#26 Bank Confirmation

In normal circumstances, auditor would send a bank confirmation to the client's bank to confirm the cash balances, loan confirmation, hire purchase & provide other client-related info as at year end date.

Bank confirmation does not only act as the confirmation of the client's cash balance, loan balances, hire purchase balance in the account, but also it other information that auditor might be interested in.

For instance, it will provide the information of corporate guarantee, which might have to be disclosed in the financial statement. Hence, receiving a bank confirmation is also critical in identifying unrecorded liabilities, if any.

#25 Auditing Management Fees earned from Inter-company

In certain circumstances, the principal activities of the holding company is mainly investment holding. The transactions throughout the year might be minimal, and the expenses are minimal as well. The only revenue earned is the management fees earned from its subsidiaries. How do we verify the management fees earned is not materially misstated?

Firstly, we should read the details of the agreement between the holding company and the subsidiaries, with respect to the calculation of management income. For instance, 80% of total revenue or 100% of expenses. These terms are not uncommon in today business world.

If we are auditing the holding company accounts and issuing financial statement for the holding company. We must ensure that the subsidiaries, where the holding company earned management fee, get audited as well.

This is because the revenue of the holding company is totally dependent on the subsidiaries' revenue. These are the cases applicable for company level financial statement.

#24 Auditing for Directors Fee

How do we ensure the directors fee in the profit & loss is not materially stated?

In normal circumstances, directors fee charged to P&L is a provisional expense, which is subject to the approval of shareholders. In normal circumstances, the directors fee will only be approved after the financial statement have been presented and finalized. The approval for directors, to certain extent, based on the financial performance of the company ( i.e. information from financial statement).

Then, how do we assess the directors fee?

1. The proposed directors shouldn't be materially different from the prior year directors fee given the same number of directors. Hence, prior year fee is a good reference.

2. Refer to the resolution to check if prior year proposed directors' fees have been approved subsequently.

3. Assess other factors that could affect the directors fee provision.

#23- Accounting for Accrual for Expense

In accordance with matching principle, we make provision for the expenses which have not been billed by our suppliers or the company has not paid out the expenses, if the underlying services are rendered in the corresponding period. Example for accrued expense, include:

1. Accruals for audit fees, tax agent fees
2. Accruals for Payroll, Bonus & CPF
3. Accruals for rental

etc.

The company can make the accruals based on the agreed quoting from the suppliers. The accruals for expense entry:

Dr. Expense ( P & L)
Cr. Accrulas (Balance Sheet- Liabilities)