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.