Answered step by step
Verified Expert Solution
Question
1 Approved Answer
QUESTIONS: Accepting a new client is a complex process based on the auditors assessment of the company's risk. Explain procedures performed by the auditor to
QUESTIONS:
Accepting a new client is a complex process based on the auditors assessment of the company's risk. Explain procedures performed by the auditor to make a decision whether to receive GEC client?
Thanks for your help!
Auditing \& Assurance 1 AUDIT PRACTICE CASE STUDY Introduction (1) Hoan Cau Auditing and Consulting Limited Company (HCC) is one of Vietnam's 20 largest auditing companies. In 2015, its sales were VND 52 billion, the total number of employees was 147 of which 12 have CPAVN. The company provides a wide range of financial services in three areas: assurance services, tax consulting services, and corporate consulting services. Revenue mainly comes from the service of auditing financial statements. The company has expanded corporate consulting and tax consulting services since 2015. (2) You are an auditor who has 6-year experience in the field of financial statement auditing. You have just received the CPA certificate in 2015 and were appointed Head of Audit Department. In October 2015, you and Mr. Hung, the company's deputy general director, joined the meeting with GoldEquip. On the way to the GEC office, Mr. Hung told you that GEC is a US high-grade paint manufacturing and supply company in Vietnam. GEC shares are currently traded on HOSE. The company contacted HCC and asked HCC to provide auditing services for its 2015 financial statements. Mr. Hung met Mr. Thanh, GEC's CEO at a seminar in July 2015. Mr. Thanh has complained a lot about their current auditing company. Therefore, Hung said that this is a potential client. (3) At the meeting with HCC, Mr. Thanh said that GEC had terminated the contract with their auditor and wished to seek a new auditing firm, which could provide GEC with more professional audit services to meet the requirements of UOB Bank, a bank in Singapore that they are looking for a large loan in 2016 to use for their investment. In addition, he revealed that GEC intends to acquire a company in the same industry and expects the new auditing firm to offer financial advisory services. GEC is a company with many complex tax obligations. Mr. Thanh also suggested HCC review its tax obligations and identify risks and mistakes that would have been made. (4) After the meeting, on the way back to the company, Mr. Hung told you that he is very interested in this customer, as HCC not only has a large audit service revenue but also may sign consultancy service contracts. In addition, HCC is also seeking to increase its clients that are listed joint-stock companies. Mr. Hung asks you to help him complete the audit procedures for risk assessment and accept new clients. He also reminds you to carefully evaluate the risks when deciding to accept this customer. 2. Information Provided Gold Equip Corporation (GEC) (5) GEC is one of the largest suppliers of premium paint in Vietnam. The company was established in 2003 as a limited liability company. In 2008, the company was equitized, and then in 2012, it was listed on Ho Chi Minh Stock Exchange (HOSE) with the code GEC. GEC produces paints based on American technology, with a technology transfer contract signed for 20 years with GEC USA. GEC USA currently holds 42% of GEC Vietnam shares and is the largest shareholder. (6) GEC paint products are of various types, divided into two groups, construction paints, and specialized paints. The specialized paint products are mainly sold to automobile, motorcycle, marine, and high-end furniture companies. Because this is a high-end paint line, its price is very high in comparison to common industrial paint products. GEC owns a company in Ho Chi Minh City, a plant in Binh Duong, and 3 branches in Hanoi, Da Nang, and Can Tho. Inventories are kept in the plant warehouse and 3 branch warehouses. GEC's raw materials are 75% imported. GEC's products are sold directly to automobile and motorcycle manufacturers in Vietnam. Other products are distributed through dealers. GEC has 25% of its revenue in 2015 (an increase of 5\% over 2014) from exports to several foreign clients, including GEC Malaysia and GEC China. (7) Currently, due to the difficulties of the high-end paint market, GEC is negotiating to buy ABB Paint Company to expand the market, seeking customers in the mid-range segment. GEC wants to appoint your company as an auditor of its financial statements for 2015. GEC is proposed to borrow $3 million from UOB to finance the acquisition of ABB. Since 2015 is the first year GEC applied Circular 200/2014/TT-BTC for its accounting, GEC also wants HCC to advise GEC on some changes and effects to its financial statements. In 2015 there are many changes in corporate income tax law, GEC expects that once its financial statements are audited by a large and reputable auditing firm like yours, the tax obligations for the state are satisfactory, if any errors, the audit firm will point out and GEC is ready to adjust. Industrial Paint Market in Vietnam (8) The paint industry in Vietnam is in a period of fierce competition between foreign and Vietnamese enterprises. In addition, paint products made in China and Taiwan, with low prices and diversity are being imported with increasing volume in Vietnam. As for the construction paint industry, the real estate market is heating up, creating a boost for growth. (9) Vietnamese economy has many signs of recovery and development. However, cheap products are still easier to be accepted by the market. High-end product lines become picky, especially when financial markets are unstable. 1 2 Therefore, in order to increase product competitiveness, in 2015, GEC has strengthened the technical support system for companies using GEC paint. GEC Development Strategy (10) GEC's traditional products are top-quality products in the US, providing for high-end markets such as high-end cars, motorbikes, and construction materials. From 2014, GEC expanded the supply of powder coatings paint for wood and furniture companies, mainly targeting high-end exporters to the fastidious markets in the US and Europe. In March 2015, the company recruited a new sales manager in charge of this market. He has 15 years doing business in the field of furniture export. However, sales of this market accounted for only 5% of total revenue in 2015 and did not meet the board's target. (11) Recognizing the price constraints of current products, GEC's CEO proposed to buy a Vietnamese paint manufacturer, in the middle segment. The CEO said that after acquiring the company, GEC would be able to expand this segment without affecting the brand of existing brands. GEC has contacted potential buyers and is looking for a financial services company to assist them in this deal. Currently, this information has not been disclosed so it has not impacted GEC stock prices yet. Accounting Policy (12) GEC chief accountant stated that GEC has implemented its accounting policies in accordance with Circular 200/2014/TT-BTC. Some policies are described as follows: (13) Depreciation policy: GEC applies straight-line depreciation for all fixed assets. Depreciation is applied according to the Group's guidelines for consolidation. (14) Credit policy: Because most of the sales are subject to 3060 days of debt termination, the company's receivables are quite large. Some of the company's traditional clients have overdue debt. They have sent their written request to ask GEC to extend the 90-day deferred payment since GEC rivals have raised their credit term to 90-120 days. However, GEC did not set up allowances for bad debt for these accounts at the end of the year as the CFO said that it was possible to collect these debts. (15) Sales policy: GEC has domestic and export sales. For domestic customers, the goods are delivered at customers' warehouses, with delivery times generally no more than 24 hours. Export contracts are commonly FOB Sai Gon prices, except for contracts signed with GEC Malaysia and GEC China which are EXW prices. The chief accountant indicates the time to record revenue is when the goods are out of GEC warehouses. (16) Purchasing policy: 75% of GEC purchases are from GEC USA and GEC China at CIf prices. Shipping time is usually 10 days (for GEC China) to 30 days (for GEC USA). The purchases are recorded after they are checked and put into the warehouses. Internal Control System (17) The Internal Audit Director told that GEC Vietnam's policy of control is in full compliance with the Group policies. The internal audit department consists of one director and four staff members. In addition, there is 1 internal auditor at each plant and branch. The report of the internal audit department is sent directly to the CEO every month. In addition, the quarterly consolidated report will be sent to the Board of Supervisors, which will be the basis for the Board of Supervisors to check and review at the beginning of the following quarter. Every year, the Group's internal audit team will visit Vietnam to audit the Group's policies. The year-end audit report of the internal audit department only recorded a minor error of the warehouse division. After investigation, it was determined that the lack of goods was due to the storekeeper's carelessness while checking the goods. Because this is the first violation and the amount is not large so the storekeeper was only reprimanded. (18) The Internal Audit Director also indicated that the risk of fraud at GEC is very low because the company had a rigorous control process and operational cycles were subdivided into specialized divisions. The company policy also requires cross-checking and cross-reconciling between departments every month. All of the reconciliations are documented and stored in the department. (19) GEC currently uses Oracle's ERP system for all departments. The Internal Audit Director is very proud of the modern software system the company has recently invested nearly $100,000 in 2015 . He said the system can handle and control automation at multiple stages, it has helped the company reduce input, provide information quickly, and support decision-making. He believes that with the rigorous controls of this system, the risk of error and fraud is very low, if not impossible. However, applying a new system, the work of the internal audit department is overloaded. The Internal Audit Director thinks that he needs an additional staff member with information technology expertise but the HR department disagreed even though he had suggested several times. Upon hearing this information, the CEO said that he was completely unaware of this and that he would consider and direct the department for additional recruitment. 3. Financial Statements of 2015 : (20) Including the Balance Sheet and the Income Statement. 3 4Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started