NATIONAL ECONOMICS UNIVERSITY EXCELLENT EDUCATIONAL PROGRAM BACHELOR THESIS Major: Auditing Topic: Improving the audit process of fixed assets in financial audits conducted by A&C Auditing and Consulting Company Limited Student’s name: Nguyen Manh Cuong HANOI, 2016 NATIONAL ECONOMICS UNIVERSITY EXCELLENT EDUCATIONAL PROGRAM BARCHELOR THESIS Topic: Improving the audit process of fixed assets in financial audits conducted by A&C Auditing and Consulting Company Limited Student : Nguyen Manh Cuong Speciality : Auditing Class : Auditing AEP 54 Student’s ID: 11120558 Supervisor : Doan Thanh Nga, PhD Nguyen Manh Cuong i Auditing AEP 54 ACKNOWLEDGEMENTS This Barchelor thesis contained huge amount of work, research and dedication Still, implementation would not have been possible if i did not have a support of many individuals and organizations Therefore, i would like to extend our sincere gratitude to all of them Foremost, I would like to express my sincere gratitude to my instructor Doan Thanh Nga, PhD for the continuous support of my research, for his patience, motivation, enthusiasm, and immense knowledge Her guidance has helped me in all the time of research and writing of this thesis Without her superior knowledge and experience, the Barchelor thesis would not like in this quality of outcomes, and thus his support has been essential My sincere thanks also goes to my manager – Mr Khoi, my seniors – Mr Tuong, Mr Tuan and Ms Tho and staffs working in Financal audited Department of A&C Auditing and Consulting Company Limited for offering me the summer internship opportunities in their groups and leading me working on diverse exciting projects Nevertheless, I express my gratitude toward our families and friends for their kind co-operation and encouragement which help me in completion of this Barchelor thesis Nguyen Manh Cuong ii Auditing AEP 54 TABLE OF CONTENTS Nguyen Manh Cuong iii Auditing AEP 54 STATUTORY DECLARATION I herewith formally declare that I myself have written the submitted Bachelor Thesis independently I did not use any outside support except for the quoted literature and other sources mentioned at the end of this paper I clearly marked and separately listed all the literature and all other sources which I employed producing this academic work, either literally or in content Hanoi, 28/4/ 2016 Signature ABBREVIATIONS Nguyen Manh Cuong iv Auditing AEP 54 ACCA CIP CPA VAT VAS Nguyen Manh Cuong Association of Chartered Certified Accountants Construction in process Certified Public Accountant Value added tax Vietnamese Accounting Standard v Auditing AEP 54 LIST OF TABLES Nguyen Manh Cuong vi Auditing AEP 54 LIST OF FIGURES Nguyen Manh Cuong vii Auditing AEP 54 PREFACE In the early 90s of the 20 th century, the trend of international economic integration of Vietnam has grown significantly Vietnam's economy has strong transformation, transition economies from focusing mechanism bureaucracy to market mechanisms Open economy poses new requirements Before the demands of economy, audit activities have been recognized in Vietnam with the appearance of the independent organization of accounting and auditing in order to help individuals and organizations understand the knowledge, enhance understanding financial literacy and accounting in the new context The appearance of the independent audit firm of international and domestic in Vietnam marks an important milestone in providing audit services and advice for those interested in the financial figures in Vietnam Male After more than 20 years of development, audit has become an intensive operation, a specialized science The financial statements reflect the results of operations of the business in general on all aspects of the business process A set of information obtained from the processing of the transaction will eventually be reflected into parts, the items on the financial statements Therefore, to achieve the purpose of a comprehensive audit of financial statements the auditor should consider separate check their parts Fixed assets and depreciation plays a very important role in the production process of a corporate business So the accounting as well as the setting up of fixed assets depreciation expense should be recorded properly and accurately calculated Moreover, the fixed asset items on the balance sheet accounts for a large proportion of so errors of this accounting item often cause significant impact to the financial statements of the enterprise Therefore, audit of fixed assets and depreciation play a key role in the audit of financial statements Aware of this, during practice at A&C Auditing and Consulting Company Limited - Hanoi Branch, I have chosen the topic: “Improving the audit process of fixed assets in financial audits conducted by A&C Auditing and Consulting Company Limited” Research about auditing fixed assets in the process of auditing financial statements at the A&C Company, first of all, help me practice theory learned about the audit fixed assets at the National Economics University, later helped me be direct observe, learn how to conduct audit of fixed assets by the company A&C implementation From that discovery of major irregularities in the audit fixed assets, learn and draw lessons for themselves about how to consult clients complete fixed Nguyen Manh Cuong Auditing AEP 54 asset management processes that effectively and accounting fixed assets to match with the regulations and applicable accounting standards In addition to the Introduction and Conclusion, my bachelor thesis includes three chapters as below: Chapter 1: Theoretical framework on audit of fixed assets in financial audit conducted by A&C Auditing and Consulting Company Limited Chapter 2: Practice of audit of fixed assets in financial audit conducted by A&C Auditing and Consulting Company Limited Chapter 3: Assessments and recommendation to improve audit of fixed assets in financial audit conducted by A&C Auditing and Consulting Company Limited Due to limited expertise and time to complete, numbers in my thesis have been extracted from the data collected in the course of auditing fixed assets at A Company conducted by A&C Auditing and Consulting Company Limited And I am very grateful to have teacher Doan Thanh Nga, who helped me a lot with this thesis, as my supervisor Nguyen Manh Cuong Auditing AEP 54 professional judgment ability to analyze the fluctuations of the items, find relationships, identify the cause of events and unusual fluctuations Auditor need to perform combined analysis, comparing the data of clients with independent figures such as the overall industry figures The calculation of financial ratios, auditors need to go deep into the analysis than to be able to predict the possibility of mistakes with each item With fixed assets, Company may apply the analysis of some specific ratio follows: Investment ratio = Fixed assets and long-term investments Total assets Self-financing ratio = Total equity Fixed assets and long-term investments Productive capacity of the = Net revenue Total historical cost = Profit before tax Total historical cost fixed assets by revenue Profitability of fixed assets When auditing the sections relating to fixed assets accounting item as depreciation, repair costs of fixed assets, auditors can calculate and analyze fluctuations over the years to find the cause of fluctuations based on certain ratios such as the ratio of total depreciation expense compared to the total historical cost, total accumulated depreciation on total historical cost, the total cost of repairs to the total historical cost normally this financial ratios relative fluctuations steadily over the month, quarter and year, any unusual fluctuations can detect potential irregularities should be explained and clarified the cause With a number of other costs such as the cost of major repairs or unusual costs incurred and other costs related to fixed assets, auditors usually go into the detailed test procedures • Physical examination of fixed assets For clients who sign audit contract before 31/12, company need to actively Nguyen Manh Cuong – Auditing AEP 54 64 organize auditors engaged fixed assets inventory with clients If for reason the audit contract was signed after the end of the fiscal year that auditors cannot participate in witnessing the inventory, the auditor should perform additional audit procedures to gather evidence of existence of fixed assets at 31/12 • Test of control Test of control procedure has been designed in the audit program of A&C Auditing and Consulting Company Limited Auditors should apply test of control to reduce the number of required transactions need perform detailed examination, thereby helping to save time CONCLUSION Nguyen Manh Cuong – Auditing AEP 54 65 Fixed assets is an important material basis of all enterprises, especially manufacturing enterprises The effectively organization of management and accounting fixed assets is great significance not only for production and business activities of enterprises, but also affect the look of the outside of the individual with the development of enterprises, is the opportunity to attract investment from outside Thus the audit fixed assets plays an important role in the audit of financial statements Audit fixed assets accounting item is done effectively not only increases the reliability of the audit of financial statements, but also to create client’s faith in auditors and audit firms, enhance the reputation of company To that auditors must constantly improve their knowledge on the part, the characteristics of fixed assets in the manufacturing business, the provisions of the relevant legislation Besides, audit firm must also build and design appropriate audit program to improve the efficiency of the audit Over time internship in A&C Auditing and Consulting Company Limited Hanoi Branch, learn about the process of general audit and audit fixed assets in particular has helped me better understand the audit financial statement process in fact, are important additions to the theoretical knowledge learned in school In my report, I mentioned the theoretical framework on audit of fixed assets in financial audit, the practice of audit of fixed assets in financial audit conducted by A&C Auditing and Consulting Company Limited and outlined the assessment on the auditing process and the recommendations to improve Although there have been many attempts, but due to limited time and knowledge so the bachelor thesis still exist weaknesses I look forward to receiving the assessment and recommendations from the teachers to complete article Again, I sincerely thank the Board of Directors and all of officers and employees in the company has enthusiastically supported me And one more time, I want to express my gratitude to teacher Doan Thanh Nga, my tutorial teacher, for helping me making this bachelor thesis REFERENCES Vietnamese Accounting Standard Nguyen Manh Cuong – Auditing AEP 54 66 Vietnam Standards on Auditing International Standards on Auditing Documents of A&C Auditing and Consulting Co., Ltd in Hanoi Website: http://www.a-c.com.vn/ The Ministry of Finance - "Corporate Accounting" (issued under Decision No 15/2006 / QD-BTC dated 20/03/2006 of the Minister of Finance) Phan Trung Kien (2006) with the book "Audit Theory and Practice", University of National Economics, Finance Publishing House, Ha Noi Arens/Elder/Beasley (2011) – “Auditing and assurance services: An integrated approach”, 14th edition APPENDIX Appendix 1: Audit program of fixed assets and construction in progress expenses Nguyen Manh Cuong – Auditing AEP 54 67 Assertions W/P Ref PLANNING CONSIDERATIONS LEAD SCHEDULE 1.1 Lead schedule of fixed assets and cost of construction in progress 1.2 Lead schedule of all fluctuations during the audit for each type: tangible assets, financial leasing fixed assets, intangible assets and cost of construction in progress (per Schedule attached) 1.3 Comparing the beginning balance on the General Schedule, ledger with ending balance of the previous year or audit file (if any) 1.4 Check ending balance on the General Schedule with the ledger, subsidiary ledger ACCOUNTING POLICIES 2.1 Consider the accounting policies applied to tangible assets, financial leasing fixed assets, intangible assets consistent with the accounting standards (need special attention to VAS 03, VAS VAS 04 and 06), the Circular guiding the implementation standards of the Finance Ministry's, accounting regulations and other State documents related to enterprises (eg Circular 45/2013 / TT-BTC dated 25/04/2013 of Minister of Finance) 2.2 Consider the accounting policies applied are consistent with the fixed assets in previous years or not (inspection the cost of construction in progress to ensure the consistent principle of the allocation method of general expenses, interest expense involving many works, construction property or purchase new) In case there is a change in accounting policy, company had compliance under the guidance of VAS 29 or not TESTING OF CONTROLS 3.1 Check the operating controls on the procurement of fixed assets and infrastructure investment ANALYTICAL PROCEDURES Nguyen Manh Cuong – Auditing AEP 54 68 BH00 BH01 BH03 BH04 BH0 BHn BHn2 5.12.4 Notes Performance Assertions 4.1 Considering the reasonable and consistent with the previous year of tangible assets, financial leasing fixed assets, intangible assets; cost of construction in progress and overhaul of fixed assets C, E Learn and collect to explain the fluctuations 4.2 Considering the reasonable of the rate of fixed assets and cost of construction in progress on total assets C, E Learn and collect to explain the fluctuations 4.3 Comparing the depreciation expense current period with the previous period, with the plan, between the months (quarterly) during the period Learn and C, A collect to explain the fluctuations 4.4 Comparing the average depreciation rate for asset groups with the previous period and collect to A, C explain if there is a major change SUBSTANTIVE PROCEDURES W/P Ref BH00 BH00 BH00 BH00 Check and collate 5.1 Collating data between the balance sheet arising, ledgers, balance sheet BH01 BH03 A, C 5.2 Collating the beginning balance on detailed list, detailed book with ending balance of the previous A, C year or audit file (if any) 5.3 In case first annual audit, view audit file of previous year by other audit firm or view original E, C, RO, documents, check the depreciation to calculate beginning VA balance 5.4 Collecting detailed list of tangible, financial leasing, intangible assets, the CIP projects and compare them with the inventory record had the witness of A, E auditors 5.5 In case company not carry inventory or auditors not to witness the inventory, select a number of fixed assets, CIP projects have high value carry out the inventory at the time of the audit to confirm the existing E, RO of fixed assets, projects, construction items are building CIP costs, and increased fixed assets Nguyen Manh Cuong – Auditing AEP 54 69 BH04 BH’1.3 Notes Performance Assertions W/P Ref 5.6 Check the original documents of the cost of A, E, RO CIP incurred during the period  For the basic construction: − - Investment decision BH4.1 The estimates and estimates approved The invitation to tender, decision approving the bidding results, − Economic contracts; Minutes of the liquidation of the contract − Finalization, decided to approve the settlement − Other documents proving the costs incurred actual and serves construction  For new procurement fixed assets: − − - Investment decision The estimates and estimates approved Economic contracts; Minutes of the liquidation of the contract − Certificates of land use rights − − Invoice, handover report,  For overhaul of fixed assets: − Planning repair − The estimates and estimates approved Economic contracts; Minutes of the liquidation of the contract… 5.7 Considering whether the works or construction items has long incurred but not yet completed or in the period incurred no costs Find out the causes and E, VA consider the appropriate adjustments 5.8 Combined with sending letter to vendor to confirm the accounts payable to consider whether there are workloads that party B has been handed over and accept to payments that have not been accounted for CIP VA, CU expenses accounting items or not 5.9 Check the original documents and of A, E, RO increasing fixed assets during the period − Nguyen Manh Cuong – Auditing AEP 54 70 BH1.1 Notes Performance Assertions W/P Ref Notes:  For fixed assets formed from construction: collate with data transferred from the CIP expense accounting item  For financial leasing fixed assets must also pay attention to check: − The recognition of the financial leasing fixed VA assets in line with guidance of 06 VAS − The accuracy of the calculation, including the principal amount / interest and calculate the present VA value of assets 5.10 Consider whether the costs were capitalized during the period related directly to the putting into use VA of fixed assets or not 5.11 Ensure the following costs are not included in the C, VA historical cost of tangible assets, intangible assets:  Selling expense, corporate administration expenses, manufacturing overhead cost not directly related to the putting into operation of fixed assets  The wasted materials costs, labor costs and other expenses in excess of normal use  The cost of staff training to operate  Internal earnings 5.12 Check the historical cost of tangible assets, intangible assets be purchased in the form of exchanges VA whether it is suitable for VAS 03 and VAS 04 or not 5.13 Check to ensure that VAT is collected from the tax authorities are not added to the cost of fixed assets, VA CIP expense 5.14 Check the upgrade costs of fixed assets in the period to ensure no-cost repair and maintenance are A, CL capitalized 5.15 Combined with the auditors have responsible to inspect manufacturing overhead costs, selling expense, business management costs, prepaid expenses to ensure no eligible assets as fixed assets and costs associated directly related to bringing the asset into use or upgrade C, A costs and amortization are accounted for as expenses Nguyen Manh Cuong – Auditing AEP 54 71 BH1.1 Notes Performance Assertions W/P Ref Interest expense capitalized 5.16 Considering interest expense were capitalized CL, A, C during the period consistent with VAS 16 or not 5.17 Check the interest expenses had capitalized A, C during the period Cost of research, development 5.18 Check the cost in research period are capitalized VA in the period or not 5.19 Check that development costs have been capitalized in accordance with the conditions of the VAS VA 04 or not Decreasing cost of CIP 5.20 Check the files relating to the transfer, including: A, VA  Finalization, decided to approve the settlement of the competent authorities  The procedures for the transfer: acceptance record in use, record of delivery  Historical cost, cost to move in line with the settlement data 5.21 Check the accounting of reducing CIP expenses A during the period Decreased fixed assets 5.22 Check the original documents related to the reduction of fixed assets during the period (liquidation VA decision, decide to transfer internally, invoice ) 5.23 Check accounting of fixed assets decreased due A to the transfer, liquidation or sale during the period 5.24 Check, calculate profit / loss due to the disposals, VA sold during the period Depreciation 5.25 Check the time and rate of depreciation of fixed VA assets is reasonable or not Notes to consider:  Depreciation timeframe stipulated in Circular 203/2009 / TT-BTC dated 20/10/2009 of the Minister of Finance  Losses or profit from the liquidation of fixed assets in previous years Nguyen Manh Cuong – Auditing AEP 54 72 BH1.2 BH1.3 Notes Performance Assertions W/P Ref  The lease term (for fixed assets financing leasing)  Consistency with the previous year 5.26 Assessing whether there are any facts and circumstances may result in a change useful life of fixed VA assets 5.27 Check sampling the depreciation of fixed assets A during the period 5.28 Considering to ensure fully depreciated fixed A assets are not depreciated 5.29 Considering to ensure that all fixed assets (excluding fully depreciated fixed assets) are C depreciated 5.30 For intangible assets are land use rights with a term: consider the shelf life on the certificate of right to A use to make sure the depreciation time is appropriate 5.31 Synthesis the depreciation of fixed assets are not used or used for purposes other than the production and business activities to exclude when determining taxable A income Financial lease fixed assets 5.32 Considering the terms of the lease to ensure the recognition of financial leasing fixed assets is CL, CU appropriate 5.33 Check the historical cost of the financial lease of fixed assets increased during the period with the original A, O documents: contracts, invoices 5.34 Considering the depreciation period of finance lease fixed assets to ensure the comparing between the time of financial lease contracts and the estimated useful VA life 5.35 Estimated depreciation expenses of the fixed A, VA asset and compare with accounting book 5.36 Considering the reduced financial leasing fixed assets, compared with the duration of the contract, the A contract liquidation minutes Commitment and pledge, mortgage Nguyen Manh Cuong – Auditing AEP 54 73 BH1.3 BH1.3 BH1.3 Notes Performance Assertions W/P Ref Notes Performance 5.37 Discuss with people who have responsibility in relation to the assets to find out company has pledged or mortgaged fixed assets and commitments related to the C, AV acquisition of fixed assets or not 5.38 Check the contracts, agreements, invoices, purchase order relating to the commitments of capital RO, AV and fixed assets mortgage 5.39 Ensuring the mortgage and commitments have C been announced fit on the notes to financial statements 5.40 Considering, collecting explanations letter of the Board of Directors on matters related to fixed assets and C, A CIP expenses Events occurring after the balance sheet date 5.41 Considering the events occurring after the balance sheet date that affect the business operation in C, A, E, the period, calculated assessment ending balance of fixed VA assets and CIP expenses SCRUTINY 6.1 Skim through the detailed book of tangible assets, financial leasing fixed assets, intangible assets, CIP expenses, overhaul of fixed assets cost for the detection of extraordinary items and check with original O, A, CL documents PRESENTATION AND DISCLOSURE 7.1 Considering the presentation and publication of tangible assets, financial leasing fixed assets, intangible assets, CIP expenses, overhaul of fixed assets ORO, C, cost in the financial statements in line with above CU, AV accounting standards and accounting regulations or not ADDITIONAL AUDIT TESTS BHn2 BHn2 O: Occurrence E: existence ORO: Occurrence and rights and obligations C: Completeness RO: Rights and obligations C: Completeness A: Accuracy C: Completeness CU: Classifications and understandability CO: Cut-off VA: Valuation and allocation AV: Accuracy and valuation CL: Classification Nguyen Manh Cuong – Auditing AEP 54 74 Apendix 2: Table of questions of existing client acceptance Question Yes / No Ownership and management 1/ There are problems in identifying the real owners of the company or not? No 2/ Had or is likely to change in the ownership of the company, the key members of the board of director or board which led to doubts about the integrity of client or not? No 3/ Are there any issues about the integrity or business reputation of the owner, the key members of the board of Director or management board or not? No / The members of the Board of Management or the Board / Board of Directors has the ability to influence matters related to audit risk or not? No 5/ There are issues related to the attitude of the majority owner, the key members of the Directorate or Management Board tend to disregard the standards and environmental of internal audit or not? No Laws and regulations 6/ Currently or in the past, clients related to litigation, dispute or not? No 7/ Company related to litigation and disputes with customers or with the warning of the litigation, the dispute or not? No Nguyen Manh Cuong – Auditing AEP 54 75 Other information Question Yes / No 8/ There are indications that clients are related to money laundering or criminal activities or not? No 9/ There are issues related to the mode of client’s operation or the business led to doubts about the reputation and integrity or not? No 10/ There are any change in the legal requirements and the additional requirements for auditors or not? No 11/ There are any important issues relating to the law and the state agencies or not? No Financial conditions 12/ There are signs of doubt about the possibility of continuous operation or not? No 13/ Financial ability of clients depend on future plans as reduce costs through restructuring, merging or not? No Accounting and Auditing 14/ There are special accounting policies require the use of complicated assessments and estimates or not? 15/ Audit report last year might be the exception or not? No No 16/ Having the accounting policies or way of handling No specific transaction caused doubts about the authenticity of financial information? 17/ The client has to be a part of the Group's complex structure or not? No 18/ Having important transactions with related parties and transactions with transaction is reasonable or not? Yes 19/ Client has purchased or has interests overseas or not? No 20/ There are changes in policies and accounting estimates, including changes in the important No Nguyen Manh Cuong – Auditing AEP 54 76 Other information Question Yes / No assumptions or not? 21/ There are complex issues related to the tax stems from the professional accounting or not? No 22/ Having any limit to the scope of the work is appropriate or not? No Nguyen Manh Cuong – Auditing AEP 54 77 Other information