26

Table Presentation and disclosure related to audit assertions of 26

Table Determine PM, TE, SAD at ABC Bank 55

Table Audit program for loans and advance to customers of commercial banks 56

Table Debt covenant compliance 58

Table 4 List of questions to understand control design 62

Table Report on entity level control at ABC Bank 67

Table Report on fraud and significant risk 68

Table Assertions for audit work and documents 72

Table Assertions for audit work and documents for interest receivable 74

Table Loans classification 77

LIST OF FIGURE

Figure Total assets of commercial banks from 2017 to 2019 46

Figure Total equity of commercial banks form 2017 to 2019 46

Figure Three audit phases at EY Vietnam 47

Figure 4 Specific of scope and strategy phase for financial statements at EY Vietnam 47

Figure Test of controls process 61

Figure ITRA audit process 62

Figure Considerations for test of controls 66

Figure Loans leadsheet 70

Figure EY Microstart 71

CHAPTER 1: INTRODUCTION 1.1 The necessity of thesis

asset of some value that the bank can reclaim in the event of nonpayment Therefore, management and the loans purposes have a significant impact on the auditor’s opinion and audit report

Being one of the four prestigious auditing firms in the world, Ernst & Young has provided assurance services for a large number of enterprises and entities Clients at EY Vietnam are large corporations, financial institutions, large-scale enterprises with diverse and complicated demands for loans Therefore, in the auditing process, Ernst & Young identifies loans which considered as material items and contained many risks that require significant consideration while conducting an audit

As a student in Accounting – Auditing major, the researcher believes that each student should prepare for themselves both theoretical and practical technical knowledge in order to meet the professional requirements Through the internship at Ernst & Young Vietnam, the researcher has gained empirical experience in performing an audit, especially, auditing of loans and advance to customers Therefore the researcher chooses the topic named: “Enhancing audit quality of loans and advance to customers in small and medium commercial joint stock banks at EY Vietnam” with the desire to further describe auditing process of the firm in this bachelor thesis

1.2 Research objectives

The thesis provides analysis and theoretical framework about auditing loans and advance to customers in commercial banks conducted by the methodology applied in Ernst & Young Vietnam Ltd Based on the research, the thesis points out the strengths, limitations, as well as give reasonable solutions, recommendations for process improvement of auditing loans and advance to customers section, performed by Ernst & Young Vietnam Ltd

1.3 Research method

- Theoretical research method: worldview method, analysis and synthesis theory, logic and generalized problem

- Empirical method: search, analyze, process information, and describe the statistical methods, practical experience through real work

Survey method: To obtain deeper understanding about the process of auditing loans and advance to customers account performed in Ernst & Young Vietnam, the author designs the questionnaire for independent auditors who currently working in Ernst & Young Vietnam This survey gathers information on a large scale in a short period of time It helps the researcher can get the responses to gain insight knowledge and identify different viewpoints to understand more about audit procedures of loans at commercial banks from many auditors with the same question, then will be able to draw the trend and identify the most accurate answers

Data sources: In this thesis, the researcher use two sources of data, which are primary data and secondary data

- Primary data: Those data collected by interview method from the research period at Ernst &Young Vietnam, in order to identify the different viewpoints in auditing loans and advance to customers, as well as the advantages and limitations of the process of auditing loans and advance to customers at EY Vietnam

- Secondary data: Those information and knowledge collected from EY Global Audit Methodology, normative documents from State Bank of Vietnam, Government Agencies and Line Ministries

1.4 Research framework and structure

CHAPTER 2: LITERATURE REVIEW

An effective and well-conducted review as a research is based upon past knowledge It is important for the researcher to review the available literature for advancing knowledge and facilitating theory development This helps in understanding the nature and design of the research investigation and provides evidence that the researcher is familiar with what is already existed

The researcher has undertaken an extensive literature survey regarding to the study The objective of the literature review is to get an insight in the areas of auditing loans and advance to customers Accordingly, to achieve the objectives, the researcher has classified the review of literature into four parts as follows: The first part introduces general information about audit financial statements, the second part points out the definition and characteristics of loans and advance to customers In the next part, audit objectives while conducting an audit will be described and the last part presents a general process of auditing

2.1 Overview about audit financial statements

expresses audit opinion, if in special circumstances, disclaims an opinion (Simunic, D., 1980)

Frank, D H (2001) pointed out that the audited financial statements play an critical role in the investor for making investment decisions Precisely, he proved that investors who viewed media reports tended to focus on negative news and misclassified more unaudited information as audited and assessed the credibility of the unaudited report much higher than investors who viewed hardcopy materials Those investors who did not look company’s risk management program, just assessed only unaudited report was more credible also judged the firm's potential earnings to be higher, resulted in wrong decision Notifying users with an “audited/ unaudited” label will attenuate these effects Contrary to this view, Brant, E et al (2014) performed an experiment to prove information presented in financial statement has strongly effect to the investors’ decision The research survey was conducted using an online questionnaire sent out to nonprofessional investors such as business school graduates who invest in individual stocks and analyze company financial data The result indicated that investors who receive a critical audit matter paragraph are more likely to change their investment decision than investors who receive a standard audit report or investors who receive the same critical audit matter paragraph information in management's footnotes Therefore, quality of the audit is drastically increased for both investors as well as their companies (Joseph, V C., 1992)

declared this conclusion made no claims that audit quality is unacceptably low in smaller companies Nevertheless, Alastair, L et al (2011) had different opinion by using the matching model, they indicated that the audit quality from Big firms is insignificantly different from those of non – Big firms Their result also suggested that the differences between Big and non – Big firm mainly reflected client characteristics and, more specifically, client size

2.2 Overview about loans and advance to customers in small and medium commercial banks conducted by audit firms

2.2.1 Feature of loans and advance to customers on financial statements Loans normally have the following distinguishing characteristics:

1 Time to maturity Time to maturity describes the length of the loan contract Loans are classified according to their maturity into short-term debt, intermediate-term debt, and long-term debt Revolving credit and perpetual debt have no fixed date for retirement Banks provide revolving credit through extension of a line of credit Brokerage firms supply margin credit for qualified customers on certain securities In these cases, the borrower constantly turns over the line of credit by paying it down and reborrowing the funds when needed A perpetual loan requires only regular interest payments The borrower, who usually issued such debt through a registered offering, determines the timing of the debt retirement

3 Interest Interest is the cost of borrowing money The interest rate charged by lending institutions must be sufficient to cover operating costs, administrative costs, and an acceptable rate of return Interest rates may be fixed for the term of the loan, or adjusted to reflect changing market conditions A credit contract may adjust rates daily, annually, or at intervals of 3, 5, and 10 years Floating rates are tied to some market index and are adjusted regularly

4 Security Assets pledged as security against loan loss are known as collateral Credit backed by collateral is secured In many cases, the asset purchased by the loan often serves as the only collateral In other cases the borrower puts other assets, including cash, aside as collateral Real estate or land collateralize mortgages Unsecured debt relies on the earning power of the borrower

There are different types of loans that a business might take out according to Decision 1627, Circular 39/2016/TT-NHNN as follows:

A commercial loan (long-term loan) is a debt-based funding arrangement that a business can set up with a financial institution such as insurance companies, banks, brokerage companies A commercial loan has mature from more than five years Commercial loans are generally used to purchase a long-term assets or help fund day-to-day operational costs Long-term bank loans are always supported by a company's collateral, usually in the form of the company's assets The loan contracts usually contain restrictive covenants detailing what the company can and cannot financially during the term of the loan Commercial loans usually charge flexible interest rates that are tied to the bank prime rate or else to the London Interbank Offered Rate (LIBOR) Many borrowers must file regular financial statements, usually at least annually Lenders also usually require proper maintenance of the loan collateral property

may have an economic life of only around years or other businesses use these loans for monthly operations

A short-term loan is usually cash-advance type loan, designed to cover short-term expenses or provide additional capital during seasonal revenue Commercial banks are main suppliers, who provide loans with term up to one year for corporations Customers choose short-term loan because it is less risky in terms of solvency and interest rate in comparison with other loans

An unsecured loan will be issued and supported only by the borrower's creditworthiness, rather than by some sort of collaterals This loan is not tied to any assets and the lender can’t automatically size the property as payment for the loan Generally, a borrower must have a high credit rating to receive an unsecured loan Commercial paper is an example of an unsecured loan A secured loan is backed by collateral; if it is not repaid, the lender can seize the collateral and sell it to use the proceeds of loan to recover the funds

Interest receivable is the amount of interest that has been earned, but which has not yet been received in cash The usual journal entry used to record this transaction is a debit to the interest receivable account and a credit to the interest income account When the actual interest payment is received, the entry is a debit to the cash account and a credit to the interest receivable account, thereby eliminating the balance in the interest receivable account The interest receivable account is usually classified as a current asset on the balance sheet, unless there is no expectation to receive payment from the borrower within one year

Loans and interest receivables make a great impact to financial indicators such as: profit margin, debt to equity ratio, short-term and long-term solvency ratios, times interest earned ratio, etc

Account no 21xx to Account 29xx according to SBV account “Lendings” reflects all loans and its principal repayment taken by the entity The account isn’t used to recorded loans arose due to issuance of bond Although all loan balance is followed by account no.21xx to no 29xx, it is compulsory to classify closing balance of such loans to short-term, medium, long-term loans The allocation is based on remaining lending term rather than total original term as classification of short-term and long-term investment

Classification of loans

There are several ways to classify and monitor loans such as: by sources, by lenders, by currency, etc However, remaining lending term is the most popular benchmark due to the requirement of loan disclosure in financial statements The method saves time for accountants in preparing FSs

According to the regulations clearly stated in Circular 200/2013/TT-BTC, all loans must be allocated to short-term and long-term debt due to their remaining loan term Short-term debts include both such loans whose due date is within the next 12 months or one operating cycle and current-portion of long-term debts which must be paid in the next 12 months Long-term loans are loans whose their remaining loan term are longer than the next 12 months Interest and principal of those loans are paid in monthly, quarterly or annually basis basing on specific loan conditions that are clearly stated in loan contracts Interest rate are determined by various method such as: single, compound, floating, or proportion of LBOR, NIBOR, etc

Accounting for loans and advance to customers 1 Accounting for disbursement

a Based on documents of disbursement, conduct disbursement transaction and accounting as follows:

Debit 21x1: Amount disbursed to customers

On a regular basis, based on the loan contract, loan balance, interest rate the person in charge calculates the receivable amount of customers and records:

For loans have debt classification as group 1: Debit 394x: Amount interest receivable

Credit 702x: Amount interest receivable

For the accrued interest amount but customer have not paid on time or the loan has been transferred from debt group to loan from group to group 5, the bank shall transfer the debt group and set up risk provision according to regulations

For loans from group to group 5:

Increase 941: receivable interest, overdue interest c Accounting for debt collection (principal and interest)

Based on debt collection documents, conducting accounting transactions: o Principal debt collected

Debit 1011, 4211,…: Principal amount collected Credit 21x1: The principal amount collected o Interest debt collected

For loans in group 1:

Debit 1011, 4211, : Interest amount collected Credit 394x: Interest amount collected For loans from group to group 5:

+ Debit 1011, 4211, …: Interest amount collected (includes penalty interest, if any)

Credit 702x: Interest amount collected (includes penalty interest, if any)

+ Decrease 941: Interest earned (includes penalty interest, if any) 2 Debt classification and provision of credit risks

a Accounting for debt classification

- Based on the list of debt classification approved and authorized by competent authorities:

Debit to new group lending: value of loans transferred to group Credit in old loan group: value of loans transferred to group For loan interests: If the loan is transferred from debt group to group

For interest already accrued in the current year:

Debit 702x: Interest amount already accounted into the accrual plan of the year for the loans transferred to other groups

Credit 394x: Interest amount

For interest already accrued in the previous year:

Debit 809x Interest amount already accounted in the previous years’ accruals of loans transferred to other groups

Credit 394x: Interest amount

At the same time, accounting for off-balance sheet for this interest:

Increase 941x: The recorded interest amount of the transferred loan group

For loans from group to group are transferred to group 1:

Debit 394x:The interest receivable of the loans are transferred to group Credit 702x: The interest receivable of the loans are transferred to group

b Accounting for provision and returning credit risk provision

Based on the Proposal for setting up credit risk provision and the detail lists of credit risk provision for each loan approved and accounted by competent authorities:

If the amount of risk provision is already set up larger than than the balance of risk provision fund in accounting book, addition risk provision shall be made:

Debit 8822: Total risk provision that must be set up in the period

Credit 2192: The general provision amount must be additionally set up in the period

If the amount of risk provision deduction is smaller than the balance of risk provision fund in accounting book, returning risk provision shall be made as follows:

Debit 2191: Specific provision amounts reversed in the period Debit 2192: General provision reversed in the period

Credit 8822 Risk provision reversed amount

All accounts for loans and advance to customers as well as interest receivable and provision are enclosed in Appendix 01

Accounting documents for loans:

For loans from individuals: Because individuals are not legal entities so they have the right to handle and use their assets, individuals can lend in cash Therefore, when businesses borrow from individuals, the set of documents include: (1) Decision of the Board of Directors/Minutes of the Board meeting on borrowing; (2) Contract of borrowing (borrowing) money; (3) Bank statement (if transfer), (4) Receipt of loan; (5) Payment slip (in case of payments in cash), (6) Minutes of liquidation of loan agreement upon repayment of principal and interest; (7) Loan interest calculation sheet; (8) Certificate on personal income tax withholding (if interest is paid)

liquidation and loan interest payment; (10) Loan interest calculation sheet; (11) Loan interest receipts (If interest is paid)

For loans from credit institutions: Because credit institutions have a strict process in monitoring and checking before lending and in the process of using the loan, so the documents for lending from credit institutions often include: (1) Decision of the Board of Directors/Minutes of the Board meeting on borrowing; (2) Credit contract; (3) Request for disbursement; (4) List of loan withdrawal; (5) Property mortgage contract (if any); (6) The minutes of mortgage payment (if any); (7) Value-added invoices, (8) Economic contracts, (9) Minutes of acceptance and handover, etc proving the purpose of borrowing by enterprises; (10) Transaction documents of the bank: bank's accounting voucher, bank transfer fee receipt, loan and principal list, bank statement, etc Credit contracts and loan withdrawal statements are important to determine the liabilities of debtors owe debt to the bank and must repay within the debt term

b Accounting for interest receivable:

According to Circular 05/VBHN/NHNN/2018, interest receivable must be recorded in account no 3941 and account no.3942 This account reflects the interest from lending of financial activities including receivables or losses regarding financial investment activities, lending costs, capital contribution costs in joint ventures or associates, losses of transferring short-term securities, securities transaction costs, provision for devaluation of trading securities, provision for loss of investment in other entities, losses incurred when selling foreign currencies, exchange rate losses

2.2.3 Common misstatements related to loans and advance to customers For lendings (an item in BS), they are intentionally understated or omitted and popular frauds and errors will be listed as follows:

• Valuation/ Accuracy:

o Closing balance of these loans are not evaluated at reporting date currency (any foreign balances are not converted to VND using relevant exchange rate, normally at the end of fiscal year);

• Completeness:

o All lendings should have been recorded but have not been recorded in accounting book yet The omission will make equity higher due to the accounting equation (Assets are equal to liabilities plus equity)

• Classification

o Portion of lendings whose date of repayment is longer than year are not classified as long-term lendings The portion that must be repay within year are not classified as current portion of long-term debts For interest income (an item in PL), it is likely intended to be understated and popular frauds and errors are:

• Completeness: All interest income for the period that should be recorded have not been recorded

• Accuracy: Interest income for the period is not recorded correctly in term of mathematics and value

• Cutoff: Interest income are not recorded in correct period based on accrual basis rather than when cash is received for those income as cash basis stated 2.2.4 Internal controls for loans and advance to customers

• Adequate separation of duties

o The accountant is responsible for recording new loans must separate with the person who records cash receipt from the lendings

o Segregation of duties between initiation and final approval of financing activities, and loan account and general ledger maintenance; between valuation monitoring and acquisition functions

• Proper authorization of transactions and activities

o All lendings should be authorized by proper personnel before loan contracts are signed, new loans and cash receipt must be recorded in accounting system

o Any significant debt commitments should be approved by BOD and the specific controls for lending and repayment may be delegated to an executive

• Documents and records

o All loan contracts must be stored until the lendings are fully repaid o All loans must be fully recorded in accounting systems and repayment

schedule for each loan contract must be followed and updated in timely manner

o Adequate detailed records of long-term debt transactions should be maintained to ensure that all lendings and repayments of principal and interest are accurately recorded

o The debt amount recorded in the subsidiary ledger should be reconciled to the general ledger control accounts regularly

o Control procedures, such as internal verification, to ensure that long-term debt is properly valued; for example, premium or discount for bonds should be amortized using effective interest method to calculate interest receivable

o Control points should ensure that loans are properly classified into short-term and long-term loans according to their due dates

o All loan contracts and documents related to these loans should be stored in safety box and only authorized personnel can assess

• Independent checks on performance

o All recording procedures of loans and interest receivables should be cross-checked in timely manner by authorized personnel

2.3 Audit assertions of conducting an audit on loans and advance to customers 2.3.1 Audit assertions for conducting an audit on loans and advance to

customers in small and medium commercial banks

Loans and advance to customers appear on BS as an account, when conducting an audit, procedures to be performed must satisfy the following assertions, according to Arens, A A et al (2010):

Table Audit assertions of loans and advance to customers

Audit assertions Description

Completeness - All loans should have been recorded have been recorded in accounting book

Existence - All recorded loans exist at balance sheet date

Valuation/ Accuracy - Closing balance of these loans are evaluated at reporting date currency (any foreign balances should be converted to VND using relevant exchange rate, normally at the end of fiscal year);

- Foreign outstanding balances (all collaterals with value greater than VND billion 200 (VND billion 50 for related parties) must be valuated by independent valuer) are re-evaluated yearly to determine unrealized revaluation gain/loss

Classification - Portion of loans whose date of repayment is longer than year should be classified as long-term borrowings

- The portion that must be repay within year should be classified as current portion of long-term debts

Detail tie-in - Details in the sub-ledger accounts is agreed with general ledger Rights & Obligations - The entity has title to all loans item listed

Table 2 Audit assertions of interest income

Audit assertions Description

Completeness - All interest income in the period should have been recorded have been recorded

Existence/ Occurrence - All interest income that have been stated in the FS should occurred in the period (starts from effective borrowings in the period)

Valuation/ Accuracy - Interest income for the period should be recorded correctly in term of mathematics and value

Cutoff - Interest income should have been accurately recorded in correct period based on accrual basis rather than when cash is received for these receivable as cash basis stated

2.3.2 Audit assertions for presentation and disclosure for loans and advance to customers in small and medium commercial banks

After conducting several audit procedures to ensure the balance of loans and advance to customers as well as interest income are truly and fairly stated according to all audit objectives have mentioned above, it is required to ensure related information of these balance in notes to FS also meet relevant audit assertions below

Table Presentation and disclosure related to audit assertions of loans and advance to customers

Audit assertions Description

Completeness - All required disclosures related to loans are included in notes to FS

Classification and understandability

- Loans are appropriately classified into short-term and long-term obligations and related FS disclosures are fully understandable

Valuation/ Accuracy - All information in loans-related notes to FS must be accurate

Occurrence and rights and obligations

- Loans as described in the notes to FS exist and are obligation of the company

According to the Vietnamese Standards on Auditing (VSA), which is clearly presented in the Decision 366 – 2016/QD – VACPA and the VSA 220 issued by Ministry of Finance, the procedures for auditing financial statements are divided into three main sections: Planning, Implementation, and Completion Although there is difference in name of each phase and quantity, the procedures have to be performed in an audit is similar The audit process for any item in the FSs will also follow this sequence

The general audit procedures for loans and advance to customers accounts at EY Vietnam consist of three phases: Scope and Strategy, Execution, and Conclusion phase Details of each phase for conducting an audit of loans and advance to customers will be described as follows:

2.4.1 Scope and Strategy phase

The VSA 300 clearly stated that, planning is not an isolated phase of an audit; it is the process that is repeated and begins immediately after or at the same time with the end of the previous audit and continues until the audit of current period Audit planning includes a schedule review of some activities and the audit procedures that need to be completed before the next audit phase are carried out

Scope and strategy phase of the audit is the most important part of any audit engagement The first generally accepted auditing standard of field work requires adequate planning to obtain sufficient appropriate evidences for the circumstances as well as allow the audit firm keep audit costs reasonable and avoid misunderstanding with the client, minimize legal liability and maintain good reputation in the business community

The Scope and Strategy phase consists of steps according to Audit and assurance services, 16th edition by Alvin Aren

First, accept client and perform initial audit planning

reasons for audit and (2) Obtaining an understanding with the client (Arens, A A et al, 2010) After the client is accepted, the audit contract and audit team members for the engagement will be carefully prepared

For (1), there are two major factors affecting acceptable audit risk They are the likelihood and intention of financial statement users The auditor is likely to accumulate more evidence, for specific case of public companies with extensive indebtedness and companies will be solved in the near future The most uses of the statements can be determined from prior experience with the client and discussions with management Throughout the engagement, the auditor gets additional information about why the client has an audit and the likely uses of financial statements This information may affect the auditor’s acceptable audit risk (AAR) For example, if the company has a great amount of loans, the AAR will be low due to the risk of violating loan covenant that may lead to going concern problem and the strict requirements of banks or financial institutions in reimbursing these borrowings

For (2), auditing standards require that auditors document their understanding with the client in an engagement letter, which includes the engagement’s objectives, the responsibilities of the auditor and management, and the engagement’s limitations It also states any restrictions to be imposed on the auditor’s work, deadlines for completing the audit, any assistance provided by the client’s personnel in obtaining records and documents, and schedules prepared for the auditor It always includes an agreement on fees The engagement letter’s purpose is to inform the client that the auditor cannot guarantee for all acts of fraud will be discovered

Furthermore, as clearly stated in terms of acceptable audit risk, an auditor is unlikely to accept a new client or continue serving an existing client if acceptable audit risk is below the risk threshold that the firm is willing to accept

the auditor determine the resources required for the engagement, including engagement staffing

Second, understand the client’s business and industry to obtain related information

According to Arens, A A et al (2010), in this step, “the auditor must obtain a sufficient understanding of the entity and its environment, including its internal controls, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures”

Loans and advance to customers may be accounted in different accounting policies due to some authorized special regulations for financial institutions The treatment requires higher attention from audit team during the engagement

Other internal factors represent how effective internal controls system will be the considered as guidelines for auditors to identify and remain questioning mindset for detecting frauds and errors The entity with high level of construction may overstate historical cost of asset by over-capitalizing interest receivable Or weak management with high financial objectives may lead to the understatement of such loans in the FS The internal controls system is effective so the risk control is lower, materiality is set at higher level Thus the volume of procedures, the audit works are reduced and vice versa, the weaker internal control system, the higher control risk, the lower materiality level is set and require more audit procedures to detect the frauds and risks influence the information presented in the FS

Third, perform preliminary analytical procedures

Fourth, set preliminary judgement of material and planning materiality According to the Vietnamese Standards on Auditing No.320, misstatements are considered to be material if they could influence the decisions of users of the financial statements It is applied by auditors at the planning stage, execution stage and evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements

The materiality normally is set by a percentage of net revenue, total assets or profit before tax If the client experiences high level of loans with strict covenant, materiality level may lower due to the higher inherent risk Any violence to those covenants may lead to requirement of immediate payment for all outstanding debts and going concern will appear This procedure compares client ratios to benchmarks of industry or competitor to obtain an indication of the company’s performance Such preliminary tests can reveal unusual changes in ratios compared to prior years, or to industry averages, and help the auditor identify areas with increased risk of material misstatements that require further attention during the audit (Arens, A A et al, 2010) To design proper audit procedures to audit loans and interest receivable, it is necessary to identify significant risks due to fraud or errors as well as assess inherent risk and understand internal control over all lending and interest receivable At this step, auditors use a questionnaire to obtain relevant and adequate information

Fifth, identification of significant risks dues to frauds and errors

To determine significant risks due to fraud or errors, auditor uses the following technique:

• Nature of the client’s business: if the entity experiences high level of loans due to construction, it is essential to consider classification of interest receivable (capitalize or non-capitalize) and risk of loans and interest receivable account will be higher

• Related parties: if there are a tremendous amount of loans have arisen between related parties (parent – subsidiary or subsidiary – subsidiary company), inherent risk for loans will be higher due to the risk of inadequate disclosure • Complex or nonroutine transactions: If the entity takes complex and non-routine loan-related transaction such as using swap or issuing convertible bond, risk of misstatement will be greater

The work done helps auditor to understand the meaning of loans and interest receivable to operating activities and how the entity controls those account balances Result of these procedures will seriously affect to final decision on materiality level as well as audit procedures for loans and interest receivable in audit program The higher risk such accounts carry, the more procedures should be performed, and also the more experienced staff should be assigned to engagement

Seventh, understand internal control and assess control risk

To understand internal control over loans and advance to customers and interest receivable, the auditor normally uses COSO framework as a general guidance beyond specific instruction of the audit firm Five components include (1) control environment, (2) risk assessment, (3) control activities, (4) information and communications as well as (5) monitoring are simultaneously considered by completing a series of related questions

For (1), (2), (4), and (5), they are the same for all items in FS

“The control environment consists of the actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about internal control and its importance to the entity.” (Alvin A Aren, 2010)

potential for fraudulent behavior; and should monitor changes that could impact internal controls.” (Alvin A Aren, 2010)

“The underlying principles related to information and communication stress the importance of using relevant, quality information that is communicated both internally and externally as necessary to support the proper functioning of internal controls.” (Alvin A Aren, 2010)

“Monitoring activities deal with ongoing or periodic assessment of the quality of internal control by management to determine that controls are operating as intended and that they are modified as appropriate for changes in conditions The underlying principles related to monitoring include performing periodic evaluations and communicating any identified deficiencies to the appropriate parties responsible for taking actions to remediate the deficiencies.” (Alvin A Aren, 2010)

For (3), different balances in FS contain different characteristics that require various control activities to ensure no frauds and errors exist According to Arens, A A et al (2010): “Control activities are the policies and procedures in addition to those included in the other four control components that help ensure necessary actions are taken to address risk to the achievements of the entity’s objectives” Some particular control point to ensure each process performed as designed and effective for auditing loans are:

• Adequate documentation must verify that a note or bond was properly authorized

• Any significant debt commitments should be approved by the board of directors and the specific controls for lending and repayment may be delegated to an executive

• Segregation of duties between initiation and final approval of financing activities, and loan account and general ledger maintenance

• The debt amount recorded in the subsidiary ledger should be reconciled accurately to the general ledger control accounts regularly

• Etc…

Last but not least, finalization of an overall audit program

The audit strategy is the mix of five tests: risk assessment procedures, TOC, STOT, SAP and TOD The lead auditor decides the most cost-effective types of all tests, then design a detailed audit program which contains a list of audit procedures should be performed in the audit engagement: specific audit techniques, scope of audit work, documents regarding loans account should be gathered

2.4.2 Execution phase

In this phase, auditors should understand the lending process at commercial banks for performing audit procedures better Steps in the lending process at commercial banks are briefly described as follows:

- Finding prospective loan customers:

• Loans to individual arise from a direct request from a customer who approaches a member of the lender’s staff and asks to fill out a loan application

• Business loan request, often arise from contacts the loan officers and sales representatives make as they solicit new accounts form firms operating in the lender’s market area

- Evaluating a prospective customer’s character and sincerity of purpose

• Once a customer decides to request a loan, an interview with a loan officer

usually follows, allowing the customer to explain his/her credit needs • That interview is particularly important because it provides an opportunity

for the loan officer to assess the customer’s character and sincerity of purpose

• If the customer appears to lack sincerity in acknowledging the need to adhere to the terms of a loan, this must be recorded as a strong factor weighing against approval to the loan request

• IT a business or mortgage loan is applied for, a loan officer often makes a site visit to assess the customer’s location and the condition of the property and to ask clarifying questions

• The loan officer” may contact other creditors who have previously loaned

money to this customer to see what their experience has been

• Did the customer fully adhere to previous loan agreements and, where required, keep satisfactory deposit balances?

• A previous payment record often reveals much about the customer’s character, the sincerity of purpose, and a sense of responsibility in making use of credit extended by a lending institution

- Evaluating a prospective customer’s financial condition

• If all is favorable to this point, the customer is asked to submit several crucial documents the lender needs to fully evaluate the loan request, including complete financial statements and, in the case of corporation, Board of Directors’ resolutions authorizing the negotiation of a loan with the lender

• Once all documents are on file, the lender’s credit analysis division conducts a thorough financial analysis of the applicant, aimed at determining whether the customer has sufficient cash flow and backup assets to repay the loan

• The credit analysis division then prepares a summary and recommendation, which goes to the appropriate loan committee for approval

• On large loans, members of the credit analysis division may give an oral presentation and discussion will ensue between staff analysts and the loan committee over the strong and weak points of a loan request

- Assessing possible loan collateral and signing the loan agreement

access to the collateral or can acquire title to the property involved if the loan agreement has defaulted

• Once the loan officer and the loan committee are satisfied that both the loan and the proposed collateral are sound, the note and other documents that make up a loan agreement are prepared and signed by all parties to the agreement

- Monitoring compliance with the loan agreement and other customer services needs

• The new agreement must be monitored continuously to ensure that the terms of the loan are being followed and that all required payments of principal and interest being made as promised, for larger commercial credits, the loan officer will visit the customer’s business periodically to check on the firm’s progress and see what other services the customer may need

• Usually, a loan officer or other staff members enter information about a new loan customer in a computer file known as a customer profile

This file shows what services the customer is currently using and contains other information required by management to monitor a customer’s progress and financial service needs

After understanding lending process, auditors perform audit procedures, details of each procedure are described as follows:

a Performing test of controls

by auditors Client’s control system is manual or automatic requires the following evidence:

• Make inquires of appropriate client personnel

• Examine to test existence, completeness, accuracy of documents, records and reports

• Observe and perform a walkthrough for any control activities • Reperform client procedures

b Performing substantive tests of transactions

Substantive tests consist of STOT, SAP and TOD STOT are used to determine whether audit objectives have been satisfied for each class of transaction

- Analytical procedures play an important role in the audit process It is implemented throughout the audit, from scope and strategy, execution and conclusion phase (Hirst, D., et al, 1996) SAP involves comparison of recorded amounts and expectations developed by the auditors to indicate possible misstatements in the financial statements and provide substantive evidence

- TOD focuses on the ending general ledger balances for both balance sheet and income statement accounts

- Some examples of audit procedure should be performed in auditing of loans and interest receivable are:

TOC and STOT procedures:

• Is the account who is responsible for recording new loans also the person who records cash receipt from the loans?

• Are all loans properly authorized by personnel before signing loan contract? Are new loans and cash receipt fully recorded in accounting system?

• Are payback schedule for each loan contract recorded in accounting system? Who is the person that follow and update contract in timely manner?

• Are all loan contracts and documents regarding those loans stored in safety box and only authorized personnel can assess • Are all recording procedures of loans and interest receivables cross-checked in timely manner by authorized personnel?

SAP procedure

• Compare outstanding loans balance for each lender in this year with the prior year

• Compare the total balance of loans, loans and personal receivables this year with the previous year to detect abnormal fluctuations which needs explanation

• Recalculate interest receivable based on regulated bank interest rates and monthly payments

TOD procedure

• Reconciliation of opening balances and year-end balances between financial statements, ledgers and detailed books and prior year's audit reports

• Affirm loans balance by:

o Reconcile a detailed list of borrowers with a detailed book, debt reconciliations

o Prepare and send confirmation letters to borrowers have large balances

o Gather confirmation letters from borrowers in the prior year that currently have no balance, but according to the information collected, this loan cannot be fully paid

o Review the arising transactions to determine whether any transactions have been recorded or unreasonably classified o Collect loan contracts effective during the audit period (if

auditing next year only need to collect new contracts that take effect after the previous audit) and make a summary, include all information as follows: Creditors, CIF number (Customer ID), Number of contract days, Debt commitment, The approval of the loan contract, The approval of the loan contract, Loan date, due date, Interest rate and term (%) and fixed interest rate (if any), Loan amount (original currency, VND conversion), Amount receivable in the next accounting year, Guarantees for loans

o Check on new loans and debts to ensure that new loans are accurately recorded; check the calculation and accounting of interest receivable by checking loan contracts and certifying letters or other related documents; consider the appropriateness of interest rates against current regulations; check the refund amount corresponding to the debt repayment plan; Consider whether using a loan for the right purpose or not

o Check receivables related to loans:

Check whether the distribution of interest in the period and allocate to the users is appropriate or not

Check the capitalization of loan interests (if borrowing loans for capital construction investment)

o Check the classification of long-term debt to current portion of term debt; recalculate the current portion of long-term debts by referring to loan contracts, debt repayment plans and payment situation during the year

o For loans and debts in foreign currencies: Check the application of exchange rates, calculation methods and accounting of exchange rate differences, re-evaluate the balance at the end of the period according to regulations o Check the classification and presentation of loans on

financial statements 2.4.3 Conclusion phase

In the last phase, auditors must (1) accumulate additional evidence related to presentation and disclosure-related audit objectives, (2) review for contingent liabilities and subsequent events, (3) accumulate final evidences regarding loans and interest receivable, (4) evaluate results, (5) issue audit report and (6) communicate with audit committee and management

For (2), according to Alvin A.Aren, 2010: “A contingent liability is a potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place Material contingent liabilities must be disclosed in the footnotes Three conditions are required for a contingent liability to exist:

1 There is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition

2 There is uncertainty about the amount of the future payment or impairment The outcome will be resolved by some future event or events

The auditor normally uses some audit procedures to search the liabilities such as: inquire of management (both orally and in writing) about the possibility of unrecorded contingencies, review current and prior years’ internal revenue agent report for income tax dispute, review the minutes of directors’ and stockholders’ meetings for indications of lawsuits or other contingencies, etc

The next part in conclusion phase is the review for subsequent events The auditor must review transactions and events that occurred after the balance sheet date to determine whether any of these transactions or events affect the fair presentation or disclosure of the current period statements In this part, the responsibility of auditor for reviewing subsequent events is normally limited to the period beginning with the balance sheet date and ending with the date of the auditor’s report There are some audit techniques used in this step: review records prepared subsequent to the balance sheet date, review internal statements prepared subsequent to the balance sheet date, examine minutes issued subsequent to the balance sheet date, correspond with attorneys, inquire of management and obtain a letter of representation

financial problems and helps the auditors take a final objective look at the audited financial statements Going concern assumption of the entity need to be evaluated for at least one year before the balance sheet date For entities who obtain a large amount of loans with strict debt covenants requirement, going concern assumption must seriously considered due to the immediate requirement of those creditors in cases any loan terms are violated The last task in (3) is to obtain management representation letter to impress upon management its responsibility for the assertions in the FS, to remind management of potential misstatements or omissions in the FS as well as to document the responses from management to inquire about various aspects of the audit

In (4), evaluating results step requires all audit documents related to loans and advance and interest receivable are reviewed to ensure sufficient appropriate evidence have been accumulated for all audit objectives stated in scope and strategy phase are met

CHAPTER 3: METHODOLOGY

This chapter gives and outline of the main methodology that researcher used to conduct the thesis As stated in the literature review, audit process is a set of procedures performed in a logical and systematic structure that auditor must follow In order to best investigate and understand the process of auditing loans and advance to customers at EY Vietnam, the researcher will discuss in terms of research method, source of data, data collection techniques

3.1 Methodology

The research method used in this thesis is qualitative research Qualitative research is empirical research where the data are not in the form of numbers (Punch, K., 1984) In the research of McLeod, S (2017), he stated that the aim of qualitative research is to understand the research objects of individuals, groups, cultures or things as nearly as possible as its participants feel it or live it Thus, research objects, are studied in their natural setting Additionally, knowledge based on experience may be distorting things that are not subjectively "experienceable" Qualitative researchers want to know where, when, how and under what circumstances behavior comes into being What historical circumstances and movements are they a part of? Each act, word and gesture is significant in the eyes of the qualitative researcher (Robert, C B & Sari, K B., 2015)

The reason for choosing qualitative research is the theory and predictability of the research’s issue The aim of using this research type is to obtain in-depth understanding about the process of auditing loans and advance to customers account in EY Vietnam and investigate how respondents interpret their own opinions about the audit process of loans and advance to customers by conducting appropriate audit procedures and techniques

3.2 Source of data

client is considered the most reliable and worthy information Although these data collection methods are demanding and time-consuming, they truly help to perform the analysis and make valid conclusions

In addition to confirm original results, raw data can be used to explore related or new hypotheses, particularly when combined with other publicly available data sets (Heather, A P., Roger, S D & Douglas, B F., 2017) The general research community benefits from shared data As a result, the secondary data such as information and knowledge from normative documents from State Bank of Vietnam, Government Agencies and Line Ministries others sources from previous researchers are also valuable sources for the research

3.3 Data and data collection:

Data for this research is gathered in a natural environment which encourages natural behavior Open ended questions allow for the informants to answer from their own perspective rather than by the structure of pre-arranged questions Informants express their thoughts more freely (Robert, C B & Sari, K.B., 2015) This thesis was conducted using two methods of data collection: observational and descriptive method and questionnaire, each of which is presented in detail as follows

3.3.1 Observational and descriptive method

According to Knupfer, N (1996), descriptive method will help researcher answer the questions of what, when, where, and how, associated with specific research questions and problems The thesis tends to be the conclusive in nature concept, rather than exploratory, therefore, this method will be a suitable option and help researcher observe and describe the research subject, which is the process of auditing loans and advance to customers at EY Vietnam

Moreover, the researcher also learning more from the audit team members, senior in charge and manager in charge, which is the most valuable thing that can be carried out to reach the conclusion and recommendation part of the research

Besides, the author also obtains the data about auditing loans and advance to customers at specific case of clients, in particular ABC Bank In the next chapter of the thesis, the author will based on the collected data to describe about the procedures of auditing loans and advance to customers, from that obtain a deeper understanding about the audit process of EY Global Audit Methodology

3.3.2 Questionnaire

The second approach in data collection of this research is to give out questionnaires because it “consists of a heterogeneous collection of case studies” (Robert, K Y & Karen, A H., 2007)

The questionnaire is a method to measure how audit teams responded to audit procedures of loans and advance to customers at EY The researcher believes that using questionnaire is the most effective way to collect and summarize data The researcher decided to send the survey to 48 participants, who have practical experience about auditing commercial banks at EY Vietnam The survey will be given and collected directly via internal email

The questionnaire used in this study has been modified from survey of James, R L., from the research to identify the satisfaction with the usability of primary computer system in 2003

particular, analytical procedures and the useful of technological audit tools while conducting an audit for the job

CHAPTER 4: FINDINGS AND DISCUSSION

Normally, audit firms sign audit contracts with banks for years consecutively Big client at EY can be listed: ViettinBank, Techcombank, VPBank, TP Bank, MB Bank,… Some indicators at these banks are described in the charts as follows:

Figure Total assets of commercial banks from 2017 to 2019

Currency: billion VND

Figure Total equity of commercial banks form 2017 to 2019

A Observation and descriptive method

Figure Three audit phases at EY Vietnam

Source: EY Global Website 4.1 Findings for the Scope and Strategy phase of the audit

In this phase, the lead audit senior must complete two important steps on Canvas platform: Pre-engagement and Risk assessment

Step 1: Pre-engagement

This is the first stage of Ernst & Young's audit process in Vietnam as well as globally In this stage, the technicians will learn about the requirements of the service, determine the scope of the audit and establish an audit team At the same time, the Company also considers whether to continue providing services to old customers or transfer to new customers After deciding to continue the audit, the auditors will learn about the business characteristics of the client, learn the environment about the complexity and determine the professionalism of the client's information system, assess internal control, discussion in the audit team the potential fraud and error, risks Thereby, the auditor will determine the materiality level for the planning materiality (PM) in the FSs, the materiality level at the items level (TE) and the summary of audit difference (SAD), and the auditors will identify the material items and relevant data base

Step 2: Risk assessment

Key personnel of audit (engagement partner, manager and senior) perform all necessary procedures for risk assessment for loans and advance to customers as well as interest receivables with other balances in client’s FS The auditors perform a combination of the following risk assessment procedures:

1 Review relevant information

2 Inquiries of management and those responsible for financial reporting, appropriate individuals within the internal audit function and Others in the entity who may have information that is likely to assist in identifying risks of material misstatement due to fraud or error

3 Perform analytical procedures on financial and non-financial information Observation and inspection

In addition to these risk assessment procedures, auditors:

• Determine whether the partner in charge of the audit has performed other engagements for the entity, including reviews of interim financial information, and if so, whether he or she considers that information obtained from those engagements is relevant in identifying risk factors • Document the sources of information

For review relevant information: auditors obtain an understanding of the entity and its environment by reviewing relevant information and using their understanding of management’s risk assessment process This helps obtain an understanding of the entity and its environment and identify risk factors

For inquiry: Engagement partner, manager and senior inquire client’s management and those charged with governance Such inquiries enhance auditors’ understanding of the entity’s operations that they obtain from analysis of the entity’s financial information Auditors use their knowledge of the entity and its environment, as well as information from other risk assessment procedures, to determine the nature of the inquiries

• Auditors may also inquire of others within the entity with different levels of authority to obtain additional information or a different perspective as they identify risk factors

• Auditors also make inquiries of appropriate individuals within the internal audit function whether or not they expect to use their work Appropriate individuals are those who, in auditor’s judgment, have the appropriate knowledge, experience and authority (e.g., Chief internal audit executive) First, nature of the entity and external environment

• The auditors also obtain an understanding of other external factors that may affect the nature of the entity and its environment, such as competitors, general economic conditions, interest rates, availability of financing, inflation or currency revaluation Due to the increasing globalization of business, external factors extend beyond the domestic environment Second, legal and regulatory framework

• To document the key elements of EY’s understanding of the legal and regulatory framework in which the client operates to help identify instances of non-compliance with laws and regulations that (1) have a direct effect on the reported amount and disclosures in the financial statements; (2) not have a direct effect on the reported amounts and disclosures in the financial statements, but non-compliance with laws and regulations may be fundamental to the operating aspects of client business or the ability to continue its business or to avoid material penalties

The interview questions for client will be enclosed in Appendix 03

• Specific observation: Client applies accounting policy of XYZ which has been approved by Minister of Finance on April 2015 Client ABC is able to record and follow accounting transactions by their policies If there is any different from normal accounting methods, it has to follow and record in accordance with Circular 02/2013/NHNN and Circular 09/2014/NHNN • No related information found for loans and advance to customers

Third, business operations and process

• To document elements of understanding about key business industries in which client ABC operates and state accounts that may contain risk of material misstatement for further audit consideration

• No related information found for loans and advance to customers Fourth, management and governance

identification and assessment of risks and to the design of further audit procedures

• No related information found for loans and advance to customers Fifth, selection and application of accounting policies

• To document EY’s understanding of the entity’s process for the selection and application of accounting policies, in particular those accounting policies for which judgment is used in their application and understand the reasons for changes to accounting policies Then evaluating whether the entity’s accounting policies are appropriate for its business and consistent with the applicable financial reporting framework and accounting policies used in the industry in which the entity operates to identify possible risk factors

• Significant accounting policies for Loans and advance to customers of commercial banks: in accordance with the Law on Credit Institutions effective from October 1998; Law on Amendment and Supplementation to a number of articles of the Law on Credit Institutions effective from October 2004; Decision No 127/2005/QD-NHNN dated February 2005; Circular No 02/2013/TT-NHNN dated 21/1/2013 effective from 1/6/2014; Circular No 09/2014/TT-NHNN dated 18/3/2014 effective from 20/3/2014

Sixth, objectives, strategies and business risk

• To obtain EY’s understanding of the entity’s objectives and strategies and those related business risks that may result in ROMM Consider whether inconsistencies between objectives and strategies or the lack of objectives that are responsive to known risks and opportunities, give rise to ROMM • Entities face business risks throughout the performance of their operations

consequences Some business risks only affect the way the entity operates, while others may also affect what is recorded in the FSs

• No related information found for loans and advance to customers

Seventh, measurement and review of the entity’s financial performance • To obtain an understanding of how management measures and reviews the

entity’s financial performance For listed entities, auditors also obtain an understanding of analysts’ expectations of the entity’s financial performance (understand their general nature) and whether this may affect management’s motives when determining accounting estimates and management’s decision as to whether to record misstatements brought to its attention

Eighth, related parties relationships and transactions

• To document nature of all related parties transactions and state accounts that may contain ROMMs

• Based on the nature of operating of client ABC Bank, loans as well as interest receivable appears in related parties transactions and will be assessed as significant with two transactions below:

• Withdrawal and repayment of borrowings • Interest payment for borrowings contracts Ninth, litigation, claims and assessments

• To document any identified litigation, claims or assessments by testing the completeness of them through reviewing minutes of meetings of those charged with governance, examining relevant documents in the entity's possession regarding such matters, including correspondence with the entity's external legal counsel, legal expense accounts and, as appropriate, related source documents such as invoices

• No related information found for loans and advance to customers Tenth, the role of IT in the entity

• No related information found for loans and advance to customers Eleventh, estimates

• To document how management makes the estimate and the data on which the estimate is based

• No related information found for loans and advance to customers

Working papers for all information have listed above, are fully uploaded and linked in relevant section on Canvas platform

For analytical procedures: The lead audit senior, who is in charge of engagement performs preliminary analytical procedures by creating and completing an excel file named Leadsheet All balances in BS and PL are analyzed the fluctuation in VND value and percentage

Loan analysis is to ensure that loans are made on appropriate terms to clients who can and when will pay them back Analysis will be conducted based on the most efficient approach to meet the needs are determined by the type and nature of the loan Some types of loans require more thorough analysis than others, which means auditor who is in charge of loans will conduct more workpaper to present the sufficient appropriate analysis For example, long-term loans for fixed assets require more analysis than short-term working capital loans For individual loans, loan analysis provides most of the guarantee for the institutions and therefore necessary analysis is more extensive

Loan analysis and BS indicates financial status of business, financial impact of loan as well as requires analysis of inventory movement and generates important ratios For Profit and Loss statement, it indicates profitability of the business and also financial impact of the loan which requires client to assess financial details of operations

The traditional factors for consideration in loan analysis are: character, capacity, capital, collaterals and conditions The first two are the key factors in micro-entrepreneur

Materiality (PM), Tolerable Error (TE), Summary of Audit Difference (SAD) Materiality is the magnitude of an omission or misstatement that, individually or in the aggregate, in light of the surrounding circumstances, could reasonably be expected to influence the economic decisions of the users of the financial statements Materiality (M) is determined based on the professional judgement and experience of auditor-in-charge The manager determines the level of material misstatement in evaluating the effect of identified misstatements on the audit and in forming audit opinion PM is determined based on materiality but it must smaller than materiality to ensure that if the wrongdoing is discovered, the entire misstatements in the financial misstatements does not exceed the materiality level as planned Auditors set TE to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds PM They also use TE as an estimate of undetected misstatements within the financial statements when auditors conclude on uncorrected misstatements In addition to determining PM and TE, auditors determine an amount below which identified misstatements are considered clearly trivial This is called the SAD nominal amount If materiality for specific accounts or disclosures is set at an amount lower than the SAD nominal amount, auditors use materiality related to those accounts or disclosures as the amount which identified misstatements are considered clearly trivial The determination of PM and TE is not a mathematical exercise but requires professional judgement involving audit executives, including the partner in charge of the audit

ABC Bank operates in finance and banking field with positive business performance In the past three years, this bank has regularly been profitable and increasing year over year Therefore, Ernst & Young determined the appropriate measurement basis for calculating Planning Materiality (PM) is profit before tax and other indicators will be calculated according to the following table:

auditors determine that Profit before tax for year ended 31 December 2019 is the appropriate basis for PM setting

In addition, the audit of the previous years conducted by EY also considered Profit before tax as the basis for PM => Therefore, auditors use 5% of the profit before tax as their starting point for determining PM

ABC Bank is a small and medium of commercial banks ABC Bank is used as an illustration in the thesis

Table Determine PM, TE, SAD at ABC Bank

EY uses audit objectives for BS’s items and PL’s items are consolidated in one acronym, in which:

• E = Existence (or Occurrence) • C = Completeness

• A = Accuracy • V = Valuation

• R&O = Rights & Obligations • P = Presentation and Disclosure

A300 Ernst & Young

Client: ABC Bank Preparer: AND

Year end: 31/12/2019 Reviewer: HTT Reviewer: HPD Currency : VND

Determine PM, TE, SAD

PM is calculated in the financial statement of ABC Bank at 31 December 2019 as follows :

PM TE SAD

PM = 5% Profit before tax PM = 533,050,467,584

TE = 50% PM

TE = 266,525,233,792

SAD = 5% PM

SAD = 26,652,523,379 Basis to determine PM: Profit before tax

PM = % Profit before tax

If the basis for calculating PM is not profit before tax, it is required to document the alternative basis and reasons

For loans and advance to customers, due to the large balance of loans and strict requirements for loans covenant, the compliance of debt covenant is in high risk level when auditing loans and interest receivable

Therefore, the audit senior has spent a significant part of the evaluation to document risk assessment of the compliance The section clearly indicates risk of and audit assertion for each accounts of loans and interest receivable Further documentation of factors considered in identifying the significant risk as well as relevant responses are also added to help reviewers and audit team members can easily understand and follow Moreover, summary of ROMMs due to error for assertions associated with the significant risk of error are stated after the risk assessment of debt covenant compliance as well and serves as a brief guidance for designing relevant audit program and performing audit procedures

Table Audit program for loans and advance to customers of commercial banks

AUDIT PROGRAM FOR LOANS AND ADVANCE TO CUSTOMERS Objectives

- All loans and interest receivable are accounted and calculated accurately (Assertion: completeness, accuracy)

- Loans and debts are accounted for in accordance with the actual investment activities (Assertion: existence, rights and obligations)

- Accounting principles used in accordance with standards applied in the audit framework (Assertion: valuation, presentation & disclosure)

1 Analytical procedures

1.1 Compare outstanding loans for each borrower of this year with the previous year

1.2 Compare the total balance of loans, loans and interest receivable this year with the previous year to see the movements

1.3 Recalculate interest receivable on the basis of regulated bank interest rates and monthly payments

2 Test of detail of balances

2.1 Prepare a summary of the loans according to the beginning balance, the arising amount and the ending balance (according to the loan contract, the purpose of the loans) Reconciliation of opening balances and year-end balances between FSs, ledgers and detailed books and previous year's audit reports (if any)

2.2 Affirm customer balance by:

- Reconcile a detailed list of borrowers with a detailed book, debt reconciliations (if any) - Prepare and send a confirmation letter to some borrowers with large balances

- Collect confirmation letters from borrowers in the previous year that currently have no balance, but according to the information collected, this loan cannot be fully paid

- Review the arising transactions to determine whether any transactions have been recorded or unreasonably classified

2.3 Collect loan contracts in effect during the audit period (if auditing next year only need to collect new contracts that take effect after the previous audit) and make a summary of the following information:

- Creditors

- Number of contract days, debt commitment - The approval of the loan contract, CIF number - Loan date, due date

- Interest rate (%) and fixed interest rate (if any) - Interest rate (%) and fixed interest rate (if any) - Loan amount (original currency, VND conversion) - Amount receivable in the following accounting year - Guarantees for loans

- Other related issues

2.4 Check on new loans and debts to ensure that new loans are accurately recorded; check the calculation and accounting of interest receivable by checking loan contracts and certifying letters or other related documents; consider the appropriateness of interest rates against current regulations; check the refund amount corresponding to the debt repayment plan;

Consider whether using a loan for the right purpose or not 2.5 Check other information related to loans:

- Reconciliation of loan interests recorded by the lender's interest calculation sheet (bank, credit fund, )

- Estimate interest receivable based on the information on the loan contract and compare with the interest receivable which has been recorded to ensure that interest receivable have been fully and properly recorded

- Check whether the distribution of interest in the period and allocate to the users is appropriate or not

- Check the capitalization of loan interests (if borrowing loans for capital construction investment)

2.6 Check the classification of long-term debt to current portion of long-term debt; recalculate the current portion of long-term debts by referring to loan contracts, debt repayment plans and payment situation during the year

2.7 For loans and debts in foreign currencies: Check the application of exchange rates, calculation methods and accounting of exchange rate differences, re-evaluate the balance at the end of the period according to regulations

2.8 Check the classification and presentation of loans on financial statements 3 Conclusions

3.1 Provide adjustment entries and issues mentioned in the management letter 3.2 Make audit conclusion for this sections

3.3 Prepare detailed explanations if there is an adjustment of the audit

Table Debt covenant compliance

Relevant factors considered in identifying the significant risk

The entity may have breached its debt covenants, this may give the right to the bank to demand immediate repayment of funds advanced to the entity The impact of this may be to:

- re-classify the presentation of the debt as all current

- make it more difficult for the entity to renegotiate covenants, re-finance or raise alternate sources of funds

- increase the risk that the going concern assertion may no longer be appropriate Judgements for identifying which components the risk relates to: As all components being power companies (both thermal and hydro) have on-going borrowings with restrictive covenants, they are subject to this risk

The risk has been identified as a financial statement level risk Document overall responses to address the risk For financial statement level fraud risks, identify the relevant fraud risk factors that give rise to this risk

Overall responses to address the risk:

- Making appropriate assignments of significant engagement responsibilities and providing appropriate supervision: communicated clearly with all components about the significant of loans and its impacts, and request all components carry our proper review on compliance with restrictive covenants for all borrowings contracts

- Incorporating elements of unpredictability in the nature, timing and extent of audit procedures: external confirmation is used for all loans to ascertain that there is not breach of covenant or contingent liability arise

- Evaluating whether the selection and application of accounting policies by the entity, particularly those related to subjective measurements and complex transactions, are indicative of a bias or fraudulent financial reporting: Selection and application of accounting policies are appropriate with relevant regulations

Events and conditions related to the entity's ability to continue as a going concern

In the event that actual restrictive covenants breach materialise, the Company might subject to have all of outstanding borrowings amount to be repaid upon demand i.e all borrowings are reclassified to be current As total borrowings amount is significant, the Company might not be able to satisfy such obligations upon incur

Approach to address the significant risk, including how the nature, timing, and extent of tests of controls, if applicable, and substantive procedures are specifically responsive to the significant risk

Procedures are performed at components with significant risks

Test of control: Test D&I of control Management review of debt covenant compliance

Substantive test: Review all loans contracts for compliance with restrictive covenants in debt agreements

Testing results over controls that are intended to address the significant risk Were there any misstatement identified that relate

to the significant risk?

Yes No Not select

Sign-off history

Status User Date

Reviewed HPD 10 March 2020

Reviewed HTT 10 March 2020

Prepared AND 10 March 2020

4.2 Findings regarding the execution phase of the audit

Ernst & Young complies with the Vietnam Standards on Auditing and Vietnam Accounting Standards as the basis for auditing When conducting an audit of loans and advance to customers, EY applies the following procedures: Test of control, Analytical procedure, Confirmation for loans and advance to customers, Test of details, Loan review and calculate Provision

Firstly, all audit evidences are recorded on Canvas – an online audit platform and will be kept as confidential information Therefore, when conducting an audit with clients who have audited from the previous years, auditors can know the strategies and goals of the clients’ business in this year, EY’s audit program will be updated and adjusted accordingly to fit with each business period of clients

Secondly, the process of implementing the audit is conducted carefully and sequentially The implementation of the audit plan is always carried out closely with the audit program set out in the scope and strategy phase Analytical procedures and test of details procedures are always combined and conducted carefully to create an appropriate way to check and review the validity of the analysis results and detailed test results

Thirdly, auditors focus on collecting evidence and record all findings It can be proved in checking details, checking documents, reconciling documents, especially bank statements are considered the most important evidence and checked carefully by auditors All of audit findings are fully and systematically documented, if any suspicious signs are detected, the differences are included in SAD and compared to planning materiality determined from scope and strategy phase to make appropriate adjustments

4.2.1 Test of controls

EY audit team involves ITRA (IT risk assessment audit) team for the testing of ITGC, application controls, completeness of Journal Entry (JE) and supporting in choosing unusual items from JE

Figure Test of controls process

Source: EY GAM As auditors evaluate the controls, auditors obtain an understanding of how they are designed, including:

- The specific design attributes or characteristics that indicate performance of the control

Figure ITRA audit process

Source: EY GAM Auditors also recognize that individual controls may not be sufficiently sensitive unless they are applied in combination with other controls If a relevant control operates in combination with other controls to address the risk for a relevant control objective or criterion, auditors also identify the other controls as relevant controls

Auditors can use the following list of questions to assist they in understanding the specific design attributes of a control and determining whether it is relevant to audit engagement:

Table 4 List of questions to understand control design

- What is the nature of the control (i.e., is it a prevent control or a detect and correct control)?

- Who performs the control?

• Is the control performed by an IT application, an individual, or both? Auditors expect to see a mix of various types of controls: application, IT dependent manual (ITDM) and manual controls

• Does the individual performing the control have any conflicting duties and has the potential for conflicting duties been addressed in the design of the control?

- When is the control performed?

• Does the control operate throughout the period of reliance or at a point in time for all transactions accumulated to that point?

• How frequently is the control performed?

• Is the control performed timely and are misstatements detected by the control corrected timely?

- How precise and sensitive is the control?

• Is the control applied at a level detailed enough to appropriately address the risk to prevent, or detect and correct, misstatements?

• Is the amount set by management as a limit to when the control applies or for when an exception is identified small enough?

• Is the control applied to a complete and reliable set of data? - How is the control affected by other components of internal control?

• Have auditors made observations with regard to the entity's control environment that affect the control?

• Do the entity's policies and procedures regarding authorization, the safeguarding of assets, asset accountability and segregation of duties support the design of the control?

• For application controls and ITDM controls, auditors expect that the IT processes support the continued operation of these controls?

Auditors confirm their understanding of:

- The accuracy of the information auditors have obtained about the controls - Whether the controls have been designed effectively to prevent, or detect and

correct, material misstatements relevant to user entities on a timely basis - Whether the controls have been implemented

- The preparation and maintenance of the underlying data used in the control, if any

Auditors confirm their understanding of relevant controls in conjunction with confirming their understanding of the processes used

Auditors design and perform tests of controls to obtain sufficient appropriate evidence about the operating effectiveness of relevant controls if the subject matter includes internal control

Test of control is either manual or automated, the nature of the tests of controls include:

- (1) Inquiry: Seeking information from knowledgeable people, throughout or outside the entity

- (2) Inspection: Examining records or documents

- (3) Observation: Watching processes or procedures being performed by entity personnel

- (4) Reperformance/recalculation: Independent execution, by the engagement team, of control procedures originally performed as part of the entity’s internal control Reperformance may include recalculation Reperformance may be manual or use computer-assisted audit techniques

- (5) Data analysis: Using automated tools to test controls Timing of Test of control

- Tests of controls may be performed either before, or at, the balance sheet date Auditors exercise professional judgment in deciding when to perform them (Normally in October or November, from 01 to 02 months, prior to balance sheet date to identify important matters at an early stage of the audit and resolve them, with the assistance of management, or to develop an effective audit response to address them)

Execute test of controls

• If auditors identify changes in the entity’s SCOTs and significant disclosure processes or relevant controls, they:

► Obtain an understanding of the changes and update the documentation to reflect the changes

► Confirm the understanding through a walkthrough and other procedures then determine the appropriate audit response

• The appropriate audit response may include: ► Modifying the tests of controls

► Testing different controls that are sufficiently sensitive individually, or in combination with other controls, to address the WCGWs

► Revising their testing strategy for SCOTs and significant disclosure processes (from a controls reliance to a substantive only strategy)\ Audit evidence:

- A prevent application control can provide reliable audit evidence Auditors may be able to obtain evidence that this control operates effectively, and as designed, by:

• Establishing a basis that the control operates consistently and reviewing the control’s configuration or applying test data to the control

• For detect and correct controls: Auditors obtain appropriate evidence to support the precision of detect and correct controls, including meetings that function as review controls Such evidence may include: ► Results of inquiries of the control owner and reviewer as well as

others

► Documentation (e.g., email correspondence), if available, indicating the follow-up required and the actions taken

► Evidence of timely resolution or correction of reconciliation items posted to the general ledger

► Inspecting any other documentation available supporting the precision of management's review (Example: meeting minutes, notes in the control owner's files, draft reports with edits)

Evaluate the results of tests of controls

The flowchart below summarizes auditors’ considerations when evaluating the results of tests of controls

Figure Considerations for test of controls

Table Report on entity level control at ABC Bank

Entity level control – ABC Bank

1 ABC Bank’s management focuses on the control/deficiency improvement and risk management activities seriously It is described through the risk management and control activities of the Bank

2 BOD set up some departments to supervise all aspects of banking operation to ensure that all risks are controlled:

- The Internal Audit Department report directly to Board of Directors and independent to BOM The Internal control department is set up to support the management to investigate and report on the deficiencies occurring at branches and to resolve the issues timely Monthly, internal auditors go to each branch to check whether branches follow correctly the regulations set up by BOD and other related policy These controllers are allocated to work directly at their assigned branches and are rotated regularly to maintain their independence with the branches They are in-charge of supervising many significant transactions at branches, whenever the transaction does not comply with the policies, the controller will require a proper correction

- Risk Management Department is responsible to take actions as the Middle offices to recheck, consolidate, analyze and report on credit risks, operation risks, liquidity risks and market risks to the management to BOD

- The Chief Accountant usually consults our audit team on significant matter relating to accounting and financial reporting issues The accounting department is also prudent in applying of accounting policies/estimates or other regulations

- The current system are T24 and Kondoor monitored by IT department The Bank also puts many application controls to minimize the deficiencies which can come from manual actions

Table Report on fraud and significant risk

Fraud and significant risk – Plan to address the risk related to loans and advance to customers

The management is aware of the adverse impact of fraud risk and the importance of identifying fraud risk Risk management is the most important concern to enhance the confidence of potential customers and the Bank’s business

- There is an independent internal audit department who reports directly to the Board of Director Internal audit department sets an audit plan for the year After each branch visit, audit team has generated an audit report which does highlight all findings including any fraud risks and/or errors, which will then be reported to Board of Director and the Bank’s management simultaneously

- Procedures to identify or detect fraud during the year: The Internal Audit Department reports directly to Board of Directors and stays independent to BOM Monthly, internal auditors go to each branch to check whether the branches follow correctly the regulations set up by BOD and other related policy These controllers are allocated to work directly at their assigned branches and are rotated regularly to maintain their independence with the branches They are in-charge of supervising many significant transactions at branches, whenever the transaction is not complied with the policies, the controller will require a proper correction - The management and internal control department does not identify any significant

problems in the year

However, we consider the following risks:

Significant risk: Loans may be wrongly classified and inadequately provided for allowance

Plan to address:

- We perform the TOC procedures to ensure that the controls are effective to address misstatement

- We use EY Microstart to select sample to test of detail to address risk We perform loan review procedures on these sample

- We inquire the BOM and Internal Audit on risk consideration

Source: EY Canvas 4.2.2 Analytical procedures

misstatement In this step, auditors can easily identify if the bank has new contracts with large balance or loses contract Then auditors explain the fluctuation with reasonable evidence

To document audit work, auditor prepare working papers include: objectives, workdone In each working paper has a sheet named guidance for preparer in performing all necessary audit procedures The person-in-charge of loans sections inquires directly with accountant in charge of loans in order to have full TB, GL, all relevant accounting documents or sub-ledgers and also a list of all loans balance by customer names (creditors) to perform procedures All loans balance are broken-down by each customer (long-term, medium term, short-term)

Figure Loans leadsheet

Client: ABC Bank WP: 234689

Period end: 31-Dec-19 Prepared by: AHT

Subject: Loans Leadsheet Date 1 – March – 2020

All amounts are expressed in VND unless stated otherwise

Objective: To enable us to state that nothing has come to our attention that Loans were significantly misstated

Description Unaudited 31 Dec

19 Adjustment Audited Jan 19 Variance

Amount Percentage

TB, GL CC

Short-term

loan - - -

NA

68,139,021,467,184 - 78,647,518,670,075 10,508,497,202,891 -13.36% Interest

receivable 4,656,371,137,395 - 4,457,543,116,987 198,828,020,408

4.46% TB Agree to trial balance at 31 Dec 2019

GL Agree to general balance at 31 Dec 2019

C/c Calculation checked

Workdone: All loans are correctly classified

4.2.3 Confirmation letter for loans and advance to customers

The auditor should exercise an appropriate level of professional skepticism throughout the confirmation process Professional skepticism is important in designing the confirmation request, performing the confirmation procedures, and evaluating the results of the confirmation procedures for loans and advance to customers section

factors have a direct effect on the reliability of the evidence obtained through confirmation procedures

At EY, for loans and advance to customers, auditors choose sample to send confirmation letter based on loans balance at 31 December 2019, using EY Microstart (EY audit tool) Because auditors conclude that control system is effective, threshold for choosing sample to send confirmation is 50% TE Other information to fill in this tool: Combine Risk Assessment: Minimal, Population value: balance at 31 December 2019, Cutoff is Threshold, Total Dollar Amount: all samples have value greater than 50% TE, Assurance from other Substantive Procedures: Little, Sample Selection Technique: Random, Number or Errors Planned for: Then it generates the number of sample size to send confirmation letters for loans to customers section

Figure EY Microstart

Source: EY GAM

For customers from which confirmation response could not be obtained, auditors perform alternative procedure: obtain full contracts, relevant documents to prove the loans exist

4.2.4 Test of details

- Key items: above threshold based on results of CRA, audit experience with the Bank and nature of each account

- Representatives items: Microstart is used to determine the number of rep items to be tested and EY random is used to identify rep items to be tested All procedures in test of details (TOD) are based on audit objectives related to loans and interest receivable As mentioned in scope and strategy stage, audit procedures for loans and interest receivable should cover the following audit objectives:

All audit procedures for loans should satisfy five audit objectives as mentioned in scope and strategy stage Detail objectives for workdone and documents needed are listed in the figure below:

Table Assertions for audit work and documents for loans and advance to customers

Audit assertions Objective for workdone Documents needed C = Completeness To ensure all loans that should be

recorded have been recorded

All loan contracts, TB, GL E = Existence

(Occurrence)

To ensure all loans recorded in accounting book exists

All loan contracts, TB, GL A = Accuracy All loans are recorded in correct

original amount and VND equivalent (if any)

TB, Confirmation letter

O = Obligations & rights

Loans presented in FS are truly obligation of the client

All loan contracts P = Presentation &

Disclosure

Loans are presented in correct category: short-term, medium and long-term loans

All loan contracts, TB, GL

Details of workdone are described as the following steps:

First, it is essential for the person-in-charge prepares a worksheet named Leadsheet Purpose of the workdone is to list all loans (short-term, medium and long-term loans) and calculate fluctuation in both VND value and percentage A brief analytical review to explain those changes is done in the worksheet

further audit procedures if required The purpose of this step is to utilize working papers of audit teams in each dependent unit and to make recommendations or adjustments arose by the audit team be able to traced to accurate dependent unit Those numbers and name of the units are came from manually checking all loan contracts by the audit assistant and examining list of loan balance by customers Third, the audit assistant completes movement of each contract based on TB, GL, all loan contracts in hard copy or soft copy and list of detail loans by customers The workdone helps person-in-charge can keep track of all necessary audit procedures that should be performed in this section Further audit procedures to examine the truth and fairness of those numbers will be performed in later steps

Each part of the movement will be audited by different audit techniques Additions check can be performed: examine loan contracts to ensure they are fully recorded in accounting book as well as inquiring borrowings accountants to ensure all loan-related policy are complied with; check GL to ensure the entries are completely recorded

- For revaluation, revaluation are checked by recalculating and comparing with client’s calculation The choice of the FX rate must comply with requirement of Circular 200/2014/TT-BTC issued on 22/12/2014 The difference between amounts (revaluation per client and per EY) should be lower than TE If any unusual items exist, the audit assistant should inquire client

- Original closing balance (CB) is checked by obtaining confirmation letters from borrowers VND equivalent CB is checked by revaluing at suitable FX rate All confirmation letters are received before issuing audited report hence, no alternative procedures are required An audit assistant takes control of confirmation control list

Table Assertions for audit work and documents for interest receivable

Audit Assertions Objective for audit work Documents needed C = Completeness All interest receivable that should be

recorded have already recorded

All loan contracts, GL

E = Existence (Occurrence)

All recorded interest receivable exist at the balance sheet date

All loan contracts, GL

A = Accuracy Interest receivable for the period is correctly calculated and recorded

All loan contracts, GL

P = Presentation & Disclosure

All interest receivables are fully presented in term of capitalization and non-capitalization as well as disclosed in note to FS interest type (fix or float) and interest rate

All loan contracts, GL

Details of workdone are as following steps:

First, the audit assistant lists all interest receivable based on client accounting book by extracting from GL in account no.3941 or no.3942 (SBV account) and categories them based on name of dependent units which use the loans

Second, an audit technique called recalculation is used under a test named Reasonableness test All interest receivable are calculated by the audit assistant and then compare with an amount determined by client The audit procedure is acceptable only if the difference between two figures is lower than TE By extracting all loan contracts and obtaining opening balance of all outstanding loans and checking simultaneously bank statement for repayment of loan principals, person-in-charge of the audit team lists the following information to an excel workbook and perform the recalculation Reasonableness test afterward: Start date, Outstanding balance, Currency, Repayment, Interest rate, Relending rate, Actual repayment date and FX rate

4.2.5 Loan review - Provision

Auditors at EY perform loan review in accordance with the following procedures:

For each loan chosen for review (loans with total outstanding balance of xx billion or more and loans with total outstanding balance of less than xx billion randomly selected as of 30 November 2019), the team must obtain the following documents:

- The latest financial report (the FS as at 30 November 2019) - applicable to corporate customers only;

- Loan classification report, Credit Appraisal Form for the customer; CIC information on customer;

- Credit approval from ABC Bank Credit Committee; Credit contract and appendices attached thereto;

- Approval of Disbursements and Indebtedness Acceptance having balance; - Mortgage/pledge/guarantee contract of all collaterals for outstanding loans of

the customer;

- Latest minutes of valuation/revaluation of collaterals;

- Registration of secured transactions and documents related to collaterals (property right certificate, vehicle registration, etc);

- Application/Approval of debt restructuring/extension of customers (if any); - Minutes of approval of interest reduction or changes of interest payment (or

principal) of each period (if any);

- Soft copy of A system-extracted spreadsheet calculating interest from loan contracts; and spreadsheet of loan repayment history of the loans from the time of disbursement

b Test of details

Check whether the Bank follows all procedures and complies with SBV’s law and regulations

- Loan contract: customer name, customer industry, original loan balance, interest rate, loan repayment schedule, collateral information, date of disbursement, etc

- Indebtedness Acceptance: agree the information on the Indebtedness Acceptance to its corresponding contract; test accounting voucher to ensure the existence of loan disbursement during the year

- Loan repayment history: recalculate the amount of principal/interest to be paid for each period; reconcile with actual payment made by the customer and identify any differences; test the actual payments during the year by:

o Checking the money transfer from customers' account to the Bank's account in the system (money cutting entry); or

o Deposit slip (in case of payments in cash)

- Note: Pay attention to loan balance in foreign currency The loans should be translated to VND using the foreign exchange rate as at 31 December 2019 under Circular 22/2017/TT-NHNN The team needs to recalculate and compares the VND amount to the amount shown in the Bank's loan portfolio c Loan classification

- Review credit appraisal documents, check customer's information and assess the reasonableness of the analysis made by the credit officer; in case of any unreasonable information/analysis, challenge the customer assessment made by the credit officer and document

- Reconcile actual repayment history of each loan covenant ("Sao ke giao dich tra no") with the payment schedule under loan contract for aging of every single loan balance

- Recalculate the amount of loan interest/principal for each repayment milestone to ensure they were fully repaid

- Review any loan reschedule agreements and agree new schedule with actual repayment

- Search internet/newspapers, etc for any information relating to the customer - Review the aging and reschedule status, assess the appropriateness of the Bank's classification of the customer (in the Loan Classification Report) by referring to the guidance of Circular 02 and Circular 09 or other relevant loan guidance/regulations

Table Loans classification

Group Name Quantitative approach Fixed

provisioning rate

Group Standard debts Current 0%

Group Debts Overdue less than 90 days 5%

Group Sub-standard debts Overdue from 90 to 180 days 20% Group Doubtful debts Overdue from 180 to 360 days 50% Group Potentially

irrecoverable debts

Overdue over 360 days 100%

d Collaterals examination

- Reconcile the list of collaterals to TB (off-balance sheet account)

- Reconcile collateral information amongst list of collaterals, loan contract, collateral contracts, registration of secure transaction, latest collateral valuation report and credit appraisal form for any inconsistencies

- Verify collateral valuation report (when it is conducted by independence valuer): review reasonableness of valuation method (consider involve TAS team for cases where audit team does not have experience/expertise); review competency of valuer; reconcile value in the Valuation Report to value used in the Bank's loan loss provision calculation

- Review the maximum accepted rate applied for each type of collaterals for purpose of calculating provision for loan impairment by referring to the guidance in Circular 02 and Circular 09

e Loan loss provision

- Recalculate the provision for loan loss as guided by Circular 02 and Circular 09 and compare with the Bank's calculation to identify any difference

Formula calculating for provision is enclosed in Appendix 05 f Interest accrual and Interest income recalculation

- Recalculate accrued interest receivable for the customer's loan balances; agree with the Bank's records

- Recalculate interest income for one random day during the year; test to accounting entries recorded by the Bank in the system

4.3 Findings related to the conclusion phase of the audit

After performing all necessary audit procedures, conclusions are made for both loans and interest receivables in relevant working papers: “The loans and advance to customers balances are truly and fairly stated.”

In order to enhance efficiency of the audit engagement, the audit assistant who is in charge of auditing loans and interest receivable prepares note to FS for this sections The workdone saves much time for the engagement audit senior in finalizing audited FS The format is based on format of relevant notes in FS

Generally, in conclusion stage, it is necessary for the engagement audit senior to complete:

1 Perform additional tests for presentation and disclosure Accumulate final evidences

3 Evaluate results Issue audit report

5 Communicate with audit committee and management

existence and rights and obligations objectives The test is done for loans and interest receivables by completing the note to FS and comparing it with note prepared by client as well as examine compliance by documenting all loan covenant

Also, in the step, audit procedures related to contingent liabilities and subsequent events are performed by completing the list of questionnaire in table 4.7 Subsequent event questionnaires afterwards

Table 10 Subsequent events questionnaires to 15 March 2020

Question for client Yes No Note

Does the Bank have new contractual agreements, commitments and/or contingent liabilities not already disclosed to auditors at balance sheet date, or existing at that date?

x

Does the Bank change to such agreements, commitments or liabilities which existed at balance sheet date?

x Does the Bank have significant increases or changes in

financing agreed to with borrowers?

x Does the Bank change in assets or other forms of collateral

in relation to the question above?

x Does the Bank reschedule of loan of refinancing schemes

being proposed or agreed?

x

The auditors gather the following evidence for the FS as a whole during the conclusion phase:

First, perform final analytical procedures

The audit work is also done in an excel worksheet named LS as prepared in prior section after adding late adjustments of client and adjustments raised by the audit team Fluctuation in both VND value and percentage are re-considered to ensure all unusual changes have been determined reasons and gathered sufficient appropriate audit evidences

Second, evaluate the going concern assumption

business gained through the audit are used to assess the likelihood of financial failure within the next year

When the auditor concludes that there is substantial doubt about the entity’s ability to continue as a going concern, an unmodified audit opinion audit report with an explanatory paragraph is required, regardless of the disclosure in the financial statements

The evaluation is prepared by the engagement manager and reviewed by the engagement partner

Third, obtain a client representation report

The letter is prepared, signed by top-level management of client and addressed to the audit team to document the most important oral representations made during the audit The purposes of the letter are:

- To impress upon management its responsibilities for the assertions in the FS - To remind management of potential misstatements or omissions in the FS

- To document the responses from management to inquire about various aspects of the audit

Fourth, ensure information in the annual report and in FS are matched The auditor who responsible for auditing loans and advance to customers after completing all the necessary procedures and documented sufficiently in the working paper need to upload the loans working papers to EY Canvas At last, senior comes to the final conclusion about loans section: Loans account is presented true and fair, in all material aspects The adjusting entries that client does not accept to adjust and the weakness in the internal control or accounting system (if any) will be presented in the management letter

B Questionnaire

were excepted As the researcher mentioned above, there were two parts in this survey

In the first part, there are 05 questions, 03 out of 05 questions investigated about the issues that auditors may face when performing auditing of loans and the last 02 questions were about the advantages and limitations of audit procedures

The question about the differences when performing loan review for individual loans and corporate loans received different view points First, It must be mentioned that procedures for review of loans to individual are basically same as those for loans to corporate It is different in terms of the time it takes to complete, also a lot more evidence to examine Differences might be documents obtained and aspects that the auditor has to focus on to identify misstatements (if any) and he uses of difference matrix risk assessment as well as clients expectation Second, individual loans tend to have fewer details (collateral, payment schedule, etc.) and simpler than corporate loans For individual client, documents to obtain: identification document, current salary and related income report, For corporate clients, it requires business registration certificate, performance report, An example of corporate loan, it normally includes short-term loan with purpose of serving for daily business operation of borrower which is controlled under a credit limit It is harder for the auditor to verify whether a loan is properly disbursed with initial purpose The auditor needs to focus on purpose of each disbursement by checking supporting documents (invoice, contracts, evaluation report for the entity operation, ) This is different from most of individual loans which is disbursed for purchasing of assets and pledging these assets as collateral

The next question was the issues that auditors may face when performing loans review It can be listed as: Loans are wrongly classified; Collaterals are not fully and regularly updated; Interest is wrongly calculated Loan is up to payment term but has not been paid Customers have paid in correct orders but bank statement shows the opposite Difference between credit score calculated by the bank and by auditors

regulations of the State Bank of Vietnam In this case, the auditor should request more information (updated collateral appraisal report) from customer to validate the valuation of the collateral as well as to ensure all the collateral are verified There should be a match between the value of assets for provision calculated by clients and auditors In case there is inaccurate information of collateral's value recorded on accounting books, procedure to perform: request the most up-to-date valuation report from client, and adjust for any differences (if any) If the customer has not renew the guarantee paper; the collaterals is incorrectly valued and the auditors need to perform analytical process – recalculation

In addition, the first part contained open ended questions in order to collect more opinions about the strengths and limitations of audit procedures

The advantage at audit firm must be mentioned: Audit program are clear, organized and easy to follow Audit tools are available, helpful in performing procedures so it can improve the quality of audit engagement The consistency is agreed between two systems Risks are somehow reduced and faults especially operational are detected and the effectiveness of the whole system is improved Loans review in the perspective of audit requires less time and effort and still be able to reasonably ensure the monetary accuracy of related accounts on the Financial Statements, whereas loans review from the point of view of Internal audit, for instance, would often involve the evaluation of internal control points, risk management policies, credit policies and regulatory compliance

In the second part of the survey investigated the satisfaction of auditors about audit procedures of loans The survey was designed for participants expressed their onions independently whether some of audit procedures such as analytical procedures are combined with other procedures (for example: test of details) to provide sufficient and appropriate audit evidence or not In general, among factors that create the satisfaction, the majority of responses were agree or strongly agree This can be considered as a positive sign that the audit procedures is quite comfortable and is one of the strength of EY Vietnam In addition, EY has technological tools to support auditors and it gets great satisfaction from auditors at EY Vietnam

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 5.1 Assessment the audit of loans and advance to customers conducted by EY Vietnam

5.1.1 Strength of an audit of loans and advance to customers at EY Vietnam 5.1.1.1 In scope and strategy phase

First, experienced audit senior prepares the audit plan well The audit plan includes certain preliminary checks, such as the updating of all pertinent information, a review of risk, and, if possible, coordination of the process Carry out a preliminary audit overview This process gives insight into the audit plan and the entire scope of the audit Discuss with relevant stakeholders matters such as the completion date, the process of the audit and even any matter relating to tax office guidelines It is important to know exactly what role each member within the audit team will play

Second, professional working style when communicating with clients is the key to success After signing audit contract, usually before starting the audit, EY will send a key person to discuss with client about the start date and give a list of documents that clients need to provide to facilitate audit process

Third, personnel are also allocated as well as strictly employed to meet the needs of the audit A modern auditing software named eAudit is used to make the audit be done faster, more convenient and highly effective It depends on the size of the bank, audit team for each engagement includes: an experienced manager who has audited the client in the previous year, is responsible for supervising the audit from the beginning until completing the audit; a senior in-charge for loans and advance to customers section, this person takes responsibility for auditing in all material aspects of loans

In short, the scope and strategy phase at EY is prepared carefully, creating a premise for the audit execution phase

5.1.1.2 In execution phase

First, all records and audit evidence are kept as confidential information Therefore, when conducting an audit with clients who have audited from the previous years, auditors can know the strategies and goals of the clients’ business in this year, EY’s audit program will be updated and adjusted accordingly to fit with each business period of clients

Secondly, the process of implementing the audit is conducted carefully and sequentially The implementation of the audit plan is always carried out closely with the audit program set out in the scope and strategy phase Analytical procedures and test of details procedures are always combined and conducted carefully to create an appropriate way to check and review the validity of the analysis results and detailed test results

Thirdly, auditors focus on collecting evidence and record all findings It can be proved in checking details, checking documents, reconciling documents, especially bank statements are considered and checked carefully by auditors All of audit findings are fully and systematically documented, if any suspicious signs are detected, the differences are included in SAD and compared to planning materiality determined from scope and strategy phase to make appropriate adjustments

5.1.1.3 In conclusion phase

The conclusion phase is carefully implemented by Ernst & Young Subsequent events arises after reporting date will be reviewed whether it has material impact on the audit report If it influences the report, auditors will immediately make appropriate adjustments The auditors review carefully working papers and audit evidence to consider if it is consistent with audit opinions The final work is to issue audit opinion, audit report and the Management Letter to the Board of Directors

5.1.2 Limitations of auditing loans and advance to customers at EY Vietnam 5.1.2.1 In scope and strategy phase

more suitable for countries with high developed economies, good legal framework, and a systematic and consistent accounting system When applying these audit techniques, there are still some incompatibilities due to the accounting system and the legal framework of Vietnam, which are still in the period of construction and completion, so there are still some shortcomings

Second, the audit program is not specific to each customer: The audit program

is built extensively, but not detailed to the specific job steps and applies to almost all customers without the flexibility and adjustment for each type of customer This makes the effectiveness of the audit is not high because each customer has its own characteristics

Third, the evaluation of internal control systems has limitation The assessment of internal control systems of customers based on two criteria: Effectiveness and in-effectiveness Therefore it does not reflect the full capacity of operation of this system For example, this system is designed to work continuously but only detects, prevents and corrects some common errors, but does not work with intentional fraud So if assessing effectiveness or ineffectiveness does not reflect the true nature Moreover, due to the access to the audit of financial statements in compliance with EY GAM - the global system of EY, the evaluation of the internal control systems of customers is limited, due to nature of clients, because auditors only rely on the questionnaires for assessing internal control system of customers This assessment does not customized to the specific characteristics of each customer, so the evaluation results will not cover the whole internal control system

Fourth, the allocation of materiality is not specific to each item: The allocation of materiality at EY during the scope and strategy stage is calculated on the basis of Profit before tax, revenue or total assets without allocating to any item The assessment of the violation level is entirely based on the SAD calculated from the PM IT applied to all items on the FS This does not reflect the true nature of the material importance of the items

First, test of controls has not been focused: The auditors in charge not pay much attention in this phase, especially for clients have audited in the prior year For new clients auditing in this year, auditors are required to perform control tests, scale, scope depending on the risks of this item, the nature of assets and judgments of auditor A standard procedure, they must first perform techniques such as interviewing the chief accountant, accounting for specific items and related employees, and examining documents to determine if the process is followed correctly or not Secondly, technicians must conduct a reconciliation between ledgers and documents to assess whether the control is good or not

Second, due to large balance of loans account, in order to cover all of samples for test of details, each audit team needs more interns or staff to fully document and examine client’s information

Third, in the peak season, audit seniors not have enough time for coaching to interns and staff It may take more time for interns and staff to understand about audit procedures and complete audit working papers to meet the requirements

5.1.2.3 In conclusion phase

First, there is no specific process for reviewing audit reports and management letters: Audit reports are prepared by audit assistant levels, and must be reviewed by higher levels: senior, manage, partner It takes time to complete the report

Second, analytical procedures in the end of the audit are not seriously applied because auditors focus on more important items This procedure in the conclusion phase is necessary for auditors to have an overview of the financial statements after the audit, as a final review of the data on the financial statements before making an audit opinion However, Ernst & Young has not yet focused on this procedure

5.2 Recommendations to improve the audit quality of loans and advance to customers of commercial banks at EY Vietnam

5.2.1 Enhancing the accuracy of analytical procedures

In order to help auditors obtain more evidence with higher accuracy, it can be considered to apply mathematicaliimethods to analytical procedures suchias regression analysis With the fast development of science and technology, this method can be complicated and requiresknowledge in statistics but the application of this method are widely implemented Audit teams are equipped with strong software systems that reduces workload and make it easier for the application of statistical regression models

Besides, the EY shouldidesign a program to control the reliability of information It can be listed as the following solutions: calculate score of factors and specify minimum marks that the information need to be achieved manually The example raises the following questions:

- What percentage is the origin of independent information?

- What percentage is the reliability in internal control systems? After that, evaluating the accuracy of information which has been obtained from the internal control system

- Is the information checked by other audit procedures?

- What are suitable levels of information with audit items and objectives? 5.2.2 Providing short-term training course to improve professional

competence

Auditors should invest further in financial ratios analysis For loans and advance to customers, some ratios as the following applied in planning phase can provide general and more detailed view on this account:

Debt to asset ratio: This ratio indicates how much of the company's asset has been sponsored by loans

If this ratio increases over the previous years, the auditor should pay attention to short-term and long-term items to detect overdue debts and debt solvency of companies This ratio may also increase due to long-term loans for new investments In general, auditors need to know the future plans of business

Overdue debt over total liabilities ratio: This method is used to estimate the debt status and the insolvency risks of businesses Preliminarily assess the financial status of enterprises and whether enterprises can still pay When confronting customers with overdue debts, auditors need to pay attention to the possibility of "going concern"

5.2.3 Improving the collection of audit evidence 5.2.3.1 Audit timing and teaming

Audit manager and senior have to plan before starting the audit Determining the timeline is necessary for appropriate planning and assigning staff to an audit team The timeline for an audit in the following describes tight deadlines that auditors must follow

With tight deadlines and tremendous audit work, the researcher would suggest members for an audit team include: one senior 3, two seniors 1, four staffs and five interns Senior is the leader who takes the responsibility for work allocation and control audit team Each senior has two staffs for supporting the job, which means there are two component teams Each team works under the allocation of lead senior Interns can be assigned to easy sections and have less risky areas to focus on Staffs have more experience as well as more understanding about audit procedures, so seniors can allocate complex sections that require experienced staff to satisfy the work quality Seniors complete more complicated sections, for example: Derivatives, Trading, Investments, Tax,… These tasks’ requirements are in-depth understanding about clients, complicated techniques and take time to fully document and complete audit work

5.3.3.2 Confirmation letters

According to VSA 500: Auditors must collect appropriate sufficient audit evidences for each type of their opinion Depending on materiality, confirmation letters will be chosen to send to borrowers The higher material and value the balance are, the more likelihood auditor will send confirmation letter to appropriate third parties before sending confirmation letter for closing balance of loans, it is essential to seriously consider materiality level for those balances In fact, all loan balances are verified by obtaining confirmation letters from borrowers whose due balance are large or unusual in accordance with auditor’s judgement The most reliable audit evidences in an audit engagement always are audit works done by auditor himself/herself based on information in confirmation letters

relationship to another To ensure reliability of audit evidences, it is necessary to keep strictly confidential all information of customers, who borrow from the bank, and require collaboration from third parties The strict requirement of time is to ensure all letters are backed to the auditors before audit report is issued

Obtaining confirmation letter strongly helps auditors affirm the existence of all loans in the BS It is one of the most important factors in forming recommendations of the audit team in management letter The more reliable and practice such advices are, the more effective operating activities of the client will be that increases not only effectiveness of the audit but also reputation of the audit firm

5.2.3.2 Test of details

Loans and advance to customers have large balance and different characteristics The huge number of loans, inconsistence in policy among regulators (State Bank of Vietnam and Ministry of Finance) make auditors more time to learn and apply Therefore, in order to conduct an effective audit, manager in charge should consider to assign more staffs or interns to support the test of details for loans, due to large amount of work

With better planning for the audit, seniors in charge may have more time for coaching on job for staffs and interns Coaching helps them understand clearly work requirements, internal systems of client, then perform audit procedures effectively to meet or even exceed expectations

5.3 Limitation

This research contains some limitations First, it is the audit assistant’s point of view so there are many things that might not be answered correctly and completely Second is the problem of representativeness of the sample size Huberman, A.Michael and Matthew B.Smiles., 1994 stated that sample sizes are typically smaller in qualitative research because, as the study goes on, acquiring more data does not necessarily lead to more information Because of time limitation, the researchers cannot obtain enough responses The result should be understood due to the small sample size In addition, audit procedures for loans and advance to customers section presented in the thesis are applied only in Ernst & Young Vietnam, the researcher cannot identify the differences between Ernst & Young and other auditing firms Besides, there is a possibility that some respondents might have biased answers to the questions in the surveys Finally, the researcher completes the thesis over one month, which may result in some misstatements

5.4 Conclusion

This thesis focuses on enhancing audit quality of loans and advance to customers of commercial banks at EY Vietnam In the research, audit procedures applied to loans section according to EY GAM The researcher also expects to collect key points about the strengths, limitations of loans and advance to customers of commercial banks at EY Vietnam, and makes suggestions to improve these limitations

The quality of a financial auditing depends on many factors, but the key factor to mention first is the process of combining the procedures and the performance of auditors in finding sufficient appropriate evidence

In the context of rapid development of market economy and the emergence of a series of businesses and large corporations, Vietnam audit industry has become fiercely competitive Companies should constantly improve the quality of auditing as well as ensure the optimal time and cost

and experience limitation, the omission is unavoidable Therefore, the researcher looks forward to receiving comments from lecturers at International School - Vietnam National University to improve the thesis quality

Sincerely thanks! Hanoi, 25th May 2020

REFERENCES

1 Anh, D V (2013) Bad debts in Vietnamese banks: quantitative analysis and recommendations p02-04

2 Comptroller’s Handbook (2001) Comptroller of the Currency & Administrator of National Banks p37-41

3 Dan A Simunic Journal of Accounting Research Vol 18, No (Spring, 1980), pp 161-190

4 Don Kieso, J W (2013) Intermediate Accounting

5 Francis, J and Yu, M (2009) Big Office Size and Audit Quality The Accounting Review, 84(5), pp.1521-1552

6 Heather, A P., Roger, S D & Douglas, B F (2017), Sharing Detailed Research Data Is Associated with Increased Citation Rate, p130-138

7 Hirst, Eric D., and Koonce, Lisa (Fall 1996) "Audit Analytical Procedures: A Field Investigation." Contemporary Accounting Research 13(2), 457–486 Huberman, A Michael and Matthew B Miles "Data Management and

Analysis Methods." In Handbook of Qualitative Research Norman K Denzin and Yvonna S Lincoln, eds (Thousand Oaks, CA: Sage, 1994), pp 428-444 James, R L (2003), IBM Computer Usability Satisfaction Questionnaires:

Psychometric Evaluation and Instructions for Use, p118-127

10 Joseph V Carcello, R H Hermanson and N T McGrath (1992) Audit Quality Attributes: The Perceptions of Partners, Preparers, and Financial Statement Users Auditing: A Journal of Practice & Theory

11 Kimberly D., Kohlbeck, M., and Mayhew, B (2011) Fixed assets management system and method Auditing: A Journal of Practice & Theory, 30(1), pp 49-73

12 Knupfer, N N., & McLellan, H (1996) Descriptive research methodologies Handbook of research for educational communications and technology, pp 1196-1212

14 Mcleod, S (2019) Qualitative vs Quantitative Research | Simply Psychology

[online] Simplypsychology.org Available at:

https://www.simplypsychology.org/qualitative-quantitative.html [Accessed 21 Apr 2019]

15 Ministry of Finance (2013) Circular 200/2013/TT-BTC Hanoi

16 Punch, K (1998), Introduction to Social Research: Quantitative and Qualitative Approaches, London

17 Robert, C B & Sari, K B (2015), Qualitative Research for Education, Vol p157-159

18 Robert, K Y & Karen, A H (2007), Using the Case Survey Method to Analyze Policy Studies, Vol 1, p24-30

19 Simunic, D (1980) The Pricing of Audit Services: Theory and Evidence Journal of Accounting Research, 18(1), pp.161-190

20 State Bank of Vietnam (2004) Decision 479/2004/QD-NHNN Hanoi

21 State Bank of Vietnam (2005) Decision No 127/2005/QD-NHNN dated February 2005 Hanoi

22 State Bank of Vietnam (2013) Circular No 02/2013/TT-NHNN dated 21/1/2013 effective from 1/6/2014 Hanoi

23 State Bank of Vietnam (2014) Circular No 09/2014/TT-NHNN dated 18/3/2014 effective from 20/3/2014 Hanoi

24 State Bank of Vietnam (2015) Article of Circular 09/2015/TT-BTC Hanoi 25 State Bank of Vietnam (2016) Decision 1627, Circular 39/2016/TT-NHNN

Hanoi

26 State Bank of Vietnam (2017) Circular 22/2017/TT-NHNN Hanoi 27 State Bank of Vietnam (2018) Circular 05/VBHN/NHNN/2018 Hanoi 28 The Ministry Finance of Vietnam Vietnamese Standard on Auditing - VSA

320 “Audit materiality” Hanoi

30 The Ministry Finance of Vietnam Vietnamese Standard on Auditing – VSA 500 “Audit evidence” Hanoi

31 Vietnam Association of Certified Public Accountants (2016) Decision 366 – 2016/QD – VACPA Hanoi

APPENDICES APPENDIX 01

According to No 05/VBHN-NHNN, Decision No 479/2004 / QD-NHNN dated April 29, 2004 of the Governor of the State Bank of Vietnam on the Issuance of the Credit Institutions Account Accounts System, effective from October 2004, the following are the accounts used at commercial banks

SỐ HIỆU TÀI

KHOẢN TÊN TÀI KHOẢN Cấp I Cấp II Cấp III

Loại 1: Vốn khả dụng khoản đầu tư

10 Tiền mặt, chứng từ có giá trị ngoại tệ, kim loại quý, đá quý 101 Tiền mặt đồng Việt Nam

1011 Tiền mặt đơn vị

1012 Tiền mặt đơn vị hạch toán báo sổ

1013 Tiền mặt không đủ tiêu chuẩn lưu thông chờ xử lý 1014 Tiền mặt máy ATM

Loại 2: Hoạt động tín dụng

21 Cho vay tổ chức kinh tế, cá nhân nước 211 Cho vay ngắn hạn đồng Việt Nam

2111 Nợ hạn 2112 Nợ hạn

212 Cho vay trung hạn đồng Việt Nam 2121 Nợ hạn

2122 Nợ hạn

213 Cho vay dài hạn đồng Việt Nam 2131 Nợ hạn

2132 Nợ hạn

214 Cho vay ngắn hạn ngoại tệ vàng 2141 Nợ hạn

2142 Nợ hạn

215 Cho vay trung hạn ngoại tệ vàng 2151 Nợ hạn

2152 Nợ hạn

216 Cho vay dài hạn ngoại tệ vàng 2161 Nợ hạn

22 Chiết khấu công cụ chuyển nhượng giấy tờ có giá tổ chức kinh tế, cá nhân nước 221 Chiết khấu cơng cụ chuyển nhượng giấy tờ có giá đồng Việt

Nam

2211 Nợ hạn 2212 Nợ hạn

222 Chiết khấu công cụ chuyển nhượng giấy tờ có giá ngoại tệ 2221 Nợ hạn

2222 Nợ hạn 229 Dự phòng rủi ro 2291 Dự phòng cụ thể 2292 Dự phòng chung 23 Cho thuê tài

231 Cho thuê tài đồng Việt Nam 2311 Nợ hạn

2312 Nợ hạn

232 Cho thuê tài ngoại tệ 2321 Nợ hạn

2322 Nợ hạn 239 Dự phòng rủi ro 2391 Dự phòng cụ thể 2392 Dự phòng chung 24 Trả thay bảo lãnh

241 Các khoản trả thay khách hàng đồng Việt Nam 242 Các khoản trả thay khách hàng ngoại tệ

249 Dự phòng rủi ro 2491 Dự phòng cụ thể 2492 Dự phòng chung

25 Cho vay vốn tài trợ, ủy thác đầu tư

251 Cho vay vốn đồng Việt Nam nhận trực tiếp Tổ chức Quốc tế

2511 Nợ hạn 2512 Nợ hạn

252 Cho vay vốn đồng Việt Nam nhận Chính phủ 2521 Nợ hạn

2522 Nợ hạn

253 Cho vay vốn đồng Việt Nam nhận tổ chức, cá nhân khác

2531 Nợ hạn 2532 Nợ hạn

254 Cho vay vốn ngoại tệ nhận trực tiếp Tổ chức Quốc tế 2541 Nợ hạn

2542 Nợ hạn

255 Cho vay vốn ngoại tệ nhận Chính phủ 2551 Nợ hạn

256 Cho vay vốn ngoại tệ nhận tổ chức, cá nhân khác 2561 Nợ hạn

2562 Nợ hạn 259 Dự phòng rủi ro 2591 Dự phòng cụ thể 2592 Dự phịng chung

26 Tín dụng tổ chức, cá nhân nước 261 Cho vay ngắn hạn đồng Việt Nam

2611 Nợ hạn 2612 Nợ hạn

262 Cho vay trung hạn đồng Việt Nam 2621 Nợ hạn

2622 Nợ hạn

263 Cho vay dài hạn đồng Việt Nam 2631 Nợ hạn

2632 Nợ hạn

264 Cho vay ngắn hạn ngoại tệ vàng 2641 Nợ hạn

2642 Nợ hạn

265 Cho vay trung hạn ngoại tệ vàng 2651 Nợ hạn

2652 Nợ hạn

266 Cho vay dài hạn ngoại tệ vàng 2661 Nợ hạn

2662 Nợ hạn

267 Tín dụng khác đồng Việt Nam 2671 Nợ hạn

2672 Nợ hạn

268 Tín dụng khác ngoại tệ vàng 2681 Nợ hạn

2682 Nợ hạn 269 Dự phòng rủi ro 2691 Dự phòng cụ thể 2692 Dự phòng chung

27 Tín dụng khác tổ chức kinh tế, cá nhân nước 271 Cho vay vốn đặc biệt

2711 Nợ hạn 2712 Nợ hạn

272 Cho vay tốn cơng nợ 2721 Nợ hạn

2722 Nợ hạn

273 Cho vay đầu tư xây dựng theo kế hoạch Nhà nước 2731 Nợ hạn

2751 Nợ hạn 2752 Nợ hạn 279 Dự phòng rủi ro 2791 Dự phòng cụ thể 2792 Dự phòng chung

28 Các khoản nợ chờ xử lý

281 Các khoản nợ chờ xử lý có tài sản xiết nợ, gán nợ

2811 Các khoản nợ chờ xử lý có tài sản xiết nợ, gán nợ từ 30/6/1998 trước

2812 Các khoản nợ chờ xử lý khác có tài sản xiết nợ, gán nợ

282 Các khoản nợ có tài sản chấp liên quan đến vụ án chờ xét xử

283 Nợ tồn đọng có tài sản bảo đảm

284 Nợ tồn đọng tài sản bảo đảm khơng cịn đối tượng để thu nợ

285 Nợ tồn đọng khơng có tài sản bảo đảm nợ cịn tồn tại, hoạt động

289 Dự phòng rủi ro nợ chờ xử lý 2891 Dự phòng cụ thể

2892 Dự phòng chung

29 Nợ cho vay khoanh 291 Cho vay ngắn hạn

292 Cho vay trung hạn 293 Cho vay dài hạn

299 Dự phòng rủi ro nợ khoanh 2991 Dự phòng cụ thể

2992 Dự phòng chung Loại 3: Tài sản cố định tài sản Có khác

39

394 Lãi phải thu từ hoạt động tín dụng

3941 Lãi phải thu từ cho vay đồng Việt Nam 3942 Lãi phải thu từ cho vay ngoại tệ vàng Loại 4: Các khoản phải trả

42 Tiền gửi khách hàng

421 Tiền gửi khách hàng nước đồng Việt Nam 4211 Tiền gửi không kỳ hạn

4212 Tiền gửi có kỳ hạn

4214 Tiền gửi vốn chuyên dùng Loại 7: Thu nhập

70 Thu nhập từ hoạt động tín dụng 701 Thu lãi tiền gửi

702 Thu lãi cho vay

Loại 9: Các tài khoản ngồi bảng cân đối kế tốn

943 Lãi cho thuê tài chưa thu 944 Lãi chứng khốn chưa thu 945 Lãi tiền gửi chưa thu 949 Phí phải thu chưa thu

APPENDIX 02

This questionnaire gives you an opportunity to express your satisfaction with the audit procedures, in particular, analytical procedures in auditing loans and advance to customers The results will be summarized and used for research purpose Please read each statement and indicate how strongly you agree or disagree with the statement by circling a number on the scale

Part I:

1 What are the differences when performing loan review for individual loans and corporate loans? Please specify at least one specific example

2 Please list out issues that auditors may face when performing loans review Please provide potential issues when performing collateral review and audit procedures to solve

4 What are the advantages of the audit procedures in auditing loans and advance to customer account in financial statements performed by audit firm?

5 What are the limitations of the audit procedures in auditing loans and advance to customer account in financial statements performed by audit firm?

Part II:

1 Audit firms always conduct audit procedures in detailed, careful and specific manner to detect material misstatements:

2 Analytical review procedures are applied effectively in three phase of an audit (Planning, Implementing and Conclusion phases):

Strongly Disagree Strongly Agree

3 The auditors combine analytical review procedure with other procedure such as test of details to provide sufficient and appropriate audit evidence:

EY Vietnam provides technological tools and software to support audit procedure and they are effective:

APPENDIX 03: Questions for Internal Audit Department I The entity level control environment of the Bank

1 Do you have a system for monitoring "Conflicts of interests" cases? If yes, what procedures you apply when detecting cases of "conflict of interest"?

2 Do you set up a Hotline system to identify and discuss cases of violations of professional standards and signs of fraud? If yes, please provide information about this system?

3 For accounting, auditing and internal control issues discovered through the process of Internal Audit, Independent Audit, inspection from competent state agencies, and during operation of the staff, how does the Bank handle it? What specific departments are responsible for solving these problems, and are the results widely reported throughout the Bank?

4 We realize that the Bank is experiencing a period of rapid development, according to your assessment, the control system has developed to keep pace with the development of new operations and products or not? Do you review and establish new control points for each new product? In the assessment of the Bank's Board of Management, what are the

main risks that your financial statements may have? Then what methods does the bank apply to limit these risks?

II Fraud considerations

1 According to the assessment of the Bank's Board of Management, what factors could the fraud risk in the operation of the Bank come from? And is this risk a permanent risk of the Bank?

3 What is the role of the Internal Audit in monitoring and detecting fraud risks? Do internal auditors have specific departments to control fraud risks? Annual activities of Internal Audit to control fraud risk

4 In the first months of 2019, did you find any outstanding fraud cases? If yes, please provide information

5 According to the Bank's Board of Management, is there any geographical area or business area with higher fraud risk than others? Do you use other advisory services? In the reports, did these services

detect fraud or non-compliance cases?

7 In ABC Bank, what is the method that Executive Board's supervision of fraud risks apply (based on the report results from which departments)? Specifically, if there are cases of fraud detection or suspicion of fraud in the Bank, will the Board of Management receive reports on all these cases? If yes, please specify which channel?

8 What is the role of Internal Audit in monitoring and detecting fraud risks? Do internal auditors have specific departments to control fraud risks? What are the annual activities of Internal Audit to control fraud risk?

III Going Concern

1 Do you periodically evaluate the Bank's ability to continue as a going

concern? If yes, what is the process for evaluating the Bank's ability to continue as a going concern? And provide the results of that evaluation process

2 What factors are considered when you evaluate the ability to operate

continuously? How long does the Bank consider the ability to continue as a going concern?

IV Laws and regulations

1 Which specific agencies of the Bank you update and disseminate the

provisions? What is the process for updating of the business units (Through the Legal Department or independent monitoring and updating)?

2 For the law and regulations, you regularly update the information

technology system to automatically monitor the indicators and ensure the compliance of the State Bank Vietnam? According to your evaluation, is there any other regulation that can perform automatic monitoring, but the information technology system has not met it?

3 For law related to the presentation and disclosure of financial

statements, you have any internal department to oversee and be responsible for the compliance of the reports? If yes, please provide information

4 What measures are you taking to ensure: staff at ABC Bank are aware

of the laws relating to their activities and supervise compliance with relevant laws in each professional activity?

5 In the recent time, has the Bank's Board of Management found any

non-compliance or perceived a higher risk of non-non-compliance in a particular geographic area or service area? If yes, please provide information V Litigation

1 Please provide the Bank’s list of outsourced legal consulting services that your bank has used the service in the first months of 2019 In the first months of 2019, will you change your outsourcing legal

APPENDIX 04:

This is the process when conducting the loans to customers:

Step 1: Customer’s loan application

- Customer applies for a loan => fill out a form => sign and write full name… - Staff at bank receives the application form

Step 2: Customer Appraisal

- A department will assess whether customer is qualified for all conditions, criteria of collaterals for loan application

Step 3: Approval (Credit Approval Division)

- Authorities will approve loan with the limitation for each level

- For example: Director is only approved from one billion or less The higher limitation requires higher authorities

- A contract will be signed between customer and bank representative, which includes contract, credit agreement, etc…

Step 5: Disbursement

Step 6: Credit document storage

- The bank manages all loan records under appropriate department and supervisor

Step 7: Control after disbursement

- The bank follows whether customer uses loan as the loan purpose stated In the signed contract

Step 8: Accrued interest receivable

- The system automatically calculates interest

- Control points: a person inputs information to the system, a supervisor check and approve information and formula for calculating interest receivable

Describe the critical path for the significant class of transactions/significant disclosure process

1 Limits for customers

Limits for lending from Banks are initially examined by MM and submitted to CAD (Credit Approval Division) CAD will assess, propose opinion and approval for limit of dealers and counterparty bank Limit of dealers and counterparty banks will be input in T24 system

2 Pre-transaction information gathering

At the beginning of the day, dealers gathers market information including: - Outstanding limit of borrowing from customers;

- Reference interest margin (maximum-minimum interest rate); - Demand to borrow of customer;

- Demand to lend from ABC Bank and market and other information;

- Capital Balance, cashflow reports and/or approved business plans of ABC Bank from Financial Planning Dept

Notes: In cases of when the transaction exceed the limits however deemed feasible, Dealer can still input transaction into TMTM system for approval

3 Approval processes:

Treasury dealers negotiate with customers through or telephone of borrowing amount, interest rate and term of borrowing

After reach agreement with customer, dealer will input ticket in TMTM system, sign it and submit to Manager for online comments and approval

- Amounts, interest rates, - Term of borrowing

- The demand for borrowing of customer - Collaterals (if any)

After the Market Risk Division have approved on TMTM ticket, move to Trea-ops where Trea-ops officer will confirm information of transaction with customer via Fax, stamp confirmation checked and approve on TMTM ticket Trea-Ops (Back office) have to prepare contract

4 Payment order/Credit advice:

Treasury will add/deduct from account at State Bank of Vietnam and prepare Payment order/Credit advice submit to supervisor for approval

5 Day-end reconciliation

- At the end of the day (At the beginning of the following day), Treasury Ops printed out blotter report from system and reconcile with supporting documents Reports will be signed off from CM (front office), CAD (Risk Management) and Treasury Ops

- After negotiation with customers through Reuter, staff in-charge will input information in online deal ticket and transfer to manager and Treasury Ops (back office) to approve online

- System automatically computes for the accrued interest income At the end of the day, upon batch running the system automatically calculates and records interest income for ALL loans

- System automatically calculates accrued interest expense T24 is automatically calculated accrued interest expense when teller updates transaction into T24

- System automatically record the deposit transactions

- Contract confirmation: Back office confirming the deal/contract with customer and customer signs the contract

Appendix 05: According to Circular 02/2013/NHNN ITEM SETTING UP OF PROVISIONS

Article 12 Specific levels of setting up provisions

Amount of specific provision required to set up for each customer shall be calculated under the following formula:

Of which:

- R: total amount of specific provisions required to set up of each customer;

- : Being total amount of specific provisions required to set up of each customer from debt balance first to n

Ri: Being amount of specific provision required to set up for each customer respect to original balance of debt i shall be calculated under the following formula:

Ri = (Ai - Ci) x r Of which:

Ai: The original balance i;

Ci: the deducted value of security assets, financial leasing assets (hereinafter referred to as security assets) of debt i;

r: rate of specific provisions required to set up under group as prescribed in clause this Article

If Ci > Ai, Ri shall be calculated equal to

2 Ratio of specific provisions required to set up for each debt group as follows: a) Group 1: 0%;