Bai 1.3

Two general categories of problems and
problem solving. Analytical Problem Solving is
one way to look at problems. Another one there's
Creative Problem Solving. Analytical problem solving
has a right answer and looking at this,
looking at these kinds of problems, it's usually systematic the way that
we work through an analytical problem. For example, what's the answer here? 2 plus 6 plus 4, 12. There's not a number of different
answers unless maybe you're in, in, astrophysics somehow maybe we could
figure out some different answer. But, you know, for
normal humans, you know, if you're not hawking then you're probably
going to end up with the answer of 12. There are four methods for doing this,
there are a number of methods but four we'll take a look
at that are common ones. One is Root cause analysis, very systematic approach
to looking at a problem. One is Matrix decision analysis,
another systematic way of looking at this. Another one is a Decision tree with a very
systematic way of looking a things. And one is a Precedence chart,
which things come first, second, third another systematic
way to look at things. Root cause analysis,
there's some different categories. What we do is say in category one,
two, three, four, what are the causes of
the problem under this category? So one category might be
something mechanical. Your car won't start, so we say something
under there that might be mechanical is, gee, I have bad spark plug wires or my battery's dead or
the starter has gone bad. So we have a number of different
possible causes for that. Another thing could be we've
flooded the engine in the car because we don't really know
how to start a car very well. We made another category that says people,
people issues. Well you may have somebody
like a brother in law that drives your in-law's car occasionally. And whenever they go out to start it,
they can't start it, so they're always calling you to come
over and start the car for them. You can't figure out why your
brother-in-law can't start the car, you just figure my
brother-in-law is an idiot. So it's a person issue, so these
categories start to divide out causes for our problem into different areas. And this is why we look at causes,
get rid of the cause, the problem ends up going away. As we start examining this
we finally find out oh, your brother-in-law is using
a different car key than you are. Oh, there's a little electronic
chip in every single car key. Oh, the electronic chip in
his car key has gone bad and the car won't recognize his key and
so it won't let him start the car. So, when you go over with your key and
put it in and start the car, of course it starts. Everybody thought he was an idiot. No, it's a mechanical problem. You get the key fixed and then even
your brother-in-law can start the car. So we look at different problems for
causes to get rid of the final problem. Matrix decisions, we're going to look at, at things we can do, how we can work
together to make these things happen. And we're going to see if there's some
kind of, of correlation between things, who's gonna do things,
how are people going to do things. So we'll end up with a decision
matrix analysis to say okay, this is what's gonna go on here. This person's gonna do this. This person will do that and
we'll get things accomplished finally. We're going to look at a decision
tree that's another systematic way of doing things. We have some kind of
a decision we need to make. We have option a and option b. Option a has some different
possible outcomes. We even have a subheading
under option a and that is two different possible outcomes. Under b, again,
we have a number of different outcomes. So we have our possible outcomes. What do we do with this? We're going to prioritize these and
figure out which is the best outcome. So a number of different tools to help
us in our decision-making process. Precedence chart is another one of these. This just says, okay,
how in the world do we solve this problem? What we're going to do is solve
this problem as we start off. What do we need to get done,
the purpose of this? What are the means we're
going to use to get there and then we get down to specific tasks. What are the things we have to do? So we get into some of the consequences
we were talking about, oh, you mean I have to do this and
and this and this and then that will finally
reach the goal over here. So, another way to affect
problem solving along the way. Let's look at creative problem solving. We just looked at
analytical problem solving. I'm just going to tell you a quick story
about a couple that makes decisions. The husband, very analytical and
every time he solves a problem, he will put all kinds of charts and
graphs together, you know, analyze a lot of things,
gather a lot of data. Put everything together in some systematic
format, go through step by step and solve the problem and
does a fairly good job most of the time. His wife doesn't do it that way. She does creative problem solving. She just thinks about problems. And somehow manages to think about all
the different aspects kind of all at the same time in her head and
comes up with a solution to the problem. And oddly enough she is
right 97 times out of 100. She comes up with the best solution. He comes up with the best
solution occasionally. She comes up with the best
solution almost always. It doesn't always work that way. Systematic analytical problem
solving is a great way to do things. So is creative problem solving. What do we learn in school? We learn analytical problem solving. Creative problem solving,
let's look at an example. There's no right answer and we just are going to look at,
look for some useful answers. What's the best answer? When we get done with this, we put
a solution in place out in the real world, things went right. We did the right, we did the right thing,
we picked the best answer. Let's take a look at this. This comes from a book from Von Oech, which you might wanna
take a look at some time. It's just kind of a fun book,
a whack on the side of the head. We have five choices here. Which one of these. You just need to decide now. Take a look at this. Which one of these, which one of these shapes does
not belong with the other shapes. Give you just a moment to look at that. And it doesn't take you long to do
that I'm sure a lot of you were just like [SOUND] that one right there. Okay, so if you picked A, you are correct. All right, so if you picked A,
you're correct. It's the only one that has part of the
shape internal to the rest of the shape. Anybody pick B? Okay, great you're right. It's the only one that has a straight and
curved side. C, correct, it's the only one
that has all straight sides. D, hey, correct, it's the only one with no point of
discontinuity, it's a perfect circle. E, I really like this one a lot maybe
some of you picked this one if you did, good job. It's the only one that depicts
a non-Euclidean triangle into Euclidean space so good job on that one. The idea being that when we look at these,
there's no right or wrong answer. A lot of times you find in the business
world there is no right or wrong answer. The organization that comes up with
the best solution to a problem is quite often the one that gets
an edge in the marketplace. There are numbers and numbers and numbers of stories about organizations who
solve problems and can do something like increase their quality over a competitor
to get an edge in the marketplace. They get things out the door
faster than their competitor. You get an edge in the marketplace. They can hit a better price point and
still make a good profit. They get an edge of over
somebody else in the marketplace. So looking at answers,
there's not a right or wrong answer. It proves itself out in the real world
eventually, did we pick the best answer?

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Bai 1.2

This module,
we'll discuss problem-solving. Decision making,
we're going to talk about in module three. Now we're going to have
a knowledge check for you. So take a look at that and we'll be back. Module one, lecture two. Let's Start with Types of Problems. A lot of this comes from Problem-Solving:
The Owner's Manual by Pierce Howard. Great book, you should take a look at that
one. There are couple of other books that we'll refer to as well through here. Problems for which solutions are unknown. So we have different kinds of problems. Sometimes, we have no idea
what the solution is. We have to find that out. We also have problems that have solutions, we just don't know which is
going to be the best one. It's not obvious to us,
which the best solution is. Problems with solutions
that have unknown results. Problems where the cause is unknown and
must be discovered. Sometimes, if we find out what
the cause of the problem is, then we can figure out how
to deal with this problem. We just get rid of the cause,
the problem goes away. Sometimes, the cause doesn't
make any difference at all. It's unknown or irrelevant. If we're talking about peace in
the Middle East, the original cause for some of the conflict,
really irrelevant and it's a little muddy about
what it really was all about. We just know that now
we have to solve this. We have problems where
solutions are known, but we don't know which one's the best one. Sometimes, these are very difficult
kinds of problems to, to solve. We have solutions with certain outcomes. We have solutions with uncertain outcomes. And we have solutions that
need to be prioritized. Let's think a little bit
about looking at a new job. What solutions with uncertain outcomes? We know that we're going
to have a new job. We have two choices, choise A, choise B. Both of them are great jobs. They are both great opportunities. One of them means that we move to
the Northeast Coast of the United States. One of them means that we move to the
South Central part of the United States. Different size cities,
different types of work, different groups of
people we will work with. So we're trying to envision, what is
our daily life going to look like once we accept one of these jobs and go there. What does it look like in
the workplace everyday? What does it look like when I'm
out around in my new community? What is it going to look like when
I make new friends in these places? So we have a number of things to
look at and we we really don't know. We will find out when, when we get there. And eventually, find out,
yes, I'm really happy here. I love my work everyday. I love the people I work with. I love where I live, everything's great. I have a fantastic life. I made the right choice. Solutions with certain outcomes, we know
that there's this outcome, that outcome. We just evaluate,
which one is the best and solutions. Where we have a number
of different outcomes, we just need to prioritize those and
say none of these ten different things. The priority listing looks like this. This looks like the best. This looks like the next best. This looks like the next, next best. So we prioritize all of these. There are a number of prioritizing tools
when you're trying to do problem-solving. Look at different kinds of problems and
solutions. If we take a look at problems with
unknown causes, we just find the cause. If you're gonna look at problems
with unknown and irrelevant causes, where we just don't even
care about what they are. We just gather ideas
that can fix the problem. That's what we're looking for there. Decisions between solutions
with certain outcomes. Decide on one or the other,
all we need to do. And decisions where there are uncertain
outcomes, like we just discussed. We just have to figure out which one looks
the best out of these with a number of things we evaluate along the way. And then if we just tear this whole jumbo
list, we need to get this prioritized. What, what does this look like? What's my best choice? My second best choice? My third best choice?

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Bai 1.1

Welcome to Problem Solving and Decision Making brought to you by
the University of California, Irvine. I'm Rob Stone,
I've been doing problem solving and decision making my whole life
just like all the rest of you. We all do that on a daily basis,
we constantly do this. We do it well, we do it not so
well but we're always doing it. I've also been doing this in my
professional life for a number of years, how many we'll not actually point out but
a number of years in many organizations. I've worked with for
profit organizations not for profit organizations,
the government organizations. We're going to, in this class talk about
some of the tools, techniques, methods, processes that can help with problem
solving and decision making. I've applied those in organizations
that made decisions myself in various organizations, helped other people make
decisions, helped teams make decisions. So we'll be working with some of
the things that help us do that. So let's take a look at some of the
concepts involved with problem solving and decision making. We're going to talk about problem solving
and decision making in organizations. This is module one, lecture one. A decision, it's a choice. So we have to make a choice. It's what decision making is all about,
choosing. And the decision making
part of it is a process, so there's some steps you can go through or
we'll look at another way. You don't have to go through specific
steps some people just somehow make decisions along the way. This is a logical choice
from available options so this is a little biased because
it's from a business dictionary and it implies that we're going
to make good decisions. We don't have to make good decisions
we can make bad decisions as well but hopefully we'll make good decisions. We can make a bad choice or no choice and then we'll talk about making good
choices along the way, as well. We may have option one and option two. A bad choice would be to look at those and
not think about them and just pick one. An example of that, there was a person who needed to hire
a new staff member in their department. This person that was going to do
the hiring was the, the head of that whole department, the final decision maker,
the authority and everything. They put together a team of people
to help in the hiring process and they got this group of people to
interview different candidates and put recommendations together. There were list of prioritized people
that this group came back with to this final authority,
the final decision-maker. And then, this final decision-maker
looked at the list and said, I don't need this and threw it away. So, if they had a choice between
person one and person two, how are they going to make that choice? What they did was they said
I'm just going to pick that person over there because
they speak Italian. Speaking Italian had nothing to do
with working in this organization. Team work,
understanding various word processes, being able to work with customers,
those were all key skills and the person who was hired
had none of those. So when we're looking at some of the
choices we make if we don't think through these we might make a bad choice,
that was a terrible choice. Another thing we can do is say option one,
option two or no choice at all. When they say that at a certain point,
something will happen. Either option one is going to take
place or option two will take place I really don't know what to do and
I don't really wanna make a decision. So I think I'll just let things go on
their own and see what happens and make no choice at all. So actually you are making a choice
which ever one is the strongest and is the one that's going to actually
become the end result is your choice. You decided not to do anything, therefore something's going to happen and
it may not be the best thing. Let's look at how we might
decide to paint new cars. So we have choice one and
choice two for paining new cars. One organization did a great job be,
between choice one and choice two, option one and option two. We had a group of engineers,
two groups of engineers. One group of engineers says, this is
the best way to paint these new cars. Another group of engineers says, this is
the best way to paint these new cars. The CEO of this car company,
all of you know this car company, many of you have cars
made by this company. The CEO finally had to make the decision
because the engineers were just like this, they couldn't make the decision
of choice one,or choice two. Nobody else could figure out how to
make this choice they went to the CEO. Both groups of engineers put together
great logical arguments on why the CEO should pick this way to paint the cars
instead of this way to paint the cars. The CEO surprised them,
got all the engineers together and said okay let's figure out how
we're going to paint the cars. Said I just have one question for
each group. Please tell me which method of
painting these cars will not work? And all of the engineers in unison said,
well both ways work just fine. He said, choice two, option two that's
the way we're gonna paint them and left. Perfectly good information
to make a good decision. Both of them worked fine. Didn't really make any
difference which way it went. It's not what the engineers were expecting
for evaluation but it worked out fine. Method A, method B, let's just pick B. Decision Making, The Ultimate Guide. This is a text that you
might wanna refer to and we're gonna use some slides
from this text along the way. There are three key elements in
the process of making a decision. Know your purpose. Why are you even trying
to make this decisions? What do you wanna get
out of this decision? Sometimes we don't have any
idea why we're even bothering. So what's the purpose of this whole thing? Understand your biases. We all have some biases that we
just carry around with us and we will tend to lean toward the ways
we kind of like to do things that may not always be the best way to do things
and consider different consequences. It's easy to make a decision sometimes,
like a New Year's resolution and then not think about the consequences. Oh, you mean I have to do that I
didn't know that was involved. So we'll talk a little bit about them. Let's take a look at an example. You have a purpose, you wanna have $1 million in
accessible assets before you retire. And that's a number that's
not all that unattainable for most people that are under 30 years old. You can probably put that money away and reach that goal but you're gonna have
to do some things to make that happen. Understand your biases, legal
considerations and ethical considerations. Legal considerations, there was a, famous
series on recently called Breaking Bad, one teacher decided that they
wanted to make more money. And so they decided the best way to
do that was to do something illegal. So we may have some legal considerations,
are we going to go that path? Hm, no,
we're just gonna go the normal path and amass our million dollars by
retirement through normal means. Ethical considerations,
sometimes we think about, are there some certain things I
don't wanna be involved with? Do I wanna be involved with companies
that do chemical testing on animals? Do I wanna be involved with companies
that make weapons for warfare? You know, there's some different ethical
considerations we might wanna make along the way and then that'll, that'll take
some of our options away from us. Also, now we have our options left over
we're going to think through those. Consequences, what are some of
the consequences of amassing this amount of money by retirement? Well, we just might have to keep our
car a few extra years, you know, instead of getting a brand new
car every three or four years. Well, now it's maybe every eight or
ten years. We might just buy a car that's not
the fanciest style right now but it gets us around just fine. A lot of cars last 250,000 miles
easily these years or these days. So, we don't have to get a new car all
the time except for just a stylish reason. We might not purchase some fancy
new item like we might not purchase some fancy new brand name,
designer watch of some sort. We might not take a fancy vacation
every year it might be every two or three years and
then we can go on a nice vacation. We don't have to cut out everything
we're going to do in our lives to get our goal of having a certain amount
of money by the time we retire. But we may have to cut
back on some things there are some consequences to what we're doing. Problem, problem is a gap or
it's some kind of a change. There's something not right in the way
that we usually understand things. Look at an example of a problem. You're gaining weight because you eat
badly and you don't exercise enough. Well, I don't know how many
of you have that problem but I have that problem from time to time,
many of us do. The exercise method that you choose
just doesn't work well for you. If you decide that you wanna go run and
you start running and you can get in usually three or
four miles a week. And then you realize oh, that's not enough to see any kind of,
weight difference at all. I'm gonna have to run at least 25 miles a
week, I don't know how I'm gonna do that. I need to find a different
way of exercising. Problem solving,
process of working through all the details of a problem to
reach some kind of solution. So it's a process,
problem solving is a process and we do that in a couple of different ways.

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STANDARD 400 RISK ASSESSMENTS AND INTERNAL CONTROL

STANDARD 400
RISK ASSESSMENTS AND INTERNAL CONTROL
(Issued in pursuance of the Minister of Finance Decision No. 143/2001/QD-BTC
dated 21 December 2001)


GENERAL

01. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and fundamental procedures and provide guidance on obtaining an understanding of the accounting and internal control systems and on assessing audit risk and its components: inherent risk, control risk and detection risk during an audit of financial statements.

02. The auditor should obtain an understanding of the accounting and internal control systems sufficient to prepare an overall audit plan and develop an effective, appropriate audit approach. The auditor should use professional judgment to assess audit risk and to design audit procedures to ensure it is reduced to an acceptably low level.

03. This VSA applies to audits of financial statements and also applies to audits of other financial information and related services rendered by the audit firm.
The auditor and the audit firm should comply with this VSA in conducting an audit of financial statements and rendering related services
It is expected that the client entity and users of the audit report should possess essential knowledge as to the principles set out in this VSA in working with the auditor and the audit firm, and dealing with the relations maintained during the audit.
In this VSA, the following terms have the meaning attributed below:

04. Inherent risk is the susceptibility of an account balance or class of transactions to misstatement that could be material individually or when aggregated with misstatements in other balances or classes, assuming that there were no related-internal controls.

05. Control risk is the risk that a misstatement, that could occur in an account balance or class of transactions and that could be material individually or when aggregated with misstatement in other balances or classes, will not be prevented or detected and corrected on a timely basis by the accounting and internal control systems.


06. Detection risk is the risk that misstatement exists in an account balance or class of transactions that could be material individually or when aggregated with misstatements in other balances or classes that the auditor and the audit firm fail to detect.

07. Audit risk means the risk that the auditor and the audit firm give an inappropriate audit opinion when the financial statements are materially misstated. Audit risk has three components: inherent risk, control risk and detection risk.

08. Audit risk assessment is the work carried out by the auditor and audit firm to assess the degree in which audit risks may occur, which include the assessment of inherent risk, control risk and detection risk. Audit risk is assessed before the planning stage and before audit performance.

09. Materiality is a term which denotes the importance of information or a disclosure in the financial statements.
Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality should be viewed in respect of both quantitative and qualitative characteristics.

10. Internal control system means all the policies and procedures designed and adopted by an entity to assist compliance with the provisions of law and relevant regulations for prevention and detection of fraud and error, preparation of financial statements that give a true and fair view, and effective safeguarding, management and use of its assets. The internal control comprises the control environment, accounting system, and control procedures.

11. Accounting system means the series of policies and procedures of an entity by which records are maintained and financial statements prepared.

12. Control environment means the understanding, attitude, awareness and actions of members of the boards of Management and Directors regarding the internal control system and its importance in the entity.
The control environment has an effect on the effectiveness of the specific control procedures. A strong control environment can significantly complement specific control procedures. However, a strong environment is not synonymous with a strong internal control system. Such environment does not, by itself, ensure the effectiveness of the internal control system.

13. Control procedures are those policies and procedures which management has established to achieve the entity’s specific objectives.

CONTENTS OF THE VSA

14. When developing the audit approach, the auditor considers the preliminary assessment of inherent risk and control risk to determine the appropriate detection risk to accept for the financial statement assertions and to determine the nature, timing and extent of substantive procedures for such assertions.

Inherent Risk

15. In developing the audit plan, the auditor and the audit firm should assess inherent risk at the financial statement level. In developing the audit program, the auditor should relate such assessment to material account balances and classes of transactions at the assertion level, or otherwise assume that inherent risk is high for the assertion. Based on the assessment on the inherent risk, the auditor estimates the work to conduct and procedures to follow for material balances and transactions in the financial statements, or balances and transactions for which, in the auditor’s judgment, inherent risk is high (see Appendix 01).

16. To assess inherent risk, the auditor uses professional judgment to evaluate the following major factors:
+ At the Financial Statement Level
- The integrity, experience and knowledge of management and changes in management during the period;
- The experience and competence of the chief accountant, key accounting personnel and internal audit staff and changes (if any) with them;
- Unusual pressures on management and the chief accountant, in particular circumstances that might predispose management and the chief accountant to misstate the financial statements;
- The nature of the entity’s business, for example, technological designs, capital structure, the number of locations, geographical spread and seasonal feature of production;
- Factors affecting the industry in which the entity operates, for example, changes in economic and competitive conditions, in purchasing and selling market and in accounting practices common to the industry.
+ At the Account Balance and Class of Transactions Level
- Financial statement accounts likely to be susceptible to misstatement, for example, accounts which required adjustment in the prior period or which involve a high degree of estimation; or changes in accounting practice which took place during the period;
- Measurement of account balances and business transactions, such as balances of provision accounts, transactions with extra-ordinary repairs either expensed or added to the cost of fixed assets.
- Susceptibility of assets to loss or misappropriation, for example, numerous receipts and expenditures in cash, cash advanced in large amounts and over a long time,…
- The complexity of underlying transactions and other events which might require using the work of an expert, for example litigations or thefts…
- The completion of unusual and complex transactions, particularly at or near period end;
- Other unusual financial and business transactions.

Accounting and Internal Control Systems

17. Internal controls relating to the accounting system are maintained to ensure:
- Transactions are executed in accordance with the authorization of relevant personnel;
- All transactions are promptly recorded in the correct amount, in the appropriate accounts and in the proper accounting period so as to permit preparation of financial statements in accordance with the prevailing accounting regulations;
- Access to assets and records is permitted only in accordance with management’s authorization;
- Recorded assets are compared with the existing assets counted at reasonable intervals and appropriate action is taken regarding any differences.

Inherent Limitations of Internal Controls

18. Accounting and internal control systems cannot provide management with conclusive evidence that objectives are reached because of inherent limitations, such as:
- Management’s usual requirement that the cost of an internal control does not exceed the expected benefits to be derived;
- Most internal controls tend to be directed at routine transactions rather than non-routine transactions;
- The potential for human error due to carelessness, distraction, mistakes of judgment and the misunderstanding of instructions;
- The possibility of circumvention of internal controls through the collusion of a member of management or an employee with parties outside or inside the entity;
- The possibility that a person responsible for exercising an internal control could abuse that responsibility;
- The possibility that procedures may become inadequate due to changes in the existing mechanism and management requirement and compliance with procedures may deteriorate.

Understanding the Accounting and Internal Control Systems

19. Within the scope of a financial statement audit, the auditor is mainly concerned with the accounting and internal control policies and procedures pertaining to assertions in the financial statements.
Understanding of the accounting and internal control systems of the entity under audit and the assessment of inherent risk and control risk would assist the auditor in:
- Locating the audit scope required for material misstatements likely to exist in the financial statements;
- Reviewing factors which may result in material misstatements; and,
- Designing relevant audit procedures.

20. When obtaining an understanding of the accounting and internal control systems to develop an audit plan, the auditor obtains a knowledge of the design of the accounting and internal control systems and their operation. This would enable the auditor measure the quantity of transactions to be audited and design necessary testing procedures.

21. The nature, timing and extent of the procedures performed by the auditor to obtain an understanding of the accounting and internal control systems will vary with, among other things:
- The size and complexity of the entity and of its computer system, for example wholly or party computerized application; computers operated separately or in a network,…)
- Materiality considerations by the auditor and the audit firm;
- The type of internal controls involved (for example control of purchases, sales or cash,…);
- The entity’s regulation on respective control procedures (for example, procedures of purchases, sales, and those on goods received and dispatched);
- The number of transactions and the entity’s documentation of specific internal controls;
- The auditor’s assessment of inherent risk as high or low.

22. Ordinarily, the auditor’s understanding of the accounting and internal control systems is obtained through:
- previous experience with the entity and its operations;
- inquiries of appropriate management, supervisory and other personnel at various organizational levels within the entity, together with reference to documentation;
- inspection of documents and records produced by the accounting and internal control systems; and
- observation of the entity’s activities and operations, including observation of the organization of computer operations, management personnel, internal controls and the nature of internal transaction processing.

23. Internal control includes control environment, accounting system and control procedures.

Control Environment

24. The auditor should obtain an understanding of the control environment of the entity in evaluating the Boards of Management and Director’s attitudes, awareness and actions regarding the internal controls.

Key factors reflected in the control environment include:

- The function of the Boards of Management and Directors and their committees and divisions;
- The Boards of Management and Director’s philosophy and operating style;
- The entity’s organizational structure and the authority and responsibility of the components thereof;
- Management’s control system including the managing and control structure, internal audit function, personnel policies and procedures segregation of duties;
- External impacts, such as Government policies, and higher levels and professional bodies’ instruction.
Accounting System

25. The auditor should obtain an understanding of the accounting system sufficient to identify and understand:
- Major classes of transactions in the entity’s operations;
- How such transactions are initiated;
- Organization of the accounting mechanism;
- Organization of the accounting practice, including accounting documents, chart of accounts, accounting books and financial reporting; and
- The accounting for significant transactions and other events, from their initiation to inclusion in the financial statements.

Control Procedures
26. The auditor should obtain an understanding of the control procedures sufficient to develop the audit plan and program. The auditor would consider knowledge of the control environment to define the control procedures in place and those absent that require application (for example in understanding accounting for cash in bank, the auditor would consider whether reconciliation procedures are available and properly performed).

Major control procedures are:
- drawing up, verifying, reconciling and approving of data and relevant documents;
- testing the accuracy of data;
- reviewing computerized programs and environment;
- comparing data between control account ledgers and sub-ledgers
- reviewing and approving of accounting documents;
- comparing data between control account ledgers and sub-ledgers;
- reviewing and approving of accounting documents;
- comparing internal documents to external documents;
- reconciling count results to book figures;
- limits of access to assets and accounting documents;
- comparing actuality to accounting estimates and budgets.

When reviewing the control procedures, the auditor should consider whether they have been established upon fundamental principles, such as leadership regime, work assignment, duty segregation, authorization and approval.

Control Risks

Preliminary Assessment of Control Risks

27. The preliminary assessment of control risk is the process of evaluating the effectiveness of an entity’s accounting and internal control systems in preventing or detecting and correcting material misstatements. There will always be some control risk because of the inherent limitations of any accounting and internal control system.

28. After obtaining an understanding of the accounting and internal control systems, the auditor and the audit firm should make a preliminary assessment of control risk, at the assertion level, for each material account balance or class of transactions.

29. The auditor ordinarily assesses control risk at a high level for some or all assertions when:
- the entity’s accounting and internal control systems are not adequate;
- the entity’s accounting and internal control systems would not be efficient;
- the auditor is not provided with an adequate basis for evaluation of the adequacy and effectiveness of the accounting and internal control systems of the client entity.

30. The assessment of control risk for a financial statement assertion should normally be at less than high if the auditor:
- is able to identify internal controls relevant to the assertion which are likely to prevent or detect and correct a material misstatement; and
- plans to perform tests of control to support the assessment of control risk.

Documentation of Assessment of Control Risks

31. The auditor should document in the audit working papers:
- the understanding obtained of the entity’s accounting and internal control systems; and
- the assessment of control risk. When control risk is assessed at less than high, the auditor would also document the basis for the conclusions.

32. Different techniques may be used to document information relating to accounting and internal control systems. The form and extent of this documentation is influenced by the size and complexity of the entity and the nature of the entity’s accounting and internal control systems (for example, the more complex the entity’s accounting and internal control systems and the more extensive the auditor’s procedures, the more extensive the auditor’s documentation will need to be).

Tests of Control
33. Tests of control are performed to obtain audit evidence about the effectiveness of the accounting and internal control systems in respect of:
- design of the accounting and internal control systems, that is, whether they are suitably designed to prevent or detect and correct material misstatements; and
- operation of the accounting and internal control systems throughout the period.

34. Apart from tests of control, the auditor may perform other audit procedures to obtain audit evidence about the effectiveness of the design and operation of the accounting and internal control systems, such as evidence collected through inquiry and observation.

35. When the auditor concludes that procedures provide audit evidence about the effectiveness of the accounting and internal control systems relevant to a particular financial statement assertion, the auditor may use that audit evidence to support a control risk assessment at a low and medium level.

36. Tests of control may include:
- Inspection of documents supporting transactions and other events to gain audit evidence that the accounting and internal control systems have operated properly, for example, verifying that payment related documents have been authorized;
- Inquiries about, and observation of, the performance of those who carry out internal control assignments to determine whether any audit trails are left;
- Reperformance of internal controls, for example, reconciliation of bank accounts, petty cash and inventory count minutes and accounts receivable and payable, to ensure they were correctly performed by the entity.

37. The auditor should obtain audit evidence through tests of control support any assessment of control risk which is less than high. The lower the assessment of control risk, the more support the auditor should obtain that accounting and internal control systems are suitably designed and operating effectively.

38. When obtaining audit evidence about the effective operation of internal controls, the auditor considers how they were applied, the consistency with which they were applied during the period and by whom they were applied. The concept of effective operation recognizes that some deviations may have occurred due to changes in key personnel, significant seasonal fluctuations in volume of transactions and human error. When deviations are detected the auditor makes specific inquiries regarding these matters, particularly the timing of staff changes in key internal control personnel. The auditor then ensures that the tests of control appropriately cover such a period of change or fluctuation.

39. In a computer information systems environment, the objectives of tests of control do not change from those in a manual environment; however, some audit procedures may change. In case the accounting work and internal auditing is performed using computers the auditor may find it necessary, or may prefer, to use computer-assisted audit techniques to collect evidence about the effectiveness of the internal controls.

40. Based on the results of the tests of control, the auditor should evaluate whether the internal controls are designed and operating as contemplated in the preliminary assessment of control risk. The evaluation of deviations may result in the auditor concluding that the assessed level of control risk needs to be revised, thus to modify the nature, timing and extent of planned substantive procedures.

Final Assessment of Control Risk

41. Before the conclusion of the audit, based on the results of substantive procedures and other audit evidence obtained by the auditor should consider whether the assessment of control risk is confirmed.
Relationship Between the Assessments of Inherent and Control Risks

42. Inherent risk and control risk are highly interrelated; and therefore the auditor should assess inherent and control risks together.

Detection Risks

43. The level of detection risk relates directly to the auditor’s substantive procedures.
The auditor’s control risk assessment, together with the inherent risk assessment, influences the nature, timing and extent of substantive procedures to be performed to reduce detection risk, and therefore audit risk, to an acceptably low level.

To reduce audit risk to an acceptably low level, the auditor would consider:
- nature of substantive procedures, for example, using tests directed toward independent parties outside the entity rather than tests directed toward parties or documentation within the entity, or using tests of details for a particular audit objective in addition to analytical procedures;
- the timing of substantive procedures, for example, performing inventory procedures at period end rather than at an earlier date with adjustment; and
- the extent of substantive procedures, for example, using a larger sample size.
It is impossible however to entirely eliminate the detection risk even when the auditor has checked all the transactions and account balances

44. There is an inverse relationship between detection risk and the combined level of inherent and control risks. For example, when inherent and control risks are high, acceptable detection risk needs to be low to reduce audit risk to an acceptably low level. On the other hand, when inherent and control risks are low, an auditor can accept a higher detection risk and still reduce audit risk to an acceptably low level (see Appendix 01)
45. While tests of control and substantive procedures are distinguishable as to their purpose, the results of either type of procedure may contribute to the purpose of the other regarding assessment of inherent risk and control risk. For example misstatements discovered in conducting substantive procedures may cause the auditor to modify the previous assessment of control risk (see Appendix 01).

46. Regardless of the assessed levels of inherent and control risks, the auditor should perform some substantive procedures for material account balances and classes of transactions.

47. The auditor’s assessment of the components of audit risk may change during the course of an audit, for example, information may come to the auditor’s attention when performing substantive procedures that differs significantly from the information on which the auditor originally assessed inherent and control risks. In such cases, the auditor would modify the planned substantive procedures based on a revision of the assessed levels of inherent and control risks.
48. The higher the assessment of inherent and control risk, the more audit evidence the auditor should obtain from the performance of substantive procedures. When the auditor determines that detection risk regarding a financial statement assertion for a material account balance or class of transactions can not be reduced to an acceptable level, the auditor should express a qualified opinion or a disclaimer of opinion.

Audit Risk in the Small Business

49. The auditor needs to obtain the same level of assurance in order to express an unqualified opinion on the financial statements of both small and large entities. However, many internal controls which would be relevant to large entities are not practical in the small business. (For example, in large businesses, those involved in the supervisory controls are separate from the accounting staff while in small businesses, accounting procedures may be performed by a few persons. Accountants may take charge of the supervisory controls, and thus the internal controls are impaired). In circumstances where internal controls are limited due to the absence of segregation of duties, the audit evidence necessary to support the auditor’s opinion on the financial statements may have to be obtained entirely through the performance of substantive procedures.

Communication of Weaknesses

50. As a result of obtaining an understanding of the accounting and internal control systems and tests of control, the auditor may become aware of weaknesses in the systems. The auditor should make management aware, as soon as practical and at an appropriate level of responsibility, of material weaknesses in the design or operation of the accounting and internal control systems.

Such communication would ordinarily be in writing. However, if oral communication is found appropriate, the communication would be documented in the audit working papers.

APPENDIX 01
Interrelationship of the Components of Audit Risk

The following table shows how the acceptable level of detection risk may vary based on assessment of inherent and control risks.

Auditor’s assessment of control risk
High Medium Low
Auditor’s assessment of inherent risk High Lowest Lower Medium
Medium Lower Medium Higher
Low Medium Higher Highest


Notes:
- Both inherent risk and control risk are set at three levels: higher, medium and lower.
- The shaded areas relate to detection risk.
- Detection risk is set at five levels: highest, higher, medium, lower and lowest.
There is an inverse relationship between detection risk and the combined level of inherent control risks. For example when inherent risk is assessed as high and control risk is low, acceptable levels of detection risk need to be medium to reduce audit risk to an acceptable low level. On the other hand, when inherent risk is low and control risk is medium, the auditor can accept detection risk as higher and still reduce audit risk to an acceptably low level.

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STANDARD No. 320 AUDIT MATERIALITY

STANDARD No. 320
AUDIT MATERIALITY
(Promulgated together with the Finance Minister’s Decision No. 28/2003/QD-BTC of March 14, 2003)

GENERAL PROVISIONS
01. The purpose of this standard is to prescribe the basic principles and procedures and guide the modes of application thereof to the responsibilities of auditors and audit firms when determining  materiality in auditing financial statements and the relationship between materiality and audit risk.
02. When conducting audits, auditors must pay attention to materiality and its relationship with audit risk.
03. This standard shall apply to the audit of the financial statements and also to the audit of other financial information of audit firms.
Auditors and audit firms must observe the provisions of this standard in the process of auditing the financial statements.
The audited units (clients) and the users of audit results must possess necessary knowledge of this standard so as to cooperate in working and handling relationships relating to the determination of materiality of audited information.
The terms in this standard shall be construed as follows:
04. Materiality is the concept used to express the importance of a piece of information (an accounting figure) in the financial statements.
Information is regarded as material if its omission or inaccuracy could influence the decisions of users of the financial statements. Materiality depends on the magnitude and nature of information or error judged in particular circumstances. Materiality is a threshold or cut-off point rather than a content which information must have. Information materiality must be considered both quantitatively and qualitatively.

CONTENTS OF THE STANDARD
Materiality
05. The objective of the audit of financial statements is to enable auditors and audit firms to confirm whether or not the financial statements have been made in accordance with the current (or accepted) accounting standards and regimes, with relevant laws and honestly or rationally reflect material aspects. The determination of the level of materiality is a matter of professional judgment of auditors.
06. When planning audits, auditors must determine an acceptable materiality level to serve as a basis for detecting quantitatively material errors. However, to judge errors as material, auditors must consider them both quantitatively and qualitatively. For example, non-compliance with the current accounting regimes may be considered a material error if it leads to the incorrect presentation of indexes in the financial statements, thus making users of financial information misunderstand the nature of the matters; or the financial statements fail to describe matters relating to non-continuous activities of enterprises.
07. Auditors should consider the possibility of relatively small errors that, if added up, could have a material effect on the financial statements, such as an error in a month-end accounting procedure may become a potential material error if it is repeated each month.
08. Auditors should consider materiality in terms of the extent of erroneousness of the financial statements as a whole in relation to detailed errors in individual account balances, transactions and information disclosed in the financial statements. Materiality may be influenced by other factors such as legal requirements or matters related to different financial statement items and the relationships between these items. In the process of consideration, different materiality levels may be discovered, depending on the nature of matters put forward in the audited financial statements.
09. Auditors must determine materiality when:
a/ Determining the contents, timing and scope of auditing procedures;
b/ Evaluating the effect of errors.
The relationship between materiality and audit risk
10. When planning audits, auditors must consider factors which may give rise to material errors in the financial statements. The auditors’ assessment of materiality relating to account balances and major transactions shall help the auditors determine which items to be examined and decide to use sampling or analytical procedures. The materiality assessment relating to account balances and major transactions shall help the auditors select suitable audit procedures that, when combined, shall reduce audit risk to an acceptable level.
11. There is an inverse relationship between materiality and audit risk in an audit: The higher the materiality level is, the lower the audit risk would be and vice versa. Auditors should take this relationship into account when determining the contents, timing and scope of audit procedures in an appropriate manner, such as when planning audits, if auditors determine that the acceptable materiality level is low, audit risk is increased. In this case, auditors may:
a/ Reduce the assessed level of control risk by carrying out extended or additional tests of control so as to prove the reduced level of control risk; or
b/ Reduce detection risk by modifying the contents, timing and scope of detailed examination procedures already planned.
Materiality and audit risk in evaluating audit evidences
12. The auditors’ materiality and audit risk assessment results at the time of initially planning the audits may be different from the assessment results at different times in the auditing process. Such difference could be attributed to a change in practical circumstances or a change in the auditors’ knowledge of the audited units on the basis of the obtained audit results, such as when the audit is planned before the end of a fiscal year, the auditors have assessed materiality and audit risk on the basis of the enterprises’ anticipated operation results and financial situation. If the enterprises’ actual financial situation and operation results are substantially different therefrom, the assessment of materiality and audit risk will also change. Moreover, when planning audits, auditors usually set the acceptable materiality level lower than that is used to evaluate the audit results in order to increase the possibility to detect errors.
Evaluation of the effect of errors
13. When evaluating the financial statements’ honesty and rationality, auditors must assess whether the aggregate of uncorrected errors which have been detected in the auditing process constitutes a material error or not.
14. The aggregate of uncorrected errors comprises:
a/ Errors detected by auditors in the current year, including those detected in the previous years and not yet corrected in the audit year;
b/ The auditors’ estimation of other errors which cannot be specifically determined (projected errors) in the financial statements of the audit year.
15. Auditors should consider whether the aggregate of uncorrected errors may be material or not. If they conclude that the aggregate of such errors is material, they should take action to reduce audit risk by adding necessary audit procedures or requesting the directors of the audited units to adjust the financial statements.
16. Where the directors of the audited units refuse to adjust the financial statements and the results of application of additional audit procedures permit the auditors to conclude that the aggregate of uncorrected errors is material, they should consider and modify the auditing reports in accordance with Vietnamese Auditing Standard No. 700 “Auditing reports on financial statements.”
17. If the aggregate of uncorrected errors which have been detected approximates the set materiality level, auditors must consider the possibility that whether the undetected errors, when combined with those detected but uncorrected, could constitute material errors or not. In this case, auditors should reduce audit risk by adding necessary audit procedures or requesting the directors to adjust the financial statements to correct the detected errors.

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Khóa học này nói khá nhiều lý thuyết về cách làm Video YouTube phục vụ làm CPA Offer. Nó thích hợp cho bạn đang muốn tìm hiểu sau làm Offer từ nguồn video trên YouTube. Việc tối ưu hóa SEO cũng không có gì mới. Tuy nhiên nếu bạn mới bắt đầu tìm hiểu làm Offer kết hợp trên YouTube thì khóa học này thích hợp cho bạn.
Link: https://www.youtube.com/watch?v=4G4iQFDLVlo&list=PLKYeSdQiW6Mz56kp9AOY8MzqUH8V_Zej_

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TANGIBLE FIXED ASSETS

Standard No. 03

GENERAL PROVISIONS

01. This standard aims to prescribe and guide the accounting principles and methods applicable to tangible fixed assets, including criteria of tangible fixed assets, the time of recognition and determination of initial value, costs incurred after initial recognition, determination of value after initial recognition, depreciation, liquidation of tangible fixed assets and some other regulations serving as basis for recording accounting books and making financial statements.

02. This standard applies to the accounting of tangible fixed assets, except where other accounting standards permit the application of other accounting principles and methods to tangible fixed assets.

03. Where other accounting standards prescribe methods of determining and recognizing the initial value of tangible fixed assets other than the methods defined in this standard, other contents of tangible fixed asset accounting shall still comply with the regulations of this standard.

04. Enterprises must apply this standard even when they are affected by price changes, except otherwise prescribed by State decisions related to the re-appraisal of tangible fixed assets.

05. For the purpose of this standard, the terms used herein are construed as follows:

Tangible fixed assets means assets in physical forms which are possessed by the enterprises for use in production and business activities in conformity with the recognition criteria of tangible fixed assets.

Historical cost means all the costs incurred by the enterprises to acquire tangible fixed assets as of the time of putting such assets into the ready-for-use state.

Depreciation means the systematic allocation of the depreciable value of tangible fixed assets throughout the useful life of such assets.

Depreciable value means the historical cost of tangible fixed assets recorded on financial statements, minus (-) the estimated liquidation value of such assets.

Useful life means the duration in which the tangible fixed assets produce their effect on production and business, calculated by:

a/ The duration the enterprise expects to use the tangible fixed assets, or:

b/ The volume of products, or similar calculating units which the enterprise expects to obtain from the use of assets.

Liquidation value means the value estimated to be obtained at the end of the useful life of the assets, after subtracting the estimated liquidation cost.

Reasonable value means the value of assets, which may be exchanged among knowledgeable parties in the par value exchange.

Residual value means the historical cost of tangible fixed assets after subtracting the accumulated depreciation thereof.

Recoverable value means the value estimated to be obtained in future from the use of the assets, including their liquidation value.

CONTENTS OF THE STANDARD

RECOGNITION OF TANGIBLE FIXED ASSETS

06. Criteria for recognition of tangible fixed assets:

To be recognized as tangible fixed assets, assets must meet simultaneously all the following four (4) recognition criteria:

a/ Future economic benefits will surely be obtained;

b/ Their historical cost has been determined in a reliable way;

c/ Their useful life is estimated at more than one year;

d/ They meet all value criteria according to current regulations.

07. Tangible asset accounting is classified by groups of assets of the same nature and use purposes in the enterprises’ production and business operations, including:

a/ Houses and architectural objects;

b/ Machinery and equipment;

c/ Means of transport, conveyance equipment;

d/ Managerial equipment and instruments;

e/ Perennial tree garden, animals reared to labor for humans and to yield products.

f/ Other tangible fixed assets.

08. Tangible fixed assets often constitute a key component in the total assets and play an important role in the reflection of the financial situation of enterprises. Therefore, the determination of an asset whether or not to be recognized as tangible fixed asset or a production or business expense in the period shall greatly affect the reporting of the enterprises’ operation and business results.

09. When determining the first criterion (prescribed in Section a, paragraph 06) of each tangible fixed asset, the enterprises must determine the degree of certainty of the acquisition of future economic benefits, on the basis of evidences available at the time of initial recognition, and must bear all related risks.

Though being unable to directly yield economic benefits like other tangible fixed assets, those assets used for the purposes of ensuring production and business safety or protecting the environment are necessary for enterprises to achieve more economic benefits from other assets. However, only if their historical cost and that of related assets do not exceed the total value recoverable from them and other related assets shall these assets be recognized as tangible fixed assets. For example, a chemical plant may have to install equipment and carry out new chemical-storing and-preserving processes in order to comply with the environmental protection requirements in the production and storage of toxic chemicals. Any related installed accompanying fixed assets shall only be accounted as tangible fixed assets if without them the enterprises would not be able to operate and sell their chemical products.

10. The second criterion (prescribed in Section b, paragraph 06) for recognizing tangible fixed assets is often satisfied since the historical cost of the fixed assets has been already determined through procurement, exchange, or self-construction.

11. When determining components of tangible fixed assets, the enterprises must apply the criteria of tangible fixed asset on a case-by-case basis. The enterprises may consolidate secondary, separate parts, such as molds, tools, swages, and apply the criteria of tangible fixed asset to such aggregate value. Accessories and auxiliary equipment are often seen as movables and thereby accounted into use costs. Major accessories and maintenance equipment shall be determined as tangible fixed assets when the enterprises estimate that their useful life would last for over one year. If they are only used in association with tangible fixed assets irregularly, they shall be accounted as separate tangible fixed assets and depreciated over a period shorter than the useful life of related tangible fixed assets.

12. In each specific case, the total cost of assets may be allocated to their components and separately accounted for each component. This case shall apply when each component of an asset has a different useful life, or contributes to creating for the enterprise economic benefits which are assessed according to different prescribed criteria so it may use different depreciation rates and methods. For example, an aircraft body and engine should be accounted as two separate tangible fixed assets with different depreciation rates if they have different useful lives.

DETERMINATION OF INITIAL VALUE

13. Tangible fixed assets must have their initial value determined according to their historical cost

DETERMINATION OF HISTORICAL COST OF TANGIBLE FIXED ASSETS ON A CASE-BY-CASE BASIS

Procured tangible fixed assets

14. The historical cost of a procured tangible fixed asset consists of the buying price (minus   (-) trade discounts and price reductions), taxes (excluding reimbursed tax amounts) and expenses directly related to the putting of the assets into the ready-for-use state, such as ground preparation expense; initial transportation, loading and unloading expense; installation and trial operation expense (minus (-) amounts recovered from products and wastes turned out from trial operation); expert cost and other directly-related expenses.

For tangible fixed assets formed from construction investment by contractual mode, their historical costs are the settled costs of the invested construction projects, other directly-related expenses and registration fee (if any).

15. Where procured tangible fixed assets are houses, architectural objects associated with the land use right, the land use right value must be separately determined and recognized as intangible fixed asset.

16. Where procured tangible fixed assets are paid by deferred payment mode, their historical cost shall be shown at the buying price promptly paid at the purchase time. The difference between the payable total amount and the promptly-paid buying price shall be accounted as expense in the payment period, except where such difference is included into the historical cost of tangible fixed assets (capitalization) according to the regulations of the accounting standard “Borrowing expenses.”

17. Incurred costs, such as administrative management cost, general production costs, trial operation cost and other costs…, if not directly related to the procurement and the putting of fixed assets into the ready-for-use state, shall not be included into the historical cost of tangible fixed assets. Initial losses caused by the machinery’s failure to operate as planned shall be accounted into production and business expenses in the period.

Self-constructed or self-made tangible fixed assets

18. The historical cost of a self-constructed or self-made tangible fixed asset is its actual cost plus (+) the installation and trial operation cost. Where the enterprises turn the products made by themselves into fixed assets, the historical costs shall be the production costs of such products plus (+) the expenses directly related to the putting of the fixed assets into the ready-for-use state. In these cases, all internal profits must not be included in the historical cost of these assets. Unreasonable expenses, such as wasted materials and supplies, labor or other costs in excess of the normal levels arising in the self-construction or self-generating process must not be included in the historical cost of tangible fixed assets.

Financial-leasing tangible fixed assets  

19. Where tangible fixed assets are leased in the form of financial lease, their historical cost shall be determined according to the regulations of the accounting standard “Asset lease.”

Tangible fixed assets purchased in the exchange form

20. The historical cost of a tangible fixed asset purchased in the form of exchange for a dissimilar tangible fixed asset or other assets shall be determined according to the reasonable value of the received tangible fixed assets, or that of the exchanged ones, after adjusting the cash amounts or cash equivalents which are additionally paid or received.

21. The historical cost of a tangible fixed asset purchased in the form of exchange for similar one, or possibly formed through its sale in exchange for the right to own similar ones (similar assets are those with similar utilities, in the same business field and of equivalent value). In both cases no profit or loss is recognized in the exchange process. The historical cost of the received fixed asset shall be the residual value of the exchanged one. For example, the exchange of tangible fixed assets is similar to exchange of machinery, equipment, means of transport, service establishments or other tangible fixed assets.

Tangible fixed assets augmented from other sources

22. The historical cost of a tangible fixed asset which is donated or presented shall be initially recognized according to the initial reasonable value. Where it is not recognized according to the initial reasonable value, the enterprises may recognize it according to the nominal value plus (+) the expenses directly related to the putting of the assets into the ready-for-use state.

COSTS INCURRED AFTER INITIAL RECOGNITION

23.  The costs incurred after the initial recognition of tangible fixed assets shall be recorded as increase in their historical cost if these costs are certain to augment future economic benefits obtained from the use of these assets. Those incurred costs which fail to meet this requirement must be recognized as production and business expenses in the period.

24. The costs incurred after the initial recognition of tangible fixed assets shall be recorded as increase in their historical cost if these costs have practically improved the current conditions of the assets as compared to their original standard conditions, such as:

a/ Replacing parts of the tangible fixed assets, thereby prolonging their useful life or increasing their use capacity;

b/ Renovating parts of the tangible fixed assets, thereby considerably improving the quality of manufactured products;

c/ Applying new technological production processes, thereby reducing the operational costs of the assets. 

25. The repair and maintenance costs of tangible fixed assets for the purpose of restoring or sustaining their capability to bring about economic benefits as in their original operating conditions shall be included into production and business expenses in the period.

26. The accounting of the costs incurred after the initial recognition of tangible fixed assets must be based on each particular case and the recoverability of these costs. When the residual value of the tangible fixed assets has already been composed of reductions in economic benefits, those costs incurred afterwards to restore economic benefits from these fixed assets shall be included in the historical cost of the fixed assets if their residual value does not exceed their recoverable value. Where the buying price of a tangible fixed asset has already covered the enterprises’ obligation to incur those costs for putting the assets into the ready-for-use state, the capitalization of the costs incurred afterwards must be also based on the recoverability of these costs. For example, an enterprise buys a house which needs some repair before it can be used. The house repair cost shall be included in the historical cost of the asset if such cost is recoverable from the future use of the house.

27. Where some parts of tangible fixed assets need to be replaced on a regular basis, they shall be accounted as independent fixed assets if they satisfy all the four (4) criteria of a tangible fixed asset. For example, air-conditioners in a house may be replaced many times throughout the useful life of the house. The costs incurred in the replacement or restoration of these air-conditioners shall be accounted as an independent asset and the value of the replaced air-conditioners shall be recorded as a decrease.

DETERMINATION OF VALUE AFTER INITIAL RECOGNITION

28. After initial recognition, during their use process, tangible fixed assets shall be determined according to their historical costs, accumulated depreciation and residual values. Where they are re-appraised according to the State’s regulations, their historical cost, accumulated depreciation and residual value must be adjusted according to the re-appraisal results. The difference resulting from the re-valuation of tangible fixed assets shall be handled and accounted according to the State’s regulations

DEPRECIATION

29. The depreciable value of tangible fixed assets shall be allocated systematically during their useful life. The depreciation method must be suited to the economic benefits yielded by the assets to the enterprises. The depreciated amount of each period shall be accounted into the production and business expenses in the period, unless they are included in the value of other assets, such as depreciation of tangible fixed assets used for activities in the development stage is a cost component of the historical cost of intangible fixed assets (according to the regulations of the standard intangible fixed assets), or the depreciation cost of tangible fixed assets used in the process of self-constructing or self-making other assets.

30. Economic benefits yielded by tangible fixed assets shall be gradually exploited by the enterprises through the use of these assets. Nevertheless, other factors, like technical backwardness, wear-and-tear of these fixed assets due to their non-use, often cause reductions in the economic benefits which the enterprises expect these assets would bring about. Therefore, when determining the useful life of tangible fixed assets, the following factors must be taken into account:

a/ The extent of use of such asset, estimated by the enterprise. The extent of use is assessed according to the estimated capacity or output;

b/ The extent of wear-and-tear, depending on the related elements in the asset’s use process, such as the number of working shifts, the enterprise’s repair and maintenance of the asset as well as its upkeep when not in operation;

c/ Invisible wear-and-tear arising from the replacement or renovation of the technological chain or changes in the market demand for the products or service turned out by the asset;

d/ Legal constraints in the asset use, such as the date of expiry of the contract of financial-leasing fixed assets.

31. The useful life of tangible fixed assets shall be determined by the enterprises mainly on the expected use extent of the assets. However, due to the asset management policy of the enterprises, the estimated useful life of fixed assets may be shorter than their actual useful life. Therefore, the estimation of the useful life of a tangible fixed asset must be also based on the enterprise’s experiences on assets of the same type.

32. Three methods of depreciation of tangible fixed assets are:

- Straight-line depreciation method;

- Declining-balance depreciation method; and

- Units-of-output depreciation method.

By the straight-line depreciation method, the annual depreciation amount is kept unchanged throughout the useful life of assets. By the declining-balance depreciation method, the annual depreciation amount gradually declines throughout the useful life of assets. The units-of-output depreciation method is based on the estimated total quantity of product units the assets may turn out. The depreciation method applied by the enterprises to each tangible fixed asset must be implemented consistently, except where appear changes in the mode of its use.

The enterprises must not continue depreciating tangible fixed assets which have been entirely depreciated but still used for production and business operations.

RECONSIDERATION OF USEFUL LIFE

33. The useful life of tangible fixed assets must be reconsidered periodically, usually at the end of the fiscal year. If there is any considerable change in the estimation of the useful life of assets, the depreciation rate must be adjusted.

34. In the process of using fixed assets, once it has been determined with certainty that the useful life is no longer suitable, it must be adjusted together with the depreciation rate for the current year and subsequent years, which shall be expounded in the financial statements. For example: The useful life may be extended as a result of the improvement of the asset’s conditions as compared with their initial standard conditions; technical modifications or changes in the demands for products produced by a machine may also shorten the useful life of the assets.

35. The tangible fixed asset repair and maintenance regime may help prolong the actual useful life or increase the estimated liquidation value of assets but the enterprises must not change the depreciation rate of these assets.

RECONSIDERATION OF THE DEPRECIATION METHOD

36. The method of depreciation of tangible fixed assets must be reconsidered periodically, usually at the end of the fiscal year; if there is any change in the way of using the assets, which brings about benefits for the enterprises, the depreciation method and rate may be changed for the current year and subsequent years.

SALE AND LIQUIDATION OF TANGIBLE FIXED ASSETS

37. Tangible fixed assets which are liquidated or sold shall be recorded as a decrease.

38. Profits or losses arising from liquidation or sale of tangible fixed assets shall be determined as differences between incomes and liquidation or sale costs plus (+) the residual value of the tangible fixed assets. These profits or losses shall be recognized as an income or an expense on the reports on the business results in the period.

PRESENTATION OF FINANCIAL STATEMENTS

39. In their financial statements, the enterprises must present the following information on each type of tangible fixed asset:

a/ Method of determination of the historical cost of the tangible fixed asset;

b/ Method of depreciation, the useful life or depreciation rate;

c/ The historical cost, accumulated depreciation and residual value at the beginning of the year and at the end of the period;

d/ A written explanation of the financial statement (the section Tangible Fixed Assets) must cover the following information:

- The historical cost of the tangible fixed asset, any increase and/or decrease in the period;

-  The depreciated amount in the period, any increase, decrease and the accumulated amount by the end of the period;

- The residual value of the tangible fixed assets mortgaged or pledged  for loans;

- Investment costs of unfinished capital constructions;

- Commitments to the future purchase or sale of tangible fixed assets of big value;

- The residual value of tangible fixed assets temporarily not in use;

- The historical cost of fully-depreciated tangible fixed assets which are still in use;

- The residual value of tangible fixed assets awaiting liquidation;

- Other changes in tangible fixed assets.

40. The determination of the depreciation method and the estimation of the useful life of tangible fixed assets bear a purely presumptive nature. Therefore, the presentation of the applied depreciation methods and the estimated useful life of tangible fixed assets permits the users of financial statements to examine the correctness of the policies set out by the enterprise management and have basis for comparison with other enterprises.

41. The enterprises must present the nature and impact of the changes in accounting estimation which bear a crucial influence in the current accounting period or subsequent periods. The information must be presented when there arise changes in the accounting estimates related to the already liquidated or to be-liquidated tangible fixed assets, their useful life and depreciation methods.

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