HANOI UNIVERSITY

FACULTY OF MANAGEMENT AND TOURISM

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ORANGE TRAVEL COMPANY

Subject: Audit of Financial Statement

Academic year: 2021 - 2022

Lecturer: Mrs. Do Van Anh, Mrs. Pham Hoang Yen

Tutor: Mrs. Tran Thanh Tam

Tut 3 - Group 5

Number Student name ID

1 Bạch Thị Trà Hiên 1804010037

2 Vũ Quốc Huy 1804010042

3 Lê Thanh Huyền 1804010045

4 Nguyễn Hữu Hoàng 1704010046

5 Nguyễn Minh Ngọc 1804010076

Hanoi, Dec 9th 2021

 TABLE OF CONTENTS

1. Introduction 1
2. Brief initial audit plan 1
3. Possible impacts on audit plan 1
3.1. Client business and industry 1
3.2. Perform preliminary analytical procedure 2
3.3. Identify significant risks due to fraud and error 4
3.4. Assess inherent risk 5
3.5. Suggestion on possible impacts on audit plan 7

4. Audit procedure for Payroll & personnel cycle 7

4.1. Substantive Test of Transaction 7
4.2. Substantive Analytical Procedure 8
4.3. Substantive Test of Detail Balances 9

5. List of documents (PBC - Prepared by client) 11

6. Audit working papers: possible misstatements and further actions 11

7. Conclusion 13

REFERENCES 15

APPENDIX A: ORANGE TRAVEL’S INCOME STATEMENT 16

APPENDIX B: ORANGE TRAVEL’S BALANCE SHEET 17

APPENDIX C: ORANGE TRAVEL’S CASH FLOWS 19

APPENDIX D: AUDITORS’ WORKING PAPER 20

 1. Introduction

We are members of the auditing team from NewAuditor Co Ltd, an auditing firm, this year
our team has performed an audit engagement for Orange Travel Co Ltd, a tourism company,
for the financial year ended 31 Dec 2020. Our report will represent the main part of three
phases of the Audit Process. Firstly, we collect information about the background and nature
of the client industry and business along with the initial risk assessment in phase I. And
then, in phase II, we discuss and identify four most significant accounts in the financial
statement, perform the audit procedures and necessary tests of TOC, STOT and STDB for
each account. Lastly, we design audit procedures for Payroll and personnel cycle.

2. Brief initial audit plan

The initial audit planning plays an important role in audit procedures, so the audit is
conducted effectively. Firstly, the auditor decides whether to accept a new client by
investigating and communicating or continue serving an existing client by evaluating the
firm through its financial factors and the size of the company. This step should be conducted
by an experienced auditor early to avoid any significant cost. Secondly, the auditor identifies
the reason why the client wants or needs an audit. After that, the auditor should obtain
understanding with the client through an engagement letter. Finally, the auditors set an
audit strategy to have a clear vision about client business and industry such as the
company’s location, risk of material and internal control. This includes engagement staffing
and any required audit specialists.

3. Possible impacts on audit plan

3.1. Client business and industry

In 2020, Vietnam's face a devastating year for the tourism industry due to Covid 19
pandemic and historic flooding. All popular tourist destinations and other entertainment
facilities are cancelled because people are required to stay home and limit gathering in large

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crowds. Orange Travel Co Ltd is the company providing tourism services and offering
different attractive packages for both native and foreigner tourists. Therefore, it is negatively
affected by the pandemic and flooding, so their sales revenue in 2020 was [Link],
dropped nearly 3 times compared to 2019 at 50.602.936. This reduction can cause some
changes in adjustment of pay rates due to cutting down working hours and staff, leading to
any misstatement that auditors need to focus carefully.

3.2. Perform preliminary analytical procedure

Selected ratio Orange Travel Industry Orange Travel Industry

(2020) (2020) (2019) (2019)

ST debt-paying liabilities

Cash ratio 0.121 0.050 0.255 0.140

Quick ratio 0.424 0.890 0.618 1.580

Current ratio 1.047 0.910 1.164 1.610

Liquidity Activities ratio

AR turnover 0.609 6.28 1.691 27.39

Days to collect AR 599 58 216 13

Inventory turnover 6.723 33.550 15.404 179.350

Days to sell inventory 54 11 24 2

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 Ability to meet long-term obligations

Debt to equity 2.017 6.604 2.278 3.984

Times to interest earned -0.54 -5.54 13 14.21

Profitability Ratios

Gross profit percent -0.077 -0.687 0.111 0.038

Profit margin -0.004 -0.065 0.075 0.006

ROA 0.0004 -0.049 0.0202 0.027

ROE 0.001 -0.482 0.064 0.196

An auditor might use ratio information to identify areas where Orange Travel faces increased
risk of material misstatements. The profitability ratios indicate that Orange Travel has
performed more slightly positively than industry average. This is explained by Covid-19
pandemic influence and this company scale is smaller than other companies, so the level of
influence is lower. In spite of higher than industry average, the liquidity measures indicate
that the financial condition of the company is not good with a long time to collect account
receivables and sell inventory. The possible reasons are Covid-19 pandemic that makes the
customers unable to pay on due date, the company still pays some types of fixed expenses,
and the company holds more inventory in the pandemic period. In identifying areas of
specific risk, the auditor is likely to focus on the liquidity activity ratios. Because of the huge
effect from Covid-19 pandemic, the ratios related to account receivable and inventory have
gone down and lower many times, compared to industry average. The collectability of
accounts receivable and inventory are likely to be assessed as having higher risk of material

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misstatement and will therefore likely warrant additional attention in the current year’s
audit.

3.3. Identify significant risks due to fraud and error

Orange Travel Co Ltd's business is subject to a number of significant risks that can have a
detrimental impact on performance and operation. The following are the identified risks
that are relevant to the Company.

Risk of fraud in inventory

The first risk identified involves inventory management. Due to the poor recording of
revenue, A small firm may be the victim of fraud committed by one of its workers, or it may
participate in fraudulent operations to deceive shareholders and tax authorities. Inventory
fraud entails the theft of actual inventory goods as well as the falsification of inventory data
on a company's financial accounts. Inventory is one of the most valuable assets on a
company's balance sheet. It is also one of the most difficult assets to measure and track. As
a result, safeguarding it becomes critical for direct growth. Timely identification and
prevention of fraud may save the organization valuable time and money.

Risk of Allowance for Doubtful Debt

The second thing that concerns us is the omission of allowance for doubtful debt of the
company. The issue necessitates substantial judgment since it involves the formulation of
accounting estimates for which there is high measurement uncertainty. At the conclusion of
the fiscal year, the allowance approach estimates bad debt expenditure by creating a
reserve account called allowance for doubtful accounts. The allowance for doubtful
accounts, as the name implies, presents a projection of receivables that are "doubtful" to be
paid. An allowance for doubtful debt must be calculated, not through by mouth as the

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Orange Company said, because they can not assure 100 percent of paying in time to the
customer. In addition, when Covid-19 pandemic is still a major concern for the economy,
many companies are on the verge of bankruptcy due to the difficulty of doing business in
the middle of the epidemic season. In reality, due to the financial difficulties of two of The
Company’s customers leading to the increase in efforts of collecting payment from these
customers to offset other expenses of the Company. Hence, we marked this issue as a
significant risk.

Risk of fraud in cash transactions

The third risk that concerns us is the cash transactions of the Company. Based on the
information that we got and observed, we found out that there are some abnormalities
involved in the cash of the company that might lead to fraud. There have essentially been
two sorts of cash scams. One would be stealing funds through employee collaboration,
while another would be overstating cash on the balance sheet through conjunction with
auditors. The trifecta of every monetary fraud is incentive, opportunity, and rationalization.
Incentive is frequently associated with fraud done by a person who believes they are being
paid too little for their efforts or have a personal problem. Opportunity is connected to the
weak controls of cash, which offers the individual involved in cash transactions the
possibility to conduct fraud. In this situation, people commit fraud not because of a personal
problem or because they believe they are being paid too little, but because they are offered
the chance to do so. Finally, Rationalization is connected to fraud done by employees who
believe it is acceptable to do so. This is frequently due to the company's inadequate
environment, particularly those connected to tone at the top. This results in an immoral
corporate atmosphere.

3.4. Assess inherent risk

Nature of client business is one of the most important factors to assess inherent risk. In fact,
in the tourism industry in which Orange Travel Co Ltd are operating, there are some inherent

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risks. First of all, risks from the natural environment are the inherent risks to the tourism
industry, including natural disasters such as typhoons, climate changes, and particularly
outbreaks of disease like Covid-19. These risks have a negative impact on the destinations,
which results in that the company can potentially suffer substantial operational disruption
and costs. In the current typical situation of Covid-19, many tourism businesses have had
difficulty in operating as well as financial issues since all the activities related to tourism
were shut down during a long quarantine period. These businesses’ main sales revenue
seems to equal to zero in this period and their profit was recognized as negative. Moreover,
Covid-19 has had a negative impact on almost all industries, not only the business operating
in the tourism industry but also some other industries, particularly hospitality industry and
food and beverage industry. Therefore, the inherent risk for sales and collection cycle is
quite high. Particularly, the account receivables will be focused since the companies have
some customers (especially companies operating in the service sectors) which are facing
financial difficulties due to Covid-19. In addition, when experiencing the difficulties in the
Covid-19 period, the company may have the human resources policies such as adjusting pay
rates, staff cutback, etc., or even the company has high payroll liabilities. Therefore, the
payroll and personnel cycle will be more concentrated as well.
Secondly, the seasonality in tourism needs to be considered as an inherent risk since the
customers’ demand for travel in a specific period in a year is not the same. In the periods
that there is a high and even peak customers’ demand such as summer vacation and
occasional holidays, the tourism companies need more laborers to serve customers,
particularly temporary tour guides as well as full-time tour guides. By contrast, there are
periods characterized by low customers’ demand for travel, so the tour guides and other
employees in the companies work less. Therefore, the transactions and balances in the
payroll and personnel cycle will be examined thoroughly. Besides, the sales and collection
cycle and the payment and acquisition cycle need to be focused as the quantity of sales and
the expenses transactions are different for each kind of period.

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Finally, since the company provides tours for foreigner tourists, and it has some foreign
company in customers lists, the macroeconomic conditions affecting exchange rates can
have an impact on the accuracy of sale transactions and account receivables.

3.5. Suggestion on possible impacts on audit plan

Based on the above analysis, the identified significant risks due to fraud and error and the
inherent risks have a quite significant impact on the audit plan. Therefore, the sample size
should be increased so that the audit test will be performed with credible results. Moreover,
it is necessary to observe and examine the company’s control so that we can decide to rely
on the control or not. Besides, TOCs, STOTs and STDB need to be designed based on the
nature of the tourism company, its inherent risks and significant risks due to fraud and error
that the company has.

4. Audit procedure for Payroll & personnel cycle

4.1. Substantive Test of Transaction

During 2020, every company over the world is strongly affected by the pandemic because of
social distancing, especially companies operating in the tourism industry, and Orange is not
the exception. Besides, the number of staff has changed according to its tourist season, such
as in the high demand season, Orange needs more staff than other times. Therefore, the
salary and commissions of employees will also be changed in each period. Thus, we decided
to test the transactions in terms of four objectives: occurrence, completeness, accuracy and
timing.
The number of staff is not stable or fixed, which can cause some mistakes because the
system did not run as usual. For instance, payroll transactions can be recorded at the wrong
dates because the date that staff were paid is not updated yet, or the payments are not paid
for existing employees, the employees actually worked, leading to the misstatement in
timing and occurrence objectives. In addition, payroll transactions that can not be recorded
may cause some errors in the amount of time that employees actually worked and pay

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rates, leading to employees’ withholdings being incorrectly calculated. These are related to
completeness and accuracy objectives.
To avoid the above issues, firstly, we need to review the payroll journal, general ledger, and
payroll earnings for unusual transactions or amounts. We should also compare direct
deposit information with human resources. Then, we reconcile the disbursement in the
payroll journal with the disbursement on the payroll bank statement. After that, we
recompute hours worked from time records, compare pay rates with union contract,
approval by board of directors, or other source. We also need to recompute gross pay and
net pay. Finally, we compare the date of recorded payment in the payroll journal with the
date on cancelled check or direct deposit and time record.

4.2. Substantive Analytical Procedure

We choose a core account payable to employees in the balance sheet because Orange Travel
is the tourism business, providing different services in a lot of domestic and international
places, so the number of staff may be a lot with typical rates. Therefore, it is essential to test
this account carefully and in detail, it has a big potential for fraud and hardly checks. Payable
employees account represents a liability account that contains the amounts of any salaries
owed to employees, which have not yet been paid to them. The balance in the account
represents the salaries liability of a business as of the balance sheet date.

We compare the payable to employees amount in 2019 and 2020 to find out the unusual
change. It can be clearly seen that the difference in two years is huge (from VND 0 in 2019
to VND 62,192,000 in 2020). Some possible reasons for this big change can be the number
of employees increasing dramatically due to tourism needs growing after the time when the
Covid-19 pandemic spread strongly in 2019, tourism was banned. Besides, another reason
may be the adjustment in pay rates. For these reasons, there are some misstatements that
can occur related to salary expense, for example, employees were paid wrong rates (actual
rate is higher than rate in books), or the hours or shifts of employees are incorrect in
recordings of time.

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After recognizing some misstatements can happen, we need to check some documents
related to these errors. Firstly, checking payroll journals or listing (this file recorded
employees name, date, gross and net payroll amounts), identify and compare the rate of
employee whether it is reasonable or not. Besides, we may check the time record by tracing
a random sample of workers to examine whether their number of hours the employees
worked are correct or not. In addition, the TOC, STOT and STDB should be based on the
nature business of the company, that is tourism and the inherent risks so that the
substantive test is conducted more effectively, which leads to a credible result. Particularly,
the significant risks due to fraud and errors should be spent more time on concentrating.

4.3. Substantive Test of Detail Balances

Testing payroll liabilities

Due to the negative impact of Covid-19, many tourism companies have many difficulties in
operations to generate revenue, especially the quarantine period in which tourism activities
were stopped. Many tourism companies have to adjust their human resources policies
including staff cutback, adjusting pay rates, working hours cutback, etc. to deal with this
situation. Moreover, they may have liabilities to employees. In addition, the characteristics
of seasonality in the tourism industry should be considered when designing audit tests since
in the peak demand periods, the companies may need more employees such as temporary
tour guides, etc. From the above reasons, the testing payroll liabilities is necessary with the
primary concern in four objectives including existence, completeness, accuracy and cutoff.
In the balance sheet of Orange Travel company, there is no amount of payable to employees
in 2019, but in 2020 this amount had significantly appeared (62,912,000 VND).
Accrued salaries and wages
First, we review the list of employees as well as labor contracts in each period to determine
if the recorded accrued salaries and wages are existent or not. After that, we check the
recorded accrued salaries and wages to ensure that it is included in the payroll master file.
Following, we review the company’s human resources policies to know how they pay
salaries and wages to employees (based on hours, rate, fixed salaries, bonus, etc);

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particularly, we focus on the policies in response to the Covid-19 situation to see any
adjustment. Then, we recalculate the accrued salaries and wages to examine the accuracy of
it based on the policies and the payroll schedule. We also inspect the time record document
to check that the cutoff for accrued salaries and wages is correct, especially these accruals
occur in the Covid-19 period when the company’s operation is disrupted and some payroll
policies may be adjusted.
Accrued commissions and bonus
During the Covid-19 period, employees in tourism companies seem not to have
commissions and bonuses due to the disruption in operation. If there is any amount of these
accruals, we need to inspect the time record to determine if the accrued commissions and
bonus are existent or not. Then, we review the company's commission agreements to
determine its nature and recalculate based on these agreements for the accruals’ accuracy.
Regarding bonus, we verify accrued bonus by comparing to the amount in the board
minutes to check the accuracy of this accrual. The objective of accuracy is more
concentrated on the period with high customers’ demand resulting in high sales.
Accrued payroll taxes
We examine the tax forms prepared in the subsequent period to verify the accuracy of the
amount recorded as liability on the balance sheet.
Tests of Details of Balances for Expense Accounts
Salaries and wage expenses
In the high peak demand periods in the tourism industry, the company may employ some
temporary employees such as tour guides to serve the large number of customers.
Therefore, in this kind of period, we have to examine the contract labor, time record and
recalculate the salaries and wages based on these two documents to determine if the
amount of salaries and wage expenses are correct or not. Moreover, by reviewing these two
documents, we can check the accounts are recorded at the proper period. By contrast, in
the Covid-19 period when the company’s operations are disrupted, we have to inspect the
time record and human resources policies for any adjustment to determine if the recorded

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salaries and wages expenses exist, this account is recorded in the proper period and its
amount is correct.

5. List of documents (PBC - Prepared by client)

- Payroll sheets (12 months in 2020): to determine the number of employees, the way
and formula that the company has used to calculate salaries and wages (based on
rate/hours, fixed salaries, allowances, deductions, bonus, commissions, etc), total
salary.
- Payroll journals or listing (2019, 2020): to identify and compare the rate of employee
whether it is reasonable or not.
- Monthly time record: to examine whether their number of hours the employees
worked are correct or not, to determine the number of employees worked in a
month.
- Payroll master file: to verify the balance accounts related to payroll and personnel
cycle (salaries and wages payable, salaries and wages expenses, etc.)
- Human resources policies: to determine the way company pay salaries and wages for
employees, any adjustment in response to Covid-19 period.
- Board minutes: to verify the amount of bonus
- Contract labor of temporary employees: to determine the amount of salaries and
wages paid to employees, the period employees worked.

6. Audit working papers: possible misstatements and further actions

Based on the risks identified, we discussed and found out 3 possible material misstatements
of Orange Travel’s financial statements. Furthermore, from what we searched, we are going
to discuss more about the course of actions needed to be done.

Improper revenue recognition

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The first misstatement that we consider to be significant is that the disposal of an asset was
not recorded at a proper period. As stated by Orange Travel, during the fiscal year
(29/12/2020), the Company chose to dispose of the printing machine and this amount was
already paid. However, it was not until January 20, 2021, the record of disposal and the
gain/loss from this transaction was made. This situation may lead to the material
misstatements threatening the objectives of Cut off and Detail tie in. In some companies,
late records of disposal can lead to the theft of assets or manipulation of expenses, and are
inappropriate. In the case of Orange, the revenue from printing machines can be recorded in
the inappropriate period between two years 2019 and 2020. In fact, the machine disposal
was 15 million and it was smaller than the AMTP (18,200,000) set by the company, so this
number will not affect much. This amount would not have a material effect on the financial
statement. However, in the end, our team will consider the accumulation of amounts below
this AMPT level.

Understated bad debt

The credit balance for Allowance for Doubtful Accounts is insufficient when this account of
the Company is undermined or totally ignored, such as in this case. This suggests that the
corporation recorded insufficient Bad Debts Expense and hence too much net income. A
small credit balance in the Allowance for Doubtful Accounts also indicates that the firm
reports too much for the following balance sheet items: net receivables, total current assets,
working capital, total assets, and owner's equity. This creates imbalances among those
accounts. Specifically, the amount to offset the bad debt expenses considered to be not able
to be collected for the two customers of Orange Travel is material. That will affect the
accounts of the Company significantly. During the year end 2020, despite attempts by the
company to collect payment from Two Island Tourism Island Co. and Future Co-Coffee
Private Co, it still got no positive result. And our team can not find a note with the specific
figures on the amount received and uncollected from these two customers of the Company.
Additionally, according to the working paper we got, the invoice amount of Two Island
Tourism Island Co was above 1 billion VND - many times more than AMPT, no matter how

12
much the Orange collected. This will absolutely affect our decision, hence, we strictly
request the management of the data list on this uncollected amount.

Interbank transfer
When our team checked the interbank transfers list of the company, we found that the
actual date of transitions recorded by the disbursing bank is later than the actual date of
receiving transactions from receiving banks, which means there might be some problem
with the operation system of the disbursing bank. The amount of all three transactions of
interbank transfer were under the level of AMPT, so this is not a considered misstatement.
However, we still request the management of the bank for a reason for this issue in case
something bad happens in the future transaction. And the amount of three transactions will
be considered along with the disposal machine we mentioned above.
After accumulating the amount of two misstatements under AMPT, we found that the
extent of the misstatement exceeded the AMPT. More specifically, the accumulated
misstatement amount was 63 million, which was over 18,200,000 of AMPT as stated.
Hence, this can affect the auditor's opinion.

7. Conclusion

After the whole process as well as necessary tests taken during the audit for payroll and
personnel accounts to analyze before identifying some related misstatement and taking
further actions for those. From all of the misstatements of Orange Travel, the audit team
considers that those misstatements can be quantified and accumulated. They influence a lot
on audit opinion due to their materiality of those misstatements. In short, the aggregate
information about the client suggests a significant risk of misstatement on the financial
statement. Based on several misstatements that have been discovered through the audit
procedures, the auditors can consider giving the qualified opinion when Orange Travel does
not disclose allowance of doubtful accounts. On the other hand, an unqualified opinion can
be considered in case interbank transfer, bad debts can be solved.

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 STUDENT CONTRIBUTION

Member Student ID Contribution

Bạch Thị Trà Hiên 1804010037 3.2. Perform preliminary analytical

procedure
4.2. SAP
5. List of documents (PBC - Prepared
by client)
7. Conclusion

Vũ Quốc Huy 1804010042 3.4. Assess inherent risk

3.5. Suggestion on possible impacts
on audit plan
4.3. STDB
5. List of documents (PBC - Prepared
by client)

Lê Thanh Huyền 1804010045 [Link]

[Link] initial audit plan
3.1. Client business and industry
4.1. STOT

Nguyễn Hữu Hoàng 1704010046 3.3. Identify significant risks due to

Nguyễn Minh Ngọc 1804010076 fraud and error

6. Audit working papers: possible
misstatements and further actions

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 REFERENCES

‌Accountinguide. (2019). Risk of Material Misstatement for Cash. [online] Available at:
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Uk3Km762

Anon, (n.d.). Auditing The Payroll Cycle - Substantive Audit Procedures For Payroll. [online].
Available at:
[Link]
F8Ew9HI2KoNfmlB8wTXoF-Xq2OZiYpswrwmKEvLMU

[Link]. (n.d.). Doanh nghiệp du lịch được hưởng những chính sách hỗ trợ gì?
[online]. Available at:
[Link]
h-sach-ho-tro-gi/[Link]

CÔNG TY TNHH TƯ VẤN & ĐẦU TƯ LTL. (2018). Đặc điểm của kinh doanh lữ hành. [online]
Available at: [Link]

[Link]. (n.d.). Inventory Fraud. [online] Available at: [Link]

Tui Group. Principal risks – Inherent to the sector. (n.d.). [online]. Available at:
[Link]
ernance/risk-report/[Link]

‌Wikiaccounting. (2020). Risk of Material Misstatement for Cash. [online] Available at:
[Link]

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APPENDIX A: ORANGE TRAVEL’S INCOME STATEMENT

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APPENDIX B: ORANGE TRAVEL’S BALANCE SHEET

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APPENDIX C: ORANGE TRAVEL’S CASH FLOWS

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APPENDIX D: AUDITORS’ WORKING PAPER

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