Monday, December 31, 2007

#30 Auditing for Rental expense

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.

Monday, October 15, 2007

#29- Review of Legal Expenses

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.

#28 Auditing audit fees

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


Friday, October 12, 2007

#27 Classification of Bad Debt Expense

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.

Sunday, September 23, 2007

#26 Bank Confirmation

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.

Tuesday, September 18, 2007

#25 Auditing Management Fees earned from Inter-company

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.

Monday, September 17, 2007

#24 Auditing for Directors Fee

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.

Sunday, September 2, 2007

#23- Accounting for Accrual for Expense

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 fees
2. Accruals for Payroll, Bonus & CPF
3. Accruals for rental


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)

Friday, August 17, 2007

#22- Search for Unrecorded Liabilities

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 date

2. Look at payment voucher after year end to find out the expenses that should be recorded in prior period, if any

3. Sent confirmation to suppliers to confirm the amount outstanding as at year end

4. Look at the expenses account, for potential indication of services which should be accrued in current year Profit & Loss

5. Perform cut off test.

Thursday, July 26, 2007

#21 Is reimbursement to staff considered payroll cost?

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 doing the payroll analysis and reclass the reimbursement out from payroll, if necessary.

Wednesday, July 25, 2007

#20 Practical audit tips- Insurance Coverage

Insurane policies is a way of the company to mitigate/ minimize certain aspect of risks exposed by the company, for instance natural disasters, flood.

Auditors 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.

Tuesday, July 24, 2007

#19 Treatment of Prepaid Insurance

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 Prepayment 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. Cash $200,000

2) At the end of 31 Dec 2007
Dr. Insurance Cost $100,000
Cr. Prepayment $100,000

3) At the end of 31 Dec 2008
Dr. Insurance Cost $100,000
Cr. Prepayment $100,000

Saturday, July 7, 2007

#18 Deferred Tax Asset from Unearned Income

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 income. Thus, where income is recognized in the current year for tax purposes and will be recognized in subsequent years for book purposes, a deferred tax asset arises.

Wednesday, July 4, 2007

#17 Risk-Based Internal Control assessment

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 manageable

In 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 design and operating effectiveness of internal control over financial reporting and documents results of the evaluation.

4. Identify and Correct Deficiencies: identify, accumulate , and evaluate design and operating control deficiencies ; communicate findings and correct deficiencies

5. Report on Internal Control: prepare management's written assurance on the effectiveness of internal control over financial reporting.

Friday, June 29, 2007

#16 No Material Misstatement vs Accurate

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 Accurate

The 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".

#15- Can auditors draft Financial Statements for client?

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 Financial Statements.

#Joke-Accountants don't read novels

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.

Monday, June 25, 2007

#14 Foreign Currency Translation Reserve

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 150

One 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 30


The 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.

Sunday, June 24, 2007

#13 Is Unutilized Investment Allowances DTA?

Should untilized investment allowances be recognized as Deferred Tax Assets?

It is now generally agreed that unutilized investment allowances should be recognized as Deferred Tax Assets. The unutilized investment allowancs may come under IAS 12 paragraph 34, depends on the fact and circumstances.

Companies that have not been recognising DTA in respect of unutilised investment allowances in the past may need to do so (subject of course to the probable future taxable profit test). This would be a change in accounting policy.

Friday, June 22, 2007

#12 Job Advertisement Analysis ( Singapore)

Seniors/Assistant Managers/Managers, Audit Department

The incumbent will work with a team of audit professionals in the Audit Department, providing audit services to a portfolio of diversified clients comprising public listed companies, MNCs, and local conglomerates. The successful candidate can also look forward to other challenges including initial public offerings related work, due diligence and special investigations work.

The above positions in the Assurance & Advisory Services call for candidates with an accounting degree/professional qualification recognised by the Institute of Certified Public Accountants of Singapore (ICPAS). You should have at least 3 years of relevant audit experience in a professional practice. The level of appointment will commensurate with experience.

< Note: The paragraphs in blue above is extracted from eFinancial Careers site>

This blog entry is intended to provide some snapshot about career opportunities in Big 4 Singapore, audit deparment in particular.

One would realize that the door is always open for highly calibre individual to join the audit firms, especially in Singapore, where demand for auditors are definitely much more than the supply of auditors in Singapore. Big 4 are dominating the auditing services of the SGX-listed ( Singapore Stock Exchange) clients, and this in term imply an endless demand for auditors. The shortage of qualified auditors is intensified by the high turnover rate in the industy, where the working hours could be very long.

One could easily switch among the Big 4 once he/she reached the senior level, as supported by the advertisement above. Besides, Big 4 are happily to accept the Big 4 from medium firm, such as: RSM due to the shortage of seniors in the firm. In short, experience really counts.

#11 Is computer software intangible assets or PPE?

Should computer software be classified as intangible assets or Property, Plant & Equipment?

IAS 38 clarifies that computer software for a computer controlled machine tool that cannot operate without the specific software is an integral part of the related hardware and it is classified as Property, Plant & Equipment.

The same applies to the operating system of a computer and operating systems software. Where the software is not an integral part of the related hardware, computer software is treated as an intangible asset, e.g. application software. For instance, accounting software used for bookkeeping system.

Thursday, June 21, 2007

#10 Difference between Accounting and Auditing ( from Financial Perspective)

Back to a fundamental question, what is the difference between accounting and auditing from a financial perspective?

A quick answer is: Accounting is a process of preparing the works, Auditing is a process of evaluating & scrutinizing of the work prepared.

In other words, accountants are in charged of the day-to-day duties of maintaing the accounts, implementing the board financial strategy, if any. At the end of the period, accountant would produce Financial Statement, a summary report of the financial performance throughout the period. Whereas, auditor conduct a check on the accuracy of the financial statements, to ensure that there is no material misstatement of the financial statement prepared.

#Joke- The accountant couldn't sleep ( stock take implication)

Kenny, an accountant, who just joined the big 4, was having a hard time sleeping and goes to see his private doctor. "Doctor, I just can't get to sleep at night."

"Have you tried counting sheep?"

"That's the problem - I make a mistake and then spend three hours trying to find it."

( Note: This is a common profession behavior while accountants are doing stock take! Haha!)

Wednesday, June 20, 2007

#9 Is banker's guarantee a contingent liability?

Companies sometimes have outstanding banker's guarantee such as those given in lieu of deposits, performance guarantees given to customers etc. Such banker's guarantees do not meet the definition of contingent liabilities under FRS 37.

The events that may trigger payment by the banks are within the control of the Company and are not uncertain future events. The Company does not have any present obligation until it defaults on payment of lease or fails to perform the contracts. These banker's guarantees should not be described as contingent liabilities of the Company in the financial statements.

Tuesday, June 19, 2007

#8 Impact of IAS 39/FRS 39 on Staff Loan & Inter-co Loan

After the implementation of FRS 39, inter-company loans & staff loans borrowed at preferential rates, the fair value of the consideration given would not be the same as the actual amount (cash) given. In fact, the fair value of such loans is the present value (NPV) of all expected future cash receipts discounted at market interest rate ( estimated at the time of disbursement) for a similar loan.

After the discounting process with market interest rate, the present value will be lower than its actual amount given; the difference is not a financial asset unless it qualifies for recognition as an asset under another applicable standard (e.g. FRS 38 Intangible Assets)

#7 Risk-based vs Control-based audit approach

The collapse of enron had not only posted auditors' works under the spot light , but also increased the work load of the auditors. Auditors are struggling hard to gain market confidence on their works, follwing the demise of Enron, HIH ...

There are emerging trend that the audit firm starts to move away from risk-based audit approach, and switching towards control-based approach. This has made the works more cumbersome & more tedious.

Thursday, June 14, 2007

#6 Unused Tax Losses & Unused Tax Credits (Deferred Tax Assets Implications)

IFRS 12:

“A deferred tax asset should be recognized for the carry-forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and used tax credits can be utilized”

If a company has unused tax losses carried forward from previous year (years), some of the companies tend not to recognize the deferred tax asset in its balance sheet. As stated in IFRS 12: “… to the extent that it is probable that future taxable profit will be available against which the unused tax losses …can be utilized”. Assuming XYZ co has been making Net Losses for 2 consecutive years, and the current losses position is strong evidence that XYZ co’s businesses are not doing well, and future profitability is in doubt.

In order to “utilize” the unused tax losses carried forward, XYZ co. has to make a profit in next financial year. Unless there are strong reasonable grounds to believe that ‘it is probable that future taxable profit will be available’, such as: entering an agreement with customers for next 12 month orders, the company should not recognize the Deferred Tax Assets, based on ground of prudence.

The second issue involved in recognizing deferred tax assets for unused tax losses and unused tax credits is: the unused tax losses are subject to Inland Revenue Authority of respective countries, and compliance with certain underlying provisions. Due to these reasons, the market tends not to recognize DTA, even if they are likely in a net profit position in next financial year.

However, one could disclosed unutilized tax losses or unutilized tax credits in the form of notes to financial statement, as an information to financial statements users.

Wednesday, June 13, 2007

#Joke - Tax advisor

John, the tax advisor had just reached home and read the story of Cinderella to his five-year-old daughter for the first time.

The little girl was fascinated by the story, especially the part where the pumpkin turns into a golden coach. Suddenly she piped up, "Daddy, when the pumpkin turned into a golden coach, would that be classed as income or a long-term capital gain?"

#5 Practical Audit Tips- Lesson 1: Cash & Bank


Cash & Bank balance stands as an asset of the company, and is one of the important element of balance sheet. The primary assertions we concerned are: valuation, existence, right & obligations. From the assertions listed, we are more concerned about the overstatement of the asset.

Generally, the audit works involved, including:
1. Analytical Procedure (compared the difference between prior year figure to current year figure)
2. Cash Book Review
3. Obtaining confirmation from respective banks
4. Bank Reconciliation Review
5. Petty Cash count

1. Analytical Procedure
Knowing the fluctuations of the cash balances, one would be able to gauge a general idea of
what had happen during the year. For instance, a purchase of machine would probably incur
a general layout ( assumption: XYZ company paid by cash), a sales of its equity shares, so on
and so forth.

As a starting ground, we would like to know the profit incurred during the year, adjusted for
non-cash items, such as: depreciation. Then, we start to taken in other cash effect
transactions. In short, analytical procedure give you a general idea about what you would
expect during the rest of the course of audit.

2. Cash Book Review
Obtaining a cash book transactions listing ( cash-in and cash-out), to examine the nature of
the transactions. The objective is to ensure that the cash transactions are within the ordinary
course of business.

3. Obtaining bank confirmation
External evidence, in this case, are more reliable than internally-generated sources. Send a
a bank confirmation to the respective banks to confirm the balance.

4. Bank Reconciliation Review
Sometimes, the company might have long outstanding reconciling items, which might
signals the issues of blank cheque. Hence, bank reconciliation review would help you to
be aware of those long reconciling items.

5. Petty Cash count
Restaurants, hotel might maintain a huge amount of petty cash on hand. A petty cash count
is essential to ensure the correctness of the balances.

Tuesday, June 12, 2007

#4 Economist comments on Sarbanes-Oxley Act

Found an article related to the Sarbanex- Oxley Act (sox), which could trigger our thinking about the time & resources we spent on implementing a desired procedures

Was is Worth it?

The Economist wonders whether the benefits of Sarbanes-Oxley exceed its costs.
Alan Greenspan, chairman of the Federal Reserve, spoke up in defence of the statute this week. It was faint praise. He said he was surprised that a law which had been passed so rapidly had worked as well as it has less of an endorsement than it first seemed, since laws dealing with issues as complex as these and passed as rapidly as was Sarbanes-Oxley can normally be expected to fail abjectly.

Monday, June 11, 2007

#3 What is big 4

Big 4 is a short abbreviation for 4 of the audit companies who are dominating the supply of auditing services worldwide. Big 4, namely Price Waterhouse Coopers, Ernst & Young, Deloitte and KPMG have their offices across the different regions in the world.

The services provided by Big 4 could be categorized into three main areas: advisory, taxation & audit. There would be different sub-categories within each area. For instance, there are financial service audit, commercial audit (including audit across different industry, e.g. manufacturing), small to medium enterprise audit, US GAAP audit, and others. Each specialization would have a target group (by industry, by region, by accounting standard).

Recruitment processes in Big 4 are considered competitive and selective. Since their main focus are corporate client, including the big conglomerate group, they prefer high fliers in the University.

#2 Accounting Treatment for Bad Debt Recovered

Assuming a manufacturer, XYZ Ltd who has a number of regular customers ( debtors), who purchased on credit term. However, one of the customer, said ABC Co. has long outstanding debt due to XYZ Ltd. The outstanding position is significantly longer than industry average. Hence, the XYZ Ltd would make a provision of doubtful debt for the amount due for the outstanding debt due from ABC Co.:

Dr. Bad Debt Expense XXX
Cr. Provision for Doubtful Debt XXX

Due to unexpected cash in-flow to ABC Co, and ABC Co. pay off the debt due to XYZ Ltd; hence, in XYZ accounting book, they would reverse the provision made:

Dr. Provision for Doubtful Debt XXX
Cr. Bad Debt Recovered (P&L) XXX

#1 Introduction to "Auditing & Accounting Blog"

This blog is dedicated to describe normal accounting & auditing practices in place on:

1. accounting treatments of certain issues (e.g. prepayment)
2. common audit issues
3. any other accounting & auditing related topics.
4. auditing & accounting career