Saturday, March 19, 2011

#102- Auditing operating cost- understanding cost drivers

Auditing operating costs is always not an easy task. A good audit procedure requires auditor to develp a thorough understanding of the nature of the cost,determination of fixed / variable costs, understand the cost drivers of the costs (especially for variable costs),understand the linkage between the costs and the revenues.

Significant assertion of auditing an operating cost is to ensure that the cost recorded is complete (i.e. completeness).

First of all, we need to understand the nature of the costs (i.e. what type of costs, when was the costs incurred, is the individual amount incurred significant, etc). After develop the understanding of the nature of the costs, we need to understand whether the costs is a fixed costs, or variable costs.

Then, we need to understand the cost driver of the costs. This procedure is especially important for variable costs component. Auditor need to understand what are the factors that drive the cost (for instance, transportation cost could be significant to a trading house). The cost driver for transportation cost is the level of business activities / number of deliveries completed

Auditor can analyze the company's record on number of deliverties completed for the year, and compare our expectation to the cost variation. To illustrate, while number of deliveries go up, we will expect total transportation cost to increase. A good understanding of the cost drivers allow the auditor to have complete understanding of the costs/ and develop a good audit approach to analyze the cost variation.

Wednesday, March 9, 2011

#101- Fraud cases in Singapore- China Hongxing and Hongwei Technologies

Accounting irregularities are detected in two S-chip companies in Singapore, namely: China Hongxing Sport and Hongwei Technologies. Coincidentally, the financial auditor of these two companies is Ernst & Young LLP.It's noted that the auditor is facing difficulty in ascertaining certain assets, liabilites, and expenses. Details are as below:

Hongwei Technologies- the auditor is facing difficulty in confirming the cash and bank balances

China Hongxing- the auditor noted irregularities in the cash and bank balances, accounts receivables, accounts payables, and other expenses

The board of directors have engaged independent investigator in resolving the issues highlighted by Ernst & Young LLP.