#50- Search for Unrecorded Liabilities (Post 2)

A search for unrecorded liabilites is to check for the completeness of the information disclosed by management / balances disclosed on the management account. However, the work is always the trickiest and toughest. A substantial amount of informations are required to fulfill the audit's satisfactory level.

How can we ensure completeness of contingent liabilities?

- Inquire with management on the status of the on-going project, analyzed the circumstances and identify potential commitments and contingencies which might have been made by managment, but not disclosed.

- Sending bank confirmation to obtain external evidence on potential bills payable, letter of credit, etc.

- Examine all the agreements of the Company to identify potential liabilities, such as: corporate guarantee given to bank for guarantee over subsidiaries' loan.

- Examine minutes & resolutions to identify on-going activities which might require commitments and contingencies

#49- Impairment on Property

We received the following query from our reader:

".. other than an independent valuation, what other alternative method can we use to test for impairment on property.."

Before we proceed to answer the following question, let's assume that the property above relates to building, land or any other commercial related building employed by the Company in the course of doing ordinary busines..

To answer your question, if the property is involved in the ordinary course of business ( e.g. shophouse where a business do its trading), then the alternative method includes:
1) Discounted Cash Flow Analysis
2) Profitability forecast for the next 5 years
3) Obtained market price of the similar property in the area nearby

To elaborate on point 1 and 2 above, if the business is able to generate sufficient cash flow and be in profit position. The auditor can conclude that there is no indcation of impairment on the property. As the asset employed is sufficient to sustain the business operations of the Company, and hence no impairment.

Besides that, the auditor could obtained the last transation price of the similar property in nearby area to compare the market price to book value of the property, in order to assess the existence of indication of impairment.

Announcement: Launching of SME Blog

Announcement:

Dear Auditing & Accounting Blog readers, we would like to, formally, announce the launching of our sister's blog:

Small and Medium Enterprises Blog @ the following URL:

http://mysme.blogspot.com

After countering numerous Small and Medium Enterprises, and meeting with all the SME' market leader, we would like to share our expertise in discussing contermporary issues facing SMEs in the global market. SMEs play a vital role in contributing the business growth of the global, and it should not be ignored. Hence, the SME blog is launched to share our expertise in SME.

Please visit the blog and leave some comment to us at: mysmeblog@gmail.com

Thanks.

Sex in Auditing & Accounting Industry

Let's make a guess on which is the majority sex group ( male / female) in auditing industry?

From an overall perspective, the majority of sex group tends to be female. This is consistent with the circumstances of more females are studying accounting degree.

However, examination of sex group at executive level ( in the auditing / accounting industry) reveals that the % of male start increasing. Probably, due to family commitments/ hectic working style, the female decided to left the industry.

Singapore Job Market

After enjoying years of economy europhia, the financial market collapse of Lehman Brother, Merrill Lynch and Bear Sterns are spilled-over and affecting the current Singapore job market.

The labour supply is definitedly more than the labour demand, and the job market turn to be extermely competitive. Some of the foreign banks are retrenching their staffs, and resulted in the increase number of people in labour supply pool.

Hence, it is extremely not easy to land a job immediately. Will accountant job be affected ? Definitely. There are accoutants in the bank too. If they got retrenched from the bank, they might join the commercial line.

# Auditor Joke

#1
What do you call an accountant without a functional spreadsheet?
Lost

#2
What would Economics be without assumptions?
Accounting.

#48- Internal Control of Small Companies

The Accounting & Auditing blog found an interesting findings on small companies' internal control on the website. Plz follow the link from CFO.com:
http://www.cfo.com/article.cfm/12202253?f=home_featured
( Note: pasting the link in this blog is not intended to infringe the copyright of CFO.com, but to share the knowledge with the blog' reader)
Small companies always struggling in the designation and implementation of internal controls due to:
- high cost involving in initiating internal control
- high monitoring and implementation costs
- time-consuming
- insufficient personnel
- unfavorable cost vs benefit analysis
The benefits brought from implementing internal control by the small companies is always lesser than the costs. And yet, internal control is considered the foundation and fundamental for future organic growth.

#47- Arms Length Transactions

Let's illustrate transfer pricing issue among 2 inter-company within the same Group.
Company A is incorporated in British Virgin Island and is not subject to tax.
Company B, which is Company A's subsidiary incorporated in USA, and is subjected to USA corporate tax.

Company B is making profit this financial year, and has a taxable profit of US$100million subjected to USA corporate tax. Company A might illegally 'transfer' the taxable profit of Company B to Company A, who is residing as a tax heaven, where no tax is payable on profits earned. To illustrate, Company A might charge Company B a lump sum of 'management fees', 'IT support fees' 'royalty fees', etc and resulted in the decrease in Company B' taxable profit.

Hence, while performing audit, we need to be aware of the nature of the inter-company transactions, and to test that the transactions are within arms length (it often requires expert to perform arms length test). This is to counter strike the transfer pricing issues mentioned above.

#46- Disadvantage of Hedge Accounting

Implementation of hedge accounting is aimed to reduce the earning volatility of the Company and to comply with the matching of the principle. However, there are some disadvantages in associated with Hedge Accounting:
- the hedge relationship has to be highly effective in order to qualify for hedge accounting
- high monitoring costs incurred from closely and constant moniotoring
- high documentation costs ( substantive documentations are required to support the hedge)
These factors are discouraging the Company from adopting hedge accounting.

#45- Timing of accruing expenses

We got the following query from the reader:

" ...Could you please tell me when the accrued expenses should be accounted for in system (AP)? is it at the beginning of each month? and once accounted should it be reversed immdiately after entering the corresponding expense for the accrual or should it be done in one go at the end of each month"

Before answering the question, we need to find out the nature of accruals, which is:
- to account for service received but billing not received from suppliers
- to account for expenses incurred ( e.g. montly provision for bonus)

Hence, practially, accruing for expenses should be done at the end of each month while doing month end closing. Yes, the amount should be reversed out immediately upon receiving the billing / payout the expenses. To illustrate with the following example:
Company XYZ has received repair & maintenance services from a service provider. The service amount has been agreed at US$500. However, at the end of the month, no billing has been received and the following entry have to be passed:
Dr. Repair Expenses
Cr. Accrued Expenses

Upon receiving the billing from service provider, the following entry should be passed to reverse the accruals:
Dr. Accrued Expenses
Cr. Trade Creditors