1.

Introduction (Huyền)

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 (Huyền)

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. 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 strategy for the audit, including engagement staffing and any
required audit specialists.
3. Possible impacts on audit plan
3.1. Client business and industry (Huyền)

Vietnam, recently named the “Asia’s Leading Destination” for the first time at the 2018
World Travel Awards, offers a variety of options for tourists such as cultural and historical
tours, sea-based tours, adventure tours, eco-tours, and luxurious vacations, with revenue in
2018 reaching VND620 trillion, up VND110 billion compared to 2017. However, 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 in the
country with people are required to stay home and limit gathering in large crowds.
According to Minister of Culture, Sports and Tourism Nguyen Ngoc Thien (2020): “Vietnam
could lose $23 billion in tourism revenue this year, or about 75 percent of last year’s industry
revenue”.

Orange Travel Co Ltd is the company providing tourism services and offering different
attractive packages for both native and foreigner tourists. It was established and operated
for 13 years with tour size varying from few people to maximum 300 people. Its operation is
mostly in Hoi An, Phu Quoc and other famous destinations in the South of Vietnam, which is
negatively affected by the pandemic and flooding. According to their income statement,
their sales revenue in 2020 was 18.220.293.000, dropped nearly 3 times compared to 2019
with 50.602.936.

3.2. Perform preliminary analytical procedure (Hiên)

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

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

3.3. Identify significant risks due to fraud and error (Ngọc, Hoàng)

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 Revenue Recognition

The first risk 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. This leads to overstatement
to make the financial statement look well or understatement to minimize the tax payable
and increase the revenue of the company.

- 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
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 interbank transfer

The third risk that concerns us is the interbank transfer transactions of the Company. Inter
Bank Transfer allows for the electronic transfer of funds from the remitter's account in one
bank to the beneficiary's account at any other bank branch. Payment systems (i.e., the
mechanism by which banks transmit and receive payments) rely on bank liquidity. If there
are any problems happening to the banks’ operational system, it will have significant
impacts on other intermediaries. Therefore, the Company might face liquidity risk. Liquidity
risk is the risk that a counterparty that owes funds may be unable to complete its payment
obligations on time, thereby impacting the recipient's predicted liquidity position at the
time the payments are due. Looking at the interbank transfer activities of the Company, we
judged that this might be a significant risk for the Company.

3.4. Assess inherent risk (Huy)

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 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. Especially, 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.
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 sampling size should be expanded so that the audit test
will be performed with better and 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. In
addition,
4. Audit procedure for Payroll & personnel cycle
4.1. STOT (Huyền)
Selling, general and administrative expense
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. The selling, general and administrative expenses include the salary of
employees in various departments such as accounting, IT, marketing, human resources,.... It
also includes commissions, advertising and promotion activities. In addition, costs for rent,
utilities, and supplies that are not part of production are included in the SG&A. Therefore,
we decided to test these expenses to know how it works.
Looking at the income statement of the company, we see a reduction in these expenses:
selling expenses reduced significantly from 1,003,522,000 to 764,076,000 in 2020, and
general & administrative expenses decreased from 435,654,000 to 374,847,000. This
reduction can be explained by the fact that the demand of tourists during the pandemic has
dropped, so the company has to cut off staff and services to reduce cost and to perform
social distance policy. Cutting off too many employees suddenly at the same time can cause
some mistakes because the system did not run as usual. For instance, payroll transactions
can be recorded at the wrong time that employees actually worked, or withholdings were
calculated incorrectly. The transaction can even be recorded at the wrong date because the
date that staff were paid are not updated.
To avoid these issues, firstly, we need to recompute hours worked from time records, and
then we compare pay rates with union contract, approval by board of directors, or other
source.
We also need to recompute gross pay and net pay. And finally, we compare the cancelled
check or direct deposit with the payroll journal for the amount.
 4.2. SAP (Hiên)

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.

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 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. STDB (Huy)

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);
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
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 (Hoàng, Ngọc)

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.

Lack of delivery misstatement

Improper revenue recognition occurs when an organization recognizes revenue in one

period that should be recognized in another. This might be done to expedite revenue
recognition in order to fulfill earnings expectations. Entities may also postpone recognition
if they have already met their period projections. In the case of Orange Travels, we
determine that the sales may fail as a result of a lack of delivery. It is indicated that income
from manufacturing and selling operations are often recorded at the point of sale, which is
typically delivery. The company decided to follow the request of the customer to bill the
sales prior to the delivery of goods and held by the seller. For further actions of the auditor,
we suggest inquiring the management, reading the contracts and especially using the cutoff
test to test the revenue recognition process by evaluating whether products have been
dispatched to the client and whether corresponding revenues have been recorded in the
same accounting period in which the shipment happened.

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. To assess the bad debt write-off, the auditors will
compare the percentage of bad debt charge to sales for this year to previous years to see if
the existing expense is acceptable.

Liquidity shortfalls due to interbank transfer

As discussed earlier, the risk associated with interbank transfer can lead to liquidity
shortfall, a sufficient problem for the Company. Payment delays enhance liquidity problems
that might develop when one or more banks unexpectedly encounter operational failures,
which prevent them from sending payments for the duration of the outage. Therefore, the
Company will experience a liquidity shortfall for this period, meaning that it will not have
enough cash to pay out for debts. Looking at the information collected about interbank
transfer transactions of the Company, there are some abnormalities about the timing of the
reported transactions. 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. However, we
need further discussion for this because this might be caused by other problems other than
the failures of the banking system. To get the information, the auditor may inquire the
management of the bank if there is any problem occurring during the transactions.
6. 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. We hope that these accounts have a material effect on the
financial statements and this report can suggest the appropriate advice and improve the
quality of auditing in the corporate environment.