Auditing & Accounting

Fraud- Nortel trial- Nearly billiton dollars in reserves "incorrectly" booked

noreply@blogger.com (Kauditor) — Tue, 14 Feb 2012 13:22:00 +0000

It is reported that Nortel conducted a comprehensive review and found out that nearly a billion dollars worth of accounting reserves ``incorrectly'' booked, dating to as far back as 1999. The internal review also found two ``material weaknesses'' tied to the use of the accrued liabilities, the first being a breach in public disclosure rules, the second a violation of Nortel's own accounting practices.

It is evident that certain management of Nortel had manipulated the results by using the accrued liabilities account.

$952 million in accrued liabilities were set up without the appropriate documentation, and weren't filed in accordance with generally accepted accounting practices (GAAP). Citing one account, called the ``out-of-balance'' provision that was stored within the firm's corporate or non-operating books, the accountant said: ``It's not warranted to have an out-of-balance account.''

Tens of millions of dollars in backlogged provisions were entered to cover anticipated costs such as contract liabilities and lawsuits. When those costs weren't realized, Nortel flowed the provisions back into earnings in later periods. Yet, they ``should have been recognized in real-time,'' not deferred.

This so-called ``earnings management'' practice was used by the three top executives in Nortel to tip the flagging tech giant back into profitability in 2003, triggering $73-million in bonuses, of which they collected $12-million combined.

Accounting Joke: Sexy Management Accountant

noreply@blogger.com (Kauditor) — Sun, 12 Feb 2012 14:11:00 +0000

Something to share with our accounting & auditing blog's reader

Did you hear about the Sexy Management Accountant?

She went to see her fitness trainer to talk about stretch targets.

Inappropriate accounting for payment- Diamond Foods, Inc

noreply@blogger.com (Kauditor) — Thu, 09 Feb 2012 13:00:00 +0000

As published in Diamond Foods' website on 08 February 2012. Diamond Foods, Inc announced that audit committee's investigation of the Company's accounting for certain crop payments to walnut growers is substantially completed. The findings shows that financial statement for FY 2010 and FY 2011 will need to be restated.
"The Audit Committee has concluded that a "continuity" payment made to growers in August 2010 of approximately $20 million and a "momentum" payment made to growers in September 2011 of approximately $60 million were not accounted for in the correct periods, and the Audit Committee identified material weaknesses in the Company's internal control over financial reporting." [ Quoted from the Company's announcement]

It is not mentioned on the accounting treatment for the payment to walnut growers. Questions we are interested in is:
- what was the accounting treatment that had been recorded for payment to Walnut Growers
- what should be the appropriate accounting treatment
- how would the financials been affected
- will the profit & loss of the Company been affected immediately
- are there any interested party relationship between Diamond Foods, Inc and those walnut growers
- had a proper review of the financials been reviewed earlier

For the 12-month-ended July 2011, Diamond Foods recorded a net profit before tax of about US$69mil. Shareholder's Equity amounted to US$495mil as at 31 July 2011. In our opinion, US$80mil of payment ( i.e. US$20mil + US$60mil) represents a significant amount to the Company's financial statement.

In addition, the audit committee also identified mateiral weakness in the Company's internal control. As evidenced, it is crucial to have a sound internal control environment to support the financial statement closing process of the Company.

Fraud- Improper segregation of duties in handling cash

noreply@blogger.com (Kauditor) — Wed, 08 Feb 2012 14:06:00 +0000

Misappropriation of cash is one of the common fraud reported in the corporate world.

In Nov 2010, it is reported that Malaysian unit sufferred a loss of RM 1.5million (approximately S$622k) due to the issuance of unauthorised cheque. It's not clear how this had occurred.

In general, one of the possibilities a cash fraud could occur is when certain individual forge the authorised signatories on the cheque. By forging the authorized signatories, the individual is able to direct the fund to his / her bank accounts. How can the internal controls of the Company helps to minimize the risk of cash fraud then?

Possible solutions are:
- to set dual authorized signatories requirement for the Company's cheque facilities
- existence of proper segregation of duties between cheque book-keeper, preparer of cheque, review of cheque amount, approver of cheque
- cash book review be performed by appropriate senior finance personnel
- review the cash movement by bank account on a monthly basis

The existence of above controls and/or procedures can help to mitigate the risk of cash fraud.

Fraud- fictitious employee been created

noreply@blogger.com (Kauditor) — Tue, 07 Feb 2012 14:35:00 +0000

One of the common fraud we have encountered / read on the news relates to payroll fraud, where fictitious employees were been created by individual to earn additional salaries on the fictitious employees been recorded.

One of the famous cases occurred in Singapore Airlines, whereby fictitious employees' hours were clocked in by payroll officer. Payroll officer pocketed the money successfully by entering the bank account details into the system to earn the extra hours clocked.

To minimize the risk of fraud arising from fictitious employees been created. There should be proper segregation of duties between:

a) personnel who have the access right to payroll system to create and employee
b) personnel who have the access right to enter bank acccount details of individual employee into the system
c) a reviewer ( who should not been entitled the right to edit, but been entitled the right to view) to ensure that the bank account details is input correctly
d) a reviewer who review the monthly payroll costs ( by department, by employee name); this reviewr should do a random testing to tally the summary of payroll cost details to timesheet submitted / revised letter of incremenet

The segregation of duties mitigate the risk that a fictitious employee can be created by individual.

Implication of Singapore Tiger Airway's Q3 results.

noreply@blogger.com (Kauditor) — Wed, 01 Feb 2012 04:51:00 +0000

Tiger Airways Singapore posted a net loss of S$17.4mil in Q3 FY 2011, as compared to a net profit of S$22.5mil in same period last year.

The net loss for the Group was largely attributable to: losses generated from Tiger Airways Australia as a result of the CASA suspension, under-utilisation of aircraft fleets (due to 38.8% increase in the average size of the operating aircraft fleet and significant increase in fuel costs. Fuel costs (net of gain/losses on fuel hedging) has increased from S$54.5mil in Q3 FY 2010 to S$75.7mil in Q3 FY 2011.
Tiger Airways made the following comments in the outlook statement of its announcement:

“The Group expects to report a significant net loss for the financial year largely as a result of the CASA suspension in Australia, the under-utilisation of the Group’s aircraft fleet and exposure to high and volatile jet fuel prices.”
Implication of Tiger Airways’ results.

Tiger Airways’ results are alarming to audit clients involved in airlines, shipping, transportation, and logistics industries. This is because:

- global economy is experiencing slow down of business activities, which may likely to result in under-utilisation of capacities (e.g. under utilisation of vessels, fleets, trucks). Your audit clients may experience significant over capacities in current period of review;
- fuel costs have increased significantly during the period of review. Your audit client may record substantial fuel costs in current period.

The above factors, individually or in combined, may result in the audit clients record substantial operating losses. In addition, the above factors may trigger potential impairment on property, plant & equipments, going concern issue, capabilities of repaying creditors / borrowings.

Classification of male pig and female pig

noreply@blogger.com (Kauditor) — Tue, 31 Jan 2012 13:18:00 +0000

In English:

A male pig is called a boar.
A female pig is called a sow.

In Accounting:

A male pig is classified as fixed asset.
A female pig is classified as inventory.

Disclaimer: just a joke, no bias against any gender.

Importance of Suppliers' Evaluation Process

noreply@blogger.com (Kauditor) — Sun, 29 Jan 2012 03:22:00 +0000

One of the key emphasis of internal audit is to evaluate whether your audit client has appropriate process in place to evaluate the suppliers.

Unfavorable event in any part of the supply chain will causes disruption to the distriubtion of products to end-customers successfully. It is important to evaluate the suppliers to ensure that they have the capability and stability to conduct sustainable business with your audit client on a long term basis.

On an ideal basis, management/ procurement of your audit client should have a formal policy on the entire process of evaluating suppliers. The evaluation has to be developed and documented in a proper format.

For instance, a background check on the suppliers is required (e.g. is the supplier a subsidiary of any congolmerates, is the supplier financially sounds). Another key document is the financial statement of the supplier. This is to ensure that supplier is financially stable to operate on a going concern basis.

Please let us know if you would like a detailed format of Suppliers' Evaluation Form. This is available in our Accounting & Auditing blog. Please drop us an email at myauditing@gmail.com.

Value of external audit to retail investors

noreply@blogger.com (Kauditor) — Sun, 13 Nov 2011 13:09:00 +0000

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

Olympus scandal: hid investment losses in the past 20 years

noreply@blogger.com (Kauditor) — Wed, 09 Nov 2011 15:06:00 +0000

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.

Audit considerations for Japan real estate companies

noreply@blogger.com (Kauditor) — Thu, 27 Oct 2011 07:25:00 +0000

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.

Implication of Bangkok's floods to Company's financials

noreply@blogger.com (Kauditor) — Wed, 26 Oct 2011 12:36:00 +0000

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.

#107- Audit tips on reviewing legal expenses

noreply@blogger.com (Kauditor) — Sun, 02 Oct 2011 12:05:00 +0000

This post intend to share with our Accouting & Auditing blogs readers on a number of tips while performing the review of audit client's legal expense account, as follows:

a) Review the invoice & billing details sent by the audit client's lawyer to identify any law suits / legal cases that's against the audit client [ note: disclosure is required in the financial statement, if the exposure is material]

b) To investigate further if there's vague and inadequate descriptions on the billings from the lawyers.

c) Review the engagement letter / contract entereted into by audit client with the lawyers to find out how detailed the firms’ fee bills should be.

d) From internal control perspective, audit client should have adequate and consistent policy for reviewing legal fee bills once they came in. [ i.e. determination of the verifier and reviewers of the legal fee bills, etc]

e) Please obtain confirmation from audit client's lawyer on the on-going legal cases/ law suits to identify if there's any material exposure.

European Commission plan to curb Big 4 Oligoply

noreply@blogger.com (Kauditor) — Thu, 29 Sep 2011 15:04:00 +0000

It is reported that European Commission is expected to release a law, which could shake up the Big 4 audit firm's oligoply situation. Big 4 audit firms include: KPMG, Deloitte & Touche, Pricewaterhouse Coopers and Ernst & Young

It's propsing that auditors be banned from providing consulting services to firms that they audit, to avoid the conflict of interest issue. From Accounting & Auditing blog's point of view, it is mandatory to maintain independence.

The said proposed plan also includes a requirement for the companies to change auditors every 9 years. In most of the european area, change of auditors rarely occur.

It's likely that the proposed plan will open up the competition within the auditing industry.

Working hours of Big 4 Auditors in ASEAN Countries

noreply@blogger.com (Kauditor) — Wed, 28 Sep 2011 15:34:00 +0000

This post intends to give everyone a general idea of the working hours of Big 4 auditors in ASEAN.

Based on our talks and discussion with auditors in ASEAN.

During peak season, generally it falls on January- February of every year in ASEAN countries, auditors would stay up till at least 10.00p.m. till beyond midnight to complete the engagement. They are quite a number of Big 4 auditors have the experience of working overnight in office during peak season.

During off-peak season, auditors may leave the office earlier, generally at approximately 8.00pm till 10.00p.m.

However, the hours mentioned above is based on the average hours of the Big 4 auditors we have surveyed. We, genuinely believe that the working hours largely depends on the engagement been allocated.

If you have any ideas / comments on the working hours or you would like to share with us of your working hours as an auditor, kindly leave a comment and / or drop us an email at myauditing@gmail.com

UBS CEO has resigned after unauthorized trading incident

noreply@blogger.com (Kauditor) — Mon, 26 Sep 2011 13:13:00 +0000

UBS CEO Oswald Grübel has resigned on 24 September 2011, after the recent unauthorized trading scandal, which has caused the bank to suffer from US$2.3billion losses arising from unauthorized transactions. Sergio Ermotti, a veteran Merrill Lynch executive, has been named as the interim CEO to lead the company.

Despite achieving impressive turn-around and strengthened UBS’ fundamentals during his tenure, Oswald Grübel stepped down after the unauthorized trading done by the rogue trader, 31-year-old Kweke Adoboli.

The board and the management of this Swiss bank are in the midst of investigating this scandal.

This entire incident re-emphasized the importance of having a strong internal controls system in place. CEO might not be the individual designate the internal controls in-place. However, a CEO needs to ensure that strong internal controls are in place to prevent/ identify unauthorized transactions. Hence, it appears to the public that Oswald Grübel has stepped down as he assumed the responsibility of unauthorized trading occurred.

There are five key elements in an internal control system, namely:
a. control environment,
b. risk assessment,
c. control procedures,
d. information & communication, and
e. monitoring

It’s evident that CEO need to be heavily involved in “information & communication” and “monitoring” components. To illustrate, there must be proper channel for all necessary information to be heard / listened by senior management,. It’s also crucial to ensure that appropriate level of monitoring activities been carried out.

#106- Stock-take for entities with incident / experiene of fraud

noreply@blogger.com (Kauditor) — Mon, 26 Sep 2011 13:07:00 +0000

Management of certain companies may encounter incidents of stocks losses due to misappropriation of assets by its employees, i.e. their employees stole the company’s stocks for personal benefit (i.e. personal usage/ personal profits after selling it out).

Let us discuss together on What Could Go Wrongs (“WCGW”) in the internal control system that may result in the entity exposure to the risk of fraud:

- stock take is not conducted on a regular basis (i.e. stock take on a half-yearly basis)
- quantities and movement of provision stocks / obsolete stocks are not kept tracked (note: these stocks usually carry scrap value, and might be misappropriated if there’s no proper record)
- physical stocks are not stored in safety area
- CCTVs not installed in warehouse
- ineffective procedure in updating inwards/outwards of stocks into stocks record

The list above is not exhaustive and it is for reference only

From management perspective, there are a few areas / procedures need to be carried out when they had experienced / encountered fraud with regard to their physical stocks:

- improve accountability of the employees by assigning different area of stocks of different employees
- impose penalty on all warehouse employees while there’s material stock differences ( e.g. penalty on warehouse employees if stock-take difference is greater than 0.5% of total stocks)
- employ strict security access to the warehouse
- install CCTV in the warehouse and perform random check on certain time slots
- security guard to perform check on employee’s bags before allowing the employees to leave the premises
- ensure that stock-take is conducted on a regular basis and any stock-take difference is investigated

Please feel free to email us Kauditor at myauditing@gmaill.com if you have any comments or you would like to find out more. Kauditor at Accounting & Auditing Blog is an experienced subject matter expert.

#105- What can an auditor do?

noreply@blogger.com (Kauditor) — Tue, 21 Jun 2011 11:18:00 +0000

Below is the query raised by one of our blog's readers:

" Somehow I came across ur blog online. I'm curious to know the difference between a auditor n accountant. I'm stuck in a situation where my company's accounts was done using MYOB Software to keep records, then when the YAs ended, we will send to our accounts auditor to do for us. but the problem nw is, when our accounts does not tally, they did not help to check for us n throw back to us to do all checking. I mean, we are not certified accountants( we onli used the MYOB software) to keep our accounts records. Now our accounts is stuck. Does it means tat auditor do not do accounting jobs? "

Our view are as belows:

Strictly speaking, auditor is not allowed to investigate the discrepancies for the book-keeper. Auditor is bound by the principle of independence, which means that auditor is allowed to reviewed and checked the account and provide opinion on the true and fairness of the account they are auditing. Auditor is strictly prohibited from investigating the difference and helping you to tally.

In short, to answer your question, auditor is not allowed to perform accounting jobs.

However, if the difference is not material, you may highlight to auditor that the amount is immaterial and they may consider to discharge.

#104- EBITDA ( Practical Guidance on how to compute)

noreply@blogger.com (Kauditor) — Sun, 22 May 2011 15:21:00 +0000

EBITDA stands for Earning before Interest, Tax, Depreciation and Amortisation.

Here is a step by step guidance on how to compute a Company's EBITDA based on a financial statement:

1. Take the Profit before Tax number (from income statement)
2. Add: Interest (usually, this number can be found in cash flow statement.
3. Add: Depreciation ( most likely: depreciation number can be found in notes to account of Property, Plant & Equipment/ cash flow statement)
4. Add: Amortisation ( most likely: amortisation number can be found in notes to account of Intangible Assets/ cash flow statement)

#103- Provision for Doubtful Debt

noreply@blogger.com (Kauditor) — Sun, 08 May 2011 11:29:00 +0000

We received queries from one of our blog readers in relation to provision for doubtul debt. We will summarize her queries as below:

a. Is general provision for doubtul debts still allowable? If a client provides an allowance of 60k per year as doubtful debt where the double entry is Dr. bad debts Cr. Provision for doubtful debts - is this practice still allowable?

b. Which IAS standard govern this area

Response from myauditing.blogspot.com

a. No. General provision is no longer allowed. IAS 39 states provision for doubtful debt is required when there's objective evidence that the receivable amount is no longer recoverable. As such, only specific provision is allowed. For accounting entries, it is Dr. Bad Debts Expense, Cr. Provision for Doubtful Debt

b. IAS 39

Guest's article: Debt Consolidation Loans

noreply@blogger.com (Kauditor) — Sun, 27 Mar 2011 01:25:00 +0000

Pros & Cons of Debt Consolidation Loans

Before you look into the pros and cons of a debt consolidation loan, know that your financial situation is unique from everyone else & what is beneficial for one person may not be beneficial for you. You need to find a debt consolidation loan that is right for you. Before applying, weigh up the pros and cons of using these loans. How much debt you have, the type of debt it is and the overwhelming need to be out of debt (or not) is what will help you determine the best option to take. The good news is debt consolidation loans are one of the best ways to position for financial success in the long term.

Benefits of Debt Consolidation Loans
Depending on the type of loan you get, the benefits may vary. However here are some aspects to consider:
• One easy manageable repayment. People who have serious financial issues usually have multiple debts, which mean that each month you have many debts to remember to pay. The more debts you have the more likely you are to miss a repayment. With one payment it is far easier to manage your debt repayments.
• Getting a lower interest rate can save you thousands of dollars. Some home equity loans, or other secured loans can charge a rate that is half of what a typical credit card company charges. In the long term, you could be saving thousands of dollars with just a few percentages of difference in interest.
• You may qualify for lower monthly payments on your debt consolidation loan. Consolidating all your debts into one loan may result in a lower monthly repayment due to the lower interest rate. You can take advantage of this by making extra repayments each month and therefore saving even more money in the long term.

These benefits make debt consolidation worth considering, however if mismanaged there can be downsides to debt consolidation.

Draw Backs
Debt consolidation loans can have a few cons, too. Consider how these would affect you.
• It is easy to get into even more debt. As you now have a lower monthly repayment and no longer paying multiple debts, it easy for you to go back to bad spending habits. Debt consolidation along with other debt solutions needs to be used with better money management & responsibility.
• You could lose assets. If you get a home equity loan to consolidate debt and end up in financial trouble again, your house could be in jeopardy. Because the house is backing up the value of the money you owe, creditors can repossess the home if you default on the loan.
• It might take you longer to pay off the debt. Depending on the terms you set up for the debt consolidation loan you applied for, you might end up repaying that debt for a longer period. For example, a home equity loan could be paid off over ten, fifteen or more years, which would extend the debt out. Depending on the situation, you could be paying more in interest because of the extended term of the loan. A good way to avoid this problem, though, is to make extra repayments.
You should take the cons of a debt consolidation loan seriously before applying.

What Debt Solution is right for you?
Are debt consolidation loans the right option for you? For many people, they do help to get out of debt quickly, but are they right for you? Consider your financial situation, your likelihood of getting into debt again and the benefits of having just one loan to pay. Take steps to protect yourself too, such as repaying debts ahead of schedule and keeping interest rates low. Doing these things can protect you in the long term.

#102- Auditing operating cost- understanding cost drivers

noreply@blogger.com (Kauditor) — Sun, 20 Mar 2011 03:24:00 +0000

Auditing operating costs is always not an easy task. A good audit procedure requires auditor to develp a thorough understanding of the nature of the cost,determination of fixed / variable costs, understand the cost drivers of the costs (especially for variable costs),understand the linkage between the costs and the revenues.

Significant assertion of auditing an operating cost is to ensure that the cost recorded is complete (i.e. completeness).

First of all, we need to understand the nature of the costs (i.e. what type of costs, when was the costs incurred, is the individual amount incurred significant, etc). After develop the understanding of the nature of the costs, we need to understand whether the costs is a fixed costs, or variable costs.

Then, we need to understand the cost driver of the costs. This procedure is especially important for variable costs component. Auditor need to understand what are the factors that drive the cost (for instance, transportation cost could be significant to a trading house). The cost driver for transportation cost is the level of business activities / number of deliveries completed

Auditor can analyze the company's record on number of deliverties completed for the year, and compare our expectation to the cost variation. To illustrate, while number of deliveries go up, we will expect total transportation cost to increase. A good understanding of the cost drivers allow the auditor to have complete understanding of the costs/ and develop a good audit approach to analyze the cost variation.

#101- Fraud cases in Singapore- China Hongxing and Hongwei Technologies

noreply@blogger.com (Kauditor) — Thu, 10 Mar 2011 02:04:00 +0000

Accounting irregularities are detected in two S-chip companies in Singapore, namely: China Hongxing Sport and Hongwei Technologies. Coincidentally, the financial auditor of these two companies is Ernst & Young LLP.It's noted that the auditor is facing difficulty in ascertaining certain assets, liabilites, and expenses. Details are as below:

Hongwei Technologies- the auditor is facing difficulty in confirming the cash and bank balances

China Hongxing- the auditor noted irregularities in the cash and bank balances, accounts receivables, accounts payables, and other expenses

The board of directors have engaged independent investigator in resolving the issues highlighted by Ernst & Young LLP.

#100- Inventories are non-monetary items - No forex

noreply@blogger.com (Kauditor) — Sat, 12 Feb 2011 17:35:00 +0000

We received questions from our reader whether inventories need to be translated/ revalued based on year end rate.

IAS 21 “The Effects of Changes in Foreign Exchange Rates” states that non-monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction. Note: inventories are non-monetary items.

Inventories are non-monetary items and should be translated at their transaction rates if they are denominated in foreign currencies. However, there might be instances where the client might have revalued the inventory wrongly by translating the inventory based on year-end closing rate or the average for the year.

The auditor need to discuss this matter with corporate management, and request management to quantify the error.

#99- Inventory System - Perpetual vs Periodic

noreply@blogger.com (Kauditor) — Thu, 30 Dec 2010 16:34:00 +0000

Entity can account for its inventory by using either perpetual method or periodic method.

Under perpetual method:
- the entity record for every single movement of the inventory (i.e. in and out of the inventory)
- at any single point of time, the entity is able to recall the inventory on hand
- frequency of stock-take required is lesser than those accounted using periodic method

Under periodic method,
- every single movement for the inventory (i.e. in and out) is not required to be tracked
- the entity perform a periodic stock-take to ascertain the inventory balance
- inventory on hand can only be recalled after the stock-take is performed
- frequency of stock-take required is higher than those accounted using perpetual method
- cost of sales is computed by using the following formula: Opening Stock+ Cost of Goods Manufactured / Purchase - Closing stock

The above summarize the difference between perpetual inventory method and periodic inventory method.