Review of petty cash amount- potential financial loss

As an auditor, we should also review the reasonableness of petty cash amount held by individual. Petty cash are generally held by invidiual (usually employees of a company) for disbursement of daily expenses / urgent payment when necessary.

Nevertheless, an individual shall not hold petty cash amount far exceeded the amounts required. This is because there is potential risk that individual may mis-appropriate the funds and resulted in financial loss to the Company.

As a result, management should exercise control to review the budgeted petty cash outflow for the month and furnish this petty cash to the person in-charge. It is not ideal for the Company to disburse significant cash amount to an individual. The Company can always top-up the petty cash amount when requested.

Audit clients with presence in China and Malaysia

Some of our audit clients may have subsidiaries in overseas, e.g. China and Malaysia.

If your audit clients have presence in China and Malaysia, pelase take note that there is a increase in minium wages in certain provinces of China and the entire Malaysia. The minium wages differ among differnt provinces in China. It is important for you as auditor to find out the actual minimum wages rate for the particular regions where you audit client has presence. For Malaysia, the minium wages has increased to RM 900.

It is important to form an expectation that the salary costs are expected to increase in FY 2012, if your audit clients have presence in the countries mentioned above.

Disclosure of the source of deferred tax assets and liabilities

Our audit client may have recorded deferred tax assets and liabilities on its balance sheet/ statement of financial position. Deferred tax is essentially the tax impact arising from the temporary difference between the Company's accounting and tax carrying value. For instance, the net book value of a property-plant and equipments are usually different between accounting book and tax book. This could be because the depreciation policy for accounting book ( i.e. set by the Company) and tax book (i.e. set by the authority) is different.

In reviewing the financial statement of our audit clients, who has recorded the deferred tax, we need to ensure that the Company has disclosed the source of the deferred tax assets / liabilities. This helps the financial statement users to understand the nature of the deferred tax assets / liabilities.

Generally, deferred tax assets are mainly attributable to:
- recognition of unutilised tax losses
- recognition of unabsorbed capital allowance
- differences on depreciation

Whereas, deferred tax liabilities are attributable to:
- differences on depreciation
- differences on provision

By disclosing the source of deferred taxes, the financial statement users can understand the balance sheet, as well as the tax expense of the Company.

Provision for restoration cost/ provision for reinstatement cost

When an audit client signed an rental / lease agreement to lease a space (i.e. office / warehouse), please make sure that we, as an auditor, we review the agreement thoroughly.

Generally, audit client has to reinstate/ restore the lease space to its original state. To illustrate, audit client may have renovated the building for its own purpose. The owner would request the audit client to reinstate the lease space to its original state when the lease expire and the audit client decided not to renew the lease agreement.

A provision for instatement cost / restoration cost need to be recorded, as it is an existing obligation of the audit client. This amount relates to the cost to be incurred to reinstate the lease space back to its original state. This amount can be estimated by obtaining quotation from the renovator / building contractor.

The accounting entries are:
Dr. Fixed asset- reinstatement cost
Cr. Accrual

The amount capitalised above relates to the full cost to be incurred when the lease expire ( note: assume the inflationary adjustment to be not material. On an annual basis, the following entry need to be recorded:

Dr. Reinstatement cost- P&L
Cr. Accum Dep- Fixed asset- reinstatement cost
This amonut is computed based on the amount capitalised divided by remaining lease period.

The depreciation entry is to record the cost capitalised into P&L on a straight line basis.