Accounting and Auditing

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#41 Recap of roles of different people in Accounting
2008-04-09 17:23:00
Bookkeepers keep the Accounting Book (day-to-day normal Account Receivable/ Account Payable entries)Accountant review the work done by bookkeepers and prepare non-recurring journal (e.g. provision for doubtful debt)Financial controller reviews the work done by Accountant and oversees the financial statement.CFO oversees and monitors the finance function and ensures the smooth flow of company’s financing.
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#40 Audit for Inventory Valuation
2008-03-25 17:27:00
As mentioned in post #39, stocks should be valued at lower of its cost or net realizable value. This has posted a imperative audit work step: to ascertain that the respective items is value at cost or net realizable value (Note: each Respective items have to be valued at cost or net realizable value).How do we ensure that the stocks are valued properly?1. Randomly selected a certain number from inventory listing.2. To find out the most recent sales/ subsequent sales after year end. (general guide: 3 months)3. From the invoices, noted down selling price.4. Compare the selling price to the actual cost of the sample.5. Cost > Selling Price, valued at selling price Selling Price > Cost, valued at cost.
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#39 Inventory Valuation (anwer to #38)
2008-03-20 06:16:00
Inventory items have to be revalued at ‘lower of cost or net realizable value’. Practically, net realizable value means the amount at which the Company could sell in an open market (selling price).To answer the question post in #381) Value at cost of $2.00. ( as cost of $2.00 is lower than its net realizable value of $2.50)2) Value at Net realizable value of $1.50 ( as cost of $1.50 is lower than its cost of $2.00)
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#38 Accounting for Discount on Prompt Payment
2008-03-19 14:28:00
The accounting for prompt payment discounts depends on the nature of the discount. If the prompt payment discount is effectively part of normal trade rebates, i.e. generally everyone receives them, whether they pay promptly or not, they should be accounted as a deduction from the cost of inventory rather than as finance income.
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#38 Inventory valuation
2008-03-18 15:56:00
As at balance sheet date, client need to value its stocks. Assuming Client ABC has only one stock, Product Y on hand.Let's consider the following different circumstances, ( assuming balance sheet date is 31 Dec 2007)1) Client ABC bought Product Y at US$ 2.00 in Aug 2007. They sold Product Y at US$ 2.50 in Dec 2007. How should the client value the stocks ? Should the company use cost or realizable value ( its selling price) to value the stocks?2) Client ABC bought Product Y at US$2.00 in Aug 2007. The client priced Product Y at US$2.50 and they are unable to sell any single stocks. Hence, the management decided to give discount and sell the stocks at US$1.50 in Dec 2007. How should the client value the stocks? Should the company use cost or realiable value (its selling price) to value the stocks.[ Refer to next posting coming up for answer]
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#37 Stock Take Audit Procedure 3
2008-03-17 15:35:00
Things to pay attention to by auditor during stock take:- to walk around the warehouse / factory to observe if there is any physically impaired/ damaged items.- if the items are damaged, to check if these damaged items are included i stock listing (if yes, then request client to write off the inventory items)- to check if the damaged items are properly segregated, as the client might put the damaged item in along with normal goods and resulted in overstatement of inventory.- if the items appeared to be dusty, check with client if the items are saleable. ( potential provisoin for inventory issue).Rule of thumb: to observe the physical condition of stocks and report any stock obsolescence.
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#36 Stock Take Audit Procedure - 2
2008-03-17 05:32:00
As mentioned in previous posting ( Post #35), test count samples in stock take need to be selected: 1) from the floor and 2) from the list.The purpose of selecting samples from the floor means select the samples from the warehouse floor, test count the result then match to inventory listing as at balance sheet date, to check that the stock listing is complete.The purpose of selecting samples from the list means select the samples from the list, to check that the inventory appear on the list exist.
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#35 Stock Take in Audit Procedure
2008-03-16 15:38:00
Purpose of stock take is to verify the existence of the inventory accounted by the company. Procedures in stock take:1. Obtain stock listing as at balance sheet date from client.2. Randomly select certain number of samples from stock listing to physically count the inventory to check that the inventory listing ( as prepared by client) has no material difference.3. Randomly select certain number of samples from the floor ( and test count the number of the items) to check that the stock listing is complete.4. Make any adjustment if necessary.
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#34 Accounting for Fixed Asset written off
2008-01-10 16:07:00
When the Company decide to write off the fixed asset, the following entries will be passed:Dr. Accumulated DepreciationDr. Loss on Asset written off (if any) Cr. Fixed Asset ( at cost)The company would write off the fixed asset in the following circumstances:1) The company may write off the fixed asset, if the assets are no longer in feasible use.2) The fixed assets have been fully depreciated.In case 1 above, the company might incurred a loss on fixed asset written down if the net book value is > nil. Whereas, when the assets have been fully depreciated ( as in case 2), no losses will be incurred upon written off.
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#33 Risk-based audit 2
2008-01-05 07:14:00
One of the argument for risk-based audit is: it is more cost efficient to focus on the risky area, rather than the traditional way. The traditional 'bottom-up' approach test almost all the details of the business, and almost every aspect of the businesses are covered (audited).Whereas, the risk-based only focus on the risky area identified by the auditors.
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#32 Accounting for Rental Deposit
2008-01-04 06:29:00
A rental deposit is usually required to be paid when a company rents a premise from the landlord. These rental deposits are either refundable at the end of the lease period or will be used to offset against the last few months rental payments. Rental deposits are usually not material to the financial statements. However, for companies in the property or retail industry, the rental deposits received or paid may be significant.The rental deposit is a financial instrument (i.e. a financial asset to the lessee and a financial liability to the lessor) and should be accounted for under FRS 39. The rental deposit should be recognised at fair value on initial recognition, and the difference between the fair value and the amount paid is carried on the balance sheet as a deferred lease expense/income and recognised as lease expense/income on a straight line basis over the lease term. Interest income/expense is recognised over the lease term as the carrying value of the rental deposit is accre...
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#31 Weakness of Risk-based audit 1
2008-01-03 13:26:00
Nowadays, the audit firms, including the Big 4 in the world adopt an top-down audit approach, so called 'Risk - based audit'. The deemed high risk areas (account) are the focus of the auditors ? Only minimal work will be done for the less-risky area.However, the problem is auditors are the one who use the professional judgement to justify what area are risky. And, auditors might fail to identify the risky area of the business. Hence, no works were done for the risky area of the business!
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#30 Auditing for Rental expense
2007-12-31 11:36:00
In normal circumstances, the audit approach for rental expense is to examine the rental agreement entered between both parties. The rental expense is stated clearly in the agreement.Things to pay attention: if there are any other expenses stated in the agreement. Also, we could test vouched the monthly billing to check the monthly expense charged.
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#29- Review of Legal Expenses
2007-10-16 04:23:00
As an auditor, we would examine the nature of the legal expense even if it is not materil/ significant from the audit engagement point of view.The rationale is to examine the nature of the expense incurred and to search for any outstanding litigation against the company, or the company is involving in any legal cases. As the damages for litigation could be tremendous, and needed to be disclosed to the financial statement users.Hence, careful examination is required.Alternatively, ' Legal Confirmation' could be sent to the client's lawyers to confirm if there is any on-going legal cases against the company.
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#28 Auditing audit fees
2007-10-16 04:14:00
How do we conduct the auditing process for audit fees as an auditors? What do we have to do?Firstly, we have to obtained the agreed/ proposed audit fees for current year. And we used the formula below to assess the sufficiency for recorded audit fees:Agreed audit fees + Reversal of Overprovision (if any) - Additional Accrual for Underprovision (if any)+ Additional audit related charges incurred during the year
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#27 Classification of Bad Debt Expense
2007-10-13 08:41:00
Should the bad debt expense be net off from the gross profit? or should it be classified in other operating expense?The answer is: bad debt expense should be classified as General & Administrative Expense in Profit & Loss.
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#26 Bank Confirmation
2007-09-23 11:13:00
In normal circumstances, auditor would send a bank confirmation to the client's bank to confirm the cash balances, loan confirmation, hire purchase & provide other client-related info as at year end date.Bank confirmation does not only act as the confirmation of the client's cash balance, loan balances, hire purchase balance in the account, but also it other information that auditor might be interested in.For instance, it will provide the information of corporate guarantee, which might have to be disclosed in the financial statement. Hence, receiving a bank confirmation is also critical in identifying unrecorded liabilities, if any.
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#25 Auditing Management Fees earned from Inter-company
2007-09-18 18:00:00
In certain circumstances, the principal activities of the holding company is mainly investment holding. The transactions throughout the year might be minimal, and the expenses are minimal as well. The only revenue earned is the management fees earned from its subsidiaries. How do we verify the management fees earned is not materially misstated?Firstly, we should read the details of the agreement between the holding company and the subsidiaries, with respect to the calculation of management income. For instance, 80% of total revenue or 100% of expenses. These terms are not uncommon in today business world.If we are auditing the holding company accounts and issuing financial statement for the holding company. We must ensure that the subsidiaries, where the holding company earned management fee, get audited as well.This is because the revenue of the holding company is totally dependent on the subsidiaries' revenue. These are the cases applicable for company level financial statement.
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#24 Auditing for Directors Fee
2007-09-17 16:15:00
How do we ensure the directors fee in the profit & loss is not materially stated?In normal circumstances, directors fee charged to P&L is a provisional expense, which is subject to the approval of shareholders. In normal circumstances, the directors fee will only be approved after the financial statement have been presented and finalized. The approval for directors, to certain extent, based on the financial performance of the company ( i.e. information from financial statement).Then, how do we assess the directors fee?1. The proposed directors shouldn't be materially different from the prior year directors fee given the same number of directors. Hence, prior year fee is a good reference.2. Refer to the resolution to check if prior year proposed directors' fees have been approved subsequently.3. Assess other factors that could affect the directors fee provision.
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#23- Accounting for Accrual for Expense
2007-09-02 17:12:00
In accordance with matching principle, we make provision for the expenses which have not been billed by our suppliers or the company has not paid out the expenses, if the underlying services are rendered in the corresponding period. Example for accrued expense, include:1. Accruals for audit fees, tax agent fees2. Accruals for Payroll, Bonus & CPF3. Accruals for rentaletc.The company can make the accruals based on the agreed quoting from the suppliers. The accruals for expense entry:Dr. Expense ( P & L) Cr. Accrulas (Balance Sheet- Liabilities)
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#22- Search for Unrecorded Liabilities
2007-08-18 06:42:00
How do we ensure that the Company has accounted for the expenses incurred before year end? ANd it should be recorded in the appropriate period if the expenses has not been billed by the suppliers?1. Look through unpaid invoices - look at the description of the services provided, and invoices date, Delivery Order date2. Look at payment voucher after year end to find out the expenses that should be recorded in prior period, if any3. Sent confirmation to suppliers to confirm the amount outstanding as at year end4. Look at the expenses account, for potential indication of services which should be accrued in current year Profit & Loss5. Perform cut off test.
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#21 Is reimbursement to staff considered payroll cost?
2007-07-26 18:16:00
It's common business practices to reimburse some of the expense incurred by the employee for business purposes. For instance, phone bill. The reimbursement will be credited into employee accounts in conjunction with its regular pay.How should the accountant account for this reimbursement ?Some of the HR manager would account reimbursement into its payroll costs, and included the amount as total payroll costs for the respective period. Hence, accountant should separate the payroll cost and the reimbursement, said Reimbursement for phone bill or etc.This is to ensure that the account reflect the fair view of the business operation. To illustrate, if reimbursement has been included in the payroll costs. Outsider, who rely on the financial statement of the Company, might have the opinion that the payroll cost of the company is unnecessaily high. Whereas, other operational costs are below the industry average.The implication for auditing in here is : be aware of any reimbursement while ...
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#20 Practical audit tips- Insurance Coverage
2007-07-25 18:18:00
Insurane policies is a way of the company to mitigate/ minimize certain aspect of risks exposed by the company, for instance natural disasters, flood.Audit ors could check the amount insured by the insurance policies bought by the companies against the respective assets. For instance, the companies might have few fire insurance policies amounted to $2 million for its buildings.Auditors could ensure that the fixed assets are while covered by examing the Net Book Value of the buildings. Assuming the NBV of the buildings are $3.5 million, and this signaled that additional insurance should be entered to ensure that the risk is monitored cautiously.
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#19 Treatment of Prepaid Insurance
2007-07-24 16:35:00
In accounting, we emphasize on ' Matching Principle': to match the expense incurred with the revenue generated in certain period. The idea behind is: there would be any direct or indirect cost incurred during the process of generating revenue within a specified period. The principle emphasize on matching the time frame of expense against the revenue, and the emphasis is on the recognition timing.Assuming Company ABC entered a fire insurance contract for its building and stocks for a period of 2 years, starting from 1 Jan 07 ~ 31 Dec 08. Company ABC has paid the entire insurance cost of $200,000 in 1 Jan 07.Apparently, the insurance cost incurred was expense over 2 years. Hence at the end of 31 Dec 07, we should only recognize $100,000 of insurance cost another $100,000 will be sitting in Prep ayment account ( Asset). This is to match the expense incurred in the specified period.To illustrate:1) When the Company pay the insurance cost ( 1 Jan 2007): Dr. Prepayment $200,000 Cr....
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#18 Deferred Tax Asset from Unearned Income
2007-07-07 09:25:00
A deferred tax asset can arise from differences in recognition of income. In this thread we're talking about the deferred tax asset arise from unearned income.For instance, a financial company is a lessor and receives advance mortgage payments for a building it leases, the tax and book accounting purposes of the payments may differ. The tax laws, under certain circumstances, require the financial company to take into income the entire amount of the payment, even though the payments include monthly payments for the period occurring after the close of the tax year.For book purposes, this income is not included into income until the payment is actually "earned," that is to say, as each month passes. This is also a deferred tax asset because the item causes a greater amount of income in the current period for tax purposes than it does for book purposes. Why? Because in subsequent years, the corporation will recognize book income when there is not a corresponding recognition of taxable ...
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#17 Risk-Based Internal Control assessment
2007-07-04 14:54:00
Risk based auditing is an innovative approach focus on the key risks the firms are facing in specified industry on the way to achieve its target. For instance, Revenue Recognition while be the key risk for the Airline companies, Provision for Doubtful debts might be a significant risk for a trading company. It aims to minimize to an acceptable level, which is manageableIn this thread, we intend to at the assessment of internal control over financial reporting. It generally involved a step-by-step assessment:1. Plan and scope the evaluation: establish assessment process. Identify significant financial reports. Define materiality. Identify significant accounts, relevant financial report assertions, and major transaction cycles. Link the accounts and cycles. Determine organizational approach.2. Document Control : document and obtain understanding of controls for all significant accounts, groups of accounts, and transactions .3. Evaluate design and operating effectiveness: evaluate desig...
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#16 No Material Misstatement vs Accurate
2007-06-29 16:30:00
To emphasize:What auditors do is to ensure that there is no material misstatement in the financial statement. Auditors are not confirming that the financial statement is accurate.No material misstatement vs AccurateThe key word " No material misstate" allowed a certain level of tolerable error in the financial statements. (i.e. a certain level amount of acceptable errors, which are not going to affect financial statements users' decision-making)The key word " accurate" required one to ensure that the financial statements are 100% or 99% correct. Higher level of responsibility and associated risk would be exposed by the auditors, if they are using the word, " accurate".
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#15- Can auditors draft Financial Statements for client?
2007-06-29 16:22:00
Can auditors draft (i.e. prepare) the financial statements for clients ?The answer is No.As mentioned in post #10, the nature & the responsibility of an auditor is to check, to scrutinize the financial statement prepared by the clients is not materially misstated. Auditors are the investigators.Self-review threat to auditors' independency would be created if auditors are checking on what the auditors themselves are preparing. Auditors are supposingly to exercise its professional due care ( in ensuring integrity) & competence to ensure the accuracy of the Fina n cial Stat ements.
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#Joke-Accountants don't read novels
2007-06-29 16:15:00
Why do accountants make good lovers?They're great with figures. Why accountants don't read novels?Because the only numbers in them are page numbers.
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#14 Foreign Currency Translation Reserve
2007-06-25 12:01:00
In this thread, let's look at the accounting for unrealized exchange differences.Assuming, XYZ Co. ( a China based company) hold 100 US$ balance on hand ( and assuming foreign exchange rate is: 1 USD= 1.5 RMB)... In XYZ Co. the Cash account balance at this time would be:US$ denominated cash = RMB 150One month later, China's currency has appreciated to 1USD= 1.2 RMB, the XYZ Co. have to make the following adjustments:Dr. Unrealized exchange difference loss 30 Cr. Cash 30The term unrealized is used in this case is because there wasn't any transactions took place, it's merely a mark-to market exchange rate practice. Hence, we called it unrealized forex losses.
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