Auditing & Assurance 1 Audit practice - Auditing (AA123) | Đại học Hoa Sen

Auditing & Assurance 1 AUDIT PRACTICE CASE STUDY 1. Introduction
(1) Hoan Cau Auditing and Consulting Limited Company (HCC) is one of
Vietnam's 20 largest auditing companies. In 2015, its sales were VND 52 billion,
the total number of employees was 147 of which 12 have CPAVN. The company
provides a wide range of financial services in three areas: assurance services, tax
consulting services, and corporate consulting services. Revenue mainly comes
from the service of auditing financial statements. The company has expanded
corporate consulting and tax consulting services since 2015.
(2) You are an auditor who has 6-year experience in the field of financial
statement auditing. You have just received the CPA certificate in 2015 and were
appointed Head of Audit Department. In October 2015, you and Mr. Hung, the
company's deputy general director, joined the meeting with GoldEquip. On the
way to the GEC office, Mr. Hung told you that GEC is a US high-grade paint
manufacturing and supply company in Vietnam. GEC shares are currently traded
on HOSE. The company contacted HCC and asked HCC to provide auditing
services for its 2015 financial statements. Mr. Hung met Mr. Thanh, GEC's CEO at
a seminar in July 2015. Mr. Thanh has complained a lot about their current
auditing company. Therefore, Hung said that this is a potential client.
(3) At the meeting with HCC, Mr. Thanh said that GEC had terminated the
contract with their auditor and wished to seek a new auditing firm, which could
provide GEC with more professional audit services to meet the requirements of
UOB Bank, a bank in Singapore that they are looking for a large loan in 2016 to
use for their investment. In addition, he revealed that GEC intends to acquire a
company in the same industry and expects the new auditing firm to offer
financial advisory services. GEC is a company with many complex tax obligations.
Mr. Thanh also suggested HCC review its tax obligations and identify risks and
mistakes that would have been made.
(4) After the meeting, on the way back to the company, Mr. Hung told you that
he is very interested in this customer, as HCC not only has a large audit service
revenue but also may sign consultancy service contracts. In addition, HCC is also
seeking to increase its clients that are listed joint-stock companies. Mr. Hung
asks you to help him complete the audit procedures for risk assessment and
accept new clients. He also reminds you to carefully evaluate the risks when
deciding to accept this customer. 1
2. Information Provided
Gold Equip Corporation (GEC)
(5) GEC is one of the largest suppliers of premium paint in Vietnam. The
company was established in 2003 as a limited liability company. In 2008, the
company was equitized, and then in 2012, it was listed on Ho Chi Minh Stock
Exchange (HOSE) with the code GEC. GEC produces paints based on American
technology, with a technology transfer contract signed for 20 years with GEC
USA. GEC USA currently holds 42% of GEC Vietnam shares and is the largest shareholder.
(6) GEC paint products are of various types, divided into two groups,
construction paints, and specialized paints. The specialized paint products are
mainly sold to automobile, motorcycle, marine, and high-end furniture
companies. Because this is a high-end paint line, its price is very high in
comparison to common industrial paint products. GEC owns a company in Ho Chi
Minh City, a plant in Binh Duong, and 3 branches in Hanoi, Da Nang, and Can
Tho. Inventories are kept in the plant warehouse and 3 branch warehouses.
GEC's raw materials are 75% imported. GEC's products are sold directly to
automobile and motorcycle manufacturers in Vietnam. Other products are
distributed through dealers. GEC has 25% of its revenue in 2015 (an increase of
5% over 2014) from exports to several foreign clients, including GEC Malaysia and GEC China.
(7) Currently, due to the difficulties of the high-end paint market, GEC is
negotiating to buy ABB Paint Company to expand the market, seeking customers
in the mid-range segment. GEC wants to appoint your company as an auditor of
its financial statements for 2015. GEC is proposed to borrow $3 million from
UOB to finance the acquisition of ABB. Since 2015 is the first year GEC applied
Circular 200/2014/TT-BTC for its accounting, GEC also wants HCC to advise GEC
on some changes and effects to its financial statements. In 2015 there are many
changes in corporate income tax law, GEC expects that once its financial
statements are audited by a large and reputable auditing firm like yours, the tax
obligations for the state are satisfactory, if any errors, the audit firm will point
out and GEC is ready to adjust.
Industrial Paint Market in Vietnam
(8) The paint industry in Vietnam is in a period of fierce competition between
foreign and Vietnamese enterprises. In addition, paint products made in China
and Taiwan, with low prices and diversity are being imported with increasing
volume in Vietnam. As for the construction paint industry, the real estate market
is heating up, creating a boost for growth.
(9) Vietnamese economy has many signs of recovery and development.
However, cheap products are still easier to be accepted by the market. High-end
product lines become picky, especially when financial markets are unstable. 2
Therefore, in order to increase product competitiveness, in 2015, GEC has
strengthened the technical support system for companies using GEC paint.
GEC Development Strategy
(10) GEC's traditional products are top-quality products in the US, providing for
high-end markets such as high-end cars, motorbikes, and construction materials.
From 2014, GEC expanded the supply of powder coatings paint for wood and
furniture companies, mainly targeting high-end exporters to the fastidious
markets in the US and Europe. In March 2015, the company recruited a new
sales manager in charge of this market. He has 15 years doing business in the
field of furniture export. However, sales of this market accounted for only 5% of
total revenue in 2015 and did not meet the board's target.
(11) Recognizing the price constraints of current products, GEC's CEO proposed
to buy a Vietnamese paint manufacturer, in the middle segment. The CEO said
that after acquiring the company, GEC would be able to expand this segment
without affecting the brand of existing brands. GEC has contacted potential
buyers and is looking for a financial services company to assist them in this deal.
Currently, this information has not been disclosed so it has not impacted GEC stock prices yet. Accounting Policy
(12) GEC chief accountant stated that GEC has implemented its accounting
policies in accordance with Circular 200/2014/TT-BTC. Some policies are described as follows:
(13) Depreciation policy: GEC applies straight-line depreciation for all fixed
assets. Depreciation is applied according to the Group's guidelines for consolidation.
(14) Credit policy: Because most of the sales are subject to 30-60 days of debt
termination, the company's receivables are quite large. Some of the company's
traditional clients have overdue debt. They have sent their written request to ask
GEC to extend the 90-day deferred payment since GEC rivals have raised their
credit term to 90-120 days. However, GEC did not set up allowances for bad debt
for these accounts at the end of the year as the CFO said that it was possible to collect these debts.
(15) Sales policy: GEC has domestic and export sales. For domestic customers,
the goods are delivered at customers' warehouses, with delivery times generally
no more than 24 hours. Export contracts are commonly FOB Sai Gon prices,
except for contracts signed with GEC Malaysia and GEC China which are EXW
prices. The chief accountant indicates the time to record revenue is when the
goods are out of GEC warehouses.
(16) Purchasing policy: 75% of GEC purchases are from GEC USA and GEC China
at CIF prices. Shipping time is usually 10 days (for GEC China) to 30 days (for GEC 3
USA). The purchases are recorded after they are checked and put into the warehouses.
Internal Control System
(17) The Internal Audit Director told that GEC Vietnam's policy of control is in full
compliance with the Group policies. The internal audit department consists of
one director and four staff members. In addition, there is 1 internal auditor at
each plant and branch. The report of the internal audit department is sent
directly to the CEO every month. In addition, the quarterly consolidated report
will be sent to the Board of Supervisors, which will be the basis for the Board of
Supervisors to check and review at the beginning of the following quarter. Every
year, the Group's internal audit team will visit Vietnam to audit
policies. The year-end audit report of the internal audit department only
recorded a minor error of the warehouse division. After investigation, it was
determined that the lack of goods was due to
while checking the goods. Because this is the first violation and the amount is
not large so the storekeeper was only reprimanded.
(18) The Internal Audit Director also indicated that the risk of fraud at GEC is very
low because the company had a rigorous control process and operational cycles
were subdivided into specialized divisions. The company policy also requires
cross-checking and cross-reconciling between departments every month. All of
the reconciliations are documented and stored in the department.
(19) GEC currently uses Oracle's ERP system for all departments. The Internal
Audit Director is very proud of the modern software system the company has
recently invested nearly $100,000 in 2015. He said the system can handle and
control automation at multiple stages, It has helped the company reduce input,
provide information quickly, and support decision-making. He believes that with
the rigorous controls of this system, the risk of error and fraud is very low, if not
impossible. However, applying a new system, the work of the internal audit
department is overloaded. The Internal Audit Director thinks that he needs an
additional staff member with information technology expertise but the HR
department disagreed even though he had suggested several times. Upon
hearing this information, the CEO said that he was completely unaware of this
and that he would consider and direct the department for additional recruitment.
3. Financial Statements of 2015:
(20) Including the Balance Sheet and the Income Statement. QUESTIONS: 1.
accepting a new customer. Given the current professional ethics regulations,
should HCC accept this customer? 4
2. Based on the information provided about the internal control system, evaluate
3. Use the financial information provided by GEC, present the initial analytical
procedures by applying trend analysis and calculating ratios including liquidity,
turnover, profitability, and solvency (as forms below). What does this procedure
mean for an auditor? Point out abnormal items in GEC financial statements the
auditor should have an intensive investigation. BALANCE SHEET Variation Items Year 2015 Year 2014 VND % Notes INCOME STATEMENT Percentage Percentage Variation Year of net Year of net Items 2015 revenue 2014 revenue VND % Notes RATIO ANALYSIS Year Year Variation Common ratios Formulas 2015 2014 VND % Notes Liquidity ratios Current ratio Quick ratio Cash ratio Activity ratios Receivable turnover Inventory turnover Working capital turnover Profitability ratios Gross margin Net profit margin Revenues on total assets Return on assets Return on equity Solvency ratios
Long-term liabilities to equity Total liabilities to equity
Long-term liabilities to asset
Total liabilities to total assets
4. Risk assessment is a very important procedure, often reviewed by an auditor and
a member of the board of directors of an audit firm. From the information given
above, identify GEC's risks and determine the audit risk. Calculate planning and
performance materiality in your audit plan. 5
5. Accepting a new client is a complex process based on the audit assessment
of the company's risk. Explain procedures performed by the auditor to make a
decision whether to receive GEC client?
6. From the results of the risk assessment above, prepare an audit program for the identified risks. REQUIRED:
1) All groups must do the work (answer the 6 questions above). Submit your work
on m-learning. Each group, each file only. Deadline: Week 15. (20% of formative
assessment, 10% of marks deducted for each day late)
2) Presentation topics are assigned using your random choices. Produce a video clip
for your presentation, upload it on YouTube, then submit the link on m-learning
in Week 15. (20% of formative assessment, 10% of marks deducted for each day late) 6