Improving the audit process of fixed assets in financial audits conducted by VACO auditing company limited

Bachelor Thesis
National Economic University

TABLE OF CONTENTS

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Bachelor Thesis
National Economic University

STATUTORY DECLARATION
I herewith formally declare that I myself have written the submitted Bachelor
Thesis independently. I did not use any outside support except for the quoted literature
and other sources mentioned at the end of this paper.
I clearly marked and separately listed all the literature and all other sources which
I employed producing this academic work, either literally or in content.
Hanoi, 27/05/2016
Signature

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LIST OF FIGURES

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LIST OF DIAGRAMS

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INTRODUCTION
1. Rationale for the research
With the strong development of market economy, the process of international
economic integration that requires financing activities must take place in a transparent,
fair and public environment, because the increasingly complex economic information
will lead to a potential risk, misleading and unreliable economic information.
Currently, there are growing a number of investors both in local and abroad who
increase investment and seek profits in Vietnam market. Therefore, it is much more
essential to consider the need of using information to make correct decisions. And that
the information provided by the accounting should be assessed and confirmed
objectively by an honest and independent party. Thus, auditing activity was born and
the growth of this service is inevitable.
Nowadays, auditing service is considered to be one of the most professional
services which brings many benefits in creating an effective business market. In
Vietnam, auditing service is quite new, but due to the high demands of the economy as

well as the encouragement of the Government, this service is growing strongly and
strongly. Currently, along with the development of many auditing firms, the auditing
of services offered is increasing more diversely. However, the auditing about financial
statements is still the principal activity of independent audit firms. It means that the
auditing of financial statements plays an important role in the economy. Due to the
higher complexity of these transactions, an audit about financial statements in general
becomes more difficult and it is needed to study to be more perfect.
As a matter of fact, the item "Fixed assets" plays an important position in the
audited financial statements. With the inherent nature of fixed asset, it is an essential
part which is enable to enhance a sustainable growth for businesses; moreover, there is
an intimate relationship between fixed assets with other items on the financial
statements, thus the discovery of violations related to fixed assets, and the
inadequacies in the management and using of fixed assets are a necessary job. The
value of fixed assets in the enterprise is often a large, it also accounts for a significant
proportion compared to the total assets on the balance sheet, particularly in the
manufacturing enterprises (heavy industry, oil and gas, telecommunications
conglomerates ...). So, if there is a mistake related to fixed assets, the integrity of
financial reporting will be affected largely. Moreover, the fixed assets may be subject
to the administrating adjustments of managers that may cause violation in the financial
statements. Therefore, the auditing fixed assets is one of the most important stages in
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the audit of financial statements that requires the auditor to design and perform audit
procedures in the manner that can detect risk to the lowest level.
Realizing the importance of auditing work, especially in the audit of fixed
assets, with the knowledge has been fitted in the school and internship period in
VACO- a limited liability company, I chose the topic for the final practice:
"Improving the audit process of fixed assets in financial audits conducted by
VACO Auditing Company Limited".
2. Objectives of the research
This topic is studied in order to achieve these objectives: Systematizing the basic
theoretical issues on audit process of fixed assets in auditing financial statements,
clarifying the situations, assessing the advantages, limitations that have still existed in
the auditing process for fixed assets in auditing financial statements and proposing
some solutions to improve the process at VACO.
3. Methods of the research
The topic uses these research methods: general methodology and specific
research methods.
General methodology consists of reasoning allows dialectical materialism and
historical materialism and Specific research methods include statistical methods,
integrated analysis, collecting information methods through the study of documents
and interviews, information processing method through mathematical processing with
quantitative and qualitative information; to clarify the status about the theoretical in
auditing processes of fixed assets.
Besides the introduction, conclusion and the list of references ... the main
structure of the thesis consists of three chapters:
Chapter 1: Theoretical framework on audit of fixed assets in the financial audits
conducted by VACO Auditing Company Limited
Chapter 2: Practice of audit of fixed assets in the financial audits conducted by
VACO Auditing Company Limited
Chapter 3: Assessments and recommendation to improve the audit of fixed assets
in the financial audits conducted by VACO Auditing Company Limited

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CHAPTER I: THEORETICAL FRAMEWORK ON AUDIT OF FIXED
ASSETS IN FINANCIAL AUDIT CONDUCTED BY VACO AUDITING
COMPANY LIMITED
1.1. Features of fixed assets
1.1.1. Nature and content of fixed assets
First, fixed assets are assets that have great value, long duration of use and
involved in many business and production cycles. Fixed assets is a significantly
proportion of accounting items on the balance sheet.
Second, fixed assets are material and technical of the unit. It reflects the
production capacity and the technical level of the application of the unit operations.
Fixed assets is an important factor in the ability of sustainable growth, labor
productivity growth, thereby the cost of goods and services will reduce.
Third, fixed assets are assets used for production and business purposes and not
for sale. In the course of use, the fixed assets are consumed. Their value is converted
gradually into operating expenses and will be recovered from the sale of goods and
services for business operations.
• Tangible assets
According to Vietnamese Accounting Standards No. 03, “assets with physical
forms held by enterprises for use in the production and trading in line with recognized

standards of tangible assets”. Tangible assets include: buildings and structures;
machinery and equipment; means of transport, transmission equipment; equipment,
management tools; perennial gardens, working animals; other type of fixed assets.
These assets are recorded as tangible fixed assets to satisfy simultaneously all
four following criteria: certain economic benefit in the future from the use of such
assets, the cost of such assets must be measured reliably, time use estimates over one
year, qualified valid under current regulations.
According to Circular 45/2013/TT-BTC dated 25/04/2013 of the Ministry of
Finance shall prescribe the standards of tangible assets must be valued at 30 million
dong or more (start applying for fiscal year 2014).
• Intangible assets
Initially, intangible fixed assets, according to the Vietnam Accounting Standards
No. 04, “the property has no material form, but determining the value and business by
holding, use in production and business, providing services or other objects for leasing
in line with standards recognized intangible assets”. Intangible assets include land use
rights, distribution rights, patents of invention, trademarks…
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An intangible asset is recognized as an intangible asset must satisfy
simultaneously definition of intangible assets and four recorded following criteria,
which are certain economic benefits in the future by bringing such properties, the cost
of assets must be measured reliably, time use estimates over one year, being qualified

for the value according to current regulations.
• Financial lease fixed assets
Financial lease fixed assets, according to Vietnamese Accounting Standards No.
06, "Leases", promulgated and published by Decision No. 165/2002 dated 31/12/2002
of the Minister of Finance is an agreement between two parties: lessor and lessee about
the lessor transfer use rights of property to the lessee for a certain period of time to
receive money to hire one or more times
Financial lease fixed assets is the leasing of assets which the lessor has
transferred substantially all the risks and rewards associated with ownership of the
leased assets. Property ownership can be transferred at the end of the lease term.
A finance lease agreement must meet 1 of 5 conditions:
First, the lessor transfers ownership of the property to the lessee at the end of the
lease term;
Second, t the inception of the lease, the lessee has the option to purchase the
leased assets at a price lower than the estimated fair value at the end of the lease term;
Third, duration minimum lease assets accounted for most of the time the
economic use of the property even though there is no transfer of ownership;
Fourth, at the inception of the lease, the present value of the lease payments
minimum dominate the fair value of the leased asset;
Fifth, leased asset is of specialized kind that only the lessee has the ability to use
no need to change, a major reconstruction.
Noticeably, fixed assets is a kind of commodity that exist through trading, it can
transfer the ownership and the using rights from one to another subject on material
market, can join in the many business and production processes. In the course of
engaging in business, fixed assets will remain the initial physical forms until damaged.
Lastly, during using, fixed assets will be worn gradually and its value is shifted to the
value of the product.
1.1.2. Accounting for fixed assets
1.1.2.1. Accounting items system
Under current accounting system, accounting fixed assets track on the following

accounts:
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Figure 1.1: Accounting items system of fixed assets
No

Concept

211

Tangible assets

2111

Buildings and structures perennial gardens

2112

Machinery and equipment

2113

Means of transport, transmission equipment

2114

Equipment, management tools

2115

Working animals

2118

Other type of fixed assets

213

Intangible assets

2131

Land use rights

2132

Rights issue

2133

Copyright, patents

2134

Trademarks, trade names

2135

Software program

2136

Permit and license

2138

Other intangible assets

214

Depreciation of fixed assets

2141

Depreciation of tangible assets

2142

Depreciation of financial assets

2143

Depreciation of intangible assets

2147

Depreciation of real estate investment

In addition, in the process of accounting, accountant also uses other related
accounts such as: 217 - Real estate investment; 331 - Payable to sellers; 111 – Cash;
112 - Bank deposits…
1.1.2.2. Bookkeeping and documents system of fixed asset
The books are used for accounting purposes of fixed assets include: book of fixed
assets, registers of fixed assets, book for monitoring fixed assets where used, the
subsidiary ledger, books of general...
The system of accounting documents including: fixed assets increased
accounting documents, fixed assets decreased accounting documents, depreciation
accounting documents of fixed assets.
Fixed assets increased accounting documents: contracts to buy fixed assets, bill
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of sale, delivery records of fixed assets, inventory records of fixed assets, amortization
test records…
Fixed assets decreased accounting documents: decision disposals of fixed assets,

liquidation records, sale contracts, delivery records and amortization, revaluation of
fixed asset records...
Depreciation accounting documents of fixed assets: spreadsheets and allocate
depreciation, registration Figures depreciation rate...
1.1.2.3. Organization of accounting of fixed assets
Transactions increased / decreased of fixed assets in company occurs
infrequently but larger scale and related to multiple accounts on the critical nature of
financial reports of a business, such as capital investment, loan... Accounting process
of fixed assets can be summarized through accounting Figure follows:
Figure 1.2: Generalization of fix assets accounting procedures
Historical cost
Beginning balance

Accumulated depreciation
Beginning balance

Increase in the
period

Depreciation expenses
Liquidation
in the period

Liquidation

Ending balance

Ending balance

Profit / Loss of liquidation

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Depreciation costs

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Fixed assets is one of the most important parts of assets in the enterprise. In the
course of using, fixed assets will be worn gradually, its value is shifted partially into
the value of the product or the services they produced, and this shift is considered in
the form of depreciation fixed assets. The key characteristics of the fixed assets that
are dominant in auditing is their great value. This is because the procurement process
and equipment and amortization of enterprises does not occur sporadically, this is
usually done in one sequence with relatively tight control of the business, thus the
fixed assets will be used in a long period, and the time for managing these assets is
often large. In the course of using, businesses must depreciate this assets, and the
application a reasonable depreciation policy greatly influence the level of honesty and
reasonableness of the information related to fixed assets in the financial statements. On
the other hand, during using period, these assets can be upgraded or repaired, which
can also affect the information on the financial statements. In fact, the recording
transactions related fixed assets will be in compliance with the principles: materiality,
cautiousness, and the historical cost principal. However, in the course of auditing, the
auditors have to note the risks related to fixed asset items such as original cost that can
be reflected opposite to the reality, noting incorrect increasing and decreasing property
values, improperly transferred resources

Depreciation and amortization fixed assets: Unsuitable methods in calculating
deprecation expenses, the unreasonable calculation and allocation and the inconsistent
in current regulations.
Fixed and upgraded fixed assets: repairing may be misunderstanding with upgrading
and vice versa. Therefore, the recording of increasing fixed assets is incorrect.
Liquidation: mistaken in confirming the residual value of fixed assets.
Depreciation for assets has expired but accountant continue to depreciate.
The basic information related to fixed assets mainly include: residual value,
original cost, accumulated depreciation, expenses related to depreciation and
amortization costs in production and business, which can affect the profitability or
costs of business. Therefore, when conducting the audit, the auditors may also detect
irregularities of these indicators in relation to each other.
1.1.3. Potential errors and frauds
When conducting the audit of fixed assets, the auditor needs to understand the
understanding of audit risk with fraud and errors in the economic transactions related
to fixed assets. Common risks in the audit of its fixed assets including:

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1.1.3.1. The errors exist in the transaction of fixed assets
Fixed asset management is not close: incomplete records of fixed assets, fixed
assets not transfer ownership to the unit but is recognized in the balance sheet; no
books and cards detailing each fixed asset.

The accountants forget to record its transactions related to fixed assets that
should have been recorded in the book. For example, accountant only record increased
fixed asset accounting which are not recording transferred funds.
Wrong determination of accounts in the case should have been Debit or Credit in
this accounting item but the accountant record to another accounting item inconsistent
with transaction such services incurred when businesses conduct minor repairs of fixed
assets, cost of repairs may that must be accounted into business expenses in the
accounting periods, the accountant recorded in the Debit fixed assets (No. 211) to
increase the value of its fixed assets on the balance sheet.
Errors in the record accounting process and the transfer of accounting books.
This is a common mistake of fixed assets that auditors have to pay attention. In the
record process, the accountant may inadvertently record the amount of bias, the upside
than the amount stated in the documents; accountants can also confuse while
transferring data from the journal to the ledger.
Misclassification: assets are not sufficient indicators recorded fixed assets but
are recognized as fixed assets, accounting confuse between tangible fixed assets and
intangible assets. Incorrect classification of intangible assets: land use rights, the cost
of compensation and site clearance ... Noting increase their costs of intangible assets
that are not strictly defined as the cost of establishing the company, the cost for the
period research…
Duplicate errors: recorded several times a transaction in the different books.
Errors due to poor level of accountant lead to mistake when record transactions arising
in the book or when the new regime issued, accountant don’t know the content of all
transaction or do not fully understand the transaction should lead to wrong errors in
the accounting process.
1.1.3.2. The frauds exist in the transaction of fixed assets
In fact, the cause-related transaction of fixed assets being reflected discrepancies
by the accountant deliberately because many different purposes. In terms of
transactions nature, intentional violations are critical nature, the frauds often have
arrangements so during the audit fixed assets items, the auditor need special attention

reviews. Some fraud generally occurs in practice.
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Firstly, the frauds to embezzle appropriation difference value between invoices
and actually incurred, such as false invoicing recorded additional cost of fixed assets
by falsifying invoices when shopping or decrease the liquidation value by collusion
with third parties, repair documents, forgery of vouchers relating to procurement fixed
asset’s cost. Accountant records repair costs higher than the fact to appropriate the
difference as compared with the reality.
Secondly, records of economic transactions involving fixed assets, such as record
to the cost of fixed assets some incurred cost as interest expense; cost overhaul fixed
assets non-upgrade, do not increase the capacity or time to use.
Thirdly, attempt to conceal documents, omitting the economic transactions in
order to achieve their own interests as deliberately not record the proceeds from the
liquidation fixed assets fully depreciated to usurp part of this money.
Fourthly, deliberately misapplied existing accounting regulations and legal
documents related as applicable depreciation rates faster than prescribed, depreciated
against fixed assets fully depreciated to increase spending charges to reduce corporate
income tax
1.1.4. Key internal controls of fixed assets
Internal Control for fixed asset includes all policies, controlling procedures that
are set up with the purpose of managing and operating activities related to fixed assets
in the unit.

Steps done to process transactions on fixed assets include:
First, identifying investment needs and making investment decisions for fixed
assets: this work is usually done by the planning department. The determination of the
need for investment and making investment decisions for fixed assets should be based
on long-term investment plans, as well as the actual demand of the unit, and it must be
approved by board of directors. After the new fixed assets investment decisions are
approved, purchase department will carry out the purchase of fixed assets.
Second, organizing the reception of fixed assets: The most important objective of
this stage is to ensure that the departments will receive the assets under good quality as
well as it must be ensured about technical standards and quality.
Third, organizing the management and preserving the fixed assets during using
period: and this should be ensured both in terms of quantity and quality to avoid
damage and loss during using. Moreover, when fixed assets are damaged, it should be
promptly detected and measured and repaired.

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Fourth, organizing and managing fixed assets records include internal control
procedures. With recognizing fixed assets, after fixed assets was handed over and
made record to the users, accountant for fixed assets will open the card and record in
the book of firm. Each fixed asset needs to be saved in a separate file. Accountants are
responsible for classifying the assets to group that is suitable for the standards and
accounting regulations. Next, with depreciating fixed assets, the level for depreciation

fixed assets must be approved through the approval the usage and in the delivery
records of fixed assets. Time for using of fixed assets is based on the regulations on
the use and depreciation of fixed assets (stated by the Ministry of Finance).
Moreover, handling and recording the expenditures used for investing fixed
assets require accountant to inspect and review the documentation related to
investment activities and purchasing of fixed assets. These documents must be made in
accordance with regulations that have been approved, while accountant will make
payment procedures. When there is demand for payment, it need to be checked and
reconcile between invoices, contracts, estimating expenses and other relevant
documents to ensure that the payment value is reasonable, accurate and true which are
specified clearly in the contract.
Next, considering, approving and processing the repair transactions, liquidation,
and sale of fixed assets consists of the internal control procedures. With repairing fixed
assets: the repairing plan will be approved by the Board of Directors. When it is
completed, it is needed to have a record of liquidation and profile of completion. And
then accountant will inspect and review documents related to repairing and
maintaining activities to ensure that all documents are made in accordance with. With
liquidating and selling fixed assets: Every year, accountant will check the depreciation
Figure to make a list of fully depreciated assets during the year and make a plan to
liquidate fixed assets during the year. When there is arising a need for liquidation of
fixed assets that are not fully depreciated, but there is no need to use or inability to
recover, there should be a minutes of the identified technical condition for the property
(With the confirmation of the parts use). Accountant check the expenses and income
receiving from liquidation process. At the end of the period, accountant reconciles the
book and Figure of depreciation and amortization for fixed assets to ensure the
removal assets from the list.

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Diagram 1.1: Step to handle the fixed assets transactions
Identifying investment needs and making decisions

Organizing to receive fixed assets
Managing and preserving fixed assets during using period

Organizing and managing in recording the value of fixed assets

Recording the liabilities incurred in the investing process of fixed assets

Handling and recording the expenditures used to pay for fixed assets investment

Considering the disposals of fixed assets

* The contents of the Internal Control can be generalized as follows:
Initially, entity of Construction will issue the regulations on Internal Control for
the buying and liquidating fixed assets. It includes the provisions about functions,
responsibilities, rights and obligations of person or related parts in handling work of
internal control.
Then, the entity will implement the regulations about managing, controlling, and
they will participate in organizations assignment, management, using and liquidation
of fixed assets.
While implementing the principle of internal control, performing concurrent
principles for the system requires a separation between the managing and recording of

fixed assets; between managing and buying assets. Moreover, while performing
authorization rule the entity must have clear rules on each level about managing and
using of fixed assets. The good controlling these functions will avoid collusion or
fraud in the management of fixed assets.

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Figure 1.3: Objectives and Contents of Internal Control for fixed assets in the
enterprises
Objectives

Contents

1. Ensuring that all
transactions on
fixed assets are
rarified correctly
2. Ensuring that all
transactions of fixed
assets have
reasonable grounds
(The rise)

3. Ensuring the
proper evaluation,
professional and
reasonableness of
fixed assets
4. Ensuring the
classification and
proper recording
fixed asset
transactions
5. Ensuring full
recording on time
for all transactions
6. Ensuring the
accruing
(calculation,
synthetic) fixed
assets

There are strict specific regulations on the ratification of these
transactions
Independent control process is needed for approval.
There is sufficient evidence, documents relating to transactions such as
business proposals, contracts, liquidation; delivery records, billing,
documents related to transportation, installation, commissioning ...
The documents must be valid, and they have been processed to ensure
that they are not erased, repaired and they had to be controlled.
The documents must be numbered and managed according to the number
on the journals
Internal Control for judging policies of firm with fixed assets

Internal Control for calculating process and evaluating the business
Having proper classifying policies for fixed assets that are suitable with
the management’s requirements of firm
Having adequate dossiers for all transactions of fixed assets
Having adequate provisions about ordering transactions, from the detailed
books to the general accounting records.
Having internal control for above contents.
Each records related to fixed assets must be numbered and monitored
closely.
The recording these transactions incurred must be made immediately
after the operation occurred and completed.

The data must be calculated correctly

(Source: Book "Audit of other financial information", Academy of Finance)
1.2. Audit objectives in auditing fixed assets
That in accordance with the overall objectives of the audit of financial statements
is the confirmation about the reliability of the financial statements that are audited, the
specific objectives of the audit are fully collected appropriate evidence, and thereby
auditors can give confirmation about the reliability of the financial information. It also
provides information and documents that are all relevant when auditing fixed assets.
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To achieve the general audit objectives, auditors must achieve specific audit objectives
for fixed assets. Which are professional objective for auditing increase (decrease) in
fixed assets and objectives for audit overbalance of fixed assets
Figure 1.4: Specific targets for auditing fixed assets
Audit objectives and ending balance of fixed assets
* Objectives
to -Existing objective: the rules and steps of control fixed assets were
evaluate
internal designed and actually worked
control for fixed Taking effect objective: the rules of control are appropriate and efficient
assets
Continuous objective: the control regulation must operate regularly
The arising: All transactions that are recorded in the period are arising in fact.
* Objectives about Calculation and evaluation: To ensure all transactions are determined in
transactions of fixed accordance with principles and current accounting system
assets
Completeness: the transactions incurred during the period are fully
reflected and monitored in the accounting books.
Correctness: all transactions of fixed assets during the period are
classified correctly in accordance with the provisions, accounting
regulations and the characteristics of the business. These transactions are
recorded correctly under the method of accounting.
Correct period: transactions are accounted under accrual accounting
principles
Existence: all business fixed assets that are presented in the financial
statements need to be actual existence at the time of reporting. Figures in
the report must be same with actual inventory data of the business.
The rights and obligations: all fixed assets that are reported are under the
ownership of the business; for financial leasing fixed assets, they must be
under permanent control of the leasers

* Target
about Rating: account balances are evaluated according to accounting
ending balance of regulations, and based on the specific provisions of the enterprise.
fixed assets
Calculation: there is no flaws in determining the proper balance
- Completeness: all fixed assets are shown fully on the financial
statements (no missing or errors)
- Correctness: Fixed assets are classified correctly for presentation on the
financial statements.
- Cumulating: cumulated data on fixed asset records are properly
identified. There are no flaws in transferring data from detailed ledger to
the general ledger
- Reporting: criteria related to fixed assets on financial statements shall be
determined in accordance with the provisions of the Standards.

1.3. Sequence in auditing fixed assets in financial audits

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Without doubt, fixed assets plays an important role in production line in
business, therefore the recording of as well as depreciation and amortization fixed
assets need to be recorded properly and accurately. Moreover, on the balance sheet, the
fixed asset items accounts for a large proportion of errors, so its errors will result in a

material effect on the financial statements of the enterprise.
Actually, auditing procedures of fixed assets helps the auditor to collect evidence
to achieve the audit objectives. In general, the audit process of fixed assets is done in
all three phases: audit planning, audit implementing and completing the audit. The
process is usually as follows:

Clearly, planning a suitable audit processes with consistent guidance will help
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National Economic University

auditors save costs and time, as well as to help stakeholders assess the quality of the
audit and find whether the audit is in compliance with current standards or not.
Conversely, if the audit process is not built in a scientific way, the audit will not go in
the right direction, which increases the cost for the firm. Thus, building an audit
process is regarded as the soul of an audit, which helps the auditors achieve auditing
objectives.
1.3.1. Audit planning
Audit planning is considered the first step in an audit and it has an important
influence on subsequent stages. An appropriate audit plan will allow auditors to follow
the right track, avoid mistakes and finish the work quickly.
After assessing the preliminary information about the client, the auditor accepts
the audit and signs an audit contract. The next step, auditors will make audit plan that
typically includes the following key issues:
1.3.1.1 Initial audit planning

Initial audit planning is established for all audits of financial statement. It must
show the expected range and how to conduct the audit. To set up the initially audit
plan, the auditors are assigned to conduct research, study and collect information.
1.3.1.2 Understanding the entity’s business and its environment
First, auditors collect general information about the economy and the
characteristics of the business which have an impact on the audited entity and the
legal obligations of the client. Auditors also collect legal documents such as the
minutes of the capital contribution, capital delivery records, certificates of joint
ventures, affiliate...
Then, auditors search about the business sectors of clients, financial results and
the obligation in providing information, the management apparatus and the capacity of
the Board of Directors, the possibility in continuing operation of the client…
Moreover, the information about accounting system and internal control system:
Considering all the accounting policies applied by clients and changes in accounting
policies; and paying attention to the impact of new policies on accounting and
auditing; the important point should be noted in the operation of the two systems.
1.3.1.3 Preliminary analytical procedures
Apparently, analytical procedures are applied to all audits and are implemented
in all stages of the audit by the auditors. According to the Vietnam Auditing Standards
No. 520- Process analysis: "Analysis is the analysis of data, information, the important
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ratio to find out trends and the relationship or there is a conflict between relevant

information with the expected value”
After collecting preliminary information about clients, auditors start to perform
analytical procedures. In this stage, auditors often adopt two most popular analytical
procedures, which are trend analysis and ratios analysis.
In trend analysis, with fixed asset items, auditors compare the Figures last year
with current year, and compare the data of clients with industry Figures to identify
abnormal movements and find out the reasons.
Meanwhile, ratios analysis is based on comparing the correlation ratio between
the index and the items that have been linked together. For fixed assets, auditors can
use some ratio such as: investment ratio, self-financing rate …
1.3.1.4 Understanding internal control and assess control risk
Researching about client’s internal control and assessing control risk will help
auditors design the appropriate auditing procedures for fixed assets, assess the volume
which is estimated to calculate the volume and complexity of the audit.
The more effective internal control is, the smaller the risk control is and vice
versa. Auditors often check the system regardless of the internal control in two
aspects, which are design and operation
When it comes to checking out the client’s internal control, auditors will check
documents and books related to fixed assets, visit the actual fixed assets of client, and
interview with employees of the company or get third-party certification or observe
internal control procedures for fixed assets then implement the internal control
procedures (if necessary)
After conducting these steps above, auditors should assess control risk and
design tests of control to define the type of fraud and errors that may occur in fixed
asset items and assess the existence of internal control to detect and prevent fraud and
errors. In addition, auditors can continue to conduct tests at a reasonable level based
on the level of control risk that is assessed.
1.3.1.5 Assessment of audit materiality and audit risks
* Assessing audit materiality
Auditors inform about the materiality for the entire enterprise's financial

statements which information is available and auditors can make professional
judgment. Actually, materiality level will help auditors make specific plan to collect
audit evidence. This materiality levels will be adjusted to suit each specific situation in
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Bachelor Thesis
National Economic University

the audit process. In auditing process of financial statements, auditors can evaluate the
materiality level as follows:
Figure 1.5: Assessing Materiality level
Step 1

Initially estimates materiality level

Step 2

Allocates initial estimate about materiality for fixed assets

Step 3

Estimates total violations for fixed asset items

Step 4

Estimates combined error

Step 5

Compares the estimated error with the original estimate or revises the
initial estimate of materiality for fixed assets

When identifying materiality on the entire financial statements, auditors will
distribute this level for each item. With those items that relate directly to business
results in the period, auditors need pay more attention. This materiality level will be
considered as a basic adjustment for auditors using during the audit.
* Assessing audit risks
Based on the materiality level that is attributable to fixed assets, auditors will
assess the likelihood of errors in the audit process for fixed assets based on three types
of risk assessment, which are inherent risk, control risk and audit risk. Firstly, for fixed
assets, inherent risks are often judged based on the characteristics of the client's
business, or the results of previous year's audit, or policy management and accounting
reports of clients for fixed assets. For example, in buying fixed assets, frequently
liquidation may also contain more risks and mistakes. Secondly, for control risk,
assessing audit risk is mainly based on information about the validity, through the
research on Internal Control systems which based on interviewing client and observing
real situation. Weak controlling environment will make it more difficult to prevent,
detect violations, so it leads to high risk and vice versa. Thirdly, for audit risk, auditors
should assess the possibility of auditors in case they cannot detect errors related to
fixed asset items. Thus, auditors should be alert to avoid these situations that may lead
to undetected errors, such as detect evidence but no noticeable flaws; incompletely
implement audit procedures that leads to ignored violations ...
1.3.1.6 Designing the audit program
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Bachelor Thesis
National Economic University

Audit program is all detail expectation that is detailed in contents, auditing
procedures, completion time and the tasks allocation among auditors as well as
projections of material, related information that are used and collected. The focus of
the audit program is necessary in audit procedures to perform each item in an audit.
Usually, the content of audit program consists of documents that requires clients
to prepare, the specific audit objectives for fixed asset items, the work that needs to be
carried out, the specific audit procedures, analytical balances procedures of fixed
assets, detailed audit procedures for increase or decrease transactions, and procedures
to check the balance of fixed assets.
1.3.2 Audit implementation
1.3.2.1

Performing tests of control

Tests of control are carried out to gather audit evidence about the design and the
operation of regulating and controlling audit procedures for fixed assets. Test of
control is done only after finding about Internal control and this stage is assessed as
effective. Thereby, auditors assess the control risk to determine the scope of the audit
and thus they can design the appropriate basic survey. For fixed assets, test of control
procedure will be included:
* Learning and evaluating about control policies and regulations for
Internal Control
To get an understanding about the provisions of Internal Control for fixed assets,
auditors should ask the business to provide relevant documents such as: regulations

about functions, tasks and rights of individuals who work in approving procurement or
liquidation of fixed assets. When studying about these documents, auditors need to pay
attention to the adequacy of provisions for controlling of fixed assets, tightness and
suitability of Internal Control with activities related fixed assets.
* Survey on the operation of Internal Control
The purposes of this survey are to collect the evidence about the effectiveness of
the operation for Internal Control, namely the existence and regularity in operating
control regulations.
To examine internal control regulations in the operation for items of fixed
assets, auditors usually observe the operation of the system by observing the
implementing, receiving and managing fixed assets, thus they can make an
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Auditing 54


Bachelor Thesis
National Economic University

assessment about the value of fixed assets. They also interview with staff who are
responsible for building and maintaining the operation (such as the implementation
of buying, receiving, managing and liquidating fixed assets). Furthermore, auditors
check the document and demonstrate the signs that internal control procedures have
been implemented (signs of approval on the contract, delivery records of fixed assets,
liquidation of fixed assets records ...)
* Survey on implementing the principles of organization for internal control
Besides checking the design of internal control regulations for fixed asset
items, auditors also need to conduct some surveys about the implementation of
internal control principles for this fixed assets including: division of responsibility,

and approval, authorization. The proper implementation of these guidelines will
ensure and enhance the operational effectiveness of internal controls in the
business. The survey is usually applied by auditors which are reading,
understanding the text and the regulation that specify clearly the responsibilities
and working scope for people who are involving in the work (considering the
independence between the approval of procurement operations with person who
decide whether to have a liquidation for fixed assets), interviewing with people
who are responsible and are carrying out work such as procurement of fixed assets,
receipt of fixed assets, fixed asset management and liquidation of fixed
assets...,checking the signs of controlling on documents such as: checking the
signature of the person doing the work, checking the signature of the person who
approved the procurement operations and liquidation of fixed assets.
1.3.2.2 Performing analytical procedures
Before checking in details about the increase or decrease of fixed assets during
the year, auditors should ensure that all data on the detail book will match with the
data on the account ledger, balance sheet. Thus, there is a need of comparison between
the total number on the detail book with those on the ledger, and balance sheet.
Auditors will base on the balance sheet and other documents to collect information for
comparing data, indicating the volatility of the information and providing orientation
for the next detailed inspection.
Depending on each characteristic of client, auditors can use many different ratio
analysis techniques such as horizontal, vertical analysis for comparison between this
period and the preceding period.
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Auditing 54


Bachelor Thesis

National Economic University

Trend analysis includes comparing the original cost existing fixed assets with the
previous period cost in business and comparing the accumulated depreciation and
amortization with those in the previous period, comparing the residual value of assets
with those in the previous period, comparing the total depreciation cost with those in
the previous period and making the lists for increasing or decreasing each type of fixed
assets compared to the previous period...
Ratios analysis consists of comparing the average depreciation rate of the
current period to the previous period, comparing the average depreciated ratios of
all fixed assets with each asset in current period with the previous period and
comparing the ratio between the total costs for repairing of fixed assets and a total
costs of fixed assets.
When conducting comparisons, auditors need to consider the impact of
depreciation policy, the increase or decrease in fixed assets in the period ... to make
appropriate conclusions.
1.3.2.3 Performing test of detail
Test of detail on fixed assets is mainly testing the operations that have been
recognized in the accounting records for fixed assets, to find out whether depreciation
and amortization can ensure the specific databases or not. The databases are also the
goal that auditors are responsible for collecting the relevant evidence as a basis data to
present in the financial statements.
 Test of detail in the increase or decrease transactions of the business
Checking in detailed the increase or decrease transactions in fixed assets have
important implications for the auditing process. Properly reflecting these transactions
have a lasting impact on the unit's financial statements. The errors in the recording will
not only affect targets on the accounting balance sheet but also affect materially on the
indicators to report business results, cash flow statement and notes to the financial
statements.
The specific audit objectives and audit procedures are commonly applied when

examining the details in increasing or decreasing transactions: (Figure 1.3)

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Auditing 54


Bachelor Thesis
National Economic University

Figure 1.6: Procedures for testing increasing or decreasing fixed assets
transactions
Objective
s

Common surveys

Ensuring the
correctness for
increasing or
decreasing
fixed assets
transactions

Comparing total cost of fixed assets in current year with previous
year.
Assessing the reasonableness of the increase or decrease transactions
in business (the ability, capacity of existing machinery and
equipment).

Assessing the reasonableness of buying and selling prices for
increased or decreased fixed assets in the period.

Ensuring the
reasonableness
for fixed assets
transactions
(The incurring)

Checking the completeness and validity documents related to
increased or decreased fixed assets (purchase invoices, delivery
records of fixed assets, material investment capital settlement). We
can combine vouchers test material with physical checks.

Ensuring the
proper
evaluation for
fixed assets
(Calculation
and evaluation)

Checking the correctness, relevance and consistency of policies
defined by the enterprise Cost application.
Comparing the data on the invoice corresponds with the data on the
contract and related documents such as shipping documents,
installation.
Checking the exchange rates used for transactions in foreign
currencies.
Recalculating the original costs on the basis of documents examined:
invoices, shipping documents, installation, and delivery records.

Ensuring fully
recording
transactions of
fixed assets
(allocating and

Comparing increase, decrease documents (invoices, delivery
records) with ledger details to ensure that the recording transaction
is not overlooked.
Checking out the huge expenses for repairing to detect forgotten
recording case, or mistakenly recording into other terms, such as

Test the buying process, the vouchers and documents related to the
acquisition of fixed assets, the cost of transportation, installation
commission.
Test the records for approving increase or decrease in fixed assets,
the approval of the competent is true or not, whether the sequence
matches with regulations on Internal Control or not, whether
approving of the contract is reasonable with invoices, records or not?

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