Tuesday, September 27, 2016

Audit observation - predicting inventory level precisely to avoid stock-holding costs

Excessive purchase of inventory have a number of consequences on the Company.

Working capital of the Company would be distorted. If a company holds a inventory that takes more than 6 months to sell, the company need to incur warehousing costs + interest costs if the inventory is purchased based on overdraft + opportunity costs ( i.e. the company would be able to use the same amount of money to purchase other inventories). Why not consider to house lower amount of inventory?

However, this is not easy due to a number of reasons:

- The supplier may requires minimum purchase of quantities. In this context, we suggest our audit client to speak to the suppliers.

- It is costly to predict the right level of inventory. To derive a sufficiently precise optimal inventory level is a scientific exercise - your inventory system should be able to support you on this. However, is it costly to develop and maintain such system?

- Purchasing department should work closely with warehousing department closely to determine the right amount of inventory.

In a distribution business - a good supply chain management will be able to give some company a good margin to continue the business in the competitive industry.

Thursday, July 2, 2015

Audit - consideration of compliance with manpower rule in Singapore

Talent / labour crunch in Singapore is a common issue in Singapore. There are certain rules imposed by Ministry of Manpower in Singapore. There is a lot of discussion with regard to the manpower of Singapore - as there are certain comments commented that there are significant number of foreign workers, whilst on the other hand there are business owners commented that it's not easy to hire sufficient labour for production or construction work.

Ministry of Manpower imposed certain restriction on the number of foreign workers that can be hired by a Company i.e. the Company is allowed to hire certain number of foreign workers for each headcount of Singaporean.

As an auditor, we should understand what's the process implemented by management to ensure that this rule is being complied with. Somebody may ask why would auditor has to consider this?

The answer is if the regulation is not complied - there is risk that the company may receive penalty or fine or in the worst case scenario, the company's operating license may be in question. Hence, we should have a word with management on how does the company ensure that they have complied with the rules and regulations prevalent to the company.

In addition, if you have overseas operations, it is also critical to understand how has the overseas management manage the compliance with overseas rule. For instance, how does the manager in China ensure compliance with contribution of pension fund required by local law.

Wednesday, July 1, 2015

Audit response to significant risk identifed for audit engagement

In any audit engagement - it is mandatory to identify significant risk that is unique to individual engagement as required by international standard of auditing. The significant risk identified requires auditors' special consideration in designing and executing the audit procedures.

For instance, for active company, the auditor may concern that the revenue might not be recorded in appropriate period as there might be incentive for management to overstate the revenue. Given that the oil price is at low end cycle, there might be risk that the oil & gas audit client may understate their provision for any onerous contract.

In short, it is important to develop a robust understanding of the audit client (including: business environment, compensation package of management, etc) to identify significant risk.

When a matter is identified as significant risk - auditors need to design audit response that requires special consideration - i.e. carry more audit procedures for certain accounts to response to the fraud risk. For instance, carry out detailed analytical review for revenue account to identify any unusual transactions.

If impairment of property, plant and equipment is identified as significant risk (most likely there's indication of impairment), auditor need to examine the cash flow analysis of the Company carefully to evaluate the reasonableness of the cash flow analysis prepared by management to support the carrying amount of property, plant and equipment.

Significant - then do something different.

Audit manager - having lunch or dinner with client

Over the years, the auditors of myauditing.blogspot.com realized that auditing is essentially a service industry. It's important to manage client's expectation whilst ensuring that the financial statement is not materially stated from the prevalent accounting standard. Works got easier and smooth, when both auditor and audit client move in the same direction and are on good term.

As such, it is important to develop or forge strong client relationship with the audit client. We realized that it's a lot easier to forge relationship over lunch, instead of formal face-to-face meeting. We are not discouraging of having formal meeting. However, we are encouraging to have informal lunch with client - in a lunch set-up, where both the auditor and audit client can talk about personal matter, instead of accounting and auditing matters.

Audit fee discussion got a lot easier when both parties are on the same good term.

Hence, the auditors in myauditing.blogspot.com always ensure that at least a lunch is being organized for each audit client. This is part of client relationship management that worth investing your time and some money.

What is your thought - hope to hear from other auditors within the world. How do you forge stronger client relationship?