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Materiality Level for the Item


Table 2.6: Materiality level for items


Item

Materiality of the item

Revenue/expenses

50% of overall materiality

Current assets

40% of overall materiality

Long-term assets

30% of overall materiality

Liabilities

25% of overall materiality

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Materiality Level for the Item

Source: A&C Auditing Company

Step 6: Determine the tolerable error threshold

The tolerable error threshold is determined by the percentage of materiality achieved. Depending on the ability of professional judgment, the auditor will give a specific tolerable error rate for each audit. Normally, this rate is chosen by auditors in the range of 0% to 5%.

g) Summarize the audit plan and establish a detailed audit program

According to the survey results, 100% of Big Four audit firms conduct a synthesis of audit plans and develop detailed audit programs. In particular, Big Four audit firms all have audit sampling software, so they present quite detailed audit procedures and sampling methods. For example, at Deloitte Audit Firm, normally if the risk of SSTY is insignificant and the auditor trusts the internal control of the insurance company, the audit will be performed at a medium level with the number of samples selected for testing ranging from 25% to 40%. If the risk of SSTY is significant and the auditor trusts the internal control of the insurance company, the audit will be performed at a high level with the number of samples selected for testing over 60%. For TNCB, determining the sample size for each item is performed by AS2 software.

Table 2.7: Select sample for compensation cost audit


P (Value of the population)

904.621.619.260

MP (Material Level)

8,552,418,066

R (Basic Guarantee Level)

1.7

J (Jump) = MP/R

5,030,834,156

Items > J (Po)

348.205.896.320

P 0p (total value of remaining transactions that occur is less than J)

556.415.722.940

N remained = P 0p /J

(The remaining samples will be tested)

111

Source: Deloitte Auditing Company


According to the survey results, 100% of the audit firms in group 2 also synthesized the audit plan and established a detailed audit program. However, if looking at the audit records, except for A&C and AASC audit firms, the remaining audit firms in group 2 only synthesized the audit plan without establishing a detailed audit program or established a detailed audit program but it was only a formality, not presenting the content, scope and schedule of the audit procedures to be performed, and not presenting the sampling method and determining the sample size. At AASC audit firms (Appendix 24), risk zoning was performed and audit time was allocated for each of these areas. Specifically: Area 1 is the NV, SD and TTTM area with high value and the risk assessment results have a high level of SSTY, the auditor will perform both TNKS and TNCB and allocate 35% of the audit time for this area; Zone 2 is the area where the value of assets, liabilities and trade receivables is small and the risk assessment results have a high level of SSTY. The auditor will perform detailed inspection procedures, which takes up about 10% of the audit time; Zone 3 is the area where the value of assets, liabilities and trade receivables is large and the risk assessment results have a low level of SSTY. The auditor will perform detailed analysis and inspection procedures, which takes up about 15% of the audit time; Zone 4 is the area where the value of assets, liabilities and trade receivables is small and the risk assessment results have a low level of SSTY. The auditor will perform detailed inspection procedures, which takes up about less than 10% of the audit time.

2.2.3.2. Current status of audit implementation phase

h) Handling of risks of material misstatement assessed at the financial statement level

According to the survey results, the audit firms of both groups performed risk treatment with SSTY at the financial statement level with the procedures commonly used by auditors being to increase the collection of audit evidence from the audit firm, increase the audit procedures at the end of the period, increase the number of experienced auditors with professional qualifications to perform, increase the supervision work, apply various sampling methods using expert support and expand the audit method to many locations that are rarely used due to the corresponding low average value.

i) Handling of risks of material misstatement assessed at the assertion level

According to the survey results, the CTKTs of both groups performed risk treatment with SSTY at the database level with detailed TNKS, analytical procedures and inspections.

ii) Perform control testing

Most of the Big Four audit firms have performed audits to evaluate the design and operation of the insurance companies' internal controls during the planning stage, so during this stage, auditors only perform additional audit procedures for the internal control procedures.


Audits performed by the insurance company at the end of the year related to the preparation and presentation of financial statements and with balances, transactions, and disclosures identified as having risks of SSTY or fraud. This explains why only 30.4% of auditors answered that they performed many audits, but up to 69.6% of auditors said that they performed audits at an average level during this period. Auditors conducted interviews to review the division of authority between individuals and departments to ensure non-concurrent holding, authorization of approval, randomly selected a number of economic transactions that arose and checked the traces of control recorded on vouchers and documents reflecting those economic transactions, and re-performed a number of control activities of the unit to assess the effectiveness of these control activities. In case the insurance company has been audited in the previous year, the auditors of the audit companies in the group mainly use the assessment results from the previous year and perform a few control procedures in the current period for control activities that have changed between this year and the previous year. From considering the nature of the internal control procedures established by the insurance company (manual or automatic); Frequency of the insurance company performing control procedures (many times, few times; level of control procedure deficiencies and level of errors in performing control procedures), the auditor will re-evaluate the effectiveness of the internal control. If there is no change in the assessment of internal control compared to the plan, the auditor will keep the content, schedule and TNCB violations the same. On the contrary, if they do not trust the internal control, the auditor will increase the TNCB sample size for the database affected by those deficiencies.

According to the survey results, non-Big Four audit firms also rarely performed audits during this period, with only 15.8% of auditors answering that they performed a lot; 59.6% performed at an average level, and the rest performed little. Through these results and reviewing the GTLV, the author found that the audits performed by auditors were sketchy, mainly to evaluate important items. Furthermore, due to the subconscious mind that even if they perform audits, auditors still have to perform internal audits, so many times the assessment of internal audits and presentation on the GTLV are just formalities.

iii) Perform basic testing

Based on the results of the TNKS performed, combined with the application of auditing techniques and methods, the auditors implemented TNCB. According to the survey results, the implementation of TNKS by both groups generally did not change the TNCB design direction much, with 67.1% of auditors in group 1 and 80.7% of auditors in group 2 choosing the unchanged option; 32.9% of auditors in group 1 and 19.3% of auditors in group 2 choosing the less changed option.


The steps in the process of performing TNCB when auditing the financial statements of insurance companies are similar to those of other companies. However, the scope of the selected sample size and the implementation method in each audit firm are not the same and even in the same audit firm are not the same because the auditor will base on the specific audit program established for each insurance company to perform appropriate audit procedures. For this reason, in this thesis, the author does not describe in detail the TNCB of each audit firm when auditing the financial statements of insurance companies. Instead, the author will present a summary of the general audit procedures commonly used by auditors of both groups for items identified as having material risks.

Insurance business revenue

According to the survey results, when auditing insurance revenue, the database is often paid attention by auditors of both groups of accounting companies to the correct period; classification and presentation, calculation. While the database is present, correct and complete, rights and obligations are less paid attention. This comes from the following characteristics:

Insurance companies record insurance revenue when the insurance contract comes into effect. On the other hand, life insurance terms last for many years, usually medium and long term, so for life insurance companies, auditors pay close attention to accounting for revenue in each period in relation to provisional insurance premiums, insurance premiums paid in advance by customers in many periods, customers owing insurance premiums and adjustments to reduce insurance premiums, increase insurance premiums, refund insurance premiums in case the insurance buyer changes the insurance amount, insurance scope or insurance term.

Changes in the accounting regime of insurance companies. According to the new regulations in Circular 199 (applicable to life insurance companies) and Circular 194 (applicable to non-life insurance companies) of the Ministry of Finance, from 2014 for life insurance companies and from 2016 for non-life insurance companies, fund separation must be implemented (separating revenue from the insurance contract owner fund and revenue from the owner fund). Because it is newly issued, the implementation of fund separation at insurance companies will inevitably have errors. Therefore, when auditing the financial statements of insurance companies, auditors of the two groups often focus on examining whether the presentation of insurance operations meets the fund separation requirements through the procedure of requesting insurance companies to provide a list of fund codes corresponding to each type of product, operation, fund separation report, profit sharing, performance report of each fund and detailed accounting books of account 337 - "Receivables and payables between funds", then checking the consistency of the information presented in these documents.


Insurance premiums are one of the accounting estimates. Therefore, errors are likely to occur in insurance premiums. However, recalculating insurance premiums is extremely complicated, beyond the ability of auditing, so in this case, 83% of auditors of Big Four accounting firms and 73% of auditors of non-Big Four accounting firms chose to use expert opinions. Accounting firms of both groups do not have an insurance valuation expert department, so experts are often outsourced or use experts from the insurance company itself. According to the survey results, most accounting firms rely on the results from the insurance company's own experts, accounting for an average proportion (43.4%) of Big Four accounting firms and a very small proportion (9%) of non-Big Four accounting firms will use outsourced experts. According to the explanation of a non-Big Four accounting firm, they rarely hire outside experts because the cost of hiring insurance experts is very high. Instead, they will consider the completeness and appropriateness of the data used to form the insurance premium. Then, they conduct interviews with the insurance company's insurance expert department and review the approval of the enterprise's management for the insurance premium schedules, especially the premiums of insurance products that are required to be approved by the Ministry of Finance or set by the Ministry of Finance. Therefore, looking at the audit records, the author finds that there is a lack of GTLV related to the collection of audit evidence by experts.

Original insurance business costs

According to the survey results, when auditing original business expenses, auditors of Big Four accounting firms often pay attention to the calculation database, correctness, existence, classification and presentation. Auditors of non-Big Four accounting firms often pay attention to the database being correct, correct, classified and presented. Also through the survey results and in-depth interviews, the author summarizes the audit procedures performed by auditors of the two accounting groups for the original business expenses item as follows:

Insurance compensation expenses account for the largest proportion of total expenses of insurance companies, so auditors spend a lot of time checking them.

For non-life insurance companies: this cost only arises when a risk occurs within the scope of insurance, so the auditor selects a sample of some compensation records and reviews the information on these records (in which, pay attention to the scope of insurance, avoid cases of compensation exceeding liability; subjective losses caused by the insured - insurance fraud; losses not covered by insurance such as natural wear and tear, losses due to other causes, etc.). The purpose of this procedure is to check


Completeness, reasonableness and logic of documents in the claim file and verify each content to ensure the correct nature and business content.

For life insurance companies: in addition to the case of risks that affect the life, body, and health of the insured, this cost also arises when the insurance contract reaches maturity, periodic payment or annuity, so in addition to checking the compensation records like non-life insurance companies, the auditor must also check the insurance payment records when the contract expires (note the terms and conditions specified in the contract, the appendices adjusting the contract), check the procedures for signing and receiving insurance money according to the provisions of current law, compare and check between the statistical data of the professional department and the data being recorded by the accounting department to detect discrepancies in the data, thereby finding the cause and determining the correct data.

In addition to compensation costs, insurance business reserve provisions are also of concern to auditors. The main violation of insurance companies is the provision of provisions not in accordance with regulations, so the main audit procedure performed by auditors is to recalculate and evaluate the appropriateness of the provisioning method implemented by the insurance company.

For other expenses such as loss prevention expenses, business management expenses, insured protection fund expenses, insurance commission expenses: Auditors rarely check except in cases where the expense ratio of each expense item shows signs of abnormality or is higher than normal. According to the auditor's experience, for safe insurance operations: expenses for regular loss compensation and technical reserves < 60% of total expenses in the fiscal year; Management expenses < 15% of total expenses in the fiscal year; Sales expenses < 20% of total expenses in the fiscal year and other expenses < 5% of total expenses in the fiscal year.

Equity capital

According to the survey results, auditing the equity of insurance companies, auditors of both groups of audit companies often pay attention to the existence, calculation, presentation and disclosure of the database with the following audit procedures:

Auditing capital contributions: . Except for the fact that auditors usually focus on checking compliance with the law in managing equity, the audit procedures for capital contributions for insurance companies are carried out similarly to those for other businesses.

Auditing undistributed profits : Compare undistributed profits in the year with profits recorded in the business results report. Recalculate and refer to the figures for payments to the state budget. Below is an example of an audit of undistributed profits conducted by A&C Auditing Company:





Name

Day


Client: BD Insurance Corporation

The performer

BVT

February 18, 2016


Accounting year: December 31, 2015


Reviewer

D.DA

February 20, 2016


Content: Check the calculation of undistributed profit after tax




Target

Accounting number

The following data

Audit

Difference



Total accounting profit

before tax

85.552.676.134

85.552.676.134

v



Taxable income

77.832.059.246

77,690,713,270

[a] 141,345,976



Corporate income tax

career

17.123.053.034

17,058,556,491

[b] 64,496,543



Untaxed profit

distribution

68,429,623,100

68,494,119,643

[b] (64,496,543)


Note:

V: Checked and verified. The data matches correctly.

[a]: unreasonable expenses, not recorded in taxable income (reference….)

[b]: Of the 77,690,713,270 taxable income, 1,670,021,422 is taxable income at the preferential tax rate of 20% (reference F131), 76,020,691,848 is taxable income at the general tax rate of 22%. While the company is applying the general tax rate of 22% to the taxable income of 77,832,059,246.

Conclude:

Incorrect recognition of taxable income affects the enterprise's corporate income tax account and undistributed profit after tax.

Proposed adjusting entry

Debit account 3334: 64,496,543

Credit account 421: 64,496,543.

Source: Excerpt from A&C's GTLV Checking fund balances: Collecting documents from the Board of Directors and regulations

The financial statements of the insurance company on the distribution of business results to the company's funds. Then, recalculate the amount set aside for each fund. The results are compared with the data recorded by the insurance company and any differences (if any) are explained. Below is an example of checking the allocation of funds from undistributed profit after tax:



Name

Day

Client: BD Insurance Corporation

The performer

BVT

February 18, 2016

Accounting year: December 31, 2015

Reviewer

D.DA

February 20, 2016

Content: Checking the allocation of funds from undistributed profit after tax

The company distributes profits according to the Resolution of the 2015 Annual General Meeting of Shareholders.

Target


(1)

Distribution ratio

(2)

Accounting number


(3)

Audited figures

(4)

Difference


(5)

Total profit used to pay dividends

news and distribution of funds

68,429,623,100

68,494,119,643

[a] 64,496,543

1. Dividend payment

12%

8,211,554,772

8,219,294,357

[b] 7,739,585

2. Investment fund deduction

develop

1%

684,296,231

684,941,196

[b] 644,965

3. Extract from reward fund

welfare bonus

1%

684,296,231

684,941,196

[b] 644,965

4. Reserve fund

Finance Department

3%

2,052,888,693

2,054,823,589

[b] 1,934,896

5. Reserve fund

obligatory

5%

3,421,481,155

3,424,705,982

[b] 3,224,827

6. Remuneration of the board of directors and executive committee

control

1%

684,296,231

684,941,196

[b] 644,965

7. Board of Directors' bonus

General Director

1.5%

1,026,444,346

1,027,411,795

[b] 967,449

8. Extract from reward fund

customer reward

1%

684,296,231

684,941,196

[b] 644,965

Note:

[a] Cause of reference difference W/P ref: F130 [b] = (4) x (2) – (3)

Conclusion: The error is smaller than the TYTH level so it does not seriously affect the related accounts. However, the company needs to make the following adjustments:

Debit account 421: 16,446,617

Credit account 3388: 7,739,585

Credit account 353: 2,257,379

Credit account 414: 644,965

Credit account 415: 1,934,896

Credit account 416: 3,224,827

Credit account 418: 644,965

Source: Excerpt from CTKT A&C's GTLV

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