Jokes about Big 4

Sharing the following jokes with you only:

Your alarm rings, signalling another brand new day. You get up, looking
forward for another new day of challenge, another new day to learn.
After washing up, you put on your office outfit, giving you that
professional look, one that you believe many out there envy. Breakfast
follows (perhaps), and you head off to your office. You're one of the
earliest to arrive, ahead of all your superior and when they come in
later, they greet you and you feel all charged up for another productive
day. Plenty to do and learn and hence, you are prepared to stay back
late to do all that is necessary.

If you're currently doing a degree in finance, accounting or law, the
above is probably what you've been waiting for all these years. You work
your ass off (well... most of you) in university because it's your dream
to join one of those big glamorous firms out there in the market.
Lawyers and accountants are the usual suspects for this curse. Once
graduated, all of them will run like headless chicken towards those big
firms. If you're an accounting student... you want to be an auditor in
one of the Big-4 right?

Well, if you do make it, it's like a dream come true. In such firms, you
get a personal computer, maybe a notebook (wow!). All your stationeries
are free, and it's also the first time you step into a 'pantry', where
you can make your own coffee, just like those nice offices in TVB
series. Next, you get an exclusive e-mail, the domain after your name is
not the ordinary @ gmail.com or @hotmail.com
or @ yahoo.com ... No, it's
not, it's your-name@a-big-and-glamorous-firm.com
. You can't wait to tell
that to your friend.

Then comes the feeling of giving a business card with your name on it,
and it's not any other business card, it's one with your name on it,
it's one that signifies you're an employee with
a-big-and-glamorous-firm. And... the word below your name is not a lowly
"accounts executive"... the word below your name is exclusive... the
word below your name is... "Associate". And when your friend gives you
the "Wow, you're an associate with this firm?"... you get into instant
orgasm.

3 or 6 months into your job, you will then be experiencing the euphoria
of saying... I-am-very-busy... I-have-a-lot-work...
I-worked-till-very-late-last-night...
I-can't-make-it-for-the-gathering-cos-I-have-to-work-this-weekend. Yeah,
it's an euphoria because to you, it's a privilege to be busy, it's very
cool to work late, you're very proud to work in during weekends. When
you utter such words, a sense of arrogance and pride radiates from you.
You feel great because working so hard means you learnt a lot of things,
those not in the professional industry somehow looks lowly to you. You
feel big, you feel you're a level smarter than them .Reality will tend
to sink in within 2 years or so, though the duration seems to be getting
shorter and shorter now with the younger generation.

First, you will probably ask yourself, how come a graduate like you must
do all sorts of donkey jobs such as photocopying, checking invoices,
going through pile and pile of documents and filing. You will also be
wondering how come your superior whom you once looked up to have to suck
up to clients. Oh yeah... most all clients are unreasonable.

If you're an accountant, you will probably realise that there is no such
thing called a 'balance' sheet. It's balanced because you did the
balancing act so that your big boss can sign on it and certify it as
'true and fair'.
Yeah... signing on accounts, the job that you once dreamed of... isn't
exactly all a bed of roses. You then realise that you will probably
never reach that "just-need-to-sign-only stage" but hey... it's ok, you
probably hate that job by now. When you tell your client something,
chances are you are just as blur and confuse as them. But you have to
act as though you're an expert because you're the con-sul-tant. This is
just a glimpse of it.

Now, all the late nights and irregular meals will probably caused you to
age 8 years in 2 years. Those I-am-very-busy... I-have-a-lot-work...
I-worked-till-very-late-last-night...
I-can't-make-it-for-the-gathering-cos-I-have-to-work-this-weekend will
take its toll on your body and it will show. You will probably look very
skinny... or very far... you will certainly look old and worn out.
Working late and spending weekends in the office is no longer a cool
thing but absolute stupidity. But hey... you will still have to do it,
because there's still much work to be done.

By now, all your friends who ended up as salesmen or doing other thing
except being a professional, those whom you felt superior to are driving
anything but a proton. But for you, it's time to think whether you
should buy a proton cause your perodua is beginning to give you problem.
Of course, if your father is well-connected fella, things can be
different.
But if you're not, tough luck. You'll be wondering how come you're
generally under-paid. Those exposure and learning curve that you once
craved are no longer relevant. You want to make more money. But unless
you're a partner of the glamorous firm, money can be a lil tough to come
by.

At this point of time, probably after 3, 4 or 5 years, you finally
realised that document you signed when you first joined the glamorous
firm was nothing but lies. Then, you decide to ply your trade in the
commercial world, you leave those glamorous firm. You think joining a
commercial firm will bring about a good change, not knowing that such
move means you switched from being a 'profit centre' to a 'cost centre'.
One of the main effect of the switch is that you will be working doubly
hard compared to the profit centre, which probably includes a lot of
late nights too... but your salary and bonus is much lower compared to
profit centre. What does this mean... a story for another time.

One thing for sure... your morning will now be something like...

Your alarm rings, signalling another day... another weekday. You get up,
after snoozing the alarm a million and one times. You hope today is
Friday, but it's not, and you feel like shit. You think of a million and
one reasons to take MC, but you realised you have to go to office
because you failed to finish the report due today though you stayed till
10pm last night. You tell yourself you need to change job, just like how
you have been telling yourself in the last 1 year. Once in office,
you're in a dilemma cause you want time to go slower so that you can
finish your work but yet, you want time to go faster so that you can
leave the office and go for lunch.

During lunch, you will b**** with your colleagues about work and
probably the bosses. You will all talk about so many people who seem to
be doing so well except for you. You realised you should have done
something else while in university. You realised you may have made a
mistake in life... a mistake in being a professional... you have made...
a professional mistake.

#87- Disposing capital-intensive business

What's happening in the corporate world now?

Capital-intensive require heavy investment of resources, including, but not limimted to: cash, human resource,management's effort, etc. As part of the restructuring exercise to scale down, there are evidence that a lot of corporate are disposing off capital-intensive business.

How would disposing capital-intensive business benefit the corporate?

- immediate liquidity ( i.e. proceeds from disposal)
- better working capital management
- allow management to evaluate other business opportunities
- lesser resources are required, which allow the business to scale down
- higher return on asset ("ROA") ratio

However, it's always not easy to dispose off a capital-intensive business unit/ busines during this business environment, unless a substantial discount is given to the potential buyers.

#86- Unpresented Cheque- Part II

In our previous post #80 Bank Reconciliation Review- Unpresented Cheque, we posted the following example and question:

Susan is the accountant of Company ABC, who has a December year-end. On 31 December 2008, Susan has approved a few cheques payable to their creditors, amounted to US$200k. Account executive has input the payments into the systems after Susan has approved the cheques. However, the cheques payable to their creditors are not delivered to their creditors until after year-end.

Is there any financial impact to the financial of the Company? Yes or No? If yes, what would be the impact then ?

Answer:

Apparently, cheques are dated before 31 December 2008 while the cheques are only delivered to the supplier after year-end. Susan has posted the following entries and recorded in 2008's book:

Dr. Trade Creditors
Cr. Cash

From accounting point of view, cheque should not be deducted from the above cash account until cheques have been delivered to the supplier. In above example, cash and trade creditors balance have been understated. A re-classification entries should be reversed out.

Auditor's Responsibility

We should inquire our clients that there are no cheques not delivered to supplier as at balance sheet date.

#85- Seagate Technology Singapore to retrench 2000 employees

Seagate Technology, hard disk drive manufacturer, has 3 facilities in Singapore, namely: Woodlands, Ang Mo Kio and Science Park.

Seagate Singapore has announced that they are going to lay off 2000 employees in Ang Mo Kio plants by end of 2010. Ang Mo Kio plant is principally involved in disk drive manufacturing. Employees being laid off will be offerred retrenchment benefit in line with industry standard.

In our opinion, the shifting of manufacturing operations out from Singapore is in line with general industry trend. In recent years, Singapore entities tend to shift their production plant out from Singapore, especially those labour-intensive manufacturing process, to China, Thailand, Malaysia. This is because labour costs are much lower in those countries, and the Singapore entities will be able to achieve cost savings in medium term.

#84- Market capitalization vs book value

In accounting, we look at net asset of the Company as an estimated guide of the value of the Company. However, the market value of the Company might differ from the book value (i.e. net asset of the accounting record).

Auditor can request management to analyze the difference between market capitalization and book value.

If market capitalization > book value. Auditors should consider what are the premium the investors are paying? Any figures on the balance sheet does not reflect true picture? Does the figure stated in accordance to accounting standards?

If market capitalization < book value. Auditors should consider the impairment issue for all assets and goodwill.

#83 - Auditing Body: PCAOB

In audit career, it is always useful to know what can be improved further in order to deliver an efficient, effective and satisfactory audit.

The Public Company Accounting Oversight Board ("PCAOB")is a non-profit corporation, created by Sarbanes-Oxley Act 2002. PCAOB oversee the auditors of public companies in order to protect overall public interest. PCAOB has a unit, called "Inspection unit". This unit is responsible in inpecting the audit works of registered public accouting firms who met certain criterias.

There's one particular section you might find interesting: PCAOB prepare and release inspection report on their website. The report written would briefly describe the audit deficiencies, departures from accounting/ auditing standard they have identified after conducting review. Audit works of Big 4 (PWC, E&Y, KPMG, Deloitte) are inspected too!

The reports are resourceful and provide a guide on what can be done further to improve our audit.

The website of Public Company Accounting Oversight Board ("PCAOB")is as follows:
http://www.pcaobus.org

You can view the inspection report by:
> Go to "Inspection" section
> Click on "Inspection Reports"

#82- Auditing: Annual Budget vs Actual Results

Company prepare budget and use budget as a performance benchmark and monitoring tools. For instance, senior management can question sales department if their actual yeat-to-date entertainment has exceeded the budget before the end of the year. Budget is , usually, prepared and approved at the beginning of the year or before that.

Budget has incorporated management's forecast, estimation and outlook of the business in the coming times.

Is management's budget useful to auditor?

The answer is yes. Budget, which represents management's expectation, should be compared against the actual results. Significant variances should be investigated. Apparently, management would have to explain the variances. It's important for auditor to find out the reason of the variances to identify potential changes in business operation, significant developments during the year.

Understanding how management view the business (by looking at the budget) is a crucial stage in audit planning, it enhance our knowledge and understanding on the business, the industry and the overall economy as a whole.

#81- Auditing FIFO Costing Method

We received a query from our loyal reader in respect of the auditing procedures on inventory costing method. Our reader specifically points to auditing procedures of First-in First-out ("FIFO") inventory method.

In FIFO inventory method, inventory acquired first acquired / purchased will be the first items sold. To illustrate with an example, Mobilephone retailer purchased one iPhone 3GS in Jun for a cost of US$500. Subseuquently, in end of June, the retailer acquired another iPhone 3GS for a total cost of US$550. What will be the COGS while the retailer sell one iPhone in July?

In FIFO method, it will be US$500. Items stocked first will be sold first.

Auditing Procedures:

In auditing FIFO valuation method, following procedures can be adopted:
- Obtain full stock listing as at balance sheet date, and select certain number of samples
- Obtain stock movement listing of respective sample, where we are able to see the stock-in and stock-out from time to time
- Obtain the stock-in costs for each purchase ( i.e. Jan: Purchase 10 items at US$10 each, Feb: Purchase 20 items at US12 each)
- Test compute the COGS for each deliveries to check that COGS amounts are recorded correctly.

To illustrate with the example above, when the retailer sold the iPhone in July. We can check to profit & loss statement in July, to verify that COGS reflects US$500. (i.e. first in first out basis).

#80 Bank Reconciliation Review- Unpresented Cheque

One of the audit procedure we perform while auditing cash account is review of bank reconciliations for year, especially at month end. Auditor need to excel higher level of cautiouness while reviewing year-end bank reconciliation.

In this thread, we would like to highlight to our readers on the potential distortions ( on cash balance) resulted from unpresented cheque. To illustrate with an example:

Susan is the accountant of Company ABC, who has a December year-end. On 31 December 2008, Susan has approved a few cheques payable to their creditors, amounted to US$200k. Account executive has input the payments into the systems after Susan has approved the cheques. However, the cheques payable to their creditors are not delivered to their creditors until after year-end.

Is there any financial impact to the financial of the Company? Yes or No? If yes, what would be the impact then ?

#79 Goodwill written off ( Part II)

In previous Goodwill written off post, we posted a question for our reader whether the goodwill should be written off after the Company and its subsidiaries has switched its businesses.

Goodwill is considered the premium the Company pay , during acquisition, in anticipation of future economic benefits. In the above case, Company A paid higher premium for Company B's existing customer base in computer hardware industry.

Company A and Company B have shifted its focus to computer software business, the goodwill the Company A paid for no longer exist. As such, the goodwill should be written off accordingly! There's no probable ground that the future economic benefit is going to flow into the Group.

#78 Goodwill written off

Company A acquired Company B in 2006. Net asset of Company B amounted to S$3mil, while Company A acquired the Company B with a purchase consideration of S$4mil. Management explained that the S$1mil excess ( which was subsequently considered as goodwill) is attributable to the goodwill paid to shareholder of Company B for existing customer base of Company B in computer hardware industry.

Year-over-year, Company B has shifted its focus to computer software industry. For the year ended 31 Dec 2008, Company B's ( which is a subsidiary of Company A) earning is at break-even stage. It has no more businesses in computer software, neither nor Company A.

What has happened to the goodwill Company A previously paid for ? Should it be written off even if Company B is not in loss-making position?

#77 Auditing Creditors- Creditor Turnover Analysis

In audit, it's essential to form an expectation of the Company's results before we really drill into the details. We compare the actual Company's results to our expectation, and investigate the variances accordingly. This is the analytical procedures adopted by most of the audit Company. Besides, we also compare the result / financial position with prior period.

Creditors' turnover anlaysis is one of the auditing procedure we performed. What are we expecting from the audit client, in general. We expect the creditors turnover (days) to increase, as compared to prior period.

To illustrate, majority of our audit clients are affected by the economy turmoil. They are squeezing suppliers' credit ( by delyaing the repayment), in order to maintain the Company's working capital, as our audit client's working capital are most likely affected by the delay of repayment from customers.

We have formed an expectation, and we will compare the actual result with our expectation. Any unusual movements need to be identified.

Accounting principle- Accrual Basis

Figures generated / kept in accordance to accounting principle is prepared on accrual basis. For instance, accountant record the provision for warranty ( based on estimate) even though there's no actual cash/ economic outflow yet.

In finance, cash basis figures are more relatively more valuable , as compared to accrual basis ( advocated by accounting principle), in order to value a business.

What do you think ? You prefer a an accrual method or cash method in valuing a business?

#76 Classification of Tax Refund

Should tax refund be classified as Income in financial statement?

Let's look at the double entries of tax refund upon receipt of advice / monies from the Income Tax Authority of the country:

Dr. Cash
Cr. Taxation Expense

Let's illustrate with example. Company XYZ made provision for tax in relation to Year of Assessment 2008 amouned to US$200 based on its tax computation, full payment of US$200 has been made. US$200 has been charged to its income statement as taxation expense.

In the same year/ subsequent year, Comptroller of Income Tax inform the Company that there's a computation error, and the actual tax for YA 2008 should be US$180 (ie overpaid by S$20). The Company should have recorded a credit to its taxation expense account (i.e. a gain to income statement) as tax refund.

In short, tax refund should not be classified as income in financial statement. It should be considered a credit to taxation expense account.

Small Business Accounting- Interest Expense

What are the entries to record interest expense incurred on borrowings from bank ? Upon occurrence of interest expense:

Dr. Interest Expense (P/L)
Cr. Interest Payable (B/S)

Upon repayment of interest payable to bank:

Dr. Interest Payable (B/S)
Cr. Cash (B/S)

Breach of Debt Covenant

While a Company withdrawn loans from bankers, a debt covenant condition will be stated on the term loan facility letter require the Company to maintain /meet certain financial position. For instance, the debt covenant might require the Company to maintain current ratio of at least 1, or maintain net worth ( i.e. net asset) of certain amounts.

If the Company does not meet the debt covenant requirement, the bank is contractually entitled to call back the loans immediately. To illustrate, if Company XYZ fail to meet debt covenant requirement of maintaining current ratio of 1, bank is entitled to call back the loans amount immediately.

However, in practise, the Company will negotiate with its bankers to extend the period of review ( ie. extend the timeline for the Company, in order for the Company to improve its financial positoin).

For auditing purpose, the Company must require a waiver letter from the bank as an evidence that the bank will not call back the loan immediately. If not the non-current portion of term loan has to be classified as term loan if waiver letter was not obtained after the Company has breached its debt covenant.

#75 Auditing Interest Expense

What's the most effective way of auditing interest expense recorded?

In order to verfiy the reasonableness of interest expense recorded, we used the following formula:

Principal x Average Interest Rate x Period = Interest Expense

Some of the auditor would perform vouching to bank advice by tracing the amount reflected on bank advice to amount stated on General Ledger. However, vouching only ensure the existence, it does not address completeness.

As a result, reasonableness is always useful to check for the completeness of expenses recorded.

#74 Accounting entries to record impairment

Previously, we discussed about the objective of IAS 36- Impairment of Assets and all other related topics. We will proceed further on the accounting entries of impairment. Generally, upon recognition of impairment, the following entries should be passed:

Dr. Impairment Loss (Profit & Loss)
Cr. Provision for Dimunition in Value (Balance Sheet)

Provision for Dimunition in Value is a contra account to the existing asset account. For instance, the contra account of Stocks, in this case, is Provision for Stocks Obsolescence. The Provision for Dimunition in Value has properly disclosed the impact of impairment on the existing asset, that could be useful to financial statement users.

Singapore Fraud Cases- Fibrechem and Oriental Century

2 Singapore-listed China entities are reported to be involved in fraud scandals recently, namely: Fibrechem Technologies and Oriental Century.

Fibrechem Technologies' auditor, Ernst & Young Singapore have encountered difficulties in the firm final audit of ascertaining the Cash and Trade Debtor balance of the Group. Fibrechem Technologies is a China-based entity involved in producing chemical fibres and synthetic leather.

Whereas, Oriental Century's auditor, KPMG face a similar problem in ensuring the existence of cash and trade debtor balance. Oriental Century is a china-based education company, in which Raffles Education (SGX-listed education Group)holds 29.9% stake with cost of investment amounted to S$34.6mil. In worst case scenario, Raffles Education might have to write- off its investment in Oriental Century if Oriental Centruy could not operate on a going concern basis.

Similarly, in previously reported Satyam Fraud Case in India, Satyam's founder and CEO has mis-appropriated its cash balance in its balance sheet. How could the auditors being mis-led ?

#73- Downgrading of Credit Rating

Media giant, Eastman Kodak Co. has recently received a downgrade on its credit rating to "B-" from "B". The downgrade was due to the company's high rate of cash consumption and concern that the cash balance will quickly be utilised. The outlooks are unfavorable for Eastman Kodak Co.

A credit rating defines the financial strength of borrowers and help inventor to determine the likelihood of repayment of bonds, etc. The credit rating is always used as a reference by the princaipal banker of the Company being rated.

The downgrading of credit rating has an direct impact on the Company's interest expense. The lower the rating, the higher the interest rate. As such, as the Company's auditors, we should always beware of the credit rating position of the Company we are auditing and form expecation and the interest expense of the Company.

A credit rating is also One OF THE TOOLS to evaluate the financial position (i.e. strength ) of the Company, and assist in forming going concern assumption for the Company.

#72 Debtors Turnover Analaysis

In auditing debtor balance, auditor will perform some analysis of the debtors turnover of the audit client, and compared the result to prior year to identify unusual fluctuations.

Debtors Turnover (day) is computed as below:

Average Debtor Balance / Sales x 365 days = Debtor Turnover (day)

Debtors turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year.

We will expecting a deteriorating debtor turnover (day) in this gloomy economy environment. To illustrate with an example, a customer of our audit client would take longer period to repay its outstanding balance due on time, and herein increase the number of day the receivable stays in the debtors balance.

Customers are squeezing their creditors by pro-longed their repayment period. Our audit client may, in another leg, delay the repayment to its (audit client's) suppliers.

A economy efficient would have been created, as the delaying in repayment has direct impact on the ultimate's suppliers decision on resource allocation. In afraid of selling items to doubtful customers, the ultimate suppliers might have cancel/ stop the supplies to our audit client.

As such, working capital need to be analyzed by auditor to identify unusual circumstances that might occur.

Small Business Accounting - Prepayment

In practice, small business made one lump sum prepayment or downpayment for purchases or services accross a certain period. For instance, the business may entered into insurance contract to insure its asset for a period of 12 months.

From accounting perspective, the amount prepaid should be expensed over the period of servie covered. To illustrate, the 12-month insurance premium paid should be expensed off over a period of 12 months. What would be the accounting treatment then?

Assuming Company XYZ entered into insurance contract to insure its inventory. Total insurance premium paid is US$12,000.

Upon payment of insurance, the Company passed the following entries:

Dr. Prepayment (B/S- Asset)12,000
Cr. Cash 12,000
(Being prepayment to insurer for insurance contract)

At month end, the following entry will be passed to recognise the insurance expense

Dr. Insurance expense (P/L)1,000 (12,000/ 12)
Cr. Prepayment 1,000
(Being utilisation of monthly insurance expense)

At the end of 12 months, the prepayment accounted will be fully utilised.

Ernst & Young Australia sacked nearly 100 staffs

The Big 4 accounting firms, once considered resilient to global economy slow down and credit crunch, have started to laid off its staffs. Apparently, it's not only the bankers are affected, but also the auditors/ consultants.

It's reported that Ersnt & Young Australia has sacked nearly 100 staffs recently.

Just yesterday, Treasuer of Australia Wayne Swan reported that Australia economy fell in to a recession trap, as evidenced by GDP shrank by 0.5 percent in 4th Quarter 2008. The economy is contracting for the first time in 8 years.

What about other Big 4 ( namely: Pricewaterhouse Coopers, KPMG, Deloitte & Touche)? Are they retrenching ?

Please feel free to comment on the blog, or drop us an email at myauditing@gmail.com.

#71- Automotive Giant, General Motor- Going Concern Issue

America automotive giant, General Motor has highlighted in its earning release section that the Company anticipates receiving a “going concern” opinion from its auditor, Deloitte & Touche. The General Motor’s management has to determine whether there is substantial doubt about General Motor’s ability to continue as a going concern.

IAS 1 states that: “when preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. Financial statements shall be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, those uncertainties shall be disclosed. When financial statements are not prepared on a going concern basis, that fact shall be disclosed, together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern.”

General Motor's businesses are severely affected by the recent market downturn and its financial results have dropped drastically. The outlook for the global automotive industry remains gloomy and pessimistic. The Company is actively looking for funding, including request for additional fund from Treasury department of United States.

IAS 1 further required that: “In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet date. The degree of consideration depends on the facts in each case. When an entity has a history of profitable operations and ready access to financial resources, a conclusion that the going concern basis of accounting is appropriate may be reached without detailed analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate.”

Small business accounting- Cash

Generally, the small business comprises:
- Cash on Hand
- Cash in Bank

Generally, the cash on hand amounts are not material, while significant amount of the businesses’ cash are kept in bank. What will be the accounting entries for cash receipt and cash disbursement (i.e. payment).

Upon receiving of cash from debtors:

Dr. Cash in Bank
Cr. Trade Debtors

Upon disbursement of cash (i.e. outflow of cash) for expenses

Dr. Trade Creditors/ Expenses
Cr. Cash in Bank

For bank charges on the bank account deducted from bank account directly:

Dr. Bank charges
Cr. Cash in Bank

It’s important to note that: a online bank account enable the small business to track the transaction on a real time basis. Conventionally, small business is required to check the cash inflow and outflow while they have received the monthly bank statement from the bank. With online banking account, the small business is allowed to view the transactions on a timely basis.

Small Business Accounting

Small business accouting, in general, are non-complex and straight forward. The fundamental is that the owner of the small business must develop certain level of undertanding of accounting before they could really appreciate the value and necessities of accounting.

Our blog has specially dedicated a separate section to educate our blog readers on basic accounting entries, specifically suits for small business.

Prior to introduction on accounting entries, we would like to highlight to business owner that it's important, convenient and cost-effective to use accounting software to perform daily book-keeping. There are already a few accounting softwares in the market, e.g. Microsoft Office Accounting Express, SAP small business accounting software.

An accounting software is considered imperative in today business environment.It reduces the time spent on book-keeping, prevent 'un-balance' entries, and provide the business owner an effective insight of the Company's financial position and results on a timely basis.

Corporate Fraud again- Stanford Fraud case

US$8billion dollar fraud by United State banker, Allen Stanford. The scam is widely perceived as Allen Stanford utilising the ill-regulated offshore banking industry in Antigua.

Stanford financial group has allegedly offerred US$8bilion worth of certificates of deposits that promised unreasonably high interest rate. CAS Hewlett, Antigua-based accountancy firm is the auditor. Unfortunately, the where-about of the chief executive is unknown.

CAS Hewlett gave unqualified audit opinion to the statutory account of Stanford.

Nevertheless, what regulators concern are the representation of the bank, as quoted below:

'The defendants have misrepresented to CD purchasers that their deposits are safe, falsely claiming that the bank re-invests client funds primarily in 'liquid' financial instruments (the portfolio); monitors the portfolio through a team of 20-plus analysts; and is subject to yearly audits by Antiguan regulators.'

#70- Objective of IAS 36- Impairment of Assets

The objective of IAS 36 is to ensure that the Company's assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amounts to be recovered through use or sales of the asset. If the carrying amount > recoverable amount, the asset have to be impaired.

IAS 36 is considered extremely for financial statement users. Let's illustrate a scenario where no Company does not apply IAS 36 appropriately.

Company ABC have recorded a few machineries in its accounting books for the year ended 31 Dec 2008. However, due to excessive usage of the machineries & improper maintenance, the machineries are at the end of its life cycle with approximately nil value. Company ABC is going to scrap off the machineries in one month time. However, in the book, the Machineries have a net book value of US$1million.

A few investors are in the process of taking over Company ABC. While reviewing the Company ABC's financial statement, they are more than happy to find out that the Company has US$1million worth of machineries on hand. As such, they are willing to pay another US$1million on top of the initial offer price!

If IAS 36 has been applied appropriately, the Company should have impaired the Machineries to its recoverable amount. Investors would not have paid another US$1mil for the end-of-life machineries. Hence, it is important to carry out proper impairment testing for significant assets on the Company's books.

#69- Implication of Credit Crunch on Money Market Fund

Before the spread of credit crunch, company's investment in money market funds are, in normal circumstances, classified as cash & cash equivalence. The classification is in view of the feature of high liquidity and easily/ readily convertible to known amount of cash.

However, the classifications above need to be challenge. We need to re-consider if the money market funds in current climate continue to meet the criteria of classified as cash & cash equivalence, by considering the following factors:

- short term
- hihgly liquid
- readily convertible

Satyam Fraud Case- Implication of Bank Confirmation / Bank Certificate

Subsequent to our previous post of " Saytam Fraud Case- Misrepresentation of Cash" , our further examination reveals that the misrepresentation pertains to misrepresentation of the Company's Fixed Deposit. The CEO, Raju, is personally in charge of the Fixed Deposit! An improper segregation of duties ( improper corporate governance) has given the CEO committed the fraud.

Investigation into the fraud case is on-going, and media widely reported that the investors are questioning what audit procedures have the Stayam auditor, Pricewaterhouse Coopers performed to ensure the existence of the asset.

The implication of Satyam Fraud Case highlited the importance of obtaining independent bank confirmation from the bank directly. No audit engagement should be closed without obtaining the bank confirmation as an audit evidence. Bank confirmation replies will also reflect any contingent claims by the bank towards the entity. As such, the auditors can ensure the completeness of the disclosure of Company's contingent liabilities.

In short, an independent bank confirmation / cash certificate is an important audit evidence, as evident in Satyam's fraud case.

Satyam's Fraud Case- Misrepresentation of Cash

Recently, the profession is hit by the significant fraud case involving India's IT Giant- Satyam. Satyam admitted that he has committed fraud, part of the action includes: inflating cash and bank balances by $1 billion dollar!!!

The professions are wondering how could the auditor miss out such a huge misrepresentation in cash and bank balance. In general, audit procederes include:

- agreeing cash and bank balance per Trial Balance amount to Bank Statement
- most importantly, obtaining bank confirmation directly from the client's banker

The confirmations and bank statements provide a certain level of audit comfort zone, given that it's an independent party confirmation, rather than client-generated evidence.

Nevertheless, Pricewaterhouse Coopers, who are the auditor for Satyam Computer Services Ltd, claims that the audits were conducted in accordance with applicable auditing standards and were properly supported by audit evidence. Apparently, the fraud cannot be easily discovered by obtaining bank confirmation. If not, it wuld have been discovered, given that Pricewaterhouse Coopers has been the auditor of Satyam for several years.

We shall wait for further news / reports then.

#68 Evaluation of Doubtful Debt

Subsequent to the topic of #67 Identification of Doubtul Debt, we would like to proceed further on how to evaluate the exposure to doubtful debt. A very critical question to ask: Does all long outstanding debt represents doubtful debt, for which the provision need to be provided for ? The answer is very subjective, and involved a lot of professional judgement.

Let's start the evaluation with asking our readers a few scenarios as below:

[Scenario A] XYZ Company has outstanding amout due from Company A (aged > 90 days), who is long standing customer of XYZ Company for the past 10 years with no history of default in repayment. The long outstanding amount is attributable to the slow-repaying from Company A.

[Scenario B]XYZ Company has outstanding amount due from Company B(aged > 90 days), who is long standing customer of XYZ COmpany for the past 20 years with no history of default in repayment. Company B usually paid the amounts on time. There is no dispute involved in the outstanding amount due from Company B.


We invite our 'Accouting & Auditing blog' readers to evaluate the recoverability of outstanding amount due from Company A and Company B respectively.

#67 Identification of Doubtful Debt

How do we identify potential doubtful client while performing audit ?

We have to identify the doubtul receivable before assessing the potential provision for doubtful debt for respective client. Be noted that, provision for doubtful debt should be assessed on a specified basis. General provision is no longer allowed in IAS 39. IAS 39 requires existence of objective evidence of impairment on doubtful receivable. General provision does not take into consideration of any evidence.

Let's come back to the topic on how do we identify slow moving debtors step-by-step:

1. Obtained trade debtor aging listing ( by customer) as at the balance sheet date
2. Pay attention to debtors who have outstanding debts overdue more than 60-90 days
( the number of days could be changed according to the industry norm)
3. Selected the debtors ( with significant outstanding long outstanding debts according to the audit materiality of the engagement

In short, we analyze the debtors who has: 1) long outstanding balance ( generally overdue more than 60- 90 days) and 2) the long outstanding balance is considered material for the purpose of audit.

#66 Audit Evidence- Company's Minutes & Resolutions

Reviewing Company's Annual General Meeting minutes & resolutions, Directors' Meeting minutes & resolutions, Audit Committee Meeting minutes & resolutions is part of the audit work steps.

By reviewing the Company's minutes & resolutions, the auditor will be able to know the latest development / recent changes to the Company's financial and operational positions. Changes in business directions will be discussed over the Company's meetings and documented accordingly.

Hence, the Company's minutes & resolutions serve as a good audit evidence for auditor to gain understanding of the Company's business and it should be filed in appropriately.

The auditors, usually, will visit the Company's corporate secretary office to obtain the Company's minutes & resolutions.