#65 Impairment Testing

Auditing & Accounting experts foreseen that impairment testing on intangible assets, fixed assets, investments, assets, etc has to be assessed crtically in a detailed basis in the coming year, subsequent to the credit crunch.

The recession has driven the stock prices down, the value of the intangible assets sank accordingly. The recession acts as a trigerring points for the impairment testing.

Hence, the auditors should highlight to the clients that the impairment testings have to be performed earlier ( rather than sometimes near the audit), as the impairment testings required a lot of times. Rigid assessment by auditors are required, given the fact that financial statements users will be using the financial statements more cautiously.

Work life balance in Big 4

Let's define what's big 4?

Big 4 was defined as 4 largest accounting firms in the accounting profession worldwide. The Big 4 consist of the following entities: Pricewaterhouse Coopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG.

Auditors in Big 4, in general, have long working hours. Working till midnight and over the weekend is a norm in the industry. We've heard about the heavy work load, stressful life and long working hours of auditors who work in Big 4 audit firms. However, what are the factors cause the long working hours in Big 4?

It is due to the portfolio of the clients that Big 4 have. Majority of the listed companies would engage one of the Big 4 audit firms as their auditors. Having high volume of transactions and relatively more complicated business, listed company has tigther dateline to meet. As such, the audit team work on a listed company have to struggling between the dateline and the complexity of the transactions. This has resulted in the increase in hours required to spend.

Listed parent company would normally requires its oversea subsidiary to engage the same auditor as the parent company or at least a big 4 auditor. The Multinational Company located in oversea has tight reporting dateline too. Due to the fact that the parent might be a listed company in United States/ Europe, and subsidiary is required to report to the parent company on time, in order to meet the regulatory dateline.

The above analysis tell you why auditors in Big 4 needs to work so late.

#64 Introduction to Auditing

What is auditing? More specifically, what is financial auditing?

In big corporate entities ( Multinational- Companies, listed companies), small-to-meidum businesses, sole proprietor,etc, the entities are, required by law, to keep accounting records of the business on a timely basis. Hence, the entities hire accountants to keep the accounting records, that reflect the day-to-day business acitivities of the Company, as well as financial position of the Company.

The financial results are summarized and presented in what we called: Statutory Account ( Financial Statements/ Annual report for listed Company). How do we ensure that the financial results presented are accurate?

The auditors, independent party, are engaged to audit the financial results prepared by the entities. The auditors provide an independent check on the accounting policies, method of estimation, mathematical accuracy on the financial results presented.

The tasks are not as easy as other people would thought, as auditing involve a lot of professional judgement to ensure that the accounting policies adopted are not materially deviated from the local financial reporting standard.

In short, auditing provide and independent check on the financial results, and publish an opinion on the financial results of the entity: to give opinion on if the financial results are fairly stated.

#63 Impact of client's Key Performance Indicator on audit

During current credit crunch climate, auditors must be aware and gain an understanding of the management's Key Performance Indicator, as it represents the risky areas, where the management is likely to manipulate the results in order to meet the Key Performance Indicator.

Meeting a Key Performance Indicator means that the management might receive higher remunerations / incentive, and the jobs are highly secured with low risk of being retrenched.

#62 Deliveries without Billings

In construction industry and service industry (that involved installation service), there are instances that goods are delivered to customer, while billings have not been done. Can the Company, who delivered the goods, recognize revenue upon deliveries of the goods? Can the Company recognize revenue even if the installation services have not been done?

It depends on the term of the contract. In industry norm, the deliveries of goods to client’s location do not constitute a probable ground to recognize revenue.

Then, how should we record the goods delivered to client’s location?

The answer is: the items delivered are stocks in nature. As such, it should be recorded as part of the inventory recorded in the Company’s balance sheet.

#61- Stock Take Procedure 4

Proper segregation of duties must exist during stocktake.

As an auditor, we need to observe that the stock take team consist of:
1) Counter (Warehouse personnel)
2) Checker (Staffs from department other than warehouse department)

Warehouse personnels are the people who has direct access to the Company's stocks. Why should the warehouse personnel (counter) accompanied with a checker during stock take? This is to prevent potential fraud case and observe the normal inventory management procedures of the client. Warehouse personnel are the people who has day-to-day access to the warehouse. Assuming, they steal one and reported one stock lesser during stock take, nobody will not realize the fraud case, unless the inventory system capture the daily movement.

To illustrate with an example. Company XYZ does not has proper inventory system that keep track on goods in and goods issued. The Company will not know the exact quantity of the inventory item, until the physical stock take, which is done on a monthly basis. The employee could have just steal one item and without letting people realize.

Hence, stock take team must consist of at least one people from other department to check that the quantity counted and reported is as what have been counted physically.

#60 Implication of Internal Control- Impact of Credit Crunch on New Customers

In the current environment, where credit crunch impacts are prevailing, there are increasing credit risks of the Company. With the eagerness to obtain new customers, the strict credit risk assessments ( of new customers) should not be compromised.

The entity ( that are directly and severely affected by the credit crunch) should evaluate creditworthiness of new customers cautiously. Complete information needed to be obtained, for instance:
- Financial results of the Company
- Inquiries with market peers/ industrial person
- Shareholders' fund of the Company
- Reasons for purchasing from the entity

The entity can discuss with the new customer on the reason to purchase from them, as the supplies customer might have been discontinued from other supplies, due to credit risk concern.

Hence, a complete understanding and proper approval process need to be undertaken to prevent doubtful debt issue.

#59 Accounting treatment for bad debt provision

What would be the accounting entries while the collectibility receivable from a customer is deemed to be in doubt:

Dr. Bad Debt Expense (P/L)
Cr. Provision for Doubtful Debt (B/S)
Being provision for doubtful debt on receivable from XYZ

Provision for doubtful debt (B/S) relates to a contra account to Account Receivable. As such, the provision amount will be off-set against Account Receivable. Whereas, bad debt expense is generally classified as administrative expense in Profit & Loss statement.