VIETNAMESE STANDARDS ON AUDITING
Standard no. 501: Additional audit evidences for special items and events
(Issued in pursuance of the Finance Minister’s Decision No. 28/2003/QD-BTC dated 14 March 2003)
GENERAL PROVISIONS
01. The purpose of this standard is to prescribe the basic principles and procedures and guide modes of application thereof to the gathering of additional audit evidences for special items and events in the process of auditing financial statements. The principles and procedures prescribed in this standard supplement those prescribed in Standard No. 500 “Audit evidences.”
02. The application of the principles and procedures described in this standard shall assist auditors and audit firms in obtaining sufficient appropriate audit evidences for special items in the financial statements and several related events.
03. This standard shall apply to the audit of financial statements and also to the audit of other financial information and related services of audit firms.
Auditors and audit firms must observe the provisions of this standard in the process of conducting audits.
The audited units (clients) and users of the audit results must possess necessary knowledge of this standard so as to cooperate in dealing with relationships relating to the supply and gathering of audit evidences for special items and events.
CONTENTS OF THE STANDARD
04. Special items and events in the audit of financial statements normally include:
- Inventory;
- Receivables;
- Long-term investments;
- Litigation and dispute cases;
- Information on various domains or geographical areas.
Whether items and events are determined as special or not depends on each audited unit and the assessment of auditors. When determining that items or events are special, auditors must perform the following:
Participation in inventory counts
05. The audited units must establish inventory counting procedures and count inventory physically at least once a year to serve as a basis for checking the reliability of the regular declaration system and for preparing financial statements.
06. When inventory is determined as material to the financial statements, auditors must gather sufficient appropriate audit evidences regarding the existence and conditions of inventory by participating in physical inventory counts unless such participation is impossible. When the units count inventory, auditors may only supervise the counting or directly join in counting inventory samples so as to gather evidences regarding compliance with the counting procedures and check the reliability of these procedures.
07. If unable to participate in the physical inventory counts on the planned date, auditors must re-count a number of commodity items on another date and, when necessary, check inventory fluctuations occurring before the time of recounting and after the time the units take the count.
08. If unable to participate in the count, for example due to the nature and location of the count, auditors must determine whether they can carry out alternative inspection procedures in order to gather sufficient appropriate evidences regarding the existence and conditions of inventory, so that they can avoid to express an exclusion opinion because of the limitation in the auditing scope, for example, checking sale vouchers after the date of physical inventory count may provide appropriate audit evidences.
09. If auditors plan to participate in the physical inventory count or carry out alternative inspection procedures, they must consider the following factors:
- The characteristics of the accounting and internal control systems relating to inventory;
- Inherent, control and detection risks, and materiality of the item of inventory;
- Whether or not the inventory counting procedures have been established and instructed to inventory counters;
- The inventory count plan;
- The locations of inventory counting;
- The necessity to invite experts to participate in the counting.
10. Where auditors have participated in the physical inventory count one or more times during the year, they only need to observe the carrying out of counting procedures and check inventory samples.
11. If units estimate the inventory quantity, such as estimating a coal pile, auditors must consider the reasonableness of this method of estimation.
12. When the physical inventory count is taken simultaneously at various locations, auditors must select appropriate locations for participation in the count, depending on the materiality of the category of inventory and the assessment of inherent and control risk at these locations.
13. Auditors must check the audited units’ regulations on inventory count:
a/ The application of control procedures, such as checking of methods of weighing, measuring, counting, receiving and delivering inventory; procedures for recording warehouse books, warehouse cards, recording of count cards and summing of count results;
b/ The determination of unfinished products, slow-moving, obsolete or damaged goods, goods sent for processing, to agents or on consignment, goods received for processing, for agency sale…;
c/ The determination of appropriate procedures relating to the internally circulated goods, goods received and delivered before and after the counting date.
14. To ensure the inventory count procedures be strictly complied with, auditors must supervise the carrying out of these procedures and may directly participate in the sample count. Auditors must check both the accuracy and completeness of the count cards by selecting and checking a number of commodity items actually kept in the warehouses for comparison with the count cards or selecting and checking a number of count cards for comparison with the goods actually kept in the warehouses. Of the checked count cards, auditors should consider which ones need to be retained for subsequent checking and comparison.
15. Auditors should also consider period-end procedures, mostly details of the value of inventory moved just before, during and after the count so that the accounting of such value can be checked later.
16. In practice, the physical inventory count may be conducted at a time other than period end. This method will normally apply to audits only when control risk is assessed as low or average. In this case, auditors must carry out appropriate procedures to consider whether fluctuations in inventory between the count date and the period-end date are correctly accounted or not.
17. If the audited units apply the periodical count method for accounting inventory, the value of inventory is determined at the period-end, but auditors must carry out several additional procedures to assess whether or not the reasons for any significant differences between the count data and the data in accounting books have been determined by the units and to check whether or not such differences have been adjusted.
18. Auditors must check the year-end lists of counted inventory to determine whether they reflect fully and accurately the actual inventory quantities or not.
19. Where inventory is under the control or custody of a third party, auditors must request the third party to directly confirm the quantities and conditions of inventory held by the third party on behalf of the unit. Depending on materiality of this inventory, auditors should also consider the following factors:
- The integrity and independence of the third party;
- The necessity to directly participate in the count or to invite other auditors or audit firms to participate in the count;
- The necessity to have other auditors’ reports on the compatibility of the third party’s accounting and internal control systems for ensuring that inventory is correctly counted and carefully preserved.
- The necessity to examine inventory-related documents held by the third party, for example, warehouse receipts, confirmations from other parties that they are holding such inventory as collateral.
Confirmation of receivables
20. Where receivables are determined as material to the financial statements and when it is likely that debtors will respond, auditors must plan to request these debtors to confirm such receivables or data constituting the account balance of receivables.
21. Direct confirmation shall provide reliable audit evidences regarding the existence of receivables and the accuracy of account balances. However, such confirmation does not normally provide sufficient evidences regarding the recoverability of receivables or regarding the existence of unaccounted receivables.
22. Where auditors assume that debtors will not respond to letters of request for confirmation of receivables, they must plan alternative procedures, for example, examining documents constituting the account balance of receivables.
23. Auditors may sort out receivables which need to be confirmed so as to ensure the existence and accuracy of receivables as a whole, taking into account receivables that may affect identified audit risk and other planned audit procedures.
24. Letters of request for confirmation of receivables shall be sent by auditors, clearly stating the authorization by the audited units and the permission for debtors to supply information directly to auditors.
25. Auditors’ letters of request for confirmation of receivables (possibly including confirmation of payables) in Vietnam dong and in foreign currency (if any) may take two forms:
- Form A: clearly stating the amount of receivables and requesting debtors to confirm it is correct or how much it is;
- Form B: not stating the amount of receivables but requesting debtors to clearly indicate the amount of receivables or express different opinions.
26. Form-A confirmation (see paragraph 25) provide audit evidences more reliable than form-B confirmation (see paragraph 25). The selection of either form depends on each specific circumstance and the auditors’ assessment of potential risk and control risk. Form-A confirmation is more appropriate when potential risk and control risk are assessed as high.
27. Auditors may combine both forms of confirmation above. For example, when the total of receivables consists of a small number of large receivables and a large number of small receivables, auditors may request Form-A confirmation for all or some large receivables and accept Form-B confirmation for a large number of small receivables.
28. Past a reasonable period of time after sending letters of request for debt confirmation, if receiving no replies from debtors, auditors may send a reminder letter to them. Letters of confirmation of exceptional cases should be more thoroughly investigated.
29. Auditors must perform alternative procedures or continue investigating and/or interviewing when:
- No reply is received;
- Replies confirm debt amounts different from the balances of the audited units;
- Replies contain different opinions.
After performing alternative procedures or continuing investigating and/or interviewing, if finding that there is still not enough reliable evidences or it is impossible to perform alternative procedures, any difference shall be regarded as an error. For example, performing alternative procedures such as examining sales invoice and receipts of receivables for which no reply is received.
30. In practice, when control risk is assessed as low, auditors may request confirmation of the balance of receivables at a time other than the last day of the fiscal year. For example, if auditors must finish the audit work within a very short time limit after the last day of a year, they must examine all transactions occurring between the time when the balance of receivables is confirmed and the last day of the fiscal year.
31. Where the directors of the audited units request auditors not to send letters of request for confirmation to a number of debtors, auditors must consider whether such requests are justified or not. For example, if a receivable is being disputed between the two parties or if requests for confirmation of debts would badly affect on-going negotiations between the units and debtors. Before accepting such requests, auditors must consider evidences supporting the directors’ explanations. In this cases, auditors must apply alternative procedures for the balance of receivables for which letters of request for confirmation must not be sent.
Valuation and presentation of long-term investments
32. If long-term investments are regarded as material to the financial statements, auditors must gather sufficient appropriate audit evidences regarding the valuation and presentation of long-term investments.
33. The procedures for auditing long-term investments normally aim to determine whether or not the units have the ability and intend to hold these long-term investments and must gather written representation to that effect.
34. The audit procedures normally include the examination of financial statements and other relevant information, such as determination and comparison of the market prices of securities with the book value of long-term investments up to the date of the auditing reports.
35. If the market prices are lower than the book value, auditors must consider the necessity to set up price decrease reserves. If doubting the recoverability of investments, auditors must take into account appropriate adjustments and explanations presented in the financial statements.
Litigation and dispute cases
36. Litigation and dispute cases involving the audited units, which may have a material effect on the financial statements, must be presented in the financial statements as provided for.
37. Auditors must carry out procedures to identify litigation and dispute cases involving the units, which may have a material effect on the financial statements. These procedures include:
- Inquiring the directors, asking for written representations;
- Examining minutes of meetings of the management boards and correspondence with the units’ legal advisors;
- Examining legal advise expenses;
- Using all information relating to litigation and dispute cases.
38. When litigation and/or dispute cases have been identified or when auditors doubt that they may exist, they must request the units’ legal advisors to directly supply information. With this method, they can obtain sufficient appropriate audit evidences regarding the cases as well as the degree of damage affecting the units’ financial statements.
39. Letters of request for the units’ legal advisors to supply information on litigation and/or dispute cases must be signed by the audited units and sent by auditors. Such a letter contains the following contents:
- A list of litigation and/or dispute cases;
- The assessment by the audited unit’s director of the consequences of the litigation and/or dispute cases and estimation of their financial impacts, including related legal expenses.
- A request that the unit’s legal advisor confirms the reasonableness of the director’s assessments and provides the auditors with further information
40. Auditors must consider the happenings of litigation and/or dispute cases up to the date of signing of the auditor’ reports. When necessary, auditors may gather updated information from legal advisors.
41. Where the cases are very complicated or there is disagreement between the directors of the audited units and their legal advisors, auditors must meet with the legal advisors to discuss the consequences of the cases. Such meetings must be consented by the directors of the audited units and attended by representatives of the units’ directorates.
42. Where the directors of the audited units refuse to permit auditors to meet with the units’ legal advisors, this will constitute a limitation in the auditing scope and auditors must give a partial acceptance opinion or an opinion on refusal to express opinion. Where the clients’ legal advisors refuse to reply with plausible reasons and auditors are also unable to gather sufficient audit evidences by applying alternative procedures, the auditors must consider whether this constitutes a limitation in the auditing scope and thus may express a partial acceptance opinion or an opinion on refusal to express opinion
Information on various domains or geographical areas
43. Where information relating to various domains and geographical areas is regarded as material to the financial statements, auditors must gather sufficient appropriate audit evidences regarding the information which needs to be disclosed in the financial statements in accordance with the current accounting standards.
44. Auditors must consider information relating to various domains and geographical areas in relation to the financial statements taken as a whole. Auditors are not required to apply audit procedures in order to express their own opinions on information relating to various domains and geographical areas. However, the concept of materiality must encompass both quantitative and qualitative factors and the auditors’ procedures used for determining material information must reckon this.
45. The audit procedures for information relating to various domains and geographical areas normally consist of analytical procedures and audit tests appropriate in each specific circumstance.
46. Auditors should discuss with the directors of the audited units the methods used to collect information relating to various domains and geographical areas, and consider whether or not these methods are in accordance with the current accounting standards and ensure that they are strictly applied. To realize this, auditors must consider sale turnover, charges of transfers between domains or geographical areas, elimination of amounts arising within a domain or area; comparisons with plans and other budget estimates, for example, the percentage of profits over sale turnover, and the allocation of assets and costs among segments in consistency with previous periods and the adequacy of the presentations in the financial statements when inconsistency exists.