This is an interesting article with regard to the value of external audit to retail investors in Singapore. Please refer to the link:
http://bizdaily.com.sg/newsite/most-singapore-retail-investors-find-value-in-external-audit-survey/
A survey was conducted by the Association of Chartered Certified Accountants (ACCA) and Securities Investors Association (Singapore) (SIAS), who sent out survenys to their own 390 members. As evient from the link above, 80% of the respondents opined that audited financial statement is important sources of information to guide their investment decisions.
In addition, the respondents also commented that the scope of audit should be extended, especially for two main areas:specific assurance on a company’s internal controls and a report on the adequacy and effectiveness of a company’s risk management programme.
In our opinion, the internal controls and risk management programme is especially important to prevent future unfavorable against the entity, and minimise the risks that the entity is been exposed to. Retail investor may feel more comfortable with their own investment if the investee has a strong internal controls in-place and effective risk management assessment programme.
For instance, the investee ( i.e. a entity listed on a stock exchange) may find an opportunity to invest in certain projects. A stringent risk assessment programme may help to evaluate the risks involved in the projects to ensure that all risks are been considered while making investment decisions.
If you have any comments, please feel free to contact us at myauditing@gmail.com
Sunday, November 13, 2011
Wednesday, November 9, 2011
Olympus scandal: hid investment losses in the past 20 years
Japanese company, Olympus Corp has finally admitted that they used inflated acquisition costs ( specifically: advisory fees) to hide investment losses incurred in the past 20 years.
Earlier on, the market was vigorously discussing on the scandalous US$687 million payment for financial advice and expensive acquisition of companies unrelated to its mainstream businesses.
Olympus issued a statement saying that an independent panel investigating the allegations had found that the acquisitions were used to cover up losses on investments dating to the 1990s. During that time in Japan known as the "Lost Decade," many Japanese companies took to making speculative investments in securities to offset sluggish sales following the bursting of Japan's economic bubble.
Olympus Corp's president, Takayama also confessed that the corporation needed higher level of corporate governance to ensure that similar things will not happen in the future.
Earlier on, the market was vigorously discussing on the scandalous US$687 million payment for financial advice and expensive acquisition of companies unrelated to its mainstream businesses.
Olympus issued a statement saying that an independent panel investigating the allegations had found that the acquisitions were used to cover up losses on investments dating to the 1990s. During that time in Japan known as the "Lost Decade," many Japanese companies took to making speculative investments in securities to offset sluggish sales following the bursting of Japan's economic bubble.
Olympus Corp's president, Takayama also confessed that the corporation needed higher level of corporate governance to ensure that similar things will not happen in the future.
Thursday, October 27, 2011
Audit considerations for Japan real estate companies
According to report from Standard & Poor’s with regard to Japan’s property market:
“ Diversified real estate companies had strong condominium sales in fiscal 2010 but at the expense of margins. Companies cut selling prices to clear inventory despite unrealized losses on fixed assets. Earnings could come under further pressure in fiscal 2011 because of possible delays in construction completions or sales slippage due to the earthquake. Japanese real estate investment trusts have turned acquisitive after recapitalizing their balance sheets, and this has”
[Note: the paragraph above was quoted from Standard & Poor’s]
If you are the auditor of a real estate companies in country, where the economy is suffering from the global slow down, please take note of the marketing strategy adopted by your audit client. As evident above, certain real estated companies are cutting their selling prices of the properties developed at the expense of profit margins. In worst case scenario, the real estate may even incur a negative margin (ie. selling the property at losses).
There are a number of reasons, where a real estate developer may conduct the sales transactions in above patterns:
- to meet the cash flow/ working capital demand (i.e. to pay off debt due / repay vendors)
- to meet the analyst’ expectation on sales revenue; the drop in GP Margin might not be evidenced obviously, as the real estate companies may have earned positive GP Margin in previous quarters / from other projects (i.e. cushion effect)
- to minimize the risks that the inventory might not be sold in a slowing-down market
- to avoid the actual and economic costs of holding on to inventory
What will be the implication for the audit for the above scenario? There are risks that the real estate company may end up in a gross loss position from this project, if margin is too thin. “Provision for foreseeable losses” need to be recognised immediately.
How to estimate the “Provision for Foreseeable Losses”:
(a) Determine the remaining quantified (of properties) to be sold;
(b) Determine the projected / estimated selling prices and compare that to the cost-to-build for each property; if it’s a gross loss position, then provision need to be provided
(c) Total provision to be provided = remaining quantities x gross loss estimated
Please apply professional judgement and maintain professional susceptibility while reviewing the working prepared by client to ensure that all costs have been considered.
“ Diversified real estate companies had strong condominium sales in fiscal 2010 but at the expense of margins. Companies cut selling prices to clear inventory despite unrealized losses on fixed assets. Earnings could come under further pressure in fiscal 2011 because of possible delays in construction completions or sales slippage due to the earthquake. Japanese real estate investment trusts have turned acquisitive after recapitalizing their balance sheets, and this has”
[Note: the paragraph above was quoted from Standard & Poor’s]
If you are the auditor of a real estate companies in country, where the economy is suffering from the global slow down, please take note of the marketing strategy adopted by your audit client. As evident above, certain real estated companies are cutting their selling prices of the properties developed at the expense of profit margins. In worst case scenario, the real estate may even incur a negative margin (ie. selling the property at losses).
There are a number of reasons, where a real estate developer may conduct the sales transactions in above patterns:
- to meet the cash flow/ working capital demand (i.e. to pay off debt due / repay vendors)
- to meet the analyst’ expectation on sales revenue; the drop in GP Margin might not be evidenced obviously, as the real estate companies may have earned positive GP Margin in previous quarters / from other projects (i.e. cushion effect)
- to minimize the risks that the inventory might not be sold in a slowing-down market
- to avoid the actual and economic costs of holding on to inventory
What will be the implication for the audit for the above scenario? There are risks that the real estate company may end up in a gross loss position from this project, if margin is too thin. “Provision for foreseeable losses” need to be recognised immediately.
How to estimate the “Provision for Foreseeable Losses”:
(a) Determine the remaining quantified (of properties) to be sold;
(b) Determine the projected / estimated selling prices and compare that to the cost-to-build for each property; if it’s a gross loss position, then provision need to be provided
(c) Total provision to be provided = remaining quantities x gross loss estimated
Please apply professional judgement and maintain professional susceptibility while reviewing the working prepared by client to ensure that all costs have been considered.
Wednesday, October 26, 2011
Implication of Bangkok's floods to Company's financials
Earlier on, Thailand Finance Minister commented that the devastating floods in Bangkok could lower Thailand's Gross Domestic Products. The floods have caused damage to equipment in the flooded industril plant.
Your audit client may have a plants / factories located in the areas affected by the massive flood. In this instance, a proper check need to be performed to assess if the audit client's plants / factories are affected.
Assuming that the plants / factories are affected by the flood, the following procedures need to be performed, including (but not limited to):
- are the machineries and equipments been damaged in the flood. Should impairment been recorded given that the machineries and equipments are damaged?
- are there any going concern issue, given that the operations are likely to be stop?
- is your audit client able to produce financials on time for reporting?
- is there any penalty on contracts with customer if audit client is not able to deliver agreed items on time?
- is your audit client able to collect outstanding debts from customers who maybe affected as well?
A thorough understanding of the floods, and how will that affect the operations are required to determine the nature and extent of audit procedures to tackle the impact of floods.
Your audit client may have a plants / factories located in the areas affected by the massive flood. In this instance, a proper check need to be performed to assess if the audit client's plants / factories are affected.
Assuming that the plants / factories are affected by the flood, the following procedures need to be performed, including (but not limited to):
- are the machineries and equipments been damaged in the flood. Should impairment been recorded given that the machineries and equipments are damaged?
- are there any going concern issue, given that the operations are likely to be stop?
- is your audit client able to produce financials on time for reporting?
- is there any penalty on contracts with customer if audit client is not able to deliver agreed items on time?
- is your audit client able to collect outstanding debts from customers who maybe affected as well?
A thorough understanding of the floods, and how will that affect the operations are required to determine the nature and extent of audit procedures to tackle the impact of floods.
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