#86- Unpresented Cheque- Part II

In our previous post #80 Bank Reconciliation Review- Unpresented Cheque, we posted the following example and question:

Susan is the accountant of Company ABC, who has a December year-end. On 31 December 2008, Susan has approved a few cheques payable to their creditors, amounted to US$200k. Account executive has input the payments into the systems after Susan has approved the cheques. However, the cheques payable to their creditors are not delivered to their creditors until after year-end.

Is there any financial impact to the financial of the Company? Yes or No? If yes, what would be the impact then ?

Answer:

Apparently, cheques are dated before 31 December 2008 while the cheques are only delivered to the supplier after year-end. Susan has posted the following entries and recorded in 2008's book:

Dr. Trade Creditors
Cr. Cash

From accounting point of view, cheque should not be deducted from the above cash account until cheques have been delivered to the supplier. In above example, cash and trade creditors balance have been understated. A re-classification entries should be reversed out.

Auditor's Responsibility

We should inquire our clients that there are no cheques not delivered to supplier as at balance sheet date.

#85- Seagate Technology Singapore to retrench 2000 employees

Seagate Technology, hard disk drive manufacturer, has 3 facilities in Singapore, namely: Woodlands, Ang Mo Kio and Science Park.

Seagate Singapore has announced that they are going to lay off 2000 employees in Ang Mo Kio plants by end of 2010. Ang Mo Kio plant is principally involved in disk drive manufacturing. Employees being laid off will be offerred retrenchment benefit in line with industry standard.

In our opinion, the shifting of manufacturing operations out from Singapore is in line with general industry trend. In recent years, Singapore entities tend to shift their production plant out from Singapore, especially those labour-intensive manufacturing process, to China, Thailand, Malaysia. This is because labour costs are much lower in those countries, and the Singapore entities will be able to achieve cost savings in medium term.

#84- Market capitalization vs book value

In accounting, we look at net asset of the Company as an estimated guide of the value of the Company. However, the market value of the Company might differ from the book value (i.e. net asset of the accounting record).

Auditor can request management to analyze the difference between market capitalization and book value.

If market capitalization > book value. Auditors should consider what are the premium the investors are paying? Any figures on the balance sheet does not reflect true picture? Does the figure stated in accordance to accounting standards?

If market capitalization < book value. Auditors should consider the impairment issue for all assets and goodwill.

#83 - Auditing Body: PCAOB

In audit career, it is always useful to know what can be improved further in order to deliver an efficient, effective and satisfactory audit.

The Public Company Accounting Oversight Board ("PCAOB")is a non-profit corporation, created by Sarbanes-Oxley Act 2002. PCAOB oversee the auditors of public companies in order to protect overall public interest. PCAOB has a unit, called "Inspection unit". This unit is responsible in inpecting the audit works of registered public accouting firms who met certain criterias.

There's one particular section you might find interesting: PCAOB prepare and release inspection report on their website. The report written would briefly describe the audit deficiencies, departures from accounting/ auditing standard they have identified after conducting review. Audit works of Big 4 (PWC, E&Y, KPMG, Deloitte) are inspected too!

The reports are resourceful and provide a guide on what can be done further to improve our audit.

The website of Public Company Accounting Oversight Board ("PCAOB")is as follows:
http://www.pcaobus.org

You can view the inspection report by:
> Go to "Inspection" section
> Click on "Inspection Reports"

#82- Auditing: Annual Budget vs Actual Results

Company prepare budget and use budget as a performance benchmark and monitoring tools. For instance, senior management can question sales department if their actual yeat-to-date entertainment has exceeded the budget before the end of the year. Budget is , usually, prepared and approved at the beginning of the year or before that.

Budget has incorporated management's forecast, estimation and outlook of the business in the coming times.

Is management's budget useful to auditor?

The answer is yes. Budget, which represents management's expectation, should be compared against the actual results. Significant variances should be investigated. Apparently, management would have to explain the variances. It's important for auditor to find out the reason of the variances to identify potential changes in business operation, significant developments during the year.

Understanding how management view the business (by looking at the budget) is a crucial stage in audit planning, it enhance our knowledge and understanding on the business, the industry and the overall economy as a whole.