Current Status of Auditing to Determine Enterprise Value in Vietnam

2.2. CURRENT STATE OF AUDITING TO DETERMINE BUSINESS VALUATION IN VIETNAM

2.2.1. Content and method of auditing to determine enterprise value

According to the Author's survey results, only about 28.58% (4/14) of auditing companies conduct a separate audit and 21.42% (3/14) of companies do not conduct a separate audit but use the results of valuation units. In the survey results, up to 50% of the audit companies investigated did not have an answer and it can be seen that these units do not conduct audits to determine the value of the enterprise. However, some auditing companies currently conduct audits to determine the value of the enterprise mainly according to the compliance method such as comparing documents and papers with relevant legal documents to consider the legality and validity in the process of determining the value of the enterprise. The basic contents of an audit to determine the value of an enterprise are shown through documents related to the audit process at XYZ Mining Enterprise, which was equitized in 2008, and at HGI Company, which was equitized in 2007, conducted by independent auditors:

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2.2.1.1. Financial audit before determining enterprise value

a. To carry out this work, the technician relies on the following documents:

- Figures on the financial statements at the time of determining the enterprise value.

- Relevant records and documents at the audited unit.

- Based on the inventory record, review and classify items on the Balance Sheet in accordance with Vietnamese accounting standards and relevant legal regulations.

- For state-owned enterprises undergoing equitization, the basis for financial handling is according to the provisions of Circular No. 146/2004/TT-BTC dated December 6, 2007 and Decree No. 109/2007/ND-CP dated June 26, 2007.

b. Issues to be examined regarding financial handling:

- For fixed assets not needed:

The auditor shall base on the results of the inventory of assets of the unit whose value is determined at the time of determining the enterprise value to check the classification of assets in the unit and determine the unnecessary tangible fixed assets that must be eliminated. The auditor shall check whether the calculation of the remaining value on the books of the unnecessary assets is correct.

At XYZ Mining Enterprise, the auditor based on the results of the asset inventory on the List of unnecessary assets as of December 31, 2007 determined that the unnecessary assets serving the determination of enterprise value include: (See Appendix I - Table I-12)

+ Houses and structures: original book value is 1,298,280,671 VND and remaining book value is 25,523,710 VND.

+ Machinery and equipment include: Two KZ20 drills, Two air compressors, Two water pumps, One survey machine, One 3.7 KV generator, One underground transformer with a total original book value of 689,548,513 VND and a remaining book value of 9,056,695 VND.

+ Means of transport and transmission equipment include: Three KPAZ cars, One low-voltage power line, One high-voltage power line, One Quyet Thang mine water pump power line with original book value of VND 990,465,045 and remaining book value of zero VND (0)

+ Other fixed assets include: Management tools, tunnel access road No. 01 and tunnel access road No. 02 with original book value of VND 4,006,072,819 and remaining book value of zero (0).

Similarly, at HGI Company, the auditor based on the results of the asset inventory on the List of unnecessary assets awaiting liquidation as of December 31, 2007 and determined that the unnecessary assets serving the determination of enterprise value include: (See Appendix II - Table II-5)

+ Houses and structures: original book value is 432,960,000 VND and remaining book value is 0 VND.

+ Fixed assets different from original book value is 1,844,982,923 VND and remaining book value is 33,898,338 VND.

Next, the auditor considers whether the handling of the above unused assets at the unit whose value is determined is in accordance with regulations or not? The auditor considers the exclusion of the value of these assets from the tangible fixed assets item when determining the enterprise value. Thereby, the auditor assesses compliance with the order of value determination at the valuation unit. The auditor conducts a detailed examination of adjustment entries No. 1 in the table "Adjustment entries before determining enterprise value" (See Appendix I - Table I-2).

- For unused materials and goods:

The auditor also bases on the inventory results of the appraised unit to re-examine the current status of the inventory and compare it with the relevant books. The auditor considers whether the valuation unit's assessment of these assets is consistent with the operating situation of the appraised unit and considers the handling of the above materials and goods in the appraisal documents. At the same time, the auditor considers the exclusion from the inventory item and the reduction of capital sources on the Balance Sheet so as not to include it in the enterprise value.

At XYZ Mining Enterprise, when determining the enterprise value, the value of unnecessary materials and goods according to the books is 90,148,455 VND. The Minutes have determined that the materials and goods are currently in a state of severe damage, cannot be used and XYZ Mining Enterprise has no plan to use them due to low economic efficiency and no longer suitable for the Company's future business plan. The auditor considers the handling of the above materials and goods in adjustment entry No. 2 in "Adjustment entry before determining enterprise value" (See Appendix I - Table I-2).

2.2.1.2. Auditing of enterprise valuation results

a. For tangible fixed assets

Fixed assets are determined by the remaining value as a percentage of the original price of newly purchased or newly constructed fixed assets. The work performed by the auditor includes:

* First, the auditor collects the Inventory of tangible fixed assets of the unit being valued at the time of determining the enterprise value, including:

- Inventory and re-evaluation of houses and structures for equitization;

- Inventory and re-evaluation of machinery and equipment for equitization;

- Inventory and re-evaluation of means of transport for equitization;

- Inventory and revaluation of other fixed assets for equitization;

- List of fixed assets not needed, awaiting liquidation;

The Inventory and Revaluation Tables for equitization clearly state the book value of each asset as well as the actual inventory and revaluation values of those assets.

* The auditor checks whether the difference (if any) between the actual inventory value and the book value is consistent between the documents.

* The auditor conducts specific inspections of each type of fixed assets of the unit, focusing on checking the original price and how to evaluate the remaining value of the fixed assets, specifically:

- For fixed assets such as houses and structures

+ The inspection of the original price of fixed assets is conducted by the auditor as follows:

• Check the original price of completed houses and structures built within the last 3 years up to the time of determining the enterprise value. The auditor shall check the approved final settlement report of completed construction investment capital and check the value of the assets on the tax settlement report, on the financial statements at the time of determining the enterprise value and the accounting books.

• Checking the original price of houses and structures completed and put into use 3 years before the time of determining the enterprise value, the auditor determines whether the original price of the assets is calculated based on the actual area (m2) in use and the unit price of building houses and structures according to relevant legal documents. At the same time, the auditor checks the classification of assets that are houses according to the regulations of the Ministry of Construction as a basis for assessment.

At XYZ Mining Enterprise, the auditor checked whether the assessment of the original price of assets put into use for more than 3 years complied with Decision No. 4005/2004/QD-UB dated November 4, 2004 of the People's Committee of Quang Ninh Province on promulgating the set of unit prices for compensation for damages when the State reclaims land in Quang Ninh Province. At the same time, the auditor checked the classification of houses based on Circular No. 05/BXD/DT dated December 9, 1993 of the Ministry of Construction guiding the classification of houses. At HGI Company, the auditor checked whether the re-evaluation of the original price of houses at the Company by the valuation unit complied with current regulations.

+ Auditing the remaining value of fixed assets is conducted through the following tasks:

• The auditor checks the determination of the remaining value of houses and architectural objects according to the instructions in the Circular of the Ministry of Construction - Finance - Prices. The assessment of the remaining value of fixed assets is based on the results of observing the actual status of fixed assets, observing the structure and construction materials of each part of the house and architectural objects such as: frame structure, ceiling, wall, floor level of the house... of the enterprise valuation unit.

• Based on the collected information, the KTV relies on the method of statistical experience and the method of technical economic analysis and the close combination of opinions of construction technical experts and KTV to determine the reasonable level of the remaining quality percentage of the factory and architectural works still in use, determined to be no less than 30% of the original price.

Fixed assets are houses and structures listed in Appendix I - Table I-4 and Appendix II - Table II-2 "Inventory and re-evaluation table of houses and structures".

- For fixed assets such as machinery and equipment

+ Auditing original cost of machinery and equipment:

• The auditor conducts an inspection of the original cost of machinery and equipment purchased and put into use before the time of determining the enterprise value.

• Check the assets that can be compared with new assets of the same type, same country of manufacture, same capacity or similar features put into use in the year of determining the enterprise value. The auditor compares the original cost of the new asset with the new purchase price of the equivalent asset, taking into account the completeness of the original cost components of the asset to determine the value of the asset.

• For assets without equivalent assets, the auditor verifies the original price according to the quotation or purchase price on the purchase invoice. Assets purchased in original currency are converted at the actual exchange rate at the time of valuation.

• Self-made assets are checked by the auditor according to the original price on the accounting books at the time of determining the enterprise value.

At XYZ Mining Enterprise, the auditor conducted an inspection of assets purchased and put into use since the year of determining the enterprise value. Because there were no equivalent assets to serve as a basis for comparison, the auditor determined the reliability of the original value of the assets in the accounting books at the time of determining the enterprise value. The auditor compared the information in the detailed books, fixed asset cards, and general ledger with related documents to confirm the reliability of the original value of fixed assets.

+ Check the asset quality assessment:

• The auditor shall base on the assessment report of the actual condition of the main parts of the asset to consider the reasonableness of the assessment of the remaining quality of each part.

• The auditor determines the remaining quality ratio of the asset based on the remaining quality ratio of each component. This determination is based on the technical economic analysis method.

• In addition to determining the remaining quality of machinery and equipment, in some cases, the auditor needs to consider the appropriateness of determining the ratio between the estimated remaining useful life of the fixed asset and the entire operating life of the asset. The remaining value of fixed assets still in use is determined to be no less than 20% of the original price.

• Fixed assets are machinery and equipment listed in Appendix I - Table I-7 and Appendix II - Table II-3 "Inventory and revaluation table of machinery and equipment".

- For fixed assets being means of transport

+ Auditing the original price of means of transport:

• For newly purchased assets with similar assets for comparison, the auditor shall compare the original price according to the new purchase price of the asset, taking into account the completeness of the original price components with the value of the same type of means of transport, same country of manufacture, with the same capacity or equivalent features.

• For assets that are means of transport without equivalent assets, the auditor shall check the reliability of the original value of the assets in the accounting books at the time of determining the enterprise value.

+ Check the quality assessment of means of transport

• The auditor evaluates the reasonableness of the remaining quality ratio of the means of transport based on the technical characteristics, age, actual condition and depreciation time. Specifically, the auditor checks the assessment report on the main components of the means of transport such as: engine, body, control system, etc. based on the analysis of economic and technical indicators and the proportion of the components in the total value of the vehicle. Assessment of quality

The remaining value of the main components is determined by measuring and analyzing the technical parameters of the components compared to the original structure, including the overhaul and upgrading of the components. The remaining value of the fixed assets still in use is determined to be no less than 20% of the original price. At XYZ Mining Enterprise, the auditor checks the minutes of determining the technical condition of the equipment made by the valuation unit (Appendix I - Table I-6) with the current status of the assets to assess the reasonableness and reliability of information about the quality of the assets when valuating.

Fixed assets are means of transport listed in Appendix I - Table I-9 and Appendix II - Table II-4 "Inventory and revaluation table of means of transport".

- For other fixed assets:

The original price and remaining quality ratio of other assets are checked in the same way as for fixed assets such as machinery and equipment. In the case of some office equipment such as servers, computers, air conditioners, etc., the auditor checks the original price by comparing it with the original price of similar assets on the market. As for the remaining quality ratio, the auditor bases the operating time of the asset on the depreciation frame and takes into account the invisible depreciation factor.

Other fixed assets are listed in Appendix I - Table I-10 and Appendix II - Table II-4 "Inventory and revaluation table of other fixed assets".

In addition, during the audit, some assets have been fully depreciated but the enterprise continues to use them, so the auditor considers re-evaluating the value of those assets when calculating the enterprise value. The auditor shall base on the quality of these assets at the time of valuation and compare with the regulations on determining the remaining quality of fixed assets as stipulated in Point 5.1b - Part A - Section III - Circular No. 126/2004/TT - BTC (asset quality must not be undervalued).

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