The assessment of risks of material misstatements of financial statements of vietnamese listed enterprises in the stage of audit planning cases study at ernst young vietnam limited

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIET NAM
BANKING UNIVERSITY HO CHI MINH CITY

TRAN ANH THU
THE ASSESSMENT OF RISKS OF MATERIAL
MISSTATEMENTS OF FINANCIAL STATEMENTS OF
VIETNAMESE LISTED ENTERPRISES IN THE STAGE OF
AUDIT PLANNING - CASES STUDY
AT ERNST & YOUNG VIETNAM LIMITED
GRADUATION THESIS
MAJOR: ACCOUNTING
CODE: 52340301

HO CHI MINH CITY, 2021


MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIET NAM
BANKING UNIVERSITY HO CHI MINH CITY

TRAN ANH THU
THE ASSESSMENT OF RISKS OF MATERIAL
MISSTATEMENTS OF FINANCIAL STATEMENTS OF
VIETNAMESE LISTED ENTERPRISES IN THE STAGE OF
AUDIT PLANNING - CASES STUDY
AT ERNST & YOUNG VIETNAM LIMITED
GRADUATION THESIS
MAJOR: ACCOUNTING
CODE: 52340301

SUPERVISOR
DANG DINH TAN

HO CHI MINH CITY, 2021


i

ABSTRACT
The purpose of research is to investigate the risks of material misstatements of
the financial statements in the stage of Audit Planning in Vietnamese listed enterprises
on stock market. Based on the audit procedures, the research was conducted using
qualitative approach to explore the strength and limitation of the process. It began with
observational and descriptive method to obtain procedures performed by EY Vietnam,
according to EY GAM. In order to acquire in depth knowledge about the points that
auditors should improve on in the stage of audit planning for the assessment of material
misstatement of Vietnamese listed enterprises, the research used questionnaire designed
for respondents at EY Vietnam.
Key words: Assessment, Risk of Material Misstatement, Financial Statements,
Audit Planning, Listed Enterprise, Ernst &Young Vietnam.


ii

DECLARATION OF AUTHENTICITY
I declare that all material presented in this paper is my own work or fully and
specifically acknowledged wherever adapted from other sources.
I understand that if at any time it is shown that I have significantly
misrepresented material presented here, any degree or credits awarded to me on
the basic of that material may be revoked.
I declared that all statements and information contained herein are true,
correct and accurate to the best of my knowledge and belief.

Ho Chi Minh City, June 2021

Tran Anh Thu


iii

ACKNOWLEDGEMENTS
Firstly, I would like to express my sincerest and deepest thankfulness to Dr
Dang Dinh Tan for his guidance and patience in giving me valuable
recommendations during my study period. I am really happy and fortunate to carry
out this study under his supervisor.
Secondly, I would like to send my profound gratitude to all of the lecturers in
Accounting and Auditing Department and also in Office of Academic Affairs
during a period of studying for a bachelor degree at Banking University of
Vietnam.
Lastly, I would like to thank my family for their support during my study and
during my life. Without whose encouragement and sacrifice, I would not have
finished this thesis, so I express my special love and gratitude to them.

Ho Chi Minh City, June 2021

Tran Anh Thu


iv

Contents
ABSTRACT ......................................................................................................................i

DECLARATION OF AUTHENTICITY .........................................................................ii
ACKNOWLEDGEMENTS ........................................................................................... iii
LIST OF ABBREVIATIONS ........................................................................................vii
LIST OF TABLES, FIGURES AND FORMULAS .................................................... viii
CHAPTER 1: INTRODUCTION .................................................................................... 1
1.1 The necessity of the thesis...................................................................................... 1
1.2 Objectives of the research ...................................................................................... 2
1.4 Subjects and scope of the research ......................................................................... 3
1.5 The research methodology ..................................................................................... 3
1.6 Contributions of the research ................................................................................. 4
CHAPTER 2: THEORETICAL PERSPECTIVES.......................................................... 6
2.1 Overview about auditing financial statements. ...................................................... 8
2.2 Overview about auditing financial statements in the planning stage ................... 11
2.3 Overview of considerations of risks of material misstatements in the audit planning
.................................................................................................................................... 19
2.3.1 Definitions of risks of material misstatements in audit planning ..................... 19
2.3.2 The assessment of risks of material misstatements in audit planning .............. 21
CHAPTER 3: METHODOLOGY ................................................................................. 28
3.1 Research methodology ............................................................................................ 28
3.2 Source of data ........................................................................................................... 29


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3.3 Data collection method ............................................................................................ 30
3.3.1 Observational and descriptive method .......................................................... 30
3.3.2 Questionnaire method ................................................................................... 31
CHAPTER 4: FINDING AND DISCUSSION .............................................................. 33
4.1 Observation and descriptive method for the assessment of risks of material
misstatements in audit planning at EY Vietnam. ....................................................... 33

4.2

Research results of questionaires for the assessment of risks of material

misstatements in audit planning at EY Vietnam. ....................................................... 38
CHAPTER 5: CONCLUSION AND RECOMMENDATION ..................................... 54
5.1 Conclusion........................................................................................................ 54
5.1.1 The characteristics of the assessment of risks of material misstatements of
financial statements of Vietnamese listed lnterprises in the stage of audit planning
at EY Vietnam ........................................................................................................ 54
5.1.2 The validity of the assessment of risks of material misstatements of financial
statements in Vietnamese listed companies in the stage audit planning at EY
Vietnam compared to ISA 300 and ISA 315 ......................................................... 55
5.1.3 Strengths of the assessment of risks of material misstatements of financial
statements in Vietnamese listed companies in the stage audit planning at EY
Vietnam .................................................................................................................. 57
5.1.4 Limitations of the assessment of risks of material misstatements of financial
statements in Vietnamese listed companies in the stage of audit planning at EY
Vietnam .................................................................................................................. 58


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5.2 Recommendations to improve the effectiveness of the assessment of risks of
material misstatements of financial statements in Vietnamese listed companies in
the stage audit planning at EY Vietnam................................................................. 59
5.3 Limitations of the study and directions for future research ............................. 60
REFERENCES ............................................................................................................... 61
APPENDICES................................................................................................................ 66

vii

LIST OF ABBREVIATIONS
Abbreviations

Full meaning

EY

Ernst & Young

IAS

International Accounting Standards

ROMM

Risks of material misstatements

IFRS

International Financial Reporting Standards

GAM

Global Audit Methodology

ISA

International Standard on Auditing

VSA

Vietnamese Standards on Auditing

FS

Financial statement

COSO

Committee of Sponsoring Organizations


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LIST OF TABLES, FIGURES AND FORMULAS
Name

Page

Figure 2.1: COSO internation control cube

17

Table 2.1: Considerations for identifying risk factors

21

Table 4.1: Ratio of responses to question 01

41

Table 4.2: Considerations for the control risk assessment process

42-45

of the entity’s system of internal control
Table 4.3: Ratio of responses to question 03

45-46

Table 4.4: Examples to determine the significant risks

47-48

Table 4.5: Examples of risk factors relating to

48-52

(Incentive/Opportunity/Attitude) generally present when material
misstatement due to fraud occurs


1

CHAPTER 1: INTRODUCTION
1.1 The necessity of the thesis
In the current market economy, auditing is one of sectors interested in and trust

by society. The demand for society for auditing profession is rapidly increasing which
require auditors and audit firms to improve both professional competence and audit
services. In the world, the collapse of Enron Energy Corporation, Worldcom, Tyco
International, Peregrine Systems, Olympus, and Health South Group resulted from fraud
of financial statements (Rahman, Meah, & Chaudhory, 2018). When performing the
audit contract, auditing firms did not detect the material misstatement from frauds, so
opinions on the financial statements are inaccurate, which seriously affect the users and
reputation of audit firms. The reason is that auditors often face difficulties in applying
audit procedures to detect risks of material misstatements in auditing financial statements
(Coderre, 1999; Dikmen & Kỹỗỹkkocaolu, 2010). The audit report is the basis for a
third party to search for information and make its investment decisions. In the growing
economic situation, the need to expand the scale and business fields is rapid. As a result,
the complexity of accounting and auditing in enterprises listed on stock market is also
more. Therefore, auditors are also difficult to detect fraud in the financial statements. In
addition, audit firms have not focused on evaluating control risks, potential risks, and
internal control system, but mainly based on subjective opinions of auditors, and pressure
on the time to complete auditor‘s work. On the other hand, audit firms, which want to
survive and develop, are also under pressure on revenue and competition. Therefore, the
quality and duration of the audit have a great influence on the choices of clients.
Assessing the risks of material misstatements in the audit plays an important role
especially in the audit planning stage, which has a decisive influence on the quality of
the audit. The stage is a crucial part and takes a lot of time. Therefore, a reasonable and
scientific risk assessment of material misstatement in auditing financial statements
should be paid attention and monitored by audit firms in the planning process.


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Currently, in Vietnam, there have been many published studies on financial
statements audits, for instance, researching the factors influencing the risks of material

misstatements at Vietnamese Listed Companies in the stage of audit planning (Hoan
Nguyen, Thi Kieu Trang Ngo & Thi Tam Le, 2020). However, there has not been any
qualitative thesis into the field of the assessment of risk of material misstatement of the
financial statements in the stage of audit planning in Vietnamese enterprises listed on
stock market at Big4 firms. The purpose of this study is to examine the characteristics of
the assessment of risks of material misstatements during the audit planning stage at EY
Vietnam in Vietnamese Listed Enterprises.
After the working period at EY Vietnam, the researcher has gain knowledge and
experience about the assessment of risk of material misstatement of the financial
statements in the stage of audit planning. Realizing the need to minimize the risks of
material misstatements on the financial statements and optimize the efficiency for users,
the researcher chose the topic name “The assessment of risks of material
misstatements of financial statements of Vietnamese listed enterprises in the stage
of audit planning - Cases study at Ernst & Young Vietnam Limited”.
1.2 Objectives of the research
The thesis provides the characteristics about the assessment of risks of material
misstatements of financial statements of Vietnamese listed enterprises in the stage of
audit planning - Cases study at Ernst & Young Vietnam Limited.
Based on the research, the thesis points out the strengths, limitations, as well as
give reasonable recommendations for process improvement of the assessment of risks of
material misstatements of financial statements of Vietnamese listed enterprises in the
stage of audit planning.
1.3 Questions of the research
What are the characteristics of the assessment of risks of material misstatements
of financial statements of Vietnamese listed enterprises in the stage of audit planning?


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1.4 Subjects and scope of the research

Subjects of the study
The research focuses on the characteristics about the assessment of risks of
material misstatements of financial statements of Vietnamese listed enterprises in the
stage of audit planning- Cases study at Ernst & Young Vietnam Limited.
Scope of the research
In term of space
The thesis focuses on the cases study at Ernst & Young Vietnam Limited which
are currently the clients of EY Vietnam.
In term of time
The thesis researches in the most recent accounting period 2019-2020 to be able
to timely update useful information.
1.5 The research methodology
The thesis uses observational and descriptive method, questionnaire method to
collect primary and secondary information at EY Vietnam. Moreover, the researcher
uses theoretical research method to search, analyze, process information, and describe
the statistical methods, practical experience through real work.
Data sources: In this thesis, the researcher use two sources of data, which are
primary data and secondary data.
Primary data
Those data collected by interview method from the research period at Ernst
&Young Vietnam, in order to identify the viewpoints about the assessment of risks of
material misstatements of financial statements of Vietnamese listed enterprises in the
stage of audit planning, as well as the advantages and limitations of the process of the
assessment of risks of material misstatements of financial statements of Vietnamese
listed enterprises in the stage of audit planning.


4

Secondary data

Those information and knowledge collected from EY Global Audit Methodology
(EY GAM), Government Agencies and Line Ministries.
1.6 Contributions of the research
In terms of theory
The thesis provides deeper understanding about the characteristics of the
assessment of risks of material misstatements of financial statements of Vietnamese
listed enterprises in the stage of audit planning.
In term of practice
The thesis has recommended the appropriate recommendations are proposed to
carry out the assessment of risks of material misstatements of financial statements of
Vietnamese listed enterprises in the stage of audit planning.
1.7 Thesis structure
The thesis consists of five chapters, which are Introduction, Literature review,
Methodology, Findings & Discussions, and Conclusion & Recommendations,
respectively.
Chapter 1: Introduction, this chapter gives an overview of the motivation for the
research, research objectives, research questions, research scope as well as research
objects and new contributions of the research.
Chapter 2: Literature review, in this chapter, the author presents definitions
related to information disclosure as well as synthesizes theoretical knowledge of auditing
and some related previous research.
Chapter 3: Methodology, this chapter indicates contents related to the research
process as well as describes the source of data and methods to collect.
Chapter 4: Findings & Discussions, this chapter describes the audit planning and
process currently applied for Vietnamese Listed Enterprises and discussion of research
results through cases study.


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Chapter 5: Conclusion & Recommendations, this final chapter summarizes
research contents, hence, some solutions will be suggested to the assessment of risks of
material misstatements of financial statements of Vietnamese listed enterprises in the
stage of audit planning.
Conclusion of chapter 01
In the first chapter, the thesis has stated the necessity of the topic as well as
specifically defined objectives, objects and scopes of the research. In addition, a
number of new contributions of the thesis towards the audit quailty of the assessment
of risks of material misstatements of financial statements of Vietnamese listed
enterprises in the stage of audit planning are also clearly shown in this chapter.


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CHAPTER 2: THEORETICAL PERSPECTIVES
Beneish (1999) was one of the pioneers on building a model to predict the fraud
of financial statements, called M-Score ratio in order to help auditors and investors assess
whether or not the fraud possibility of financial statements appear. The model can detect
potentially fraud accounting for 76% of predicting probability. Students in Cornell
University dawn Enron's fraud before a year when the company went bankrupt. Based
on M Score model, Dikmen and Kỹỗỹkkocaolu (2010) developed a model to find frauds
in the financial statements of 126 enterprises listed on stock market in Turkey. Dikmen
and Kỹỗỹkkocaolu (2010) added two variables in the model including inventory index
(DINV) and financial cost index (FEI) that help Capital Markets Board of Turkey
forecast 81% of adjusted income. Chae, Nakano, and Fujitani (2020) used a model to
verify the positive and significant relationship between financial reporting opacity
measured by the company's earnings management behavior and crash risk in Japanese
listed companies. In which, crash risk consists of three variables CRASH, NSKEW,
DUVOL.
Many studies used adjusted accrual model to predict fraud of financial statements

such as Healy (1985) followed by Jone (1991), DeAngelo, DeAngelo, and Skinner
(1994), Friedlan (1994). Adjusted accrual mode is a tool to detect the possibility of fraud
in the financial statements if there are abnormal differences which is based on standards
and regulations on accrual levels between the reported number and the expected number.
DeAngelo, DeAngelo, and Skinner (1994) and Jones (1991) focused on adjusting
revenue through adjusting accrual variables.
Norman, Lombard, Wright, Kopral, Rodriguez, and Miller (2011) indicate that
the characteristics of internal control committee affect the reliability of financial
statements. The risks of material misstatements may be caused by business risk and
control risk. The first study on fraud in the financial statements is of Romney, Albrecht,
and Cherrington (1980) who gave 87 red flags to predict fraud. They concluded that the


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above signs are essential in detecting frauds and predicting integrity of the Director
Board. Moreover, Loebbecke, Eining, and Willingham (1989) provided a predictive
model of the errors risk by fraud that is supported by Bell and Carcello (2000),
Nieschwietz, Schultz, and Zimbelman (2000), and Wilks and Zimbleman (2004).
Risks of material misstatements often occur in the balance sheet (Albrecht,
Albrecht, Albrecht, & Zimbelman, 2011; Brazel, Jones, & Zimbelman, 2009;
Kreutzfeldt & Wallace, 1986; Schultz, Bierstaker, & O'Donnell, 2010). Previous studies
concurred that the frequency of misstatement risks, which appear in indicators such as
revenue, customer receivables and inventory is higher than other indicators on the
balance sheet.
The risks were discovered easily when enterprises went bankrupt (Anderson &
Yohn, 2002; Ettridge, Scholz, Smith, & Sun, 2010; Palmrose, Richardson, & Scholz,
2004; Srinivasan, 2005). In addition to that, management practice is main cause of
misstatement risks (Curtis, Lundholm, & Mcvay, 2013; Riley, Preason, & Trompeter,
2003). Keune (2010) assessed the risks of material misstatements by fraud and focused

on the fraudulent performance of revenue, receivables and inventory accounts.
Compared to previous studies that only concentrated on an item, Keune (2010) expanded
many fraudulent accounts.
As mentioned above, most of the researches on the risks assessment of material
misstatements in financial statement audit is only limited to the following issues:
First, assessing risks of material misstatements on the financial statements,
auditors usually focus on such criteria as inventory, customer receivables, etc. Reason is
that business characteristics of the enterprises significantly affect to these indicators
compared to other indicators on balance sheet.
Second, when conducting audits and collecting audit evidence to assess the risks
of material misstatements, auditors have difficulty performing audit procedures, and


8

evaluating errors with material misstatements. The lack of flexible application of
auditing techniques also affects the results of risk assessments.
Third, in Vietnam, very little research on the risks assessment of material
misstatements in Vietnamese listed companies in audit planning at Big4 firms are
appeared. In particular, there have no study has examined the qualitative factors that
affect risk assessment results by characteristics of material misstatement in Vietnamese
listed companies during the audit planning stage.
2.1 Overview about auditing financial statements
The purpose of auditing financial statements is to increase the credibility of users
with respect to the financial statements, through the auditor's opinion on whether the
financial statements are true and fairly stated, in all material aspects, and consistent with
the framework of the disclosure and presentation of the financial statements, according
to Linda, E. (1981),. In particular, auditing is the accumulation and evaluation of
evidence about financial information obtained through audit period to determine and
report on the degree of correspondence between the financial information prepared by

client and a wide set of criteria (Arens, A. A. et al, 2010). Similarly, the purpose of
auditing which indicates in the Auditing Standard issued by Public Company Accounting
Oversight Board evidently stated the objective of auditing the financial statements by
independent auditor is the impartial opinion on the financial statements of the company.
In all material aspects, auditor’s opinion about financial health, operations results, and
client’s cash flows in conformity with generally accepted accounting principles. The
auditor's report is the medium that expresses audit opinion, if in special circumstances,
disclaims an opinion (Simunic, D., 1980).
Frank, D. H. (2001) pointed out that the audited financial statements play an
critical role in the investor for making investment decisions. Precisely, he proved that
investors who viewed media reports tended to focus on negative news and misclassified
more unaudited information as audited and assessed the credibility of the unaudited


9

report much higher than investors who viewed hardcopy materials. Those investors who
did not look company’s risk management program, just assessed only unaudited report
was more credible also judged the firm's potential earnings to be higher, resulted in
wrong decision. Notifying users with an “audited/ unaudited” label will attenuate these
effects. Contrary to this view, Brant, E. et al (2014) performed an experiment to prove
information presented in financial statement has strongly effect to the investors’
decision. The research survey was conducted using an online questionnaire sent out to
nonprofessional investors such as business school graduates who invest in individual
stocks and analyze company financial data. The result indicated that investors who
receive a critical audit matter paragraph are more likely to change their investment
decision than investors who receive a standard audit report or investors who receive the
same critical audit matter paragraph information in management's footnotes. Therefore,
quality of the audit is drastically increased for both investors as well as their companies.
(Joseph, V. C., 1992).

When the initial market for audit services is perfectly competitive, arguments
about the relationship between audit firm size and audit quality are still controversial.
The four prestigious audit firms in the world are Ernst & Young, Deloitte Touche
Tohmatsu, Pricewaterhouse Coopers and KPMG, resulted in the excessive market share
of these firms compare to non – big audit companies (Kimberly, D. et al, 2011).
However, whether the audit quality in these Big 4 audit firms is higher than remaining
firms. Marshall, A. G. et al (2006) conducted an analysis and pointed out that the error
rates for Big 4 audit firms are significantly lower compared to non‐Big 4 firms. Similarly,
conclusion of Francis, J. and Yu, M. (2009) in their research, which was undoubtedly
stated audit quality is higher than average in Big 4 firms. They also declared this
conclusion made no claims that audit quality is unacceptably low in smaller companies.
Nevertheless, Alastair, L. et al (2011) had different opinion by using the matching model,
they indicated that the audit quality from Big 4 firms is insignificantly different from


10

those of non – Big 4 firms. Their result also suggested that the differences between Big
4 and non – Big 4 firm mainly reflected client characteristics and, more specifically,
client size.
The main objective of conducting an audit of financial statements is to increase
the reliability of the financial statements based on the auditor's opinion. In addition to
the above target, the auditing of financial statements also helps audited enterprises see
their limitations and shortcomings, thereby finding solutions and overcoming the
situation to minimize risks, as well as improve quality. The AICPA auditing standard
has pointed out two main objectives of audit financial statements:
 Obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the financial statements are
presented fairly, in all.

 Report on the financial statements, and communicate as required by auditing
standards, in accordance with the auditor’s findings.
The result of conducting audit financials statements is audit’s opinion about the
most general view of the financial situation of the business. The question of whether
auditors perform their independent role adequately by providing the appropriate audit
opinions has been a matter of much public interest (Habib, A. 2013). Audit opinion
formulation is a detailed and complex procedure which consists of: assessing client
acceptance decisions, understand the clients’ business, performing internal control tests,
obtaining substantive audit evidence about account assertions and “aggregating results
to form opinions” (Felix and Kinney, 1982; Rittenberg et al., 2012). In general, there are
following types of audit opinion: Unqualified opinion, Qualified opinion, Adverse
opinion, Disclaimer of opinion.


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Unqualified opinion
An unqualified opinion is also known as a clean opinion. The auditor reports an
unqualified opinion if the financial statements are presumed to be free from material
misstatements.
Qualified opinion
A qualified opinion may be given due to either a limitation in the scope of the
audit or an accounting method that did not follow accounting standards.
Adverse opinion
An adverse opinion indicates financial records are not in accordance with law,
regulations and contain grossly material and pervasive misstatements. Investors, lenders,
and other financial institutions do not typically accept financial statements with adverse
opinions as part of their debt covenants.
Disclaimer of opinion
When the auditor is unable to complete the audit report due to the absence of

financial records or insufficient cooperation from management, the auditor issues a
disclaimer of opinion. This is referred to as a scope limitation and is an indication that
no opinion over the financial statements was able to be determined.
2.2 Overview about auditing financial statements in the planning stage
Arens, A. A. et al (2010) stated that auditing process comprise of four main
phases, which are (1) plan and design an audit approach, (2) perform test of control and
substantive tests of transactions, perform substantive analytical procedures and test of
detail of balances, and (3) complete the audit and issue an audit report. According to the
Vietnamese Standards on Auditing (VSA), which is clearly presented in the Decision
366 – 2016/QD – VACPA and the VSA 220 issued by Ministry of Finance, the
procedures for auditing financial statements are divided into three main sections:
Planning, Implementation, and Completion. Although there is difference in name of each
phase and quantity, the procedures have to be performed in an audit is similar. The audit


12

process for any item in the FSs will also follow this sequence.
The VSA 300 clearly stated that, planning is not an isolated phase of an audit; it
is the process that is repeated and begins immediately after or at the same time with the
end of the previous audit and continues until the audit of current period. Audit planning
includes a schedule review of some activities and the audit procedures that need to be
completed before the next audit phase are carried out.
Scope and strategy phase of the audit is the most important part of any audit
engagement. The first generally accepted auditing standard of field work requires
adequate planning to obtain sufficient appropriate evidences for the circumstances as
well as allow the audit firm keep audit costs reasonable and avoid misunderstanding with
the client, minimize legal liability and maintain good reputation in the business
community.
The Scope and Strategy phase consists of 8 steps according to Audit and

assurance services, 16th edition by Alvin Arens.
First, accept client and perform initial audit planning.
The engagement partner must be satisfied that appropriate procedures regarding
the acceptance and continuance of client relationships and audit engagements have been
followed, and should decide whether or not accept the clients no matter what they are
new or continuing engagement by: (1) Identifying client’s reasons for audit and (2)
Obtaining an understanding with the client. (Arens, A. A. et al, 2010). After the client is
accepted, the audit contract and audit team members for the engagement will be carefully
prepared.
For (1), there are two major factors affecting acceptable audit risk. They are the
likelihood and intention of financial statement users. The auditor is likely to accumulate
more evidence, for specific case of public companies with extensive indebtedness and
companies will be solved in the near future. The most uses of the statements can be
determined from prior experience with the client and discussions with management.


13

Throughout the engagement, the auditor gets additional information about why the client
has an audit and the likely uses of financial statements. This information may affect the
auditor’s acceptable audit risk (AAR). For example, if the company has a great amount
of loans, the AAR will be low due to the risk of violating loan covenant that may lead to
going concern problem and the strict requirements of banks or financial institutions in
reimbursing these borrowings.
For (2), auditing standards require that auditors document their understanding
with the client in an engagement letter, which includes the engagement’s objectives, the
responsibilities of the auditor and management, and the engagement’s limitations. It also
states any restrictions to be imposed on the auditor’s work, deadlines for completing the
audit, any assistance provided by the client’s personnel in obtaining records and
documents, and schedules prepared for the auditor. It always includes an agreement on

fees. The engagement letter’s purpose is to inform the client that the auditor cannot
guarantee for all acts of fraud will be discovered.
Furthermore, as clearly stated in terms of acceptable audit risk, an auditor is
unlikely to accept a new client or continue serving an existing client if acceptable audit
risk is below the risk threshold that the firm is willing to accept.
In the end of this step, the auditor should develop a preliminary audit strategy,
considering the nature of the client’s business and industry and identifying where there
is greater risk of significant misstatements. The auditor also considers other factors such
as the number of client locations and the past effectiveness of client controls in
developing a preliminary approach to the audit. The planned strategy helps the auditor
determine the resources required for the engagement, including engagement staffing.
Second, understand the client’s business and industry to obtain related
information.
According to Arens, A. A. et al (2010), in this step, “the auditor must obtain a
sufficient understanding of the entity and its environment, including its internal controls,


14

to assess the risks of material misstatements of the financial statements whether due to
error or fraud, and to design the nature, timing, and extent of further audit procedures”.
Other internal factors represent how effective internal controls system will be the
considered as guidelines for auditors to identify and remain questioning mindset for
detecting frauds and errors. The entity with high level of construction may overstate
historical cost of asset by over-capitalizing interest receivable. Or weak management
with high financial objectives may lead to the understatement of such loans in the FS.
The internal controls system is effective so the risk control is lower, materiality is set at
higher level. Thus the volume of procedures, the audit works are reduced and vice versa,
the weaker internal control system, the higher control risk, the lower materiality level is
set and require more audit procedures to detect the frauds and risks influence the

information presented in the FS.
Third, perform preliminary analytical procedures.
After accepting client and performing initial audit planning. Each item in the FS
is seriously considered by performing preliminary analytical procedures. The
comparison of financial ratios to industry average and main competitors of the client is
used to assist auditors in identifying areas with increased ROMMs.
Fourth, set preliminary judgement of material and planning materiality.
According to the Vietnamese Standards on Auditing No.320, misstatements are
considered to be material if they could influence the decisions of users of the financial
statements. It is applied by auditors at the planning stage, execution stage and evaluating
the effect of identified misstatements on the audit and of uncorrected misstatements, if
any, on the financial statements.
The materiality normally is set by a percentage of net revenue, total assets or
profit before tax. Determining materiality involves the exercise of professional
judgment. A percentage is often applied to a chosen benchmark as a starting point in
determining materiality for the financial statements as a whole. This procedure compares


15

client ratios to benchmarks of industry or competitor to obtain an indication of the
company’s performance. Such preliminary tests can reveal unusual changes in ratios
compared to prior years, or to industry averages, and help the auditor identify areas with
increased risks of material misstatements that require further attention during the audit
(Arens, A. A. et al, 2010).
Factors that may affect the identification of an appropriate benchmark include the
following:
 The elements of the financial statements
 Whether there are items on which the attention of the users of the particular
entity’s financial statements tends to be focused

 The nature of the entity, where the entity is in its life cycle, and the industry and
economic environment in which the entity operates
 The entity’s ownership structure and the way it is financed The relative volatility
of the benchmark
To design proper audit procedures to audit loans and interest receivable, it is
necessary to identify significant risks due to fraud or errors as well as assess inherent
risk and understand internal control over all lending and interest receivable. At this step,
auditors use a questionnaire to obtain relevant and adequate information.
Fifth, identification of significant risks dues to frauds and errors.
To determine significant risks due to fraud or errors, auditor uses the following
technique:
 Nature of the client’s business
 Results of previous audits
 Related parties
 Complex or non-routine transactions
The work done helps auditor to understand the entity operating activities and how
the entity controls those account balances. Result of these procedures will seriously