Audit - consideration of compliance with manpower rule in Singapore

Talent / labour crunch in Singapore is a common issue in Singapore. There are certain rules imposed by Ministry of Manpower in Singapore. There is a lot of discussion with regard to the manpower of Singapore - as there are certain comments commented that there are significant number of foreign workers, whilst on the other hand there are business owners commented that it's not easy to hire sufficient labour for production or construction work.


Ministry of Manpower imposed certain restriction on the number of foreign workers that can be hired by a Company i.e. the Company is allowed to hire certain number of foreign workers for each headcount of Singaporean.


As an auditor, we should understand what's the process implemented by management to ensure that this rule is being complied with. Somebody may ask why would auditor has to consider this?


The answer is if the regulation is not complied - there is risk that the company may receive penalty or fine or in the worst case scenario, the company's operating license may be in question. Hence, we should have a word with management on how does the company ensure that they have complied with the rules and regulations prevalent to the company.


In addition, if you have overseas operations, it is also critical to understand how has the overseas management manage the compliance with overseas rule. For instance, how does the manager in China ensure compliance with contribution of pension fund required by local law.

Audit response to significant risk identifed for audit engagement

In any audit engagement - it is mandatory to identify significant risk that is unique to individual engagement as required by international standard of auditing. The significant risk identified requires auditors' special consideration in designing and executing the audit procedures.


For instance, for active company, the auditor may concern that the revenue might not be recorded in appropriate period as there might be incentive for management to overstate the revenue. Given that the oil price is at low end cycle, there might be risk that the oil & gas audit client may understate their provision for any onerous contract.


In short, it is important to develop a robust understanding of the audit client (including: business environment, compensation package of management, etc) to identify significant risk.


When a matter is identified as significant risk - auditors need to design audit response that requires special consideration - i.e. carry more audit procedures for certain accounts to response to the fraud risk. For instance, carry out detailed analytical review for revenue account to identify any unusual transactions.


If impairment of property, plant and equipment is identified as significant risk (most likely there's indication of impairment), auditor need to examine the cash flow analysis of the Company carefully to evaluate the reasonableness of the cash flow analysis prepared by management to support the carrying amount of property, plant and equipment.


Significant - then do something different.

Audit manager - having lunch or dinner with client

Over the years, the auditors of myauditing.blogspot.com realized that auditing is essentially a service industry. It's important to manage client's expectation whilst ensuring that the financial statement is not materially stated from the prevalent accounting standard. Works got easier and smooth, when both auditor and audit client move in the same direction and are on good term.

As such, it is important to develop or forge strong client relationship with the audit client. We realized that it's a lot easier to forge relationship over lunch, instead of formal face-to-face meeting. We are not discouraging of having formal meeting. However, we are encouraging to have informal lunch with client - in a lunch set-up, where both the auditor and audit client can talk about personal matter, instead of accounting and auditing matters.


Audit fee discussion got a lot easier when both parties are on the same good term.


Hence, the auditors in myauditing.blogspot.com always ensure that at least a lunch is being organized for each audit client. This is part of client relationship management that worth investing your time and some money.


What is your thought - hope to hear from other auditors within the world. How do you forge stronger client relationship?

Discipline is needed for the auditors, especially audit manager, who is manaing portfolio of client

Throughout the years, with the progress and promotion in the audit career - from audit staff to audit senior to audit manager... - we realized that being discipline is important for an audit manager to manage its portfolio of clients.

Depending on the workload, an audit manager may assigned to manage at least 10 client groups and there are managers who are managing more than 50 client groups, where the size of each client groups varies. It's important to be discipline to plan the audit, execute the audit, review the audit working papers, resolve the accounting issues and close the audit immediately.


Procrastinating, which is a no-no habit in life, would result in delay in audit, overtime hours to be incurred by audit team and audit manager himself/herself. If the audit manager don't carry out his/ her work diligently in a discipline manner. Audit progress may goes beyond the audit team's control - for instance, delay in review by audit manager would causes the client to miss its filing dateline. There will be spill over effect for other audit engagements that are on-going on the same period.


In life, it's important to plan, to execute and be discipline and diligent.

Auditors' are not infallible - Article from The Edge -

We came across this article in The Edge with the title of Auditors, like anyone else, are not infallible:


http://www.theedgemarkets.com/en/article/auditors-anyone-else-are-not-infallible


What the article said is quite true - where the auditors can't guarantee everything within the company is "all right" even though a clean unqualified audit opinion has been issued. However, the market perception seems to be like the company "is ok" since it has been audited and clean audit opinion has been issued?


WHat can be done to change this market perception ?

Audit manager and audit partner - EQ - managing emotion or temper

Auditors are subject to tremendous stress, as you are responsible to opine on a set of financial statements, which could be subject to lot of reviews or scrutiny or subject to reliance. A bankers place reliance on the financial statement to evaluate the capability of your audit client to repay, public investor rely on the financial statement to evaluate the investment decision. A audit partner need to carry out the audit in accordance with relevant auditing standard and need to defend on their audit opinion on areas that require significant judgement.


Pressure can cause audit partner and audit manager to have emotionally bad day. A distressed audit partner or audit manager need to watch their communication and interaction with different parties carefully to ensure that the emotion or temper is controlled and surrounding others are not affected.


To illustrate,


Audit partner or audit manager should not whack a subordinate without any reason just because you are having a bad day!


Learn how to control your emotion or attend anger management  class or leave the office immediately if you feel that you going to explode.


Short post but hope the audit partner or audit manager can learn.

Audit - authenticity of audit confirmations sent to customers or suppliers

For all audit, auditors request for debtors' confirmations, creditors' confirmations when the balances are material for the purpose of the audit.


Upon receipt of confirmations, if the counter-parties do reply - what would you do if the following circumstances happen:
- replies via email to auditors' email account
- replies to audit client, who then pass the confirmations to the auditors
- replies via email to client's email then the email was forwarded by audit client to auditors


Strictly speaking, the original confirmations should be mailed to the auditor with original stamp. This is the procedures / protocol to be reiterated to all audit client, so that they are on the same page from the beginning.

Nevertheless, after noting the above scenarios - what should auditors do ? Is auditor "ok" to accept the above confirmations? We suggest the auditor to carry out some procedures to test the authenticity of this confirmations, by:
- giving a call to counterparties who have replied to confirm that they have replied the amount stated on the confirmation (note down the phone number, name of counterparties);
- test check the email account of the sender by sending an email to them to request for confirmation
- do a high level reasonableness test on the sales or purchase trend with this particular customer or supplier


From an audit perspective, some additional procedures need to be carried out to gain more comfort on the confirmations received. Maintain professional skepticism throughout the audit.

Overview of component auditors' audit working papers - International Standard of Auditing 600 ("ISA 600")

ISA 600 dealt with the work of related auditors and other auditors in the audit of group financial statement - to elaborate, if your audit client is a holding company, who has a subsidiary audited by another auditor, then you have to consider this ISA 600.


For instance, audit client A is audited by your audit firm. Audit Client A has a material subsidiary in China, i.e. subsidiary B, which is audited by another auditor. If you are required to sign-off consolidated account of Audit Client A then you are required to consider ISA 600 when audit / consider the financial of subsidiary B.


ISA 600 requires the auditor of the parent company to be proactive in participating in the audit of subsidiary B - as, ultimately, the consolidated account will be signed off by the auditor of parent company. Auditor for audit client A should not solely rely on the work carried out by the auditor of subsidiary B.


Hence, the auditor of the holding company should consider ISA 600 seriously and in detail when planning the group audit. The following key factors should be considered:


- significant risk of the Group and subsidiary
- significant accounts of the subsidiary
- audit materiality and methodology for the audit of subsidiary B
- communication protocol
- timeline of the audit
- deliverables by auditor of subsidiary B


The above matters must be considered by the auditor of Client A in planning its group audit - it's also important to go through the above with corporate management to identify if there's any other matters to be emphasized.

Audit manager - managing uncertainty - attitude of stay cool

This post is not about how to prevent uncertainty or surprises in audit, as the trick boils down to proper planning and timely communication with the stakeholder. The post will be focusing more on - when surprises happen , what should an audit manager do / react/ behave?


Based on our experience: stay cool and calm - no matter how serious the matters are , stay cool and calm - audit manager is the leader of the audit team and the audit manager would have direct contact with the audit team -  being emotionally stable and react calmly would ensure that the emotions of the audit team would not be affected so severely.


Imagine yourselves , if you behaved negatively - what would be the impact on the audit team / audit client / audit partner? Would they be more tensed in the surprised situation?


Emotionally stable and capability of taking everything at a stride is a must-have attitude of an audit manager, who should continue to drive the audit through any big waves.


Audit manager, no matter how life is tough, please put on a smile.:)

Audit - impairment assessment - identification of cash-generating units within a legal entity

Recently, we came across a interesting observations relating to impairment assessment when we audit a legal entity. The entity, which consist of 3 business divisions, is profit-making from an overall perspective. By looking at the surface, one might conclude that there's no indication of impairment. Is this appropriate and sufficient?


When we dealt with the audit further (which is a new audit client), we noted that one of the three business division is in loss-making and in gross loss position. The assets are not generating return that is within management's expectation. Is this considered an indication of impairment? Yes.


Question: when carrying out impairment assessment , do we have to consider 3 business divisions or just 1 legal entity?


Looking at IAS 36, a principle of identifying a CGU is to identifying the lowest level of cash generating unit that generate independent cash flow. We noted that the cash flow of this loss-making business division is independent of other 2 business divisions (i.e. non-interdependent) and there's a separate management team dealing with this business division.


As a result, we have proposed management to reconsider the impairment assessment and request management to estimate the recoverable amount of CGU for the loss-making business division. A impairment was provided subsequent to management's re-assessment.


Morale of the story: look into details.

Audit manager - not to demotivate a diligent staff

What would you, as a manager do when you encoutered a staff who possess good attitude, have an eyes into details, diligent, have been working late - but this staff over audited one area.

How would you handle this closed matter or convey the message to him/her - i.e. this area has been over audited and in fact you dont have to spend so much hours.

Would you tell the staff directly straight into his/her face? Would you find another chance to talk to him/her to educate that some of the procedues can be passes on to client?

Objectively, the message should be conveyed immediately and clearly. However, one should take note of the likely impact of this message. Would your message demotivate your staff? Would your message discourage the staff?

Managing a staff and motivating staff are a long term matter - depending on the character of your staff- manager always try to balance out to strike for the best outcome. Perhaps, the message should be conveyed at the end of the audit engagement for the staff to take note next year. Would it be too late to do so?

Managing people is tough huh? But, not uninteresting .

Why would audit manager has exposure on different industries

It's common to hear from accounting world that audit manager has a relative wide exposure on different industries. How is that so?


As what we understand, an audit manager are given a portfolio of audit clients for him / her to serve throughout the year. Depending on the audit requirements and different audit timeline, the audit manager may serve different audit client and different period of time. To illustrate, for instance: an audit manager maybe handling the audit issue of clients who are having December year-end in January to March period. For listed companies with quarterly announcement requirement, audit manager may have to review their audit client's announcement on a quarterly basis.


Due to different service requirement, an audit manager may handle quite a number of client's audit matters within a day. This has put pressure on audit manager to have multi-tasking skill and always on top of the audit matters to ensure that the audit is progressing on track or to avoid any last many surprises.


The intensity of the daily activities and the opportunities to be exposed to different clients ( who are likely in different industries) have pushed the audit manager to be trained in different aspects, including: accounting knowledge, industry knowledge, capability to handle multi-task and mentality to handle pressure.


There's in fact a joke to say that the auditor aged faster ?


Of course, the headcount turnover in audit is relatively high compared to other industries. One may leave to pursue a different lifestyle or another priority of life.


What about you  - are you still in auditing line?

A mandatory skill required for an audit manager

What are the key skills that are mandatory for manager in this rapidly changing world ? What makes one a good / outstanding audit manager? What are the key skill required?


Technical skill
Administrative skill
Communication skill
Managing skill
etc etc


If you only have a choice of one, what would you want to have as an audit manager?


If you ask myauditing.blogspot.com founder, the answer would be articulation skill. The economy is changing rapidly, and the accounting standard is changing from year to year to keep up with the change of economy or financial statement user's expectation.


The accounting standard is become more and more complex. The audience of your financial statement user might not have accounting knowledge. A good audit manager should possess the skill of articulating accounting concept / framework to layman on the street.


Without a good articulation skill, nobody is able to understand the essence of the accounting standard / principle - and hence, the financial statement users would not be able to appreciate the value of the accounting. One would appreciate a piece of work he/ she understand where the value lies.


If you are an audit senior / audit assistant - please try to put in thought on how to explain profound accounting concept in a layman term. It's not easy, but worth to invest the time.

Singapore & Malaysia - accounting graduate - should you start your career from audit firm or commercial

If you are an accounting graduate in Singapore or Malaysia, more often that not , you maybe asking if you should start your career in audit or commercial firm (note: for those accounting graduate, who intend to pursue non-accounting field, it is different set of stories / analysis).


There are pros and cons that one would have heard about having a career in audit, as summarized below:


Pros:
- Exposure to different industries and client
- Steep learning curve to build up career foundation
- Favorable increment and promotion
- Exposure in different aspect of financial accounting, including: tax
- Opportunity to deal with different client


Cons:
- Extensive working hours
- Tight dateline
- Health


Above are the pros and cons one should expect from audit. Different personnel has different priority at different stage of life - it's important for one to weigh the key considerations that matters in determining the career. Of course, for youngster, we recommend them to start from audit.


No doubt, commercial do provide pros that may be listed above - e.g. you start with a finance department in commercial, who is a big conglomerate. However, through our observation, more often than not, the financial controllers/ finance managers/ chief financial officer of most of the listed entities had some background in audit.


The exposure in audit allows one to gain different insight of the business. Our comments could be bias, as we are auditor.


Any blog reader who want to share with us your thought or other side of the stories?

Non- Audit: long working hours - worth it?

Its a widely known fact in the market, commercial, university and all other possible places that financial audit require long working hours. Late night in office, weekend during one peak period.

Is it worth it to devote so much hours? In life, time is limited in one's life. You may have 70 years of life span- but would you be able to spend the entire 70 years with parents? Would you be able to spend good 5 years of time before your kids grow older?

What do you want in life? Money? Time? Career progression? What do you want at this stage of life?

Its good to think about these questions seriously before you gets old.

What do you want in life?

Audit - debt overdue more than one year

This is going to be a post that involves significant judgements.

As previously discussed, auditor would review management assessment relating to doubtful debt, where we understand the normal debts turnover (day) and identify the long outstanding debtors for further review and discussion. For instance, auditor would pick material overdue debts aged more than 90 days if normal turnover is about 60 days.

What if you noted a debtor, whose debt is overdue more than a year and with no provision? Is this a straight away action when we push the client to provide allowance for doubtful receivale in full?

Your audit client may come back to you on their assessment / story / justification on why no allowance is required. This then involves auditor to test management's justification. Test the subsequent receipt, test the story of the long standing customer by researching online etc etc.

This matter is always not straight forward and with lot of uncertainty. If there's no subsequent receipt, what should auditor do if management insist that the amount can be recovered in full. Based on experience, we would require client to pass an allowance amount equals to 50% of gross amount to demonstrate that we understanf mangement justification, but due to uncertainty - management should provide 50% allowance.

Usually, this is easier for client to accept. Note: the percentage determined is judgemental and varies among different auditors.

It is also important to disclose management process of assessing allowance for doubtdul receivable as a process involves significant judgement in the financial statement.

As the number years of audit experience, the auditors tend to be able to make judgemental call that can reflect the business substance better. Hence, pls discuss this matter with the audit partner as well.

Assessment of insurance claims receivable

Audit client may encountered/ experienced certain incidents for which the company (i.e. audit client) has purchase insurance previously. The audit client has recorded a insurance claims receivable to cover the expense that has been incurred.


For instance, the employee of the company may suffer minor injury and got hospitalized for a period of 1 day. The hospital bill has been paid by the Company, who then claim the fee incurred under Company's insurance. The accounting entries recorded are as follows:


Dr. Insurance claims receivable
Cr. Cash


The insurance claims receivable represents the full amount of fee the Company had paid and intend to claim back from insurance. The question is whether if the incident is fully covered by the insurance. Management of the audit client or in-charge is responsible to go through the insurance purchased and determine:
- if the incident falls within the insurance coverage of the insurance purchased;
- if there's any cap on the claim amount


Management is required to evaluate this incident against the insurance policy. In addition, management may consider to discuss with the insurance agent on the likelihood of claiming insurance and the quantum as the insurance agent may have more in-depth industry experience / knowledge on this matter.


If the insurance claims receivable recorded by audit client is not likely to be fully recovered - management is required to estimate the receivable amount ( by reviewing historical trend or talking to insurance agent) and charge the remaining unrecoverable amount to profit or loss.


As claiming insurance may be a lengthy process - hence, do expect relatively long lead time.

Audit - goods rejected by audit client pending credit note from supplier

The title of this post is long, as we want to articulate out a scenario clearly for our reader to understand.

It is common for a company in trading/ manufacturing industry to return goods to the supplier, due to a number of reasons. For instance, returned of goods due to quality matters/ incorrect pricing as previously quoted/ excess quantity etc.

In some circumstances, return of goods is a straightforward process where the vendor would issue credit note to the audit client to reduce payable amount by your audit client.

However, there are circumstances where the vendor may not accept the goods returned and didn't issue any credit note to the audit client. There could be possibility that the supplier delay its process in issuing credit note. This may result in incorrect payable balance.

How can auditor pick up this instance. We can inquire management / accountant if there's any major dispute/goods returned matter yet to be resolved. In addition, we can also review reconciliation on statement of account issued by supplier to review if theres any long-standing reconciling item that may suggest goods returned not accepted by supplier.

To illutrate, if the statement of account from supplier shows a higher amount of receivable (from audit client) as compared to a payable balance recorded in audit client's book. This could be due to: a) payment made by audit client not yet received by supplier, b) goods returned by customer not yet accepted by supplier, c) goods delivered by supplier not yet taken up by audit client. An investigation into this reconciling item should tell the auditor what causes the difference.

Audit- offsetting receivale and payable balance

In some situation, your audit client may have receivable balance and payable balance with a same party, either external or internal party. For instance, your audit client may purchase raw materials part from Company A. Upon completion of manufacturing the goods, audit client sold certain finished goods to Company A. Consequent to these transactions, audit client has a receivale from Company A and a payable to Company A.

How should this amount been presented on the financial statement?

According to IFRS, the amount should be offset each other (i.e. presented as net) when:
- there is intention to offset (i.e. both parties intend to offset the amount) and settle net balance; and
- it's legally enforcable that the amount can be offset in all circumstances (including: in the event of liquidation/ bankrupt of either party)

To elaborate further, in order to present the amount as net, the law jurisdictions of audit client and Company A, must allow the amount to be offset in all circumstances, even when either party goes bankrupty. Logically, why is that so?

The accounting standard is worded such that- in the event of receivership, the receiver, who acts on behalf of the financial distressed company, would try to recover as much asset as possile, including financial receivable. Final Payment of liabilities usually only represent a fraction of the original amount.

As a result, iy may not be in receiver's best interest to allow offsetting. Accounting standard has considered this and hence emphasized that to present the balance as net when it is legally enforcable for balance to be offset in all situation.

Assessment get more complicated when the contractual parties are located at different countries.

Hence, a careful evaluation is warranted from management.

Implementation of Value-Added Tax (i.e. Goods and Service Tax) in Malaysia

Malaysia is going to roll out GST with effect from 1 April 2015 onwards. The entire business scene are likely to be affected directly or indirectly. If the Group company owns any branch or subsidiary in Malaysia, it is important to ensure that the management is already looking at managing this smooth roll out.


Generally, we expect the compliance costs to increase and there could be costs incurred /to be incurred with regard to the roll out of GST.


Based on our understanding, there have been a lot of discussion on the GST - which is not surprised. However, there are also expression of confusion by business in general on certain items - for instance, rental income earned on investment property.


From our point of view, whenever there is a change, the change need to be managed - hence, the company's process in place to manage the change is important - not only on GST but on all other matters as well.