Factors affecting the assessment of internal control in the audit of financial statement at small companies in viet nam

VIETNAM NATIONAL UNIVIVERSITY, HA NOI INTERNATIONAL SCHOOL GRADUATION PROJECT FACTORS AFFECTING THE ASSESSMENT OF INTERNAL CONTROL IN THE AUDIT OF FINANCIAL STATEMENT AT SMALL COMPANIES IN VIET NAM SUPERVISOR: MA, Doctor of Business Administration, Ngo Tri Trung STUDENT: Bui Dinh Son STUDENT ID: 15071521 COHORT: Bui Dinh Son MAJOR: Accounting, Auditing and Analyzing Hanoi -2019 LETTER OF DECLARATION I hereby declare that the Graduation Project entitled “Factors affecting the assessment of internal control in the audit of financial statements at small companies in 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, have seriously taken research ethics; all findings of this project 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, 19th December, 2019 Student Bui Dinh Son ABSTRACT Currently, the annual audit of financial statements becomes more and more common for businesses But the identification of factors affecting the audit process has not been widely exploited, especially at small companies Therefore, in this study, I have sought to identify the factors affecting the assessment of internal control in auditing financial statements at small companies, in order to contribute a different perspective to the audit work In this thesis, I apply the qualitative research method and use questionnaire related to internal control evaluation in the auditing of financial statements to explore and describe the outstanding influence factors Besides, the random sample selection among auditors helps to make the answers more objective and diverse With the survey results obtained from the auditor's responses, the assessment of internal control in small companies is influenced by many factors, mainly in internal factors and the process conduct audits The identified influencing factors will contribute to some practical experience in the audit work as well as novice auditors Thereby, understanding these factors will limit the inadequacies and increase the quality of the audit of financial statements when auditing small companies Finally, this topic has contributed a part of the view to research topics related to internal control audits and has become a material that can be useful to other researchers Keywords: Internal control assessment, small companies, internal factors, the process conduct audits ACKNOWLEDGEMENT The essential of the topic According to Vietnam General Statistics Office 2017, our country has more than 518 thousand operating enterprises, of which small and medium enterprises account for about 98.1% In which, small businesses are 114.1, accounts for 22% [1] This shows that the small and medium enterprises plays important role and is an indispensable part of the national economy, contributing to the successful implementation of the country's industrialization and modernization process This growth in numbers of small companies has led to increased demand for an effective risk management as well as sophisticated corporate governance Every business organization is subject to some kind of risks depending upon several factors such as the products and services it sell, the market in which it functions, the sources through which it is financed, and the way it utilizes its resources Hence, it is important to coordinate every aspect of a business organization in an effective way, especially the internal control system in the business In other words, a good corporate internal control has now become an integral segment of risk management framework about operation and misstatements Similar to audits, internal control is a key determinant of the audited financial statements of companies Currently, in the process of auditing financial statements, the evaluation of the internal control system still faces many difficulties and is affected by many factors inside and outside the enterpriseIn particular, understanding Internal Control and Assessing Control Risk is a decisive factor for planning the audit and building effective audit approaches In addition, the assessment of internal control is also affected by other factors both inside and outside the enterprise Besides, internal control is becoming more and more complex when relying on the information system and the personnel operating it or the industry specific characteristics of companies also hinder the assessment of control internal These issues are even more evident in small businesses, where the internal control system has many design and implementation issues Being aware of the importance and urgency of this issue, I chose the topic "Studying the factors affecting the assessment of internal control in auditing financial statements at small companies" for my thesis Object and scope of the study - Object: Factors arising and affecting the assessment of the internal control system in auditing financial statement (non- financial institutions) - Scope: The entire audit process and procedures relate to the internal control assessment for auditing of financial statements at small companies Research purposes and objectives of the study - Research purpose: Explore, analyze and evaluate the factors affecting the assessment of internal control in the audit of financial statements at small companies The research focuses on the following issues: + Learn and assess the status of internal control system in auditing financial statements at small companies + Proposing solutions to avoid or overcome the factors that adversely affect the process of assessment the internal control system in financial statement audits - Objectives: + Find out the factors that influence the assessment of internal controls in auditing financial statement at small companies (non-financial institutions) + Determine the impact of the above effects on the process of auditing financial statements Research methods The thesis uses qualitative research methods, includes surveys, in-depth interviews with auditors, collecting data, and analysis of the factors affecting the evaluation of the internal control system in the audit of financial statements The structure of the topic In addition to the abstract, preface, abbreviations, list of table, references and appendices in the thesis include the following chapters: Chapter1: Introduction Chapter2: Literature review Chapter3: Data and method Chapter4: Findings Chapter5: Solution TABLE OF CONTENT LETTER OF DECLARATION ABSTRACT ACKNOWLEDGEMENT TABLE OF CONTENT TABLE OF NOTATIONS AND ABBREVIATIONS LIST OF TABLE LIST OF CHARTS AND FIGURE 10 CHAPTER 1: INTRODUCTION 11 OVERVIEW OF RESEARCH TOPIC 11 Studies on internal control systems in Vietnam 11 1.1 The audit curriculum in Economics University 11 1.2 Related scientific topics and the relevant thesis 11 CHAPTER 2: LITERATURE REVIEW 13 GENERAL THEORY OF INTERNAL CONTROL 13 2.1 Concept of internal control 13 2.1.1 Definition of internal control 13 2.1.2 Nature of the internal control system 13 2.3 Internal control system according to COSO 2013 14 2.2 Internal control in the small organizations 17 2.2.1 Concept of a small company 17 2.2.2 The inherent limitations of the internal control system are most evident in small and medium-sized companies 19 2.3 Concept of auditing financial statements 22 2.3.1 Auditing financial statements 22 2.3.2 The internal control assessment in the audit of financial statements 24 2.3.3 The process of assessment internal controls in the audit of financial statements according to Vietnam standard on auditing 27 CHAPTER 3: DATA & METHOD 36 3.1 Research method 36 CHAPTER 4: FINDINGS 40 4.1 The influencing factors come from the characteristics of small companies 40 4.2 According to COSO framework 45 4.3 The audit process 46 4.3.1 The process of acquiring an understanding of the auditor's internal control system at a small-scale firm 47 4.3.2 The process of assessing control risks and designing control trials 49 4.3.3 The process of performing control testing 51 4.3.4 Reassess control risks and design substantive test 54 CHAPTER 5: SOLUTIONS 55 5.1 Solutions for internal control assessment in auditing financial statements 55 5.2 Solutions for thesis 55 REFFERENCE 57 APPENDIX 59 TABLE OF NOTATIONS AND ABBREVIATIONS Abbreviation Meaning COSO The 'Committee of Sponsoring Organizations of the Treadway Commission' IC Internal control FS Financial statement VAS Vietnam accounting standards VSA Vietnamese Standard on Auditing ISA International Standard on Auditing LIST OF TABLE Table 4.1: Internal and External factors………………………………………………… 37 Table 4.2: Influence level of industry factors………………………………………… .38 Table 4.3: The impact level of misstatement in the previous year……………………… 38 Table 4.4: The importance of evaluating internal control at small companies compared to large companies ………………………………………………………………………… 39 Table 4.5: The existence of internal control and COSO (unit: 10%)…………………… 40 Table 4.6: The level of dependence of internal control on the information system……….40 Table 4.7: Influence level of changes and updates of information systems on the assessment of internal control ………………………………………………………… 41 Table 4.8: The frequency of updates or changes information systems related to internal control systems………………………………………………………………………… 41 Table: 4.9: Influence factors from COSO ……………………………………………… 43 Table 4.10: Frequency of applying the methods when understanding the internal control system of the auditor at small companies ……………………………………………… 45 Table 4.11: The subjectivity and judgment of the auditor in assessing the control risks of frauds and errors based on the design of the internal control system…………………… 47 Table 4.12: Number of material misstatements of the items relevant to the critical business cycle…………………………………………………………………………………… .47 Table 4.13: The level of control risk is often found in small companies ………………….48 Table 4.14: Level of effectiveness on the design side (detecting and preventing correcting discovered errors)………………………………………………………………………… 49 Table 4.15: Level of effectiveness in terms of implementation (effective in the period)….49 Table 4.16: The effectiveness of methods in control testing at small companies……… 50 Table 4.17: Frequency of using “walk through test”………………………………………50 LIST OF CHARTS AND FIGURE Diagram 2.1: Process of auditing financial statements……………………………………23 Diagram 2.2: Process of assessment internal control system…………………………….26 Figure 4.1: The importance of evaluating internal control at small companies compared to large companies……………………………………………………………………………39 Figure 4.2: The frequency of updates or changes information systems related to internal control systems…………………………………………………………………………….42 Figure4.3: Set of question 1……………………………………………………………….44 Figure 4.4: Set of question …………………………………………………………… 46 10 APPENDIX SAMPLE SURVEY FORMULES ON FACTORS AFFECTING THE ASSESSMENT OF INTERNAL CONTROL IN AUDIT OF FINANCIAL STATEMENTS AT SMALL COMPANIES Part 1: General information Survey area: Auditing companies based in Hanoi Subjects participating in the survey: Auditors Survey date: from November to November 25 Send survey via: Email Number of questionnaires issued: 50 Number of questionnaires collected: 42 Part 2: Content of survey questions A Factors affecting comes from specific characteristics of small companies (5-point scale) How well you rank the influence of EXTERNAL FACTORS on the evaluation of the internal control system in the audit of financial statements? How well you rank the influence of INTERNAL COMPANY's FACTORS on the evaluation of the internal control system in the audit of financial statements? 59 At what point are the industry-specific factors ranked by the auditor on a 5-point scale when considered to evaluate internal audit in auditing financial statements of companies? According to the auditor, are there any significant impacts from frauds or misstatements of the previous year to the assessment of internal control in the financial statements audit this year? 5 Is assessment of internal control system in the auditing of financial statements at small companies as important as the large ones? In your opinion, what is the percentage of companies having internal control systems out of the total number of small companies in Vietnam today? What is the percentage of internal control systems in small companies applying COSO? 60 The adequacy and reasonableness of the process of evaluating internal control systems in the auditing of financial statements at small companies How dependent is the internal control system on the information system of small companies? 10 How much is the impact of such updates or changes on the assessment of internal control at these companies? B According to COSO framework 11 Accuracy in the division of powers and responsibilities among the members of the unit, organizational structure in small companies 12 The adequacy of control procedures in the operations of the business when done directly by the company's staff 61 13 Quality of accounting knowledge of accountants and managers at small companies 14 What is the common accounting system used at small companies? 15 Validity, legitimacy and honesty in making vouchers of all arising 16 The correctness and completeness of the implementation of the principles of division of duties, part-time assignment, authorization and approval principles in small company transactions C In the process of assessment the internal control system (impact-level scale) I The process of acquiring an understanding of the auditor's internal control system at a small-scale firm 17 The level of difficulty when the auditor collects evidence Very high High Medium 62 Low Very low 18 Direct accessibility to assets and accounting documents of auditors Very high High Medium Low Very low 19 The difficulty of choosing the approach of internal control system in each accounting practice at a small company Very high High Medium Low Very low 20 The difficulty of choosing the approach of internal control system in each accounting practice at a small company Very high High Medium Low Very low 21 Application of business cycle approach in small company Very high High Medium Low Very low * The effectiveness of methods to present the knowledge of technicians on internal control systems in small companies: 22 Describe narration Very high High Medium Low Very low Very high High Medium Low Very low 23 Flowchart 63 24 Question list Very high High Medium Low Very low * Frequency of applying the methods when understanding the internal control system at the auditor's small-scale firm 25 Based on previous experience of the auditor with the customer Very high High Medium Low Very low Low Very low Low Very low Low Very low 26 Interview employees of the client company Very high High Medium 27 Review the company's manuals and procedures Very high High Medium 28 Check the completed documents and books Very high High Medium 29 Observe the operational and operational aspects of the client company Very high High Medium 64 Low Very low 30 Questionnaire about the Internal Control System Very high High Medium Low Very low 31 Does the auditor encounter difficulties in analyzing and evaluating the effectiveness of the internal audit system? Very high High Medium Low Very low 32 Differences between the current business process and the ideal business process Very high High Medium Low Very low 33 Advantages of internal control systems in small companies Very high High Medium Low Very low 34 The disadvantages of internal control systems in small companies Very high High Medium Low Very low Low Very low 35 Potential risks have not been discovered Very high High Medium 65 II The process of assessing control risks and designing control trials 36 The impact of strengths and weaknesses of the internal control system to the control risk assessment Very high High Medium Low Very low Low Very low 37 Is it important to document control risk assessment? Very high High Medium 38 The adequacy of the documentation provided to the auditor to evaluate the adequacy and effectiveness of the accounting and internal control system at a small company Very high High Medium Low Very low Low Very low 39 The existence and correctness of audit procedures Very high High Medium 40 The effectiveness of control procedures is implemented in practice and in achieving control targets Very high High Medium Low Very low 41 Consistency in the application of procedures and control performers throughout the year Very high High Medium 66 Low Very low 42 Is it difficult to apply the objectives of the internal control system to a small company to assess the control risks for each business item? Very high High Medium Low Very low 43 The effectiveness of the analysis of specific control processes is expected to affect the satisfaction of audit objectives Very high High Medium Low Very low 44 The possibility of errors and frauds in financial statements of small companies Very high High Medium Low Very low 45 The effectiveness of the Internal Control System in detecting and preventing the frauds Very high High Medium Low Very low 46 The subjectivity and judgment of the auditor in assessing the control risks of frauds and errors based on the design of the internal control system Very high High Medium Low Very low 47 The existence of shortcomings in internal control systems at small companies (the ineffective operation of internal control systems will increase the probability of material misstatements in the financial statements of customers) Very high High Medium 67 Low Very low 48 The existence of deficiencies in the internal control system of small companies (ineffective operation of the internal control system will increase the likelihood of material misstatements in the client's financial statements) Very high High Medium Low Very low Medium Low Very low 49 Control risk at the item level Very high High 50 Number of material misstatements of the items relevant to the critical business cycle Very high High Medium Low Very low 51 The level of compliance and appropriateness of procedures designed to achieve control objectives Very high High Medium Low Very low *The effectiveness of risk assessment methods in small companies 52 Qualitative evaluation method (high, medium, low) Very high High Medium Low Very low Low Very low 53 Quantitative evaluation method (percentage) Very high High Medium 68 54 The level of control risk is often found in small companies Very high High Medium Low Very low 55 The number of basic tests when the risk is at its maximum Very high High Medium Low Very low III The process of performing control testing 56 The necessity of a control test when the control risk is assessed to be below the maximum level Very high High Medium Low Very low 57 Is the use of control tests conducted regularly in small companies? Very high High Medium Low Very low 58 Is it difficult to gather audit evidence about the appropriateness and effective operation of the accounting system and internal control system at a small company? Very high High Medium Low Very low *The collection of evidence on the operation of internal control systems and accounting systems 69 59 Level of effectiveness on the design side (detecting and preventing correcting discovered errors) Very high High Medium Low Very low 60 Level of effectiveness in terms of implementation (effective in the period) Very high High Medium Low Very low * The effectiveness of methods in control testing at small companies 61 Interview method Very high High Medium Low Very low Medium Low Very low Medium Low Very low Medium Low Very low 62 Practical observation method Very high High 63 Method of re-implementation Very high High 64 Method of checking documents Very high High 70 65 Methods of checking from detail to synthetic Very high High Medium Low Very low Medium Low Very low Medium Low Very low 66 Methods of checking from synthesis to detail Very high High 67 Difficulty in representative sampling Very high High 68 Sampling risks and risks outside sampling at small companies Very high High Medium Low Very low Medium Low Very low 69 Effect of cost and time on sample size Very high High 70 The importance of choosing the right sampling method Very high High Medium Low Very low Low Very low 71 Effective level of random sampling method Very high High Medium 71 72 The effectiveness of non-random sampling method Very high High Medium Low Very low Low Very low 73 Do auditors often use "walk through test"? Very high High Medium IV Reassess control risks and design substantive test 74 The necessity of making a table of evaluation of internal control systems in a small company Very high High Medium Low Very low 75 In small companies, the level of control risk after reassessment varies significantly from the initial risk level Very high High Medium Low Very low 76 The influence of the substantive test adjustment on the audit program Very high High Medium Low Very low 77 Has the number of basic tests after adjustment changed significantly from the original design? Very high High Medium 72 Low Very low 78 Based on the level of change in the number of basic tests above, what is the audit risk at small companies? Very high High Medium Low Very low * The importance of the information reflected in internal control panels at small companies 79 Internal control objectives for each item or business cycle Very high High Medium Low Very low 80 The information describes the status of internal control collected by auditor Very high High Medium Low Very low Low Very low 81 The nature and significance of the respective risks Very high High Medium 82 Principles of designing and operating control procedures Very high High Medium Low Very low 83 Review on Internal Control for each item or business cycle Very high High Medium 73 Low Very low ... to audits, internal control is a key determinant of the audited financial statements of companies Currently, in the process of auditing financial statements, the evaluation of the internal control. ..LETTER OF DECLARATION I hereby declare that the Graduation Project entitled ? ?Factors affecting the assessment of internal control in the audit of financial statements at small companies in Vietnam”... Objectives: + Find out the factors that influence the assessment of internal controls in auditing financial statement at small companies (non -financial institutions) + Determine the impact of the above