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National Economic University

GROUP ASSIGNMENT
SUBJECT: FINANCIAL AUDIT 1

INTAKE: 58

CLASS: AUDIT A

Members:

NGUYEN DUC THANG

PHAN ANH TUAN

NGUYEN HUY VIET

Ha Noi, May 12, 2019


Table of content Page

1. Understanding client and business environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

2. Preliminary analytical procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

3. Risk of material misstatements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

4. Evaluation of internal control at overall enterprise level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

5. Calculating planning materiality and performance materiality . . . . . . . . . . . . . . . . . . . . . . . . . 9

6. Determining the materiliaty level for the balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

7. Audit program for inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

8. Audit program for short term and long term payable account (suppliers) . . . . . . . . . . . . . . . . 12

9. Audit report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

10. Management letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1. UNDERSTANDING CLIENT AND BUSINESS ENVIRONMENT

A. UNDERSTANDING OPERATING ENVIRONMENT AND EXTERNAL FACTORS

1. Electronic devices retail industry and trend

(a) Market and competition

Retail market of electronic products in Vietnam is full of excitement and competition is fierce. The participation of
foreign corporations has opened up opportunities for Vietnamese customers to have more access to good quality
products, affordable prices and that also increases a great pressure which alrealdy exists for retailors in Vietnam.

Vietnam retail market continues to be considered an attractive market because the size of this market continues to
achieve positive growth for some product groups. According to GfK Temax's research, the retail sales of consumer
electronics products in 2018 were 9.5 billion USD and achieved a growth rate of nearly 300% compared to 2017. In
the previous period, from 2013 - 2017, revenue in 2013 was only USD 1.8 billion, in 2014 reached USD 2.2 billion,
in 2015 reached USD 2.55 billion and in 2016, 2017 reached USD 3.27 billion and USD 3.63 billion respectively.
The year of 2018 showed a very clear statement: The market for electronic products - electronics is really "hot".

(b) Cyclical or seasonal activities

Not affect much the retail industry for electronic products since most of them doen’t depend on environmental
factors.

(c) Technology related to electronic retail, changes in production technology

As a consequence of cutting edge technology, cellphone’s production technology changes rapidly. The cycle life of
product, as the result, is very short, which means that they are more likely to be obsolete.

2
The technological challenges involved in retailing include the planning of strategies to produce efficiency,
effectiveness, advantage and profitability. How resources fit these strategies, the people involved etc. ultimately
decide the successful implementation of technology.

Technology has evolved into cheaper, more accessible applications. Still, the capital outlay required will result in
making cost/benefit analysis essential. The capabilities of staff, as regards technology, are of utmost importance to
successful implementation.

The size of the business is also has considerable consequences. The advantages offered by technology include
business process re-engineering, just in time ordering, electronic shelf labels, point of sale systems etc. These
advantages offer greater efficiency, effectiveness, and advantage, as well as cost reduction, improvements in quality
etc

(d) Supply and price

The technology product’s price is very high, even though it really slight. A cellphone may range from 1 million to
about 40 millions, depend on its segments.

2. Legal envỉonment

(a) Accounting principles and practices applied

Vietnamese Accounting Standard, IFRS

(b) Laws and regulations applicable to the Binh Anh which has a significant influence on the operation of the
enterprise

Corporate law, retail law, stock market regulations, currency regulations, foreign exchange rate, incentives,
government financial support, tariff, trade barriers, etc.

(c) Tax regulations

Value added tax (VAT), Coporate income tax (CIT), import tax.

B. UNDERSTANDING BINH ANH’S CHARACTERISTICS

1. Retail

(a) Revenue sources; products, services and markets; sales methods, sales policy

Products: Cell phones, accessories of cell phones, computers, etc. Other information is unavailable

(b) Purchase: main supply and related issues

Binh Anh totally depends on a variety of foreign suppliers.

(c) Places and number of warehouses, offices

Binh Anh has many stores in big cities over the country. In 2018, Binh Anh has opened more stores in small cities.

2. Type of ownership

Binh Anh is a joint stock company with 60 shares holders.

3. Applicable accounting policies

3
(a) Reporting system required

Vietnamese accounting standard (VAS)

(b) Currency of accounting book

Vietnam dong (VND)

4. Objectives, strategies and related business risks

(a) Expanding the scope of business

Management still made decision to open some new stores in small cities without considering shareholders’ protest.

(b) Use of IT

Accounting software, retail machines

5. Other issues

(a). Key personels

Name Position Qualification and experiences Email/Tel


- CEO - -
Xuan Nghi CFO - -
- Chief Accountant - -

(b). Accounting personel

Name Position Role Email/Tel


- Payable accountant Compare vendor’s invoice to puchase order, then record the -
transaction in the purchase journal and related cost using
accunting software, prepare checks and updates the cash
disbursements journal using the same accounting software
and submit checks to CEO for signature along with all
supporting documents.

2. PRELIMINARY ANALYTICAL PROCEDURE

Items/Ratios 2018 2017 2016


Turnover 44,540 42,920 40,012
Gross profit 7,078 7,140 7,432
Net Profit before tax 519 1,150 1,210
Total assets 27,727 25,163 24,500
Current assets 16,360 13,190 12,267
Current liabilities 16,167 9,581 8,905
Inventory 11,172 8,215 7,577
Current ratio 1.012 1.3767 1.3775
Inventory turnover 0.966 1.133 -
Days to sell inventory 377.78 322.2 -
Gross profit percent 15.89% 16.64% 18.75%
Return on assets 0.005 0.0116 -

- Current ratio remained at the same level in 2017 and 2016 but decreases suddenly in 2018. As 2018 draft FS, both
current liabilities increased at significantly higher percentage, compare to current assets.

4
- Inventory turnover decreasing from 1.133 to less than 1 indicates that more inventory is being hold by company
assume cost of goods sold does not fluctuate.

 Since inventory accouts for a large amount of current assets for Binh Anh as a reailer and assume other current
assets usually remain at the same amount (since we do not have enough data), we preliminary suspect that current
liabilities significant increasing was due to finanicial fraudulent. In addition, we had found in April and Dec 2018,
payable account made payment to suppliers approved by Chief accountant; suppliers’ statement reconciliations
have not always been performed by the client; invoices were often not approved before payment; and Payable leger
and the individual accounts of suppliers making up the trade payables balances. Therefore, This is the first riskiest
area we would focus on.

Also, since Inventory is not classified reasonably according to descriptions of each type of categories;
camera system not works for months, some employees can enter warehouse without any restriction; due to
lack of personel, sometimes goods are not examined fully by receiving department and a large portion in
inventory may be obsolete, we had a great cercern on inventory account. Therefore, Inventory would be
the second riskiest area we want to focus on.

3. RISK OF MATERIAL MISSTATEMENTS

Issues Risk Impact Procedures Fraud risk


Potential financial fraudulent due to
The client is a listed Inquiry
Inherent pressure from large number of Fraudulent financial
company with 60 Inspection
risk shareholders to meet the reporting
shareholders
shareholder's needs.
Assets, especially inventory, are Inspection,
Binh Anh has many stores in Control
difficult to control both quality, Physical
big cities over the country risk
quantity, and physical existance examnination
Company could not make enough
provision and over value inventory
Recent years, inventory has which overstated cost of goods sold
Inherent Fraudulent financial
been slow moving due to and unstate net income. Tthis could Revaluation
risk reporting
competition of rivals also create appressure for financial
fraudulent to make the financial
performance better.
Take long time to find the right
Inventory is not classied
product for customer; reduce
reasonably according to Control Phycial
reputation, delay other activities in
descriptions of each type of risk examination
the sale cycle, negatively impact
categories
revenue in long term.
Camera system not works
Inquiry,
for months, some employees Control Opportunity for employee to steal Missappropriation of
Observation,
can enter warehouse without risk inventory assets
Inspection
any restriction
Due to lack of personel, The quantity, quality are not fully
Inquiry,
sometimes goods are not Control assured; company may sell low Missappropriation of
hire expert to
examined fully by receiving risk quality product to customers which assets
examine
department damages to its reputation
Company could not apply accounting
stand properly. There is maximum
Inventory is counted and
level of difference allowed to be
compared to perpeptual
Accounting recognized as operating expense. Inspection, Fraudulent financial
records  differences are
error This could be an error or financial Recalculation reporting
recorded as operating
frauduent enable to decrease net
expense
income and therefore reduce tax
expense.
Payable accountant uses the Payable accountant has opportunity
same accounting software Control to change accounting figures; Inspection, Missappropriation of
for recording payable and risk potentially steal money for personal Inquiry assets
cash disbursement purpose
5
The approvement is not full secured
In April and Dec 2018, by separation of duty. The chief
payable account made account being responsible for
Control Inspection, Missappropriation of
payment to suppliers recording but also being able to
risk inquiry, assets
approved by Chief approve payment could lead to fraud
accountant of collusion to take money for
personal purposes.
Reconciliation monthly, annually
Suppliers statement
with suppliers is compulsory, but the
reconciliations have not Control Confirmation,
client does not. It can lead to the the
always been performed by risk Inspection
different payable account and cash
the client
outflow
Invoices which aren't being approved Inquiry,
Misappropriation of
Invoices were often not Control are unavailable, so that the Inspection,
assets
approved before payment risk disapproval of invoices can lead to Analytical
the omission of assets, or even frauds procedure
Because the total of trade payable is
material to the statement of financial
Payable leger and the position, error in the payable ledger
individual accounts of Control and the individual accounts can lead
Inspection
suppliers making up the risk to the deviation of financial
trade payables balances statements. Even though it is an
error, but it can results in risk of
frauds
The year end inventory figure could Observation,
A large portion in inventory Control
be misstated. This could be a chance Inspection,
may be obsolete risk
for financial fraudulent Revaluation

4. EVALUATION OF INTERNAL CONTROL AT OVERALL ENTERPRISE LEVEL

A. Objective

The assessment of internal control at the enterprise level helps auditor to determine the risks of material
misstatements (especially risks due to fraud), from which, plan the audit and determine the content, schedule and
scope of next audit procedures.

B. Main content

Internal control at the enterprise level often has a wide impact on business activities. Therefore, internal control at
the enterprise level sets the standard for other components of internal control. Good understanding of internal
control at the enterprise level will provide an important basis for evaluating internal control for important business
cycles. The auditor uses his/her professional judgments to evaluate internal control at the enterprise level by
interviewing, observing or examining documents. In this table, the assessment was carried out for five components
of the Internal Control: (1) Control environment; (2) Risk assessment process; (3) Information system; (4) Control
activities; (5) Monitoring controls activities.

Components of internal control system Yes No N/A Test of control


I. CONTROL ENVIRONMENT
1.1. Communicate information and requirement for integrity and moral values in the company
- Does the company have regulations on moral values (stated in employee
regulations, labor rules, code of conduct, etc.) and do these values get
informed to all departments of the company through employee training, □ □ □ Inspection
Inquiry
periodic dissemination, etc.?
- Does company have any regulations to monitor compliance with the
principles of integrity and moral values? □ □ □ Inspection
- Is there a clear regulation and proper application of handling measures for
violations of integrity and moral values? □ □ □ Inspection
Inquiry
1.2 Commitment to the competence and qualifications of employees

6
- Does the company specify/describe the requirements for qualifications
and skills for each staff position? □ □ □
- Does company pay attention to the qualifications and competance of
employees? □ □ □ Inspection
Inquiry
- Does the company have timely measures to deal with employees who do
not have the competence? □ □ □
1.3 Participation of the Board of Management
- Are the BOM members independent of the Board of Directors? □ □ □ Inspection
Inspection
- Does the BOM include experienced people, position? □ □ □ Inquiry
Obervation
- Does the BOM regularly participate in important activities of company? □ □ □ Inquiry
Inspection
- Are important issues and errors reported promptly to the BOM? □ □ □ Inquiry
- Does the company have a secured information channel to report violations
of rules and regulations on professional ethics which are discovered? □ □ □ Inquiry
Observation
Inspection
- Does the BOM meet regularly or periodically and Is the meeting minutes
prepared in a timely manner? □ □ □ Inquiry
Observation
1.4 Management style and philosophy of the Board of Directors
- The attitude of the BOD for internal control (for example: is there any
concern and respect for the design and implementation of effective internal
audit)?
□ □ □ Inquiry
Observation

- The Board's approach to risks? □ □ □ Inquiry


Inquiry
- Is the BODs' income based on performance? □ □ □ Inspection
Observation
- The level of participation of the BOD in the process of preparing financial
statements (through the selection and application of accounting policies,
accounting estimates ...)
□ □ □ Observation
Inquiry
- Is there opinion of the BOD about the preparation and presentation of
financial statements? □ □ □ Inquiry
- Is there opinion of the BOD about information processing, accounting and
personnel? □ □ □ Inquiry
1.5 Organizational structure
- Is the organizational structure suitable to the objectives, scale, business
activities and geographical location of the business? □ □ □ Inspection
- Does the organizational structure differ from those of similar industries? □ □ □
1.6 Assigning rights and responsibilities
- Does company have policies and procedures for authorization and
approval of operations at appropriate levels? □ □ □ Inspection
- Does company have appropriate supervision and inspection for the
activities delegated to employees? □ □ □ Observation

- Do employees of the company understand their duties and those of


individuals related to their work? □ □ □ Inquiry

- Do the supervisors have enough time to carry out their monitoring work? □ □ □ Inquiry
Observation
Inspection
- Is the segregation of duty principle implemented appropriately in the
company? (e.g. separate accounting and asset procurement jobs) □ □ □ Inquiry
Observation
1.7 Human resources policies and practices
- Does the company have policies and standards for recruitment, training,
evaluation, promotion, and dismissal of employees? □ □ □ Inspection

- Are these policies reviewed and updated regularly? □ □ □ Inspection


Inquiry
- Are these policies communicated to all employees of the unit? □ □ □ Inquiry
- Are new employees aware of their responsibilities as well as the BODs'
expectations? □ □ □
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- Is the performance of each employee reviewed periodically? □ □ □ Inquiry
Inspection
2. RISK ASSESSMENT PROCESS
Business risks relate to the goal of making and presenting the financial statements
- Have the BOM/BOD developed a process of assessing risk of transactions
related to financial statements (including: assessing risks, estimating the
impact level, likelihood, actions ...)?
□ □ □ Inquiry
Inspection
- Does the BOD set out the operational and financial goals in line with the
size and complexity of the Company? □ □ □
- Are the objectives regularly reviewed, updated and approved by the BOD
and BOM? □ □ □ Inspection
- Does the process of risk assessment for financial statements has the
participation of appropriate personel, for example, senior financial
personnel?
□ □ □
- Does company consider risks of fraud in financial statements as well as
criminal acts and establish review of financial statements, accounting
entries and other transactions to manage fraud risks?

book entries / Controls are made for book entries and other adjustments /
□ □ □
(Auditor's assessment of the risks of material errors due to frauds related to Inquiry

contents, schedules and violations micro check the book entries and other
adjustments)
3. INFORMATION SYSTEM
3.1 Understand information system related to the preparation and presentation of financial
statements
- Identify groups of transactions in the unit's activities that are important for
- - - -
financial statements
- Procedures implemented in the IT or manual system, to create, record,
process, edit transactions, record into accounting books and present - - - -
financial statements
- Relevant accounting documents, supporting information and specific
items on the financial statements are used to create, record, process and
- - - -
report transactions, including correcting inaccurate information. and how
data is reflected in the ledger.
- The way of information system receives events and situations of important
- - - -
nature for financial statements.
- Process of making and presenting the financial statements of the unit,
- - - -
including important accounting estimates and explanatory information.
- Controls for entries, including book entries, are not common to record
- - - -
irregular transactions, unusual transactions or adjustments.
3.2 Learn how units exchange information about roles, responsibilities and other important issues
related to financial statements
3.3. Evaluation of the internal control measures of information system
- Does company have a process to collect important information to achieve Inquiry
the financial statements objectives, prepare and present financial
statements?
□ □ □ Observation
Inspection
- Is IT system appropriate or not? IT personnels are appropriate or not? IT
□ □ □
processes, for example: data processing or ensuring the safety of data, etc.
is it appropriate?
Inquiry
Observation
- Are relevant positions such as finance, accounting, IT and functional
departments clearly communicated on important issues regarding financial
statements and internal audit?
□ □ □ Inquiry

- Is financial information communicated promptly and clearly to non-


business entities and authorities? □ □ □ Inquiry
Inspection
4. CONTROL ACTIVITIES
4.1 Gather understanding of specific controls for business types, TK balances or disclosures to
prevent or detect and correct critical errors
4.2 Gather an understanding of how units deal with risks arising from IT
- Are there appropriate procedures for accepting hardware and software
installations including assigning a project team to monitor IT projects,
testing and evaluation of loopholes, check and accept users and are these □ □ □ Observation
Inspection
issues kept on file?

8
- Are IT team members of the company guided, trained and knowledgeable
about key issues? □ □ □ Inquiry
- Is control measures related to access to the information system
appropriate? □ □ □ Observation
- Is there any control over access to data, updating data into accounting
books and printing data? □ □ □ Inquiry
Observation
- Are the data checked before updating to the accounting books? □ □ □ Inspection

- Can entries be deleted without an approved journal entry? □ □ □ Inquiry


Inspection
- Is the anti-virus program installed and updated regularly? □ □ □ Inquiry
Observation
- Is there a rule or prohibition on the use of computers for personal
purposes? □ □ □ Inspection
5. MORNITORING CONTROLS ACTIVITIES
5.1 Regular and periodic monitoring
- Does the company have a policy to review internal control periodically
and assess the effectiveness of internal control? □ □ □
Inquiry
- Enterprises have policies to periodically review the controls, framework
contracts, policies and processes ... whether they are still suitable for
businesses?
□ □ □ Inspection

5.2 Report the shortcomings of Internal control


- Does company have policies and procedures to ensure timely
implementation of measures to correct shortcomings of internal control? □ □ □ Inspection
- Does BOD consider the recommendations related to the internal control
system issued by independent auditors and implement those proposals? □ □ □ Inquiry
- Does Internal Audit Department send a report to detect the shortcomings
of the Internal Audit to the BOM or the Inspection Commitee in time? □ □ □ Inquiry
Inspection
- Does Internal Audit Department have direct access to the Management
Board or the Supervisory Board? □ □ □ Inspection

5. CALCULATING PLANNING MATERIALITY AND PERFORMANCE MATERIALITY

Due to acedamic environment, planning materiality is assumed to be equal actual materiality.

Items Planning materiality Explanatory


Inventory and account payable belongs to Balance sheet;
total assets is stable and predictable for retail company;
Base Total assets
profit before tax and revenue are not stable for Binh Anh,
they could fluctuate too much.
Source of information Pre-audit Financial statements Draft financial statement
Base value $27,727,000 Total assets given in 2018 draft financial statement
Adjustment due to effect
0
of abnormal fluctuations
Rate used to calculate The control risk is high and this is the 1st year we audit Binh
1% of total assets
overal material ity Anh Company, so we choose the lowest materiality level
Overall materiality $277,270 =$27,727,000 total assets * 1%
Because the risk of material misstatement for inventory and
Rate used to calculate
50% payable accounts are high so we choose the lowest
performance materiality
materiality level
Performance materiality $138,635 = $277,270 Overall materiality * 50%
Rate used to calculate
3% Based on our professional judgment
trivial level
= $138,635 Performance materiality * 3%
This item determines the level of misstatement which blows
Trivial level $4,159 $4,159 would be essentially ignored on the basis that they
can not individually (or cummulatively) affect decisions
taken by users on a set of applied FS.

9
Summary

Items 2018
Overall financial statement materiality $277,270
Performance materiality $138,635
Trivial $4,159

6. DETERMINING THE MATERILIATY LEVEL FOR THE BALANCES.

Over financial materiality = $277,270

Balance sheet’s accounts Discription Performance materiality


Inventory 50% of overall FS materiality $138,635
Account payable 50% of overall FS materiality $138,635

7. AUDIT PROGRAM FOR INVENTORY

A. Objective

Ensure that inventories items are existing, owned by the enterprise; be recorded fully, accurately, in the right
accounting period, calculated consistently and recorded according to net realizable value value; presented on the
financial statements in accordance with the VAS for preparing and presenting the applied financial statements.

B. Risk of material misstatement

Risk of material misstatement Procedures


Inventory is slow moving due to competition, not safely
guarded because camera system in warehouse not working for
months and some employees can easily access without Physical examination, Revaluation, Inspection
restriction; inventory not fully examined when received; a
large amount may be obsolete

C. Audit procedures

Order Procedures Detail


I. Overal procedures
Examine applicable accounting policies if it is consitency with prior years and suitable with
1 Inspection
framework about presenting financial statements.
Make table and compare with the closing balance of prior year audit balances. Companre with
2
bookeeping, journal entry and working paper.
II. Analytical procedures
Compare balance of inventory (include provisions) and structure of present year’s inventory with
1
previous year’s inventory, explain unusual trend
Compare the proportion of inventory with total short-term assets this year compared to the
2
previous year, assess the reasonableness of changes.
Compare the inventory turnover with the previous year and plan, determine the cause of the
3
change and the need to set up the reserve (if any).
III. Substantive test
Physical
1 Witnessing inventory counting at the end of the accounting period:
examniation
Identify all warehouses (of enterprises or rent), consignment ..., determine the value of
1.1 warehouses and risk assessment of each warehouse to determine where auditor will participate in
the inventory.
1.2 Participate in inventory countingaccording to inventory program.
For rented warehouse: Send confirmationf letter to ask the warehouse keeper to confirm the
1.3
quantity of goods sent (if it is important).
2 Inspection Check and compare the detailed data of inventory:

10
Collect reportsof entry and exit for all types of cooperatives (monthly and yearly / period):
- Reconciliation of data with related documents (ledger, detailed book, arised balance sheet,
financial statements), explain the difference (if any).
2.1
- Review monthly reportsentry and exit, review the close balance of present year to identify
unusual items (large balances, negative balances, fluctuations in many periods, or long-term ...)
Proceed with the corresponding inspection procedure.
Collect summary of inventory results of units:
- Make sure all inventory records are included in this summary.
- Reconciliation of data with related documents (counting sheets of enterprises, documents of
2.2 observations and inventory results of auditor [D531-D533], confirmation of third parties (if any)
...) . Explain the difference (if any).
- Reconciliation selects the actual number of samples from the summary of inventory results with
report of entry and exit and vice versa. Ensure enterprises have compared and adjusted accounting
data according to actual inventory data.
In case of witnessing an inventory before or after the end of the accounting period:
Proceed to select the check form for warehousing / ex-warehousing operations arising after or
Tracing,
3 before the inventory time, carry out the reverse / reverse comparison to the actual inventory
Vouching
balance on the ledger / stock card at the closing date by adjusting the corresponding arising I / O
operations. Find out the cause of the difference (if any).
Skim the ledger to identify unusual transactions (content, value, reciprocal account ...). Find out
4
the cause and perform the corresponding test procedure (if necessary).
Auditing the balance at the beginning of the period:
- Collect minutes and records of inventory at the end of last year of the unit. Review and evaluate
the reliability of the internal control of the unit for the inventory process.
- Reconcile the number of year-end cooperatives with inventory minutes;
5 Inspection
- Find out and check the method of calculating inventory price applied for the previous fiscal
year;
- Check the correctness of inventory;
- Check the balance of provision for devaluation of inventory at the beginning of the period.
Checking the purchase operations in the period: Checking and selecting the operations of
purchasing goods in stock during the period, comparing professional records recorded in the
6 Inspection ledger with relevant documents. (Note that in case of purchasing inventory if it is included with
products, goods, equipment, spare parts (in case of failure), whether accountant recorded in
accordance with regulations of TT200 / 2014 / TT-BTC or not)
Check the balance of sold goods, goods being held by 3rd party, buying goods on the way:
Inspection, Compare or send receive and exit to the receiver to send inventory (if necessary) or check
7
Confirmation shipping documents, contracts or borders delivery receipt after the end of the accounting period to
ensure the reasonableness of the receipt.
8 Revaluation Check and set up inventory devaluation provisions:
8.1 Learn and evaluate the reasonableness of the provisional calculation methods (if any).
Review items of inventory that are slow, outdated or damaged.
Select the completeness test form and check the detailed tracking table inventory (date of
8.2 warehousing, goods status, expiry date, ...) before using this information to make a backup. It is
recommended to combine inspection of these samples when conducting inventory (see status of
goods during inventory counting).
Check that inventory account have large fluctuations in cost or price or technology or market
8.3
demand to consider the possibility of making provision for devaluation
Analyze gross profit to see if inventory has a higher cost than the net realizable value to determine
8.4
the need for provision.
Checking events arising after the end of the accounting period, affecting the operations of the year
8.5
and the value of inventory.
Considering the provisioning of returned goods due to damage, poor quality in the year and after
8.6
the year
8.7 Evaluate the tax treatment method for deducted provisions
Timing: Selecting samples of warehouse import / export operations before and after the end of the
accounting period and checking to the original documents to ensure the transactions are recorded
9 Inspection in the correct accounting period (combined with the related practice).
Select the form of warehousing / ex-warehousing bills before and after the end of the accounting
period and compare with the books to ensure the transactions are recorded on time.
10 Inspection For purchases by foreign currency: Check the application of exchange rate to record inventory

11
(in conjunction with the related part).
Checking the classification and presentation of inventory amounts on financial statements.
11 Inspection Considering the time to complete unfinished products for short / long term classification
according to TT200 / 2014 / TT-BTC

D. Conclusion

In my opinion, based on the evidence gathered from the implementation of the above procedures, the audit
objectives presented at the beginning of the audit program have been achieved, except for the following issues:

8. AUDIT PROGRAM FOR SHORT TERM AND LONG TERM PAYABLE ACCOUNT (SUPPLIERS)

A. Objectives

Ensure that short-term and long-term payables actually exist, under the payment obligations of the enterprise; was
recorded accurately and completely; are evaluated and presented in accordance with VAS for preparing and
presenting the applied financial statements.

B. Risk of material misstatement

Risk of material misstatement Procedures


Payable accountant uses the same software to record payable accounts
and also cash disbursements ; In April and Dec 2018, payable account
Inspection, inquiry, confirmation
made payment to suppliers approved by Chief accountant;

C. Audit procedures

Order Procedure Detail


I. Overall procedures
Check accounting policies applied consistently with the previous year and in accordance with the
1 Inspection
framework for preparing and presenting the applied financial statements.
Prepare a table of aggregate data that compares with the balance at the end of the previous year.
2 Reconcile the balances on the aggregate data sheet with BCSPS, ledger, detailed book, etc. and
working papers of the previous year audit.
II. Analytical procedures
Compare and analyze the volatility of balances payable to suppliers this year compared with the
previous year, as well as the proportion of balances to pay suppliers in the total short-term and
1
long-term liabilities to detect abnormal fluctuations and hitting price in accordance with changes in
business operations of enterprises.
Compare the average number of payment days (Payable sellers / Cost of goods sold x number of
2 days in the period) of this period with the previous period. Review and explain unusual
fluctuations.
III. Substantive tests
Collect a detailed summary table of payable and prepaid account for each supplier:
- Reconciliation of data with related documents (ledger, detailed book by each supplier, financial
statements);
1 Inspection - Review the summary table to identify unusual items (large balances, stakeholders, unmodified
long-term debt balances, debts not related to vendors, negative balances, etc.). Perform inspection
procedures (if necessary);
- Overdue loan balances: Estimate interest payable and compare to record in book.
Procedures for auditing the balance at the beginning of the period:
- Select the test sample to the original voucher for large balances;
Inspection
2 - Checking transactions arising after the end of the accounting period to prove the beginning
Confimation
balance;
- Send confirmation letter (if necessary);

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- Check the balance of provision for bad debts (for prepaid suppliers) at the beginning of the
period.
Prepare and send confirmation letter for balance of account payable and prepaid balance to
suppliers.
3 Confỉmation
Summarize the results received; compare them with the balance in the details book. Explain the
differences (if any).
In case suppliers do not reply: Send confirmation letter for the second time, or:
Implementation of replacement procedures: Collect and compare detailed book data with debt
4 Inspection reconciliation records of the unit (if any). Check payments arising after the end of the accounting
period or check documents to examine the existence of purchase transactions (contracts, invoices,
delivery notes, etc) in the year.
In case the company does not allow auditor to send confỉmation letter: Collect written explanation
5 Inspection of the Board of Directors / Board of Management on the reasons for not allowing doing so and
implementing other replacement procedures.
Check prepaid amounts for suppliers:
- Reconcile with prepaid terms specified in the contract;
- Check payment documents;
- Check if the prepayments for suppliers are at risk of not receiving the goods / not refunding
6 Inspection money?
- Consider the level of transaction completion at the end of the accounting period and assess the
reasonableness of large prepaid balances for suppliers;
- Considering the debt age and payment terms, ensuring the provision for overdue receivables for
prepayment to suppliers is sufficient and accurate.
Looking for unrecorded debts:
- Reconcile of unpaid invoices at the audit date with the outstanding liabilities recorded at the
balance sheet date;
- Check the payments made in 60 days after the end of the accounting period;
Inspection
7 - Checking the original documents, comparing the dates of professional development with the date
Inquiry
recorded in the books to ensure proper calculation;
- Inquiry or work with departments related to cost cycle (such as import department, purchasing
department, marketing department) to collect and check additional purchase/expense documents
arising but not promptly transferred to the accounting department for recognition.
Check the classification and presentation of suppliers’ payables on financial statements.
Inspection
8 Check if there are overdue debts, interview customers about overdue debt issues. Check the
presentation of overdue debt on financial statements.
Contingent liabilities:
Inspection Consider commitments to purchase if any and the implementation of these commitments. In case
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Inquiry the company violates the commitments, the arising debts should be considered, acknowledged for
the payable liabilities and published in the financial statement notes.

D. Conclusion

In my opinion, based on the evidence gathered from the implementation of the above procedures, the audit
objectives presented at the beginning of the audit program have been achieved, except for the following issues:

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9. AUDIT REPORT

No: 58/2019/ AIC – BCKiT

INDEPENDENT AUDITOR’S REPORT


On the Gerneral Financial Statement for the fiscal year 2018

Of Binh Anh Joint stock Company

To:

MANAGEMENT COUNCIL; BOARD OF DIRECTOR

BINH ANH JOINT STOCK COMPANY

We have audited the accompanying Financial Statements Binh Anh Joint stock Company for the year ending 31
December 2018 including Statement of Financial Position on 31 Dec 2018, Statement of Profit and Loss,
Statements of Changes in Stockholders’ Equity, Statement of Cash flows and the Notes to the General Financial
Statements as set out on the pages 07 to 28. The Financial Statements have been prepared on 17 February 2019.

Responsibility of the Board of Director

Board of Directors of the Company are responsible for the preparation and true and fair representation of Financial
stements of the Company in accordance with the accountign standards, corporate accounting regulations in Vietnam
and the legal provisions relating to the preparation and presantation of financial statements and is responsible for
the internal controls that the Board of Directors determines to be necessary to ensure the preparation and
presentation of financial statements did not have material misstatements due to fraud or confusion.

Responsibility of Auditor

We have conducted our audit in compliance with the Vietnamese Standards on Auditing and the current
Vietnamese Regulations on Independent Auditing. These Standards require that we plan and perform our audit to
obtain a reasonable assurance that the Financial Statements are material misstatement – free.

An audit includes implementing procedures to gather audit evidence about the amounts and disclosures in the
financial statements. The audit procedures depend on the auditor’s judment, including the assessment of the risks of
material misstatement may in the financial statements dur to fraud or error. When performing this risk assessment,
the auditor has to consider internal control relevant to the Company’s preparation and fair presentation of the
Financial Statements truthful and appropriate in order to design audit procedures that are appropriate with the actual
situation, but not for the purpose of expressing an opinion on the effectiveness of internal control of the Company.
An audit also includes evaluating the appropriateness of accouting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall presentation of the general financial
statements.

We believe that our audit provides a reasonable basis for our opinions.

Basis for Adverse Opinion

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Audited financial statements are reflecting a large amount of obsolete inventories at too high prices for XXX VND.
We did require Binh Anh to make appropriate adjusting entries to record devaluation of stock but managers of the
company did not agree with us. According to our assessment, this issue has material impact to many items in
Financial Statement, specifically Cost of goods sold, income before tax, XXX2 VND; tax, XXX3 NVD

Adverse Opinion

In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion paragraph, the
financial statements do not present fairly on all material levels the financial position of Binh Anh Company as at
December, 31, 2018, and their financial performance and their cash flows for the year then ended in conformity
with accounting standards, corporate accounting regulations in Vietnam and legal provisions relating to the
preparation and fair presentation financial statements.

Hanoi, 12 March 2019

AIC VIETNAM Co, LTD

General Director Auditor

Nguyen Van H Le Thuy Y

Auditing registered certificate Auditing registered certificate

No: 0123-2013-016-1 No: 0321-2013-016-1

10. MANAGEMENT LETTER

Hanoi, 12th March 2019

MANAGEMENT LETTER
To:

MANAGEMENT COUNCIL; BOARD OF DIRECTOR

BINH ANH JOINT STOCK COMPANY

Dear Sir,

We have audited in accordance with Vietnamese Standards on auditing the financial statements of Binh Anh Joint
Stock Company (“the Company”) for the year ended 31 December 2018, and have issued our report thereon dated 1
March 2019. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks
of material misstatement of the financial statements, whether due to fraud or error.

During our audit we noted certain matters involving internal control and other operational matters that are presented
for your consideration. These comments and recommendations, all of which have been discussed with the

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appropriate members of management, are intended to improve internal control or result in other operating
efficiencies and are summarised in the enclosed report.

Our audit procedures are designed primarilly to enable us to form an opinion on the statements, and therefore may
not bring to light all weaknesses in policies or procedures that may exist. We aim, however, to use our knowledge
of the Company gained during our work to make comments and suggestions that we hope will be useful to you.

The Company’s written response to our comments and recommendations has not been subjected to the auditing
procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it.

This communication is intended solely for the information and use of the Company management and others within
the Company and should not be distributed to or used by any other parties.

Contents:

1. Improving inventory managing system

2. Improving internal control

3. Reducing the risk of misrecording of assets

4. Control payable account

1. Improving inventory managing system

Observations

- Recent years, inventory has been slow moving due to competition of rivals

- Inventory is not classied reasonably according to descriptions of each type of categories

- Camera system not works for months, some employees can enter warehouse without any restriction

- Inventory is counted and compared to perpeptual records and the differences are recorded as operating expense

- A large portion in inventory may be obsolete

Implications

- These examples indicate that the control over the inventory managing system is inappropriate

- Company could not make enough provision and over value inventory which overstated cost of goods sold and
understate net income

- Warehouse manager must take long time to find the right product for customer; reduce reputation, delay other
activities in the sale cycle, and negatively impact revenue in long term.

- The inactive camera system can lead to the opportunity for employee to steal inventory

- Company could not apply accounting stand properly. There is maximum level of difference allowed to be
recognized as operating expense. This could be an error or financial frauduent enable to understate the company's
business performance to decrease tax expenses

- The omission of inventory can lead to the misstatement of year end inventory figure. This could be a chance for
financial fraudulent

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Recommendations

- Promote different sales channels, like email, facebook ads, and television ads

- Put the items on sales or include slow moving products as “bonus” items in customer orders.

- Improvements should be made to the system of control to facilitate a review of the dispatches at the year end to
ensure that a proper cutoff is achieved.

- The camera system should be fixed to enhance security condition in warehouses.

- A simple system of perpetual inventory should be implemented at each location. This should be used to check for
the dispatch and receipt of inventory and would provide good overall control to enable a comparison of expected
use to actual by comparison with orders, and book inventory to actual after regular inventory checks

- The difference between period and perpetual records should be recorded as other expense or other revenue,
instead of operating expense

2. Improving internal control

Observations

- Management of BinhAnh still made decision to open some new store in small cities without considering some
shareholders’ protest

- In April and Dec 2018, payable account made payment to suppliers approved by Chief accountant

Implications

- Assets, especially inventory, are difficult to control quality, quantity, and physical existance.

- The expansion of business will increase costs.In the context of difficult business; this may make the financial
situation bleaker because of rising costs and slow-moving condition of inventory.

- The approvement is not full secured by segregation of duty. The chief account being responsible for recording but
also being able to approve payment could lead to fraud of collusion to take money for personal purposes.

Recommendations

- Management of Binh Anh should consider some shareholders’ protest before making decision to open new store.

- Segragarion of duty is necessary: Company policies should clearly states that Chief account is not allowed to
authorize payments. The same should be applied for other situations.

3. Reducing the risk of misrecording of assets

Observations

- Devaluation of stock is not recorded

- Due to lack of personel, sometimes goods are not examined fully by receiving department

Implications

- The quantity and quality are not fully assured; company may sell low quality product to customers which damages
to its reputation. In addition, the emloyees in receive department can steal goods in receiving process.

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- Business performance will be adversely impacted because of the unrecorded devaluation of stock. This could be a
financial fraudulent enable to overstate the company’s assets.

Recommendations

- HR department should recruit more employees for receiving department to examining goods

- The managers should record devaluation of stock to accurately reflect financial statements.

Manager’s response

- The managers of the company did not agree to make appropriately adjustng entries to record devaluation of stock.
They explained if they did that the business performance would be adversely impacted

4. Improve and control payable account

Observations

- The monthly account payable listing is not used

- Suppliers’ statement reconciliations have not always been performed by the client

- Invoices were often not approved before payment

- Error in the payable ledger and the individual accounts of suppliers making up the trade payables balances

Implications

- The client does not use payable listing, so that it is difficult for them to detect the difference between bank
reconciliation and their payable. This problem can lead to risk of frauds

- Reconciliation monthly, annually with suppliers is compulsory, but the client does not. It can lead to the the
different payable account and cash outflow

- Invoices which aren't being approved are unavailable, so that the disapproval of invoices can lead to the omission
of assets, or even frauds

- Because the total of trade payable is material to the statement of financial position, error in the payable ledger and
the individual accounts can lead to the deviation of financial statements. Even though it is an error, but it can results
in risk of frauds

Recommendations

- A monthly account payable listing should be introduced. Payments should be marked off. This would provide
control over unpaid invoices and a means for regular control account reconciliation.

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