Wednesday, April 9, 2014

Singapore Straits Times article - Tax Cheats

Singapore Straits Times reported a news today relating to tax cheats in Singapore where certain individuals are targeting at government scheme or incentives roll out by Singapore government. It is reported that some of the individual used fictitious invoices to claim productivity and innovation credit scheme ("PIC")

There are certain cash payout or enhanced deduction if the Company invested in specific items ( for example, IT and automation equipment approved by IRAS). It is reported that some individuals have fictitiously claimed the PIC benefit with fictitious invoices - i.e. they may not have purchased the items specified by IRAS, but had proceed to claim benefit.

Some individuals had been charged because of the matters above. This matter have the following implication to us, as the auditor:

- while reviewing the PIC claims, we should also maintain professinal skepticism if the PIC claims is supported by appropriate purchases of specific equipments;
- to consider the sighting of equipments if material;
- to assess if the items the Company is claiming qualify under PIC scheme - as only specific items are eligible for PIC
- to review if the Company has developed a process to monitor this PIC scheme

Given that there could be incentives for individual to claim deductions - it is important for the auditor to maitain skepticism in this area of work.

Sunday, March 30, 2014

Managerial Accounting : Budgeting - its implication to auditor

We would like to discuss some managerial accounting matters that are related to our audit. The first matter we want to discuss relates to the budgeting process of your audit client. Some blog readers may wonder, given that budgeting is likely to be related to management accounting, hence, not really related to financial accounting. Hence, as auditor, we should not be overly concerned about the budgeting process of the audit client. The truth is, budgeting process is part of the internal controls and assessments carried out / ought to be carried out by management of audit client - this has a significant impact on the extent of our audit and key areas of audit focus.

A comprehensive budgeting process allows management to understand the financial results of the company, identify significant developments not expected, identify key risk areas and identify unusual transactions recorded but not identified. Comparing the actual results against budgeted results and developing understanding on the variance, management is able to make better decision in its resource allocation.

An audit client with no budgeting process in place indicate a relatively higher risk profile of the audit client - as your audit client may not be able to gain the complete picture of the financial affairs of the Company. At this juncture, auditor may have to extend the testing of entity-level controls to review for absence of mitigating controls. Also, a higher level of professional skepticism need to be exercised during the course of our audit to detect any unusual transactions, for which a budgeting process may assist to discover.

The extent of our audit testing may be reduced, if the audit client's entity level controls, including: budgeting process is working effectively. This is because, if the client's process is able to identify risks / unusual transactions - we would be able to rely on the client's process on certain areas.

Please feel free to contact us if you need service on how to develop a comprehensive budget. Please drop us a note at myauditing@gmail.com

Saturday, March 29, 2014

Settlement of account receivable via shares / interest in the Company

Let us explore something that is not common but it may have happened in the real business world.

Your audit recorded an account receivable from a particular customer, who is understood to be in financial difficulty. As a result, your audit client had determined that the colleatability of this debt is not uncertain, hence, they had provided for with provision.

After a while, this external customer in financial diffulty situation went through some restructuring, and they had agreed to settle the debt by issuing its own shares to the creditors as a partial settlement plan. As a result, your audit client may hold hold interest in this external customer.

What is the accounting implication to management? Management is required to assess the value of the shares obtained via this arrangement - due to the financial difficulty encountered by this external cutomer, it is probably worth minimal. Nevertheless, it is important to remove the accont receivable and provision for doubtful debt previously provided for - as there is no more such balance.

Instead, the management should record the value of this investment - and this amount should not be higher than the gross account receivable previously recorded, whilst the Company may reverse the provision amount by the value of investment received.

The above scenario is not straightforward and may involve complex discussion. Please feel free to seek clarification from us - myauditing@gmail.com

Saturday, February 22, 2014

Review of discount rate / WACC in a discounted cash flow analysis ("DCF") of different subsidiaries within the client Group

Your client may have a number of subsidiaries in different countries / different regions. From holding company, the Company records investments in subsidiaries on its company's balance sheet. When there is indication of impairment, the holding company is usually required to estimate the recoverable amount via the following:

- estimated value-in-use; or
- fair value less cost of disposal

The recoverable amount is higher of one the above.

In estimating the value-in-use, a discount rate will be applied in estaming the value-in-use. Developing an understanding of client's discount rate estimation process is essential for the auditor the test the reasonableness of the discount rate. Typically, your audit client would use weighted average cost of capital (i.e. WACC) as its discount rate. Hence, it is important to know how client gather cost of debt, cost of equity, market premium and beta. These need to be supported by proper source (i.e. print out from Bloomberg).

When a discount rate has been estimated, it is important to perform the review of the discount rate against the industry disocunt rate/ country discount rate/ or even the discount rate within the Group.

Of course, country risk need to be considered. Generally, we would expect the discount rate for a developed nation is lower than the discount rate in an emerging market. As the risk is higher for emerging market.

Hence, it is important to understand and test the discount rate estimation process and perform review of the end result.