Data Analytics - impact to financial audit

Recently, data analytics is a very common topic. We were looking at Deloitte website and it appears to us that data analytics provide an insightful analysis of the business which assist the auditor (or even management) to look at the business from a different ankle and assist to identify potential weakness within the business (including: weakness in business process).

We are lucky enough to work on a number of data analytics project. How we felt? It is not easy to apply data analytics to all the audit client, as your audit client's IT system or data may not capture the information we need or the client's IT system might not be commonly use and may not allow us to conduct further analysis.

Having said that, data analytic is useful if the data is available. For instance, it may share with you a list of transactions with unusual preparer ID (e.g. CEO post entries into revenue account) - this may assist the auditor or audit commitee to identify red flags.

Data analytic is portraited as the future of audit tool and we believe that greater emphasis would be placed on data analytic going forward. It is time for auditor to educate the audit client to capture more information / data into the system for more in-depth analysis.

Please feel free to contact us if you need assistance on data analytics.

Payroll Audit: Over/ underpayment to staffs

In payroll audit - auditor need to be cautious and maintain high level of professional skepticism - as payroll is a sensitive area. Payroll has implication on the Company's cost, as well as individual's payment. In certain circumstances, employee union or industry union is also stakeholder.

There could be instances where by there would be over payment or under payment to employee - and this may not be identified by the reviewer of the monthly payroll costs nor the employee. Hence, it is important not only ensure that the payroll costs stated in the payroll summary is correct. Auditor should also test the details within the payroll summary. This is especially true for individual not withdrawing full monthy salary for various reasons, for instance:

- new joiner who joins during the month;
- resignee who leave during the month;
- employee took unpaid leave during the month
- part time employee who were paid based on the number of days work

The computation of the payroll costs for different scenario should be cross-checked against the employment contract to test that correct details have been captured. There could be huge consequences for over payment and/or under payment for payroll costs.

Accounting for derivatives - things to take note

Derivatives are financial instruments recognised as fair value through profit or loss. The contractual term for some derivatives is more than one year.

For instance, interest rate swaps for a non-current loan is typically more than one year - hence, the fair value includes current and non-current portion. Management should assess and determine the current and non-current portion of these derivatives on balance sheet appropriately. This is one of the items to take note.

Also, we also have to disclose the notional amount of the derivative contracts in the financial statement. For instance, the interest rate swap is entered into to hedge a loan amonut of S$10million. This would be the notional amount to be disclosed. This would assist the financial statement user to understand how many % of the loan has been hedged with the derivatives

Besides the points above, the fair value of the derivatives should not be offset against each other. For instance, one derivative contract is in asset position, while the other derivative contract is in liability position as at year-end. These contracts should not be offset against each other on the balance sheet.

Please feel free to contact us if you need clarification on the accounting for derivatives at myauditing@gmail.com

Inventory theft

Inventory may theft may occur to your audit client. As audit, you may or may not detect this event, if it is not revealed by your audit client. To illustrate, your audit client maybe using one of the inventory system:

a> Perpetual inventory system

By using this system, the audit client track every single inventory movement - its in and out - there would be a account created (i.e. inventory differences) to record the the discrepancies noted between actual physical count while carrying out the stock count. Generally, the stock conut is carried out on a monthly or quarterly basis. If the auditor noticed a higher than usual inventory difference, we should ask management to share with us the reason on the rationale for significant inventory differences.

b> Periodic inventory system

More often than not, there is no inventory difference account created to track the difference between the stock quantity per book against physical account. This is because the inventory theft, if any would have been recorded in cost of sales. As auditor, we may be able to identify large inventory difference that would have an impact on the gross margin of the company. However, inventory theft loss as a percentage of cost of sales might not be significant -it is not easy for management nor auditor to detect this.

As auditor, we should understand from management what is the process implemented by management to prevent inventory theft and what is the controls in place to detect this. This is important as safeguaring the Company's asset is important. 

EVA : Economic value added - Auditors should know this as well

Economic value added ("EVA") statement is commonly seen as another measurement of the financial performance of a company. EVA statement is usually seen in the annual report/ reporting of conglomerate.

Economic value added (EVA) is an internal management performance measure that compares net operating profit to total cost of capital. Stern Stewart & Co. is credited with devising this trademarked concept.

(Extracted from www.investinganswers.com)

Please research more details on the nature of EVA as it is useful to know and audit work may arise from this area.

You may visit the following page for more information:

http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/economic-value-added-eva-2925