Assignment Financial Audit I High-quality Auditing 58A

PART I. AUDIT PLANNING

1. Understanding the Business and Risks Assessment

1.1. External consideration

- Binh Anh Co’s key stakeholders (internal or external to the business) influence the actions of
management: 60 sharesholders and many potential investors.

 Binh Anh Co may be under high pressure by stakeholders. Risks can arise, if key
stakeholders’ expectations are unrealistic. These may affect management decisions when
setting strategies and goals – in response to those unrealistic expectations.

 This pressure may cause risk of Fraud (following Fraud triangle)

- Binh Anh Co industry: Retail industry

 The industry has been transformed by the dramatic growth of platform companies, which
have influenced legions of consumers, impacting how they shop and what they demand and
expect from retailers.

 There remain significant risks that can impact both top-line growth and long-term viability
including competitive from rivals and how to satisfied consumers’ expectation.

1.2. Internal consideration

1.2.1. Nature of the entity

- Business operations and processes. Objectives, Strategies and related business risks

 Binh Anh Co is a chain of retail stores dealing in goods such as cell phones, accessories of
cell phones, computers,…

 Electronics retailer face a greater likelihood of obsolete inventory leading to devaluation of

stocks and provions for inventory impairment. It makes the decrease in sales, profitability
and simlutanously decrease in business performance.

 Products of Binh Anh provided by a variety of foreingn suppliers.

 Time, quantity and place are three main factors that define supply risks. With foreign
suppliers, risks can arise from: There are several issues that contribute to the overall cost and
price risk:

+ International exchange rates; these often fluctuate and what was once a lower cost could
soon rise.

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Assignment Financial Audit I High-quality Auditing 58A
+ Higher shipping costs and cost of delays/ loss in transit; depending on the customs, taxes,
security measures and sheer distance these costs can soon make a low cost transaction into a
much higher one.

+ High transaction costs; complexity of documentation, time zone differences, contract

management, staff training, etc. can all contribute to rising costs of international sourcing.

 Binh Anh has many stores in big cities over the country.

 Differences in cultural and economic conditions. Similarly, a lack of understanding of

regional nuances where retailers are expanding can quickly result in significant costs and
divert resources from other strategic initiatives.

 Incresing competitions by Binh Anh’s rivals

 Retail industry is growing very quickly. The exodus of consumers from bricks to clicks (the
way cunstomer shop) has exacerbated the challenges of how and where to compete.

 With trategy in 2018, Binh Anh still opened some new stores in small cities without
considering some shaeholders’s protests.

 BA may faced with slow-moving inventory problem and risks come from obsolete inventory
may araise and cause loss.

Conclusion after evaluate: Binh Anh has high level of Business Risks

1.2.2. Measurement and review of preformance

Hereunder is some key financial ratios that the auditors use to review financial performance of Binh
Anh Co:

Ratios 2018 2017 2016

Short-term debt-paying ability

Quick ratio 0.32 0.52 0.53

Current ratio 1.01 1.38 1.38

Liquidity activity ratios

Inventory tunover 3.86 4.53 4.30

Days to sell inventory 94.56 80.57 84.88

Profitability ratios

Gross profit percent 15.89 16.64 18.55

Profit margin 0.01 0.03 0.03

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Return on assets 1.61 1.71 1.63

Average turnover per store 1,782 2,146 2,001

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Assignment Financial Audit I High-quality Auditing 58A
Evaluation:

 Quick ratio and current ratio decrease graduatelly from 2016 to 2018. Exspecially, quick
ratio significantly decrease from 2017 to 2018

 Binh Anh may have difficulies in meeting short-term debts.

 Inventory tunover declined and days to sell inventory increased. In addition, the averrage
turnover per store decrease significantly from 2017 to 2018 make an conclusion that
company may have trouble in selling inventory as a result of slow moving conditions (when
increase the number of rivals and leading to obsolete inventories) and the strategy of opening
more stores in 2018 did not work.

 This problem may effect significantly to

1.2.3. Governance and Internal control

 The ineffective in performing opening more store strategy showed that management of Binh
Anh has made a wrong decision and did not consider some shareholders’ protests.

 That may cause the conflict between internal of Binh Anh and therefore, increase business
risks.

 The risk drivers:

+ Binh Anh management is lacking of competence.

+ Having potential risks of fraud behind (collusion between management – personal

interests)

 After understanding of internal control, there are some Internal control deficiencies of Binh
Anh Co below:

(1) Inventory management problem:

+ Binh Anh’s inventory is not classified reasonable according to description of each type of
categogies.

 It takes much time for storekeepers to find out the right things that customers want to buy.

+ Management does not consider the security condition in warehouses. The camera system in
ware houses have not worked for months and some Binh Anh’s employees can enter the
warehouses without any restriction.

 This is a consequence of weakness of physical control due to the deficiencies of internal

control. As there is no restriction about the access warehouse, employees have opportunities
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Assignment Financial Audit I High-quality Auditing 58A
to steal inventories which is easy to be stolen. Therefore, based on the fraud triangle, the
risks of fraud may be higher. That factor show the lack of internal control and cause the high
level of control risk.

+ Goods stored in the warehouses under the control of warehouse manager.

 The lack of separation of duties as the warehouse manager may have control right over the
goods stored. In addition, he also has authorisation to update the perpetual records which
include only quantities, not have qualities and condition of goods.

 Opportunities for him to misstate financial statements by stealing goods for personal
objectives. This is a kind of fraud risks.

+ The inventory at warehouse is counted and compared to the perpetual records, but the
company counts and reconciles with inventories annualy.

 Some differences may not be detect timely, leading to some of them obsolete, differences at
the year end significant which have a huge impact on Financial statements (such as operation
expenses account). => Increase the level of control risks.

+ The differences between the physical count results and the inventory balance are recorded as
operating expenses

 Binh Anh applied wrong accounting method. The accountant records the discrepancy as an
inventory adjustment. The amount of discrepancy is charged to Cost of goods sold with the
other portion of the entry charging Inventory. If the physical inventory count shows a higher
balance than the inventory system, the accountant debits Inventory and credits Cost of goods
Sold. If the physical inventory count shows a lower balance than the inventory system, the
accountant debits Cost of goods Sold and credits Inventory.

+ Large portion of inventory may be obsolete.

 There is a risk that inventory as a whole in the Financial statement will not be carried at the
appropriate value. Given that inventory is likely to be a material balance in the statement of
financial position of Binh Anh Co.

 The factors that will contribute to the likelihood of these risks causing a misstatement are
matters such as:

+ Whether management regularly review inventory levels and scrap items that are obsolete.

+ Whether such items are identified and scrapped at the inventory count.

+ Whether such items can be put back into production and changed so that they are saleable.

(2) Prosurement and payments system problems:

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Assignment Financial Audit I High-quality Auditing 58A
+ Prenumbered purchase orders are righly prepared by the purchasing department and approval
by the vice president of finance for all purchases. However, the original form must send to the
supplier and copies to the department head, receiving, and accounts payable. The company lacks
this activities.

 It made difficulty for other related departments to monitor and check the occurance as well
as the complete and accuracy of the purchases. Purchasing department might have
oppotunities to commit risks of fraud about ignoring some orders to steal money.

+ The receiving department counts the good received and prepare prenumbered receiving report,
send a copy to accounting.

 This activies may lead to the prenumbered of two departments is not matched, raise
opportunities for them to collude together. This is a kind of fraud risk.

+ Sometimes goods received cannot be examine fully by the receiving department due to lack of
personal.

 Lacking of separation of duties leads to the risks that employees collude to manipulate the
fraud that they made to steal money or purchases.

+ The comparing and recording are done by the payable accountant software and the checks and
updates the cash disbursements journal are also done by the same person

 Lacking of separation of duties may cause the fraud due to the personal interest.

The risks of misstatements of payables in the Financial statements are due to:

 The entity understating its liabilities in the financial statements (completeness)

 Cut-off between goods inwards and liability recording being incorrect (cut–off)

 Non-existent liabilities being declared (existence, rights and obligations)

+ In April and December 2018, due to the leave of the CEO, accountant made payment to
suppliers but the payments were approval by the chief of accoutant instead of the CEO.

 This is a kind of risks of management: accountant and chief of accountant may have
opportinities to collude together to steal money. The suppliers statement reconciliations may
have not always been performed by the client, and invoices may were not approved before
payments

 Risks may arise at this stage of proceedings:

• False invoices are paid in error

• Invoices are paid too soon

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Assignment Financial Audit I High-quality Auditing 58A
• Payment is not correctly recorded

• Credits are not correctly recorded

• Payments are not recorded in the right period

• The key risk is that money might be paid put by the business inappropriately.

+ Binh Anh does not use the monthly accounts payable listing.

 When receiving monthly bank reconcilation, it is difficult to reconcile the balance and detect
the differences.

 This is an expression of control risk due to the deficiencies in monotoring payable accounts.
In addition, the accountant receive the reconcilation directly from the bank, it is easy for her
to change some figures in payable accounts or receivable accounts to hide her mistakes or
frauds (fraud risks).

2. Deciding audit procedures and Determine Material

2.1. Deciding audit procedures

- Performing both Tests of control and Substantive test with Inventory management system and
Payable and payment systems

2.2. Determine Scope, Materials

 Binh Anh Co is a commercial company and has 60 shareholders as well as many potential
investors, the shareholders are most likely to be interested in how much they receive
dividends from profit before tax. Therefore, Profit before tax (PBT) is the primary
benchmark for deciding what material for this company. Setting overall materiality at 10% of
PBT give an overall materiality figure of $51,900.

 From overall understanding of Binh Anh Co we reckon that Binh Anh has a weak control
environment and will identify numerous areas requiring adjustment so the risk of material
misstatement in Binh Anh Co is higher and performance materiality should therefore be
lower. In addition, typically the percentages range from 75% (low risk) to 50% (high risk)
thus Performance materiality will be a set 65% of overall materiality.

Overall materiality – This is the amount we use in assessing the overall impact $51,000
on the financial statements of potential adjustments

Performance materiality (PM ) - We use this to plan the amount of work we are $33,735
going to do – for example in calculating sample sizes

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Assignment Financial Audit I High-quality Auditing 58A
Tolerable Error (TE – 50% PM) – We use this to apply planning materiality at $16,868
the individual account balance level

Nominal Amount (1% of PM) - an amount at which any adjustments below it, $337
individually or in the aggregate, would be immaterial to the financial statements
being audited and is an amount consistent with the Binh Anh Co’s expectations.

 As the information above, we judge that Current assets is a high-risk area. Setting overall
materiality at 2% of total assets give an overall materiality figure of $554,540 (= 2% x
$27,727,000).

Performance materiality for current assets could then be set in proportion to client’s size relative to
total asset, at $327,200 (= $16,360/$27,727 x 554,540)

Overall materiality $554,540

Performance materiality (PM ) $327,200

Tolerable Error (TE – 50% PM) $163,600

Nominal Amount (1% of PM). $3,272

 Determining materiality as an average of two benchmarks:

Overall materiality $302,770

Performance materiality (PM ) $180,468

Tolerable Error (TE – 50% PM) $90,234

Nominal Amount (1% of PM). $1,805

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Assignment Financial Audit I High-quality Auditing 58A

PART II.

IDENTIFY AND USE APPROPRIATE AUDIT PROCEDURES TO COLLECT EVIDENCE

1. Tests of Control

1.1. Audit of Inventory

- The objectives arise out of the risks:

+ Separation of duties between assest managenment and recording person.

+ All inventory inwards should be recorded and remained inventory should be counted, supported
by physical inventory counts

+ All obsolete inventory should be devaluated and provisions may be required on the grounds that
their net realizable value is below cost

+ Company should have control systems about inventory so that materials are detected timely.

- Audit procedure

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Assignment Financial Audit I High-quality Auditing 58A
Procedures Tests of control

Observation  Observe physical security of inventories and environment in

warehouse: camera system, security guard,…

 Observe the quality and the condition of the goods – Is there any
sign of impairment/obsolescence?

 Observe whether the client complies with the proposed

policies/procedures for the count – Are these procedures being
performed correctly and efficiently?

Inspection  Reconciliations of inventory counts to detailed inventory

records (this gives overall comfort on theadequacy of controls
over the recording of inventory).

 Check authorization for write-off or scrapping of inventories

 Check recorded inventory against suppliers invoices and goods

received notes.

 Check sequential controls over purchase requisition, purchase

order, receiving report and vouchers.

Reperformance  Assess adequacy of inventory counting procedures and attend

count to ensure they are carried out.

Inquiry See the Questionare bellow:

Internal Control Questionare for Inventory

Question Yes No N/A Remarks

Whether Binh Anh should establish policies to ensure proper accounting, reporting, and
safeguarding over inventory? Inventory records need to be maintained to record purchases.
Perpetual inventory records are updated immediately and represent the quantity on hand, unit
cost, and total cost. Periodic inventory systems record the beginning balance and are updated
at the end of each fiscal year as determined by a physical inventory.

1. Are receiving, accounting and storing

responsibilities properly segregated?

2. Has management taken the appropriate steps to

safeguard goods against risk of loss by theft (e.g:
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Assignment Financial Audit I High-quality Auditing 58A
camara systems in warehouses, restriction to
access warehouses which are granted only to
authorized personnel, goods kept in appropriate
location with specific description)?

3. Do departments compare quantities goods

received against purchase orders? (GDN, GRN…)

4. Is adequate provision made for obsolete and

inactive items in inventories?

5. Does management monitor and approve the

write-offs of obsolete and inactive inventories?

6. Are all classes of inventory items physically

counted annually?

7. Do procedures for physical counts provide for:

a. Clearly marking damaged and obsolete

inventory?

b. Use of pre-numbered tags which are accounted

for?

c. Prompt adjustment of records for inventory

discrepancies ?

d. Recording counts on permanent inventory count

sheets

8. Does management review the reconciliation of

physical inventory counts to the inventory
records?

9. Are detailed perpetual inventory records

periodically reviewed for slow-moving items?

10. Is a perpetual inventory system (including

quantities and value) in use as to all major classes
of inventory?

11. Are perpetual inventory records updated

promptly?

12. Are discrepancies between physical counts and

perpetual records investigated and resolved?

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Assignment Financial Audit I High-quality Auditing 58A

1.2. Audit of Purchase system (Payment)

- The objectives arise out of the risks:

+ All expenditure is for goods that are received

+ All expenditure is authorised

+ All expenditure that is made is recorded correctly in the norminal and payable ledgers

+ Payments are not made twice for the same liability

- Audit procedures

+ Inquiry:

Internal Control Questionre for Payment system

Question Yes No N/A Remarks

13. Is purchasing function separate from receiving and

accounting?

14. Are purchase orders approved by appropriate

authorisatons?

( By vice president finance)

15. Are purchase orders required for purchasing all equipment

and services?

16. Are purchase orders controlled and accounted by

prenumbering and keeping a logbook?

17. Do organization have a receiving function to handle

receipts?

18. Are quantities and description of goods received checked

by the receiving department against a copy of the purchase
order?

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Assignment Financial Audit I High-quality Auditing 58A
19. Is a logbook or copy of receiving ticket kept in the
receiving department and send other one to accounting
department?

Area Tests of control

Bank  For a period which includes a reconciliation date reperform

reconciliations reconciliation.

 Verify that reconciliations have been prepared at regular

intervals throughout the year

 Scrutinise reconciliations for unusual items

Petty cash payment  Check to supporting vouchers

 Check whether they are properly approved

 See that vouchers have been marked and initialled by the casher
to prevent their reuse.

2. Substantive procedures

2.1. Auditt of Inventory

- The key issues for Auditors when auditing inventory of Binh Anh are:

 As perpetual inventory counting is used, auditors have to check that management does the
following:

+ Ensure that all inventory lines are counted at least once a year

+ Maintains adequate inventory records that are kept up-to-date.

+ There are no inventory movements whilst the count is taking place, and inventory records
are updated up until the time of the inventory counts.

+ Investigates and corrects all material differences. Reasons foe differences should be
records and any necessary correctve action taken. All corrections to inventory movements
should be authorised by a manager who has not been involved in the detail work; these
procedures are necessary to guard against the possibility that inventory records may be
adjusted to conceal shortages.

 To ensure that obsolete inventory is not included at full cost in the finanacial statements.
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Assignment Financial Audit I High-quality Auditing 58A
 To ascertain that inventory included in the financial statement exists and that all existing and
valuabe inventory is included.

 To ensure that inventory is held at the appropriate value in the financial statements.

- Audit Procedures

Assertions Procedures

Existence  Obtain a copy of the count instruction issued to employees of

Binh Anh and review them to assess whether controls over the
count appear strong enough to ensure that the correct amount of
inventory will be reflected in the financial statements

 Assess the key issues arising at the count; for instance, what the
hihg value inventory is, what the risks are, or whether there are
any specific issues that will make counting complex.

 Plan count attendence, including sample sizes and target

inventory lines

 Attend the inventory count, at which auditor will carry out

sample counts to ensure that the counters are counting properly,
the instructions are being adhered to, procedures for obsolete
and damaged inventory are being followed.

 Trace a sample of items on th efinal inventory sheets back to

orginal count documents and ensure all count documents are
reflected in the final sheets.

Completeness  Follow up items sampled at the inventory count to ensure that

they are inclued in the final inventory sheets, and therefore the
financial statements.

 Carry out a “cut-off” test, ensuring that year-end deliveries and

sales have not been double counted (for example, by including
an item in inventory and in sales). This will be done by
selecting the goods inwarda and outwards notes on either side
of the year-end and tracing them to invoices, ledgers and
inventory sheets to ensure they are recorded correctly.

Valuation  Check that the calculations of valuation on the final inventory

sheets have been made correctly

 Ascertain the accounting policy for inventory cost from the

financial statements (for example, FIFO) and confirm it is
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Assignment Financial Audit I High-quality Auditing 58A
reasonable and appopriate

 Trace the cost of input inventory sample to purchase invoices to

ensure cost has been recorded correctly and on the right basis.

 Compare valuation of cost for inventory sample to post-year

end selling pricesm by reference to sales orders or invoices, to
ensure inventory is held at the lower of cost and NRV.

 Review Binh Anh’s overhead allocation to ensure only

appropriate costs are included (for example, not idle time) and
perform analytical procedures comparing overhead allocation to
previous year.

 Follow up items noted as obsolete or damaged at the inventory

count to ensure that valuation has been appropriately adjusted
to reflect NRV.

 Agree the total on the inventory listing to the perpetual

inventory records, using CAATS

2.2. Audit of Payables

- Key areas when testing payables:

+ Ensuring that all liabilties are included (completeness)

+ Confirming that all liabilities are owed by the company (rights and obligations)

- Audit procedures

Assertions Audit procedures Notes

Completeness - Comparing supplier  Auditors include within the sample

statements with year-end payables with nil or negative payables
payables ledger balances ledger balances

 Be practicularly wary of low balances

with major suppliers

Rights and Send confirmation letter Positive replies will be required when:
obligations to suppliers
 Suppliers’ statements are, for whatever
reason, unavailable or incomlete

 weakness in internal control or the

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Assignment Financial Audit I High-quality Auditing 58A
nature of the clients business make
possible a material misstatement of
liabilities that would not othewise be
picked up

 it is though that the client is

deliberately trying to understate
payables

 the accounts appear to be irregular of

if the nature or size of balances or
transactions is abnormal

Cut - off Making estimation of the

accural and comparing
this with the amount
accrual by client.

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Assignment Financial Audit I High-quality Auditing 58A

PART III. DRAFT AN AUDIT REPORT

Independent Auditors’ Report

To the Board of Directors and Stockholders

Binh Anh Company

We have audited the draft financial statements of Binh Anh Company for the year ended
December 31, 2018 and a summary of significant accounting policies and other explanatory
information.

Management’s Responsibility for the Financial Statements

Managers of the company are responsible for the preparation and fair presentation of the
financial statements in accordance with Vietnamese Accounting Standards (VAS) and the
Companies Act 2014 in Viẹtnam. This responsibility includes the design, implementation and
maintenance of internal control relevant to the preparation and presentation of the financial
statements that give a true and fair view and are free from material misstatement, whether due to
fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audit in accordance with Vietnamese Standards on Auditing (VSA) issued by The
Ministry of Finance of Vietnam. Those Standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the
auditor’s judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and
presentation of the financial statements that give a true and fair view in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on whether the entity has in place an adequate internal financial controls system over
financial reporting and the operating effectiveness of such controls. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
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Assignment Financial Audit I High-quality Auditing 58A

Basis for Adverse Opinion

As explained in Note to financial statement, the Company had errors in the payables balance
which is material to the statement of finacial position. The Company has not been aslo able to
determine the ability to meet the short term debts and operate some new stores due to the large
portion of obsolete inventory. In addition, the Company has not made appropriately adjusting
entries to record devaluation of stock. The effects on the financial statements of this action is
adverse and related to the performace of the entity and consequently to many shareholders.

Adverse Opinion

In our opinion, because of the significance of the matter described in the Basis for Adverse
Opinion on paragraph, the financial statements referred to above do not present fairly, the
financial position of Binh Anh company, as of December 31, 2018 or the changes in financial
position or cash flows thereof for the year then ended.

Other Matters

Required Supplementary Information

Vietnamese Accounting Standards (VAS); Companies Act 2014 in Viẹtnam; Vietnamese

Standards on Auditing (VSA) be presented to supplement the basic financial statements. We
have applied certain limited procedures to the required supplementary information in accordance
with auditing standards generally accepted in Vietnam, which consisted of inquiries of
management about the methods of preparing the information and comparing the information for
consistency with management’s responses to our inquiries, the basic financial statements, and
other knowledge we obtained during our audit of the basic financial statements. We do not
express an opinion or provide any assurance on the information because the limited procedures
do not provide us with sufficient evidence to express an opinion or provide any assurance.

Supplementary and Other Information

Our audit was conducted for the purpose of forming opinions on the financial statements that
collectively comprise Binh Anh’s basic financial statements. The introductory information,
combining and individual nonmajor fund financial statements, budgetary schedules, other
schedules, and statistical section are presented for purposes of additional analysis and are not a
required part of the basic financial statements.

Because of the significance of the matters described in the “Basis for Adverse Opinion on
paragraphs, collectability as discussed previously, it is inappropriate to and we do not express an
opinion on the supplementary information referred to above.

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Assignment Financial Audit I High-quality Auditing 58A
The introductory information and the statistical sections have not been subjected to the auditing
procedures applied in the audit of basic financial statements and, accordingly, we do not express
an opinion or provide assurance on them.

Your faithfully

AIC

PART IV. DRAFT MANAGEMENT LETTERS

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Assignment Financial Audit I High-quality Auditing 58A
AIC
The Directors

BINH ANH STOCK COMPANY

Ba Dinh,

Ha Noi.

13th May 2019

Dear Sirs/ Madams,

Management Letter - Year ended 31 December 2018

We have audited in accordance with the International Standards on Auditing the financial
statements of Binh Anh Stock Company for the year ended 31 December 2018 and issued our
report thereon date 15 March 2019. An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the finacial statements. The procedures selected
depends on our judments, including the assessments of the risks of material misstatement of the
financial statements, whether due to frauds or errors. In making those risks assessment, we
considered internal control relevant to the company’s preparation and fair presentation of the
financial statements in order to design audit procedures that are appropriate in the circumstances.

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

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

We would be pleased to discuss these points with you at your convenience.

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

This communication is intended solely fro the information and use of the audit committee,
management and others within the Company and is not intended to be and should not be used by
anyone other than specified parties.

Your faithfully

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Assignment Financial Audit I High-quality Auditing 58A
AIC

(signed by Audit Partner)

Appendix

I. Inventory system

Weaknesses

 Unreasonable classification of inventory

 Lack of physical and financial control over times of inventory

 Lack of restriction in warehouses

 Lack of separation of duties between warehouse management and recording person

 Examination of inward inventory is not fully implemented by the receiving department

 Perpeptual records lack of description of value of inward inventory

 Untimely reconcilation between results of inventory counts and its record figures

Implications

 Inventory could be misappropriated (stolen by employees, warehouse manager)

 Inventory may be obsolete without any devaluation of stock.

 The differences of any errors is not corrected immediately.

 The year end inventory figure could be misstated

Recommendations

o Warehouse maps or warehouse books should be created to classify and record locations of
different kinds of inventory in warehouse.

o A camera system in warehouse should be operated to keep track the people coming in and out
with any inventory

o Using the inventory description to keep track of their condition, age and value

o Permit only authorised person to come in the warehouses

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Assignment Financial Audit I High-quality Auditing 58A
o Store-keeper who records inventory should be hired to separate duties of warehouse manger

o Management should regularly review inventory’s levels, condition, age to determine and making
provison for inventories that are obsolete.

o Hire more staffs in receiving department to have enough personnel to check the received goods.

o Adding description of quanlity of received goods.

o A simple system of perpetual inventory should be implemented to check for the dispatch and
receipt of inventory and any differences should be corrected promptly.

II. Purchases and payments systems

Weaknesses

 Inconsistency in prenumbering of documentations

 Lack of monthly accounts payable listing

 The suppliers statement reconcilations are not always performed and invoices are not
approved by authorised person before payment.

 Problems about accouting software in recording transactions in payable ledger and

individual accounts of

Implications

 Prenumbered of documentations in purchasing department and receiving department are not

matched leading to difficult to monitor and check

 Trade payables balance may be misstated

 Difference number arises between payable ledger and individual accounts

 Accountant and chief of accountant may collude together to steal money by understating
payables.

Recommendations

o Assignment of specific duties to each employee, specifically separate workers prepare checks
and updates cash disbursements, separate authorization of the payment of vendor’s invoice and
approve the cash disbursement.

o Use the monthly accounts payable listing.

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Assignment Financial Audit I High-quality Auditing 58A
o Implement additional review procedures to verify that all payables are recorded in the correct
period and reconcile the open Purchase Orders at the end of each month.

o Measure purchasing performance. Consistently review statistics and use decision support tools to
constantly improve purchasing and procurement activities. In addition to prenumbered purchase
orders that are not only approved by the vice president of finance for but also send to the
supplier and copies to the department head, receiving, and accounts payable.

o All charges incurred should be allocated to the relevant cost centre to promote accountability of
these centers.

o Proper supporting documents for all payments must be retained and property filed for easy
retrieval.

o Control over payments would be improved if only one cheque book was in sue at any one time.

GROUP PERFORMANCE REVIEW

No. Full name Student Code Performance - Role

1 Kieu Thi Cam Anh 11160151 - Leader

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Assignment Financial Audit I High-quality Auditing 58A
- Planning Audit (Part I)

- Final check, add information and edit

file Word

2 Nguyen Thi Mai Huong 11162242 - Substantive Test (Part II)

- Management letter (Part IV)

3 Nguyen Thanh Huong 11162312 - Test of Control (Part II)

- Audit Report (Part III)

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